Washington, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
[Mark One]
For the quarterly period ended September 30, 2023
or
For the transition period from to
Commission File Number 1-37556
________________________________________________________
 | ||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | ||||
(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 | ||||||
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 x 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 x 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 “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Smaller reporting company ☐
Accelerated filer ☐
Emerging growth company ☐
Non-accelerated filer ☐
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 x
On October 30, 2023, there were 92,523,391 shares of the Registrant’s Common Stock outstanding.
Table of Contents
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2023 Q3 10-Q Report | Stericycle, Inc. ● | 3 | ||||||
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 | ||||
| 2022 Form 10-K | Annual report on Form 10-K for the year ended December 31, 2022 | ||||
| Adjusted Income from Operations | Income from Operations adjusted for certain items discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||
| Credit Agreement | Credit Agreement dated September 30, 2021, First Amendment dated April 26, 2022, and Second Amendment dated June 15, 2023, among the Company and certain subsidiaries as borrowers. Bank of America, N.A., as administrative agent, swing line lender, a lender and a letter of credit issuer and the other lenders party thereto, as amended | ||||
Credit Agreement Defined Debt Leverage Ratio | 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 (each as defined in the Credit Agreement) for the period of four fiscal quarters most recently ended on or prior to such date | ||||
| Credit Facility | The Company's $1.2 billion credit facility due in September of 2026 granted under the terms of the Credit Agreement | ||||
| CRS | Communication and Related Services (Divested December 2022) | ||||
| DEA | U.S. Drug Enforcement Administration. The DEA is a division of the DOJ. It is the federal agency which regulates the manufacture, dispensing, storage, and shipment of controlled substances including medications with human abuse potential | ||||
| DOJ | U.S. Department of Justice | ||||
| Domestic Environmental Solutions | Hazardous Waste Solutions and Manufacturing and Industrial Services (Divested April 2020) | ||||
| DSO | Days Sales Outstanding as reported, defined as the average number of days that it takes a company to collect payment after revenue has been recorded, computed as the trailing twelve months of Revenues for the period ended, divided by the Accounts Receivable balance at the end of the period. Days Sales Outstanding, net of Deferred Revenues is similarly computed except Accounts Receivable balance is netted with Deferred Revenues. | ||||
| DTSC | U.S. Department of Toxic Substances Control | ||||
| EBITDA | Earnings Before Interest, Taxes, Depreciation & Amortization. Another common financial term utilized by Stericycle to analyze the core profitability of the business before interest, tax, depreciation and amortization | ||||
| Enviri | Enviri Corporation, a Delaware Corporation, formerly known as Harsco Corporation | ||||
| ERP | Enterprise Resource Planning | ||||
| Exchange Act | U.S. Securities Exchange Act of 1934 | ||||
| FCPA | U.S. Foreign Corrupt Practices Act | ||||
| FCPA Settlement | FCPA settlement with the SEC, the DOJ and Brazil authorities of approximately $90 million and engagement of an independent compliance monitor for 2 years and self-reporting for additional year | ||||
| International | Operating segment including Europe, Middle East, Asia Pacific (Divested our Korea operations in June 2023, which was our last remaining Asia Pacific business) and Latin America (Divested our Brazil operations in April 2023, which was our last remaining Latin America business) Business operations outside of North America | ||||
| IRS | U.S. Internal Revenue Service | ||||
| LIBOR | London Interbank Offered Rate - benchmark interest rate that was replaced by SOFR | ||||
| Net Debt | As defined in the Credit Agreement, adding back unamortized debt issuance costs, less cash and cash equivalents | ||||
| North America | Operating segment in North America, including U.S., Canada and Puerto Rico | ||||
| NOV | Notice of Violation | ||||
| Other Costs | Represents corporate enabling and shared services costs, annual incentive and stock-based compensation | ||||
| Purchase Agreement | Stock Purchase Agreement, dated as of February 6, 2020, by and between Stericycle, Inc., and the Harsco Corporation (now known as Enviri Corporation) and CEI Holding LLC, a Delaware limited liability company and subsidiary of Harsco Corporation (now known as Enviri Corporation) | ||||
| PSU | Performance-based Restricted Stock Unit | ||||
| RSU | Restricted Stock Unit | ||||
| RWCS | Regulated Waste and Compliance Services, a business unit that provides regulated medical waste services | ||||
| SEC | U.S. Securities and Exchange Commission | ||||
| Senior Notes | 5.375% ($600.0 million) Senior Notes due July 2024 and 3.875% ($500.0 million) Senior Notes due January 2029 | ||||
| SG&A | Selling, general and administrative expenses | ||||
| SID | Secure Information Destruction Services, a business unit that provides confidential customer material shredding services and recycling of shredded paper | ||||
| SOFR | Secured Overnight Financing Rate - benchmark interest rate that replaced LIBOR | ||||
| SOP | Sorted Office Paper | ||||
| SQ Settlement | Small quantity medical waste customers class action settlement of $295.0 million | ||||
| 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 | ||||
| TSA | Transition Services Agreement | ||||
| UAE | United Arab Emirates | ||||
| U.S. | United States of America | ||||
| U.S. GAAP | U.S. Generally Accepted Accounting Principles | ||||
2023 Q3 10-Q Report | Stericycle, Inc. ● | 4 | ||||||
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
| In millions, except per share data | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Divestiture losses, net (Note 3) | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | ( | ||||||||||||||||||||
| Net income (loss) attributable to Stericycle, Inc. common shareholders | $ | $ | $ | ( | $ | ||||||||||||||||||
| Income (loss) per common share attributable to Stericycle, Inc. common shareholders: | |||||||||||||||||||||||
| Basic | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted | $ | $ | $ | ( | $ | ||||||||||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 5 | ||||||
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| In millions | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Cumulative currency translation loss realized from divestitures | |||||||||||||||||||||||
| Total other comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||
| Comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||
| Less: comprehensive income (loss) attributable to noncontrolling interests | ( | ( | ( | ||||||||||||||||||||
| Comprehensive (loss) income attributable to Stericycle, Inc. common shareholders | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 6 | ||||||
STERICYCLE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| In millions, except per share data | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowance for doubtful accounts of $ | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total Current Assets | |||||||||||
Property, plant and equipment, less accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
Intangible assets, less accumulated amortization of $ | |||||||||||
| Other assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Bank overdrafts | |||||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred revenues | |||||||||||
| Other current liabilities | |||||||||||
| Total Current Liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Long-term income taxes payable | |||||||||||
| Other liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Commitments and contingencies (Note 8 - Commitments and Contingencies) | |||||||||||
| EQUITY | |||||||||||
Common stock (par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total Stericycle, Inc.’s Equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total Equity | |||||||||||
| Total Liabilities and Equity | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 7 | ||||||
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| In millions | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash from operating activities: | |||||||||||
| Depreciation | |||||||||||
| Intangible amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes | |||||||||||
| Divestiture losses, net | |||||||||||
| Asset impairments, (gain) loss on disposal of property plant and equipment and other charges | |||||||||||
| Other, net | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Prepaid expenses | ( | ||||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued liabilities | ( | ( | |||||||||
| Deferred revenues | ( | ||||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Net cash from operating activities | |||||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from divestiture of businesses, net | |||||||||||
| Other, net | |||||||||||
| Net cash from investing activities | ( | ( | |||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Repayments of long-term debt and other obligations | ( | ( | |||||||||
| Proceeds from foreign bank debt | |||||||||||
| Repayments of foreign bank debt | ( | ( | |||||||||
| Repayments of term loan | ( | ||||||||||
| Proceeds from credit facility | |||||||||||
| Repayments of credit facility | ( | ( | |||||||||
| (Repayments) proceeds of bank overdrafts, net | ( | ||||||||||
| Payments of finance lease obligations | ( | ( | |||||||||
| Payments of debt issuance costs | ( | ||||||||||
| Proceeds from issuance of common stock, net of (payments of) taxes from withheld shares | ( | ( | |||||||||
| Payments to noncontrolling interest | ( | ( | |||||||||
| Net cash from financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net change in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||||
| Interest paid, net of capitalized interest | $ | $ | |||||||||
| Income taxes paid, net | $ | $ | |||||||||
| Capital expenditures in Accounts payable | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 8 | ||||||
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| In millions | |||||||||||||||||||||||||||||||||||||||||
| Stericycle, Inc. Equity | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Cumulative currency translation loss realized from divestitures | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for incentive stock programs, net of (payments of) taxes from withheld shares | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||
| Stericycle, Inc. Equity | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for incentive stock programs, net of (payments of) taxes from withheld shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 9 | ||||||
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| In millions | |||||||||||||||||||||||||||||||||||||||||
| Stericycle, Inc. Equity | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Cumulative currency translation loss realized from divestitures | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for incentive stock programs, net of (payments of) taxes from withheld shares | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||
| Stericycle, Inc. Equity | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for incentive stock programs, net of (payments of) taxes from withheld shares | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 10 | ||||||
STERICYCLE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of Stericycle, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's condensed consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenues, and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as “Noncontrolling interests”.
The accompanying unaudited condensed consolidated financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022, have been prepared pursuant to the rules and regulations of the SEC for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements prepared in conformity with U.S. GAAP. In the opinion of management, however, all adjustments, consisting of normal recurring adjustments necessary to present fairly the results of operations, financial position and cash flows have been made. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2022 Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year or any other period.
NOTE 2 — REVENUES FROM CONTRACTS WITH CUSTOMERS
The Company provides RWCS, which provide collection and processing of regulated and specialized waste, including medical, pharmaceutical and hazardous waste, for disposal and compliance programs and SID services, which provide for the collection of personal and confidential information for secure destruction and recycling of shredded paper.
The Company’s customers typically enter into a contract for the provision of services on a regular and scheduled basis, e.g., weekly, monthly or on an as needed basis over the contract term, e.g., one-time service. Under the contract terms, the Company receives fees based on a monthly, quarterly or annual rate and/or fees based on contractual rates depending upon measures including the volume, weight, and type of waste, number and size of containers collected, and weight and type of shredded paper.
Amounts are invoiced based on the terms of the underlying contract either on a regular basis, e.g., monthly or quarterly, or as services are performed and are generally due within a short period of time after invoicing based upon normal terms and conditions for our business type and the geography of the services performed.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 11 | ||||||
Disaggregation of Revenue
The following table presents revenues disaggregated by service and reportable segments:
| In millions | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue by Service | |||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | $ | $ | $ | |||||||||||||||||||
| Secure Information Destruction Services | |||||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | |||||||||||||||||||
| North America | |||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | $ | $ | $ | |||||||||||||||||||
| Secure Information Destruction Services | |||||||||||||||||||||||
| Total North America Segment | $ | $ | $ | $ | |||||||||||||||||||
| International | |||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | $ | $ | $ | |||||||||||||||||||
| Secure Information Destruction Services | |||||||||||||||||||||||
| Total International Segment | $ | $ | $ | $ | |||||||||||||||||||
Deferred Revenues
Deferred revenues are recognized when cash payments are received or when the Company bills for services in advance of performance. Deferred revenues as of September 30, 2023 and December 31, 2022, were $65.1 million and $7.9 million, respectively. Beginning in the third quarter of 2023, the Company advanced billings for certain Regulated Waste services. Deferred revenues are classified within current liabilities since the revenues are earned within 12 months and there are no significant financing components.
Contract Acquisition Costs
The Company’s incremental direct costs of obtaining a contract, which consist primarily of sales incentives, are deferred and amortized to SG&A over a weighted average estimated period of benefit of 6.5 years.
During the three months ended September 30, 2023 and 2022, the Company amortized $4.2 million and $3.8 million, respectively, of deferred sales incentives to SG&A. During the nine months ended September 30, 2023 and 2022, the Company amortized $12.3 million and $10.8 million, respectively, of deferred sales incentives to SG&A.
Total contract acquisition costs, net of accumulated amortization, were classified as follows:
| In millions | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Other current assets | $ | $ | |||||||||
| Other assets | |||||||||||
| Total contract acquisition costs | $ | $ | |||||||||
Allowance for Doubtful Accounts
The Company estimates its allowance for doubtful accounts based on past collection history and specific risks identified among uncollected amounts, as well as management’s expectation of future economic conditions. If current or expected future economic trends, events, or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past-due receivable balances are written off when the Company’s collection efforts have been exhausted.
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The changes in allowance for doubtful accounts were reported as follows:
| In millions | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Beginning Balance | $ | $ | |||||||||
| Bad debt expense, net of recoveries | |||||||||||
| Write-offs | ( | ( | |||||||||
Other changes(1) | ( | ( | |||||||||
| Ending Balance | $ | $ | |||||||||
NOTE 3 — RESTRUCTURING, DIVESTITURES, AND ASSET IMPAIRMENTS
Restructuring – Operational Optimization:
In October 2023, the Company recognized Operational Optimization charges of approximately $3.0 million, split between its North America and International segments, related to headcount reduction.
North America Divestiture
On December 1, 2022, the Company completed the sale of its Communication Solutions business for cash proceeds of approximately $45.0 million. The transaction resulted in a pre-tax gain of $15.6 million in the fourth quarter of 2022. In connection with the transaction, the Company entered into certain additional ancillary agreements including a TSA, for up to 12 months. The Company allocated and deferred $1.4 million of the proceeds, which will be recognized over the duration of the TSA period offsetting the expenses incurred to deliver TSA services not reimbursed by the buyer.
International Divestitures
On October 6, 2023, the Company exited its operations in Romania for nominal consideration which resulted in a third-quarter assets-held-for-sale impairment charges of $4.2 million, of which $1.0 million relates to the reclassification of non-cash accumulated currency translation adjustments to earnings. The impairment charge is included in Divestiture losses, net in the Condensed Consolidated Statements of Income (Loss).
On July 25, 2023 and August 10, 2023, respectively, the Company exited its dental recycling business in the Netherlands and its SID joint venture in the UAE for nominal consideration which resulted in second quarter pre-tax charges of $1.5 million.
On June 1, 2023, the Company exited its operations in the Republic of Korea, for cash proceeds of approximately $109.3 million. The transaction resulted in a second quarter divestiture pre-tax gain of $50.8 million, of which $2.7 million of gain related to the reclassification of non-cash accumulated currency translation adjustments to earnings.
On May 24, 2023, the Company exited its operations in Australia and Singapore, for cash proceeds of approximately $2.9 million. The transaction resulted in a second quarter divestiture pre-tax loss of $7.3 million, of which $2.2 million of loss related to the reclassification of non-cash accumulated currency translation adjustments to earnings.
On April 20, 2023, the Company exited its operations in Brazil for cash consideration to the acquirer of approximately $28 million. The transaction resulted in a second quarter divestiture pre-tax loss of $96.2 million, of which $70.1 million of loss related to the reclassification of non-cash accumulated currency translation adjustments to earnings. In connection with the agreement, the Company entered into a TSA with the acquirer for a period of up to six months . The agreement provides for indemnifications to the acquirer against certain liabilities.
On January 19, 2023, the Company exited its International container manufacturing operations, for cash proceeds of approximately $2.2 million. The transaction resulted in a first quarter divestiture pre-tax loss of $5.0 million. In connection with the transaction, the Company entered into certain additional ancillary agreements, including an exclusive two-year supply agreement for containers.
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Stericycle recognized the following International pre-tax Divestiture losses (gains), net in the Condensed Consolidated Statements of Income (Loss):
| In millions | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||
| Loss - pre-cumulative currency translation | Cumulative currency translation loss realized | Total loss | Loss (gain) - pre-cumulative currency translation | Cumulative currency translation loss (gain) realized | Total loss (gain) | ||||||||||||||||||||||||||||||
| Divestitures | |||||||||||||||||||||||||||||||||||
| International Segment | |||||||||||||||||||||||||||||||||||
| Romania Operations | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| UAE Joint Venture | |||||||||||||||||||||||||||||||||||
| Netherlands Dental Operations | |||||||||||||||||||||||||||||||||||
| Republic of Korea Operations | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Australia and Singapore Operations | |||||||||||||||||||||||||||||||||||
| Brazil Operations | |||||||||||||||||||||||||||||||||||
| International Container Manufacturing Operations | |||||||||||||||||||||||||||||||||||
| Divestiture losses (gains), net | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
Revenues of the completed divestiture transactions in 2023, each individually contributed less than 1 % or in aggregate approximately 3.5 % of consolidated revenues in the year ended December 31, 2022.
Asset Impairments
In the three and nine months ended September 30, 2023, the Company recognized an impairment in SG&A of $3.1
In the nine months ended September 30, 2023, the Company recognized an impairment in COR of $3.4 million in International associated with certain long-lived assets, primarily property, plant and equipment in Romania.
In the three and nine months ended September 30, 2022, the Company recognized an impairment in SG&A of $2.0
NOTE 4 — DEBT
The Company’s long-term debt consisted of the following:
| In millions | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
$ | $ | $ | |||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
Promissory notes and deferred consideration weighted average maturity of | |||||||||||
Foreign bank debt weighted average maturity | |||||||||||
| Obligations under finance leases | |||||||||||
| Total debt | |||||||||||
| Less: current portion of total debt | |||||||||||
| Less: unamortized debt issuance costs | |||||||||||
| Long-term portion of total debt | $ | $ | |||||||||
The estimated fair value of our debt approximated $1.2 billion and $1.4 billion as of September 30, 2023 and December 31, 2022, respectively. These fair value amounts were estimated using an income approach by applying market interest rates for comparable instruments and developed based on inputs classified as Level 2.
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The weighted average interest rates on long-term debt, excluding finance leases were as follows:
| Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | ||||||||||
$ | % | % | |||||||||
$ | % | % | |||||||||
$ | % | % | |||||||||
$ | % | % | |||||||||
| Promissory notes and deferred consideration (fixed rate) | % | % | |||||||||
| Foreign bank debt (fixed rate) | N/A | % | |||||||||
The Credit Agreement contains, among other covenants, a financial covenant requiring maintenance of a maximum Credit Agreement defined Debt Leverage Ratio of 4.00 to 1.00 for any fiscal quarter ending on or after September 30, 2022, which includes, among other provisions, $50.0 million cash add backs to EBITDA with respect to any four fiscal quarter period ending on or before December 31, 2023. As of September 30, 2023, the Company was in compliance with its financial covenants. The Credit Agreement Defined Debt Leverage Ratio was 2.84 to 1.00, which was below the allowed maximum ratio of 4.00 to 1.00 as set forth in the amended Credit Agreement. If the Company's 2024 Senior Notes are still outstanding 91 days prior to their respective maturity date (the “Springing Maturity Date”), then the Credit Agreement maturity date will be the Springing Maturity Date.
The Company currently has the ability and intent to refinance the 2024 Senior Notes on a long-term basis through available capacity under its Revolving Credit Facility. Therefore, as of September 30, 2023, the 2024 Senior Notes remain classified as Long-Term Debt in the Condensed Consolidated Financial Statements.
Second Amendment
On June 15, 2023, we entered into a Second Amendment to the Credit Agreement. Among other provisions, the Second Amendment modifies the pricing reference from the Eurocurrency Rate Loans (LIBOR) to Term SOFR Loans as defined in the Credit Agreement and allows for higher capital leases now capped at $200 million in the aggregate.
Amounts committed to outstanding letters of credit and the unused portion of the Company's Senior Credit Facility were as follows:
| In millions | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Outstanding letters of credit under Credit Facility | $ | $ | |||||||||
| Unused portion of the Credit Facility | |||||||||||
NOTE 5 — INCOME TAXES
The Company reported income tax expense of $4.8 million and $5.1 million for the three months ended September 30, 2023 and 2022, respectively. The effective tax rates for the three months ended September 30, 2023 and 2022 were 69.6 % and 15.4 %, respectively. The effective tax rate for the three months ended September 30, 2023 reflects (i) losses in jurisdictions that are not eligible for tax benefits on account of valuation allowances, (ii) the impact from net non-deductible losses from divestitures, and (iii) equity-based compensation awards expiring without a tax benefit, partially offset by (iv) the tax benefit associated with the U.S. federal research and development tax credit. The effective tax rate for the three months ended September 30, 2022, reflects (i) the tax benefit from the release of uncertain tax position reserves and (ii) the tax benefit associated with the U.S. federal research and development tax credit, partially offset by (iii) losses in jurisdictions that are not eligible for tax benefits on account of valuation allowances, and (iv) equity-based compensation awards expiring without a tax benefit.
The Company reported income tax expense of $19.1 million and $16.4 million for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rates for the nine months ended September 30, 2023 and 2022 were (112.4 )% and 40.2 %, respectively. The effective tax rate for the nine months ended September 30, 2023 reflects a loss from operations before tax and additionally (i) the impact from net non-deductible losses from divestitures, (ii) losses in jurisdictions that are not eligible for tax benefits on account of valuation allowances, and (iii) equity-based compensation awards expiring without a tax benefit. The effective tax rate for the nine months ended September 30, 2022 reflects (i) losses in jurisdictions that are not eligible for tax benefits on account of valuation allowances, and (ii) equity-based compensation awards expiring without a tax benefit, partially offset by (iii) the tax benefit from the release of uncertain tax position reserves.
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NOTE 6 — EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is computed by dividing Net income (loss) by the number of weighted average common shares outstanding during the reporting period. Diluted earnings (loss) per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period, only in the periods in which such effect is dilutive.
The following table shows the effect of stock-based awards on the weighted average number of shares outstanding used in calculating diluted earnings (loss) per share:
| In millions of shares | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Weighted average common shares outstanding - basic | |||||||||||||||||||||||
Incremental shares outstanding related to stock-based awards (1) | |||||||||||||||||||||||
| Weighted average common shares outstanding - diluted | |||||||||||||||||||||||
(1)In periods of net loss, stock-based awards are anti-dilutive and therefore excluded from the loss per share calculation.
Anti-dilutive stock-based awards excluded from the computation of diluted earnings (loss) per share using the treasury stock method include the following:
| In thousands of shares | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Option awards | |||||||||||||||||||||||
| RSU awards | |||||||||||||||||||||||
PSUs are offered to key employees and are subject to achievement of specified performance conditions. Contingently issuable shares are excluded from the computation of diluted earnings (loss) per share based on current period results. The shares would not be issuable if the end of the quarter were the end of the contingency period. If such goals are not met, no compensation expense is recognized, and any previously recognized compensation expense is reversed.
NOTE 7 — SEGMENT REPORTING
The Company evaluates, oversees, and manages the financial performance of two
The following tables show financial information for the Company's reportable segments (see Note 2 – Revenues from Contracts with Customers for segment revenues):
| In millions | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Adjusted Income from Operations | |||||||||||||||||||||||
| North America | $ | $ | $ | $ | |||||||||||||||||||
| International | |||||||||||||||||||||||
| Other Costs | ( | ( | ( | ( | |||||||||||||||||||
| Total Adjusted Income from Operations | $ | $ | $ | $ | |||||||||||||||||||
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The following table reconciles the Company's primary measure of segment profitability, Adjusted Income from Operations, to Income from operations:
| In millions | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Total Reportable Segment Adjusted Income from Operations | $ | $ | $ | $ | |||||||||||||||||||
| Adjusting Items: | |||||||||||||||||||||||
| ERP and System Modernization | ( | ( | ( | ( | |||||||||||||||||||
| Intangible Amortization | ( | ( | ( | ( | |||||||||||||||||||
| Portfolio Optimization | ( | ( | ( | ( | |||||||||||||||||||
| Litigation, Settlements and Regulatory Compliance | ( | ( | ( | ( | |||||||||||||||||||
| Asset Impairments | ( | ( | ( | ( | |||||||||||||||||||
| Income from operations | $ | $ | $ | $ | |||||||||||||||||||
NOTE 8 — COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company operates in highly regulated industries and responds to regulatory inquiries or investigations from time to time that may be initiated for a variety of reasons. At any given time, the Company has matters at various stages of resolution with the applicable government authorities. The Company is also routinely involved in actual or threatened legal actions, including those involving alleged personal injuries and commercial, employment, environmental, tax, and other issues. The outcomes of these matters are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, claimants seek damages, as well as other relief, including injunctive relief, that could require significant expenditures or result in lost revenue.
In accordance with applicable accounting standards, the Company establishes an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and reasonably estimable. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is not probable or a probable loss is not reasonably estimable, no liability is recorded. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. These accruals represent management’s best estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. Estimates of probable losses resulting from litigation and regulatory proceedings are difficult to predict. Legal and regulatory matters inherently involve significant uncertainties based on, among other factors, the jurisdiction and stage of the proceedings, developments in the applicable facts or law, and the unpredictability of the ultimate determination of the merits of any claim, any defenses the Company may assert against that claim, and the amount of any damages that may be awarded. The Company’s accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes in the law or regulatory environment, adverse or favorable rulings, newly discovered facts relevant to the matter, or changes in the strategy for the matter. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Contract Class Action and Opt Out Lawsuits. Beginning on March 12, 2013, the Company was served with several class action complaints filed in federal and state courts in several jurisdictions. These complaints asserted, among other things, that the Company had imposed unauthorized or excessive price increases and other charges on its customers in breach of its contracts and in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The complaints sought certification of the lawsuit as a class action and the award to class members of appropriate damages and injunctive relief. These related actions were ultimately transferred to the United States District Court for the Northern District of Illinois for centralized pretrial proceedings.
The parties reached a settlement agreement, as previously disclosed, which obtained court approval on March 8, 2018. Under the terms of the SQ Settlement, the Company admitted no fault or wrongdoing whatsoever, and it entered into the SQ Settlement to avoid the cost and uncertainty of litigation.
Certain class members who have opted out of the SQ Settlement have filed lawsuits against the Company, and the Company has reached a settlement in principle with the plaintiffs in the remaining opt out actions, subject to documentation. The Company has made an accrual in respect of these collective matters consistent with its accrual policies described above, which is not material.
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Government Investigations. As previously reported, the Company entered into a deferred prosecution agreement (“DPA”) with the DOJ in 2022 in connection with its resolution of investigations by the DOJ, SEC, and various authorities in Brazil relating to the Company’s compliance with the FCPA and other anti-corruption laws with respect to operations in Latin America. Under the DPA, the DