10-Q 1 srcl-10q_20170630.htm 10-Q srcl-10q_20170630.htm

 

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017 or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to

Commission File Number 1-37556

 

Stericycle, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-3640402

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

 

28161 North Keith Drive

Lake Forest, Illinois 60045

(Address of principal executive offices, including zip code)

(847) 367-5910

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "accelerated filer", "large accelerated filer", "smaller reporting company", and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES NO

 

On August 3, 2017, there were 85,338,685  shares of the Registrant’s Common Stock outstanding.

 

 


 

 

 

 

 

Stericycle, Inc.

Table of Contents

 

 

Page No.

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.  Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2017 and year ended December 31, 2016

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

41

 

 

 

 

Item 4.  Controls and Procedures

41

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.  Legal Proceedings

45

 

 

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

 

Item 6.  Exhibits

45

 

 

 

 

 

 

SIGNATURES

46

 

 

 


 

 

 

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In thousands, except share and per share data

 

 

June 30, 2017

 

 

December 31, 2016

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

44,191

 

 

$

44,189

 

Accounts receivable, less allowance for doubtful accounts of $49,689 in 2017 and $49,645 in 2016

 

639,611

 

 

 

634,902

 

Prepaid expenses

 

66,907

 

 

 

46,214

 

Assets held for sale

 

8,797

 

 

 

9,134

 

Other current assets

 

36,608

 

 

 

39,179

 

Total Current Assets

 

796,114

 

 

 

773,618

 

Property, plant and equipment, less accumulated depreciation of $551,937 in 2017 and $495,215 in 2016

 

733,770

 

 

 

723,894

 

Goodwill

 

3,637,182

 

 

 

3,591,020

 

Intangible assets, less accumulated amortization of $332,423 in 2017 and $271,568 in 2016

 

1,839,434

 

 

 

1,861,973

 

Other assets

 

30,997

 

 

 

29,556

 

Total Assets

$

7,037,497

 

 

$

6,980,061

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

$

111,400

 

 

$

72,822

 

Accounts payable

 

150,043

 

 

 

152,881

 

Accrued liabilities

 

561,129

 

 

 

228,526

 

Deferred revenues

 

19,239

 

 

 

17,902

 

Liabilities held for sale

 

2,094

 

 

 

2,858

 

Other current liabilities

 

71,328

 

 

 

67,864

 

Total Current Liabilities

 

915,233

 

 

 

542,853

 

Long-term debt, net

 

2,749,818

 

 

 

2,877,315

 

Deferred income taxes

 

513,949

 

 

 

645,371

 

Other liabilities

 

97,681

 

 

 

98,136

 

Equity:

 

 

 

 

 

 

 

Preferred stock (par value $0.01 per share, 1,000,000 shares authorized), mandatory convertible preferred stock, Series A (694,380 issued and outstanding in 2017 and 726,500 issued and outstanding in 2016)

 

7

 

 

 

7

 

Common stock (par value $.01 per share, 120,000,000 shares authorized, 85,336,739 issued and outstanding in 2017 and 85,152,700 issued and outstanding in 2016)

 

853

 

 

 

852

 

Additional paid-in capital

 

1,155,131

 

 

 

1,166,457

 

Retained earnings

 

1,910,684

 

 

 

2,006,064

 

Accumulated other comprehensive loss

 

(316,737

)

 

 

(367,643

)

Total Stericycle, Inc.’s Equity

 

2,749,938

 

 

 

2,805,737

 

Noncontrolling interests

 

10,878

 

 

 

10,649

 

Total Equity

 

2,760,816

 

 

 

2,816,386

 

Total Liabilities and Equity

$

7,037,497

 

 

$

6,980,061

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2017 10-Q Report

Stericycle, Inc.  •  3

 


 

 

 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited)

In thousands, except share and per share data

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

917,733

 

 

$

891,621

 

 

$

1,810,132

 

 

$

1,765,802

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation shown below)

 

 

513,277

 

 

 

488,950

 

 

 

1,014,107

 

 

 

972,701

 

Depreciation - cost of revenues

 

 

22,704

 

 

 

25,030

 

 

 

