UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

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

For the quarterly period ended June 30, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	SRCL	Nasdaq Global Select Market

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 every Interactive Data File required to be submitted 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 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 July 29, 2019, there were 91,120,794 shares of the Registrant’s Common Stock outstanding.

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION
	Item 1.  Financial Statements (Unaudited)
	Condensed Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2019 and 2018	5
	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	7
	Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2019 and 2018	8
	Notes to Condensed Consolidated Financial Statements	10
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Item 3.  Quantitative and Qualitative Disclosure about Market Risk	53
	Item 4.  Controls and Procedures	53
PART II. OTHER INFORMATION
	Item 1.  Legal Proceedings	56
	Item 1A.  Risk Factors	56
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	56
	Item 6.  Exhibits	57
SIGNATURES		58

2019 Q2 10-Q Report Stericycle, Inc.  •  2

Glossary of Defined Terms

Unless the context requires otherwise, the “Company,” “Stericycle,” "we," "us" or "our" refers to Stericycle, Inc. on a consolidated basis. The Company also uses several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below:

Abbreviation	Description
2018 Form 10-K	Annual report on Form 10-K for the year ended December 31, 2018
Adjusted EBITDA	EBITDA adjusted for certain items discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
APAC	Asia Pacific
ASC 606	Accounting Standards Codification Topic 606 "Revenue from Contracts with Customers"
ASC 740	Accounting Standards Codification Topic 740 "Income Taxes"
ASC 842	Accounting Standards Codification Section 842 "Leases"
ASU	Accounting Standards Update
Consolidated Leverage Ratio	Consolidated Leverage Ratio means, as of any date of determination, the ratio of (a) (i) Consolidated Funded Indebtedness as of such date minus (ii) Unrestricted Cash as of such date to (b) Consolidated EBITDA for the period of four fiscal quarters most recently ended on or prior to such date, as defined in the Fourth Amendment.
COR	Cost of revenues
COSO Framework	Internal Control Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
Credit Agreement	Credit Agreement dated November 17, 2017 by and among the Company and certain of its subsidiaries named therein, Bank of America, N.A., as administrative agent, and the other financial institutions party thereto
CRS	Communication and Related Services
DOJ	U.S. Department of Justice
EBITDA	Earnings before interest, tax, depreciation and amortization
Environmental Solutions	Provider of Hazardous Waste Solutions and Manufacturing and Industrial Services
EPA	U.S. Environmental Protection Agency
EPM	Enterprise Performance Management
ERP	Enterprise Resource Planning
ESPP	Employee Stock Purchase Plan
Exchange Act	U.S. Securities Exchange Act 1934
Expert Solutions	Recall and return services
FASB	Financial Accounting Standards Board
FCPA	U.S. Foreign and Corrupt Practices Act
Fourth Amendment	Fourth Amendment to the Credit Agreement, dated as of June 14, 2019
Indenture	Indenture, dated as of June 14, 2019 between the Company, the guarantors named therein and U.S. Bank National Association, as trustee
IRS	U.S. Internal Revenue Service
PFA	Pre-filing agreement
PSU	Performance-based restricted stock unit
RWCS	Regulated Waste and Compliance Services
ROU	Right-of-use
RSU	Restricted stock unit
S&P	Standard & Poor's
SEC	U.S. Securities and Exchanges Commission
Senior Credit Facility	The Company's $1.2 billion senior credit facility due in 2022 granted under the terms of the Credit Agreement
Senior Notes	5.375% Senior Notes due July 2024
Series A	Series A Mandatory Convertible Preferred Stock, par value $0.01 per share
SG&A	Selling, general and administrative expenses
SOP	Sorted office paper
SOX	U.S. Sarbanes Oxley Act of 2002
SQ	Small quantity
SQ Settlement	Small quantity medical waste customers class action settlement
Tax Act	U.S. Tax Cuts and Jobs Act of 2017
Term Facility	Aggregate amount of commitments made by any lender under the terms of the Credit Agreement
Term Loans	Advances made by any lender under the Term Facility
U.K.	United Kingdom
U.S.	United States of America
U.S. GAAP	U.S. Generally Accepted Accounting Principles

2019 Q2 10-Q Report Stericycle, Inc.  •  3

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited)

In millions, except per share data
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues	$	845.8		$	883.3		$	1,675.9		$	1,778.3
Cost of revenues		543.2			530.0			1,076.2			1,066.5
Gross profit		302.6			353.3			599.7			711.8
Selling, general and administrative expenses		277.3			290.9			557.7			595.3
Goodwill impairment		-			-			20.9			-
Income from operations		25.3			62.4			21.1			116.5
Interest expense, net		(33.6	)		(24.6	)		(61.2	)		(49.6	)
Loss on early extinguishment of debt		(23.1	)		-			(23.1	)		-
Other expense, net		(1.8	)		(0.6	)		(4.0	)		(0.6	)
(Loss) Income before income taxes		(33.2	)		37.2			(67.2	)		66.3
Income tax benefit (expense)		3.0			(9.6	)		(0.6	)		(16.2	)
Net (loss) income		(30.2	)		27.6			(67.8	)		50.1
Net (income) loss attributable to noncontrolling interests		(0.3	)		0.1			(0.5	)		0.1
Net (loss) income attributable to Stericycle, Inc.		(30.5	)		27.7			(68.3	)		50.2
Mandatory convertible preferred stock dividend		-			(8.3	)		-			(17.1	)
Gain on repurchases of preferred stock		-			7.2			-			14.5
Net (loss) income attributable to Stericycle, Inc. common shareholders	$	(30.5	)	$	26.6		$	(68.3	)	$	47.6
(Loss) earnings per common share attributable to Stericycle, Inc. common shareholders:
Basic	$	(0.33	)	$	0.31		$	(0.75	)	$	0.56
Diluted	$	(0.33	)	$	0.31		$	(0.75	)	$	0.55
Weighted average number of common shares outstanding:
Basic		91.0			85.6			90.9			85.6
Diluted		91.0			85.8			90.9			85.8

See accompanying Notes to Condensed Consolidated Financial Statements.

2019 Q2 10-Q Report Stericycle, Inc.  •  4

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE (LOSS) INCOME

(Unaudited)

In millions
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net (loss) income	$	(30.2	)	$	27.6		$	(67.8	)	$	50.1
Other comprehensive income (loss):
Foreign currency translation adjustments		(2.4	)		(76.2	)		6.1			(59.9	)
Amortization of cash flow hedge into income, net of tax ($0.1 and $0.1 and $0.2 and $0.2) for the three and six months ended June 30, 2019 and 2018, respectively)		0.2			0.4			0.4			0.5
Change in fair value of cash flow hedge, net of tax expense ($0.1 and $0.0 and $0.1 and $0.0) for the three and six months ended June 30, 2019 and 2018, respectively		0.2			-			0.2			-
Reclassification of cash flow hedge, net of tax ($1.1 for both the three and six months ended June 30, 2019)		2.3			-			2.3			-
Total other comprehensive income (loss)		0.3			(75.8	)		9.0			(59.4	)
Comprehensive loss		(29.9	)		(48.2	)		(58.8	)		(9.3	)
Less: comprehensive income (loss) attributable to noncontrolling interests		0.3			(0.8	)		0.8			(0.7	)
Comprehensive loss attributable to Stericycle, Inc. common shareholders	$	(30.2	)	$	(47.4	)	$	(59.6	)	$	(8.6	)

See accompanying Notes to Condensed Consolidated Financial Statements.

2019 Q2 10-Q Report Stericycle, Inc.  •  5

STERICYCLE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

In millions, except per share data
	June 30, 2019			December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	34.5		$	34.3
Accounts receivable, less allowance for doubtful accounts of $75.1 in 2019 and $71.9 in 2018		613.7			599.6
Prepaid expenses		97.8			50.0
Other current assets		73.1			63.4
Total Current Assets		819.1			747.3
Property, plant and equipment, less accumulated depreciation of $737.8 in 2019 and $678.1 in 2018		786.2			743.5
Operating lease right-of-use assets		393.2			-
Goodwill		3,195.1			3,222.2
Intangible assets, less accumulated amortization of $572.7 in 2019 and $499.9 in 2018		1,562.8			1,637.7
Other assets		113.3			104.8
Total Assets	$	6,869.7		$	6,455.5
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt	$	117.3		$	104.3
Bank overdrafts		2.2			14.8
Accounts payable		229.4			225.8
Accrued liabilities		303.8			340.8
Operating lease liabilities		89.5			-
Other current liabilities		42.0			47.5
Total Current Liabilities		784.2			733.2
Long-term debt, net		2,697.2			2,663.9
Long-term operating lease liabilities		317.2			-
Deferred income taxes		360.2			307.3
Long-term taxes payable		76.1			83.3
Other liabilities		72.6			70.7
Total Liabilities		4,307.5			3,858.4
Commitments and contingencies
Equity:
Preferred stock (par value $0.01 per share, 1.0 shares authorized), 0.0 issued and outstanding in 2019 and 2018, respectively		-		-
Common stock (par value $0.01 per share, 120.0 shares authorized, 91.1 and 90.7 issued and outstanding in 2019 and 2018, respectively)		0.9			0.9
Additional paid-in capital		1,192.8			1,162.6
Retained earnings		1,720.9			1,789.2
Accumulated other comprehensive loss		(356.6	)		(365.3	)
Total Stericycle, Inc.’s Equity		2,558.0			2,587.4
Noncontrolling interests		4.2			9.7
Total Equity		2,562.2			2,597.1
Total Liabilities and Equity	$	6,869.7		$	6,455.5

See accompanying Notes to Condensed Consolidated Financial Statements.

2019 Q2 10-Q Report Stericycle, Inc.  •  6

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

In millions
	Six Months Ended June 30,
	2019			2018
OPERATING ACTIVITIES:
Net (loss) income	$	(67.8	)	$	50.1
Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation		64.7			63.5
Intangible amortization		74.7			64.8
Loss on early extinguishment of debt and related charges		26.5			-
Stock-based compensation expense		10.0			12.8
Deferred income taxes		12.8			(13.6	)
Goodwill and other impairment charges and gains on divestiture of businesses, net		23.7			18.9
Other, net		0.9			(1.5	)
Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts receivable		(14.0	)		(23.5	)
Prepaid expenses		(22.4	)		(2.6	)
Accounts payable		3.6			13.8
Accrued liabilities		(50.6	)		39.2
Other assets and liabilities		8.9			9.1
Net cash from operating activities		71.0			231.0
INVESTING ACTIVITIES:
Capital expenditures		(108.2	)		(64.0	)
Payments for acquisitions, net of cash acquired		(0.3	)		(29.0	)
Proceeds from divestiture of businesses		13.6			8.2
Other, net		1.8			1.4
Net cash from investing activities		(93.1	)		(83.4	)
FINANCING ACTIVITIES:
Repayments of long-term debt and other obligations		(21.1	)		(29.8	)
Proceeds from foreign bank debt		9.0			6.9
Repayment of foreign bank debt		(4.5	)		(11.6	)
Proceeds from Term Loan		365.0			-
Repayment of Term Loan		(23.8	)		(23.8	)
Proceeds from issuance of Senior Notes		600.0			-
Proceeds from Senior Credit Facility		933.9			707.4
Repayment of Senior Credit Facility		(731.5	)		(766.7	)
Repayments of private placement notes		(1,075.0	)		-
Payments on early extinguishment of debt		(20.4	)		-
(Repayments of) proceeds from bank overdrafts, net		(12.1	)		0.2
Payments of capital lease obligations		(1.3	)		(2.7	)
Payment of debt issuance costs		(8.8	)		-
Proceeds from issuance of common stock, net of shares withheld for tax		13.9			8.8
Payments for repurchase of mandatory convertible preferred stock		-			(14.8	)
Dividends paid on mandatory convertible preferred stock		-			(17.1	)
Net cash from financing activities		23.3			(143.2	)
Effect of exchange rate changes on cash and cash equivalents		(1.0	)		(1.6	)
Net change in cash and cash equivalents		0.2			2.8
Cash and cash equivalents at beginning of period		34.3			42.2
Cash and cash equivalents at end of period	$	34.5		$	45.0
SUPPLEMENTAL CASH FLOW INFORMATION:
Net issuances of obligations for acquisitions	$	0.3		$	21.7
Capital expenditures in accounts payable	$	30.6		$	5.5
Interest paid during the period, net of capitalized interest	$	48.8		$	42.5
Income taxes paid during the period, net of refunds	$	6.5		$	18.4

See accompanying Notes to Condensed Consolidated Financial Statements.

2019 Q2 10-Q Report Stericycle, Inc.  •  7

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN EQUITY

(Unaudited)

In millions
	Stericycle, Inc. Equity
	Preferred Stock				Common Stock				Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Noncontrolling Interests		Total Equity
	Shares		Amount		Shares		Amount
Balance as of April 1, 2019		-	$	-		90.8	$	0.9	$	1,171.2	$	1,751.4		$	(356.9	)	$	3.9	$	2,570.5
Net loss												(30.5	)					0.3		(30.2	)
Currency translation adjustment															(2.4	)				(2.4	)
Change in qualifying cash flow hedge, net of tax															0.4