45,611

 

 

 

48,880

 

Selling, general and administrative expenses ("SG&A" - exclusive of depreciation and intangible amortization shown below)

 

 

538,150

 

 

 

220,343

 

 

 

756,991

 

 

 

421,436

 

Depreciation – SG&A

 

 

6,475

 

 

 

6,681

 

 

 

12,658

 

 

 

12,971

 

Intangible amortization – SG&A

 

 

29,481

 

 

 

50,909

 

 

 

58,570

 

 

 

69,183

 

Total Costs and Expenses

 

 

1,110,087

 

 

 

791,913

 

 

 

1,887,937

 

 

 

1,525,171

 

(Loss) Income from Operations

 

 

(192,354

)

 

 

99,708

 

 

 

(77,805

)

 

 

240,631

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

28

 

 

 

9

 

 

 

102

 

 

 

30

 

Interest expense

 

 

(23,772

)

 

 

(24,367

)

 

 

(47,146

)

 

 

(48,429

)

Other expense, net

 

 

(1,607

)

 

 

(2,118

)

 

 

(3,151

)

 

 

(3,369

)

Total Other Expense

 

 

(25,351

)

 

 

(26,476

)

 

 

(50,195

)

 

 

(51,768

)

(Loss) Income Before Income Taxes

 

 

(217,705

)

 

 

73,232

 

 

 

(128,000

)

 

 

188,863

 

Income tax (benefit) expense

 

 

(73,513

)

 

 

27,002

 

 

 

(42,365

)

 

 

65,038

 

Net (Loss) Income

 

 

(144,192

)

 

 

46,230

 

 

 

(85,635

)

 

 

123,825

 

Less: net (loss) income attributable to noncontrolling interests

 

 

(150

)

 

 

196

 

 

 

218

 

 

 

1,005

 

Net (Loss) Income Attributable to Stericycle, Inc.

 

 

(144,042

)

 

 

46,034

 

 

 

(85,853

)

 

 

122,820

 

Mandatory convertible preferred stock dividend

 

 

9,185

 

 

 

10,021

 

 

 

18,549

 

 

 

20,127

 

Gain on repurchase of preferred stock

 

 

(4,459

)

 

 

(1,280

)

 

 

(9,022

)

 

 

(1,280

)

Net (Loss) Income Attributable to Stericycle, Inc. Common Shareholders

 

$

(148,768

)

 

$

37,293

 

 

$

(95,380

)

 

$

103,973

 

(Loss) Earnings Per Common Share Attributable to Stericycle, Inc. Common Shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.74

)

 

$

0.44

 

 

$

(1.12

)

 

$

1.23

 

Diluted

 

$

(1.74

)

 

$

0.43

 

 

$

(1.12

)

 

$

1.21

 

Weighted Average Number of Common Shares

   Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

85,271,699

 

 

 

84,893,263

 

 

 

85,246,105

 

 

 

84,799,131

 

Diluted

 

 

85,271,699

 

 

 

85,760,686

 

 

 

85,246,105

 

 

 

85,798,892

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2017 10-Q Report

Stericycle, Inc.  •  4

 


 

 

 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

In thousands

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (Loss) Income

 

$

(144,192

)

 

$

46,230

 

 

$

(85,635

)

 

$

123,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

24,101

 

 

 

(32,946

)

 

 

50,626

 

 

 

(15,782

)

Amortization of cash flow hedge into income, net of tax expense ($171 and $173, and $342 and $345 for the three - and six -  months ended June 30, 2017 and 2016, respectively).

 

 

266

 

 

 

269

 

 

 

532

 

 

 

538

 

Change in fair value of cash flow hedge, net of tax expense ($66 and $43, and $74 and $132 for the three - and six -  months ended June 30, 2017 and 2016, respectively)

 

 

180

 

 

 

130

 

 

 

201

 

 

 

372

 

Total Other Comprehensive Income (Loss)

 

 

24,547

 

 

 

(32,547

)

 

 

51,359

 

 

 

(14,872

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (Loss) Income

 

 

(119,645

)

 

 

13,683

 

 

 

(34,276

)

 

 

108,953

 

Less: comprehensive income attributable to noncontrolling interests

 

 

15

 

 

 

189

 

 

 

671

 

 

 

1,060

 

Comprehensive (Loss) Income Attributable to Stericycle, Inc. Common Shareholders

 

$

(119,660

)

 

$

13,494

 

 

$

(34,947

)

 

$

107,893

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2017 10-Q Report

Stericycle, Inc.  •  5

 


 

 

 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

In thousands

 

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net (loss) income

$

(85,635

)

 

$

123,825

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

Stock-based compensation expense

 

11,880

 

 

 

11,557

 

Depreciation

 

58,269

 

 

 

61,851

 

Intangible amortization

 

58,570

 

 

 

69,183

 

Deferred income taxes

 

(137,935

)

 

 

4,515

 

Asset impairment charges and loss on disposal of assets held for sale

 

13,177

 

 

 

 

Other, net

 

502

 

 

 

(634

)

Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:

 

 

 

 

 

 

 

Accounts receivable

 

5,176

 

 

 

(12,888

)

Accounts payable

 

(4,538

)

 

 

(1,496

)

Accrued liabilities

 

333,827

 

 

 

(13,303

)

Other assets and liabilities

 

(16,215

)

 

 

2,830

 

Net Cash Provided by Operating Activities

 

237,078

 

 

 

245,440

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

(21,159

)

 

 

(42,097

)

Capital expenditures

 

(63,092

)

 

 

(67,133

)

Proceeds from sale of property and equipment

 

409

 

 

 

1,355

 

Other

 

 

 

 

7

 

Net Cash Used in Investing Activities

 

(83,842

)

 

 

(107,868

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repayments of long-term debt and other obligations

 

(33,344

)

 

 

(31,789

)

Proceeds from foreign bank debt

 

1,907

 

 

 

27,619

 

Repayments of foreign bank debt

 

(10,992

)

 

 

(36,953

)

Repayment of term loan

 

(50,000

)

 

 

(250,000

)

Proceeds from senior credit facility

 

899,029

 

 

 

902,817

 

Repayments of senior credit facility

 

(924,968

)

 

 

(715,653

)

Payments of capital lease obligations

 

(1,779

)

 

 

(2,605

)

Payments for repurchase of common stock

 

 

 

 

(40,814

)

Proceeds from issuance of common stock

 

4,415

 

 

 

30,308

 

Payments for repurchase of convertible preferred stock

 

(22,135

)

 

 

(5,025

)

Dividends paid on mandatory convertible preferred stock

 

(18,549

)

 

 

(20,127

)

Payments to noncontrolling interests

 

(708

)

 

 

(6,961

)

Net Cash Used in Financing Activities

 

(157,124

)

 

 

(149,183

)

Effect of exchange rate changes on cash and cash equivalents

 

3,890

 

 

 

297

 

Net change in cash and cash equivalents

 

2

 

 

 

(11,314

)

Cash and cash equivalents at beginning of period

 

44,189

 

 

 

55,634

 

Cash and Cash Equivalents at End of Period

$

44,191

 

 

$

44,320

 

 

 

 

 

 

 

 

 

NON-CASH ACTIVITIES:

 

 

 

 

 

 

 

Issuances of obligations for acquisitions

$

15,164

 

 

$

23,069

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

2017 10-Q Report

Stericycle, Inc.  •  6

 


 

 

 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

In thousands

 

 

Stericycle, Inc. Equity

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

 

Additional Paid-In Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Noncontrolling Interests

 

 

Total Equity

 

Balance as of January 1, 2016

 

770

 

$

8

 

 

 

84,853

 

$

849

 

 

$

1,143,020

 

 

$

1,868,645

 

 

$

(282,631

)

 

$

17,947

 

 

$

2,747,838

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

206,359

 

 

 

 

 

 

 

1,540

 

 

 

207,899

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86,340

)

 

 

(235

)

 

 

(86,575

)

Change in qualifying cash flow hedge, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,328

 

 

 

 

 

 

 

1,328

 

Issuance of common stock for stock-based compensation awards and employee stock purchases

 

 

 

 

 

 

 

 

661

 

 

6

 

 

 

44,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44,769

 

Purchase and cancellation of treasury stock

 

 

 

 

 

 

 

 

(361

)

 

(3

)

 

 

 

 

 

 

(40,811

)

 

 

 

 

 

 

 

 

 

 

(40,814

)

Purchase and cancellation of convertible preferred stock

 

(44

)

 

(1

)

 

 

 

 

 

 

 

 

 

(42,194

)

 

 

11,285

 

 

 

 

 

 

 

 

 

 

 

(30,910

)

Preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(39,414

)

 

 

 

 

 

 

 

 

 

 

(39,414

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,455

 

Reduction to noncontrolling interests due to additional ownership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

413

 

 

 

 

 

 

 

 

 

 

 

(8,603

)

 

 

(8,190

)

Balance as of December 31, 2016

 

726

 

 

7

 

 

 

85,153

 

 

852

 

 

 

1,166,457

 

 

 

2,006,064

 

 

 

(367,643

)

 

 

10,649

 

 

 

2,816,386

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(85,853

)

 

 

 

 

 

 

218

 

 

 

(85,635

)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,173

 

 

 

453

 

 

 

50,626

 

Change in qualifying cash flow hedge, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

733

 

 

 

 

 

 

 

733

 

Issuance of common stock for stock-based compensation awards and employee stock purchases

 

 

 

 

 

 

 

 

184

 

 

1

 

 

 

8,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,218

 

Purchase and cancellation of convertible preferred stock

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

(31,157

)

 

 

9,022

 

 

 

 

 

 

 

 

 

 

 

(22,135

)

Preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,549

)

 

 

 

 

 

 

 

 

 

 

(18,549

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,880

 

Reduction to noncontrolling interests due to additional ownership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(266

)

 

 

 

 

 

 

 

 

 

 

(442

)

 

 

(708

)

Balance as of June 30, 2017

 

694

 

$

7

 

 

 

85,337

 

$

853

 

 

$

1,155,131

 

 

$

1,910,684

 

 

$

(316,737

)

 

$

10,878

 

 

$

2,760,816

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


 

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STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Unless the context requires otherwise, “the Company”, "we," "us" or "our" refers to Stericycle, Inc. and its subsidiaries on a consolidated basis.

NOTE 1 — BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes the disclosures included in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the Stericycle, Inc. and Subsidiaries consolidated financial statements and notes thereto, as filed with our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”). The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2017.

There were no material changes in the Company’s significant accounting policies since the filing of its 2016 Form 10-K. As discussed in the 2016 Form 10-K, the preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.

Certain amounts in previously issued financial statements have been reclassified to conform to the current period presentation.

During the three and six months ended June 30, 2017, we presented certain rent, utility and depreciation expenses in cost of revenues that had historically been recorded in selling, general and administrative expense (“SG&A”). We have reclassified $3.4 million of which $2.0 million was for rent and utility expenses and $1.4 million was for depreciation expenses from SG&A to cost of revenues for the three months ended June 30, 2016, and $6.0 million of which $3.4 million was for rent and utility expenses and $2.6 million was for depreciation expenses from SG&A to cost of revenues for the six months ended June 30, 2016 to conform to the current period presentation.

NOTE 2 – NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment

Effective January 1, 2017, the Company early adopted the guidance in Accounting Standards Update (“ASU”) No. 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 of the goodwill impairment test and requires a goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. The adoption of this standard did not have a material impact on our financial statements.

 

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Statement of Cash Flows

Effective January 1, 2017, the Company early adopted the guidance in ASU No. 2016-15 “Statement of Cash Flows” (Topic 230). This ASU clarifies diversity in practice on where in the Statement of Cash Flows to recognize certain transactions, including the classification of payment of contingent consideration for acquisitions between Financing and Operating activities. Based on the results of the Company’s analysis, there is no impact on our financial statements, as our treatment of the relevant affected items on the Condensed Consolidated Statements of Cash Flows is consistent with the requirements of this guidance.

Accounting Standards Issued But Not Yet Adopted

Revenue From Contracts With Customers

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), guidance to provide a single and comprehensive revenue recognition model for all contracts with customers. The revenue guidance contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The amended authoritative guidance associated with revenue recognition is effective for the Company on January 1, 2018. The Company currently anticipates adopting this ASU using the modified retrospective method. The Company continues to assess its various revenue streams to identify performance obligations under this ASU and the key aspects of the standard that will impact the Company's revenue and expense recognition process. Based upon our preliminary assessments, the Company expects that contract acquisition costs of obtaining revenue generating contracts, such as sales commissions paid in connection with multi-year service contracts, will be capitalized and amortized over the economic life of the contracts. Under the current guidance, the Company expenses such costs when incurred. The Company continues to work with third party service providers to assist us in our review of implementing the new revenue recognition standard and implementing an information technology solution. As the Company completes its evaluation of this new standard, new information may arise that could change the Company's current understanding of the impact to revenue and expense recognition. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession to adjust the Company’s assessment and implementation plans accordingly.

Definition of a Business

On January 5, 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (Topic ASC 805), guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace the missing elements. This ASU is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein. Due to the number of acquisitions the Company completes in any year, there may be instances where the acquisition will be determined to be an acquisition of assets instead of a business. The Company believes this will be a minority of the acquisitions completed in any year and that there will not be a material impact to our financial statements.


 

2017 10-Q Report

Stericycle, Inc.  •  9

 


 

 

 

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). This guidance will require lessees to record a right-of-use asset and lease liability on the balance sheet for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. This ASU also requires certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The guidance should be applied on a modified retrospective basis. This ASU is effective for the Company beginning January 1, 2019. During the second quarter of 2017, the Company engaged a third party service provider to assist us in our review of implementing the new leases standard, and we have begun the initial evaluation of the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs, instead of when the asset is sold to an outside party. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. We do not expect the adoption to have a material impact on our financial statements.

Compensation – Stock Compensation

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation” (Topic 718) - Scope of Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This ASU is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. We do not expect the adoption to have a material impact on our financial statements.

NOTE 3 – ACQUISITIONS, DIVESTITURES, AND ASSETS HELD FOR SALE

Acquisitions

During the six months ended June 30, 2017, we completed 19 acquisitions.

Domestically and in Canada, we acquired 100% of the stock of one and selected assets and liabilities of nine secure information destruction businesses. We also acquired selected assets and liabilities of two regulated waste businesses and one communication services business.

Internationally (exclusive of Canada), we acquired selected assets and liabilities of one regulated waste business and one secure information destruction business in the Netherlands, and selected assets and liabilities of two regulated waste businesses in the Republic of Korea. We also acquired 100% of the stock of one regulated waste business in Portugal and one regulated waste business in Spain.

The acquisitions were all considered to be business combinations.

 

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Stericycle, Inc.  •  10

 


 

 

 

The following table summarizes the locations of our acquisitions for the six months ended June 30, 2017:

 

Acquisition Locations

2017

 

United States

 

12

 

Canada

 

1

 

Republic of Korea

 

2

 

Netherlands

 

2

 

Portugal

 

1

 

Spain

 

1

 

Total

 

19

 

The following table summarizes the acquisition date fair value of consideration transferred for the current period acquisitions and the adjustments to the consideration transferred for prior year acquisitions during the six months ended June 30, 2017:

 

In thousands

 

 

Six Months Ended June 30, 2017

 

 

Current Period Acquisitions

 

 

Adjustments to Prior Year Acquisitions

 

 

Total

 

Cash

$

21,140

 

 

$

19

 

 

$

21,159

 

Promissory notes

 

14,550

 

 

 

(440

)

 

 

14,110

 

Deferred consideration

 

1,001

 

 

 

 

 

 

1,001

 

Contingent consideration

 

53

 

 

 

 

 

 

53

 

Total purchase price

$

36,744

 

 

$

(421

)

 

$

36,323

 

For financial reporting purposes, our acquisitions were accounted for using the acquisition method of accounting. These acquisitions resulted in the recognition of goodwill in our financial statements reflecting the premium paid to acquire businesses that we believe are complementary to our existing operations and fit our growth strategy. During the six months ended June 30, 2017, we recognized an increase in goodwill of $20.5 million related to current period acquisitions, excluding the effect of foreign currency translation. Approximately $18.3 million of the goodwill recognized from current period acquisitions will be deductible for income taxes.

During the six months ended June 30, 2017, we recognized an increase of $13.4 million in the estimated fair value of acquired customer relationships for current period acquisitions, excluding the effect of foreign currency translation, with amortizable lives of 10 to 40 years.

The fair value of consideration transferred in a business combination is allocated to the tangible and intangible assets assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill. The allocations of the acquisition price for recent acquisitions have been prepared on a preliminary basis, pending completion of certain intangible asset valuations and finalization of the respective opening balance sheets. The following table summarizes the preliminary purchase price allocation for current period acquisitions and various adjustments to our prior year acquisitions during the six months ended June 30, 2017:

 

In thousands

 

 

Six Months Ended June 30, 2017

 

 

Current Period Acquisitions

 

 

Adjustments to Prior Year Acquisitions

 

 

Total

 

Fixed assets

$

2,515

 

 

$

(979

)

 

$

1,536

 

Intangibles

 

13,436

 

 

 

5,800

 

 

 

19,236

 

Goodwill

 

20,514

 

 

 

(1,877

)

 

 

18,637

 

Net other assets/(liabilities)

 

593

 

 

 

(9

)

 

 

584

 

Net deferred tax liabilities

 

(314

)

 

 

(3,356

)

 

 

(3,670

)

Total purchase price allocation

$

36,744

 

 

$

(421

)

 

$

36,323

 

During the three months ended June 30, 2017 and 2016, the Company incurred $23.7 million and $25.2 million, respectively, of acquisition and integration expenses related to acquiring businesses, reported within SG&A on the

 

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Stericycle, Inc.  •  11

 


 

 

 

Condensed Consolidated Statements of (Loss) Income. During the six months ended June 30, 2017 and 2016, these costs were $43.6 million and $47.4 million, respectively. Acquisition-related costs are costs the Company incurs to effect a business combination such as due diligence and legal expenses, costs of maintaining an internal acquisitions department, direct travel expenses related to acquisitions, government fees, and environmental studies. Integration-related costs are costs the Company incurs after an acquisition is completed to integrate the acquired business’ operations with the Company and include, for example, integration of our sales and collection processes and systems to support those efforts, rebranding to the Company’s name, severance expense related to personnel redundancies, and other. The results of operations of these acquired businesses have been included on the Condensed Consolidated Statements of (Loss) Income from the date of the acquisition. Pro forma results of operations for these acquisitions are not presented because the pro forma effects, individually or in the aggregate, were not material to the Company’s results of operations.

Divestitures

During the second quarter of 2017, we sold certain assets and liabilities in the UK for $1.2 million resulting in a pretax loss of $3.6 million ($2.9 million, net of tax) which is included in SG&A on the Condensed Consolidated Statements of (Loss) Income.

Assets and Liabilities Held for Sale

As of June 30, 2017, we have certain of our international operations classified as held for sale. No material changes to the fair value of these assets and liabilities held for sale were recorded during the three and six months ended June 30, 2017. Fair value of these assets and liabilities held for sale is subject to changes in estimates as a result of evolving market conditions, negotiations, and other matters. The assets and liabilities of the disposal groups are presented in Assets held for sale and Liabilities held for sale on the Condensed Consolidated Balance Sheets.

The following table presents information related to the major classes of assets and liabilities that were classified as held for sale on the Condensed Consolidated Balance Sheet at June 30, 2017:

 

In thousands

 

Total current assets

$

3,295

 

Fixed assets

 

4,494

 

Goodwill

 

279

 

Intangibles

 

375

 

Other assets

 

354

 

Assets held for sale

$

8,797

 

 

 

 

 

Total current liabilities

$

1,751

 

Deferred income taxes

 

343

 

Liabilities held for sale

$

2,094

 

 

NOTE 4 – RESTRUCTURING, CONTRACT EXIT AND PLANT CONVERSION EXPENSES

During the first quarter of 2017, management began executing a realignment of our operations to reduce labor redundancies and facility costs in our Latin American countries. Various operating locations, primarily in Brazil, have been consolidated to increase efficiency while reducing headcount. For the three months ended June 30, 2017, the Company recorded $5.9 million of restructuring expenses of which $2.0 million related to employee severance, $3.6 million was long-lived assets and operating permits impairment charges, and $0.3 million was other related expenses. For the six months ended June 30, 2017, the Company recorded $6.6 million of restructuring expenses of which $2.6 million related to employee severance, $3.6 million was long-lived assets and operating permits impairment charges, and $0.4 million was other related expenses. These expenses are reflected as part of SG&A on the Condensed Consolidated Statements of (Loss) Income. The recorded restructuring liabilities

 

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are expected to be paid within the current year. While the Company believes the recorded restructuring liabilities are adequate, revisions to current estimates may be recorded in future periods based on new information as it becomes available. There could be additional initiatives in the future to further streamline our operations. As such, the Company expects further expenses related to workforce reductions and other facility rationalization costs when those restructuring plans are finalized and related expenses are estimable.

For the three and six months ended June 30, 2017, the Company recorded $1.1 million and $2.5 million, respectively, of expenses to exit certain of our patient transportation services contracts in the UK which are reflected as part of SG&A on the Condensed Consolidated Statements of (Loss) Income.

For the three months ended June 30, 2017, the Company recorded $7.2 million of plant conversion and other related expenses of which $5.5 million was operating permits and customer relationships impairment charges and $1.7 million was other costs due to rationalizing our operations and environmental liabilities primarily in our Latin America countries. For the six months ended June 30, 2017, the Company recorded $8.0 million of plant conversion and other related expenses of which $5.9 million was operating permits and customer relationships impairment charges and $2.1 million was other costs due to rationalizing our operations and environmental liabilities primarily in our Latin America countries. These expenses are reflected as part of SG&A on the Condensed Consolidated Statements of (Loss) Income.

NOTE 5 – INCOME TAXES

We file income tax returns in the U.S., in various states and in certain foreign jurisdictions.

The Company has recorded liabilities to cover certain uncertain tax positions. Such uncertain tax positions relate to additional taxes that the Company may be required to pay in various tax jurisdictions. During the course of examinations by various taxing authorities, proposed adjustments may be asserted. The Company evaluates such items on a case-by-case basis and adjusts the liability for uncertain tax positions as deemed necessary.

The effective tax rates for the three months ended June 30, 2017 and 2016 were 33.8% and 36.9%, respectively. The decrease in the current period tax rate, when compared to the prior period, is primarily due to the tax impact of the charge associated with the proposed settlement, in the amount of $295.0 million, of the small quantity customer class action lawsuit in the U.S. (see Note 14 – Legal Proceedings) resulting in a lower proportion of U.S. pre-tax income which has a higher statutory tax rate when compared to international operations.

NOTE 6 – STOCK-BASED COMPENSATION

At June 30, 2017, we had the following incentive stock plans:

 

the 2017 Incentive Stock Plan, which our stockholders approved in May 2017;

 

the 2014 Incentive Stock Plan, which our stockholders approved in May 2014;

 

the 2011 Incentive Stock Plan, which our stockholders approved in May 2011;

 

the 2008 Incentive Stock Plan, which our stockholders approved in May 2008;

 

the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;

 

the 2000 Non-statutory Stock Option Plan, which expired in February 2010; and

 

the Employee Stock Purchase Plan ("ESPP"), which our stockholders approved in May 2001.

 

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Stock Based Compensation Expense:

The following table presents the total stock-based compensation expense resulting from stock option awards, restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), and the ESPP included on the Condensed Consolidated Statements of (Loss) Income:

 

In thousands

 

 

Three Months June 30,

 

 

Six Months June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenues - stock option plan

$

13

 

 

$

12

 

 

$

26

 

 

$

27

 

Selling, general and administrative - stock option plan

 

3,809

 

 

 

4,585

 

 

 

7,889

 

 

 

9,337

 

Selling, general and administrative - RSUs

 

1,546

 

 

 

399

 

 

 

2,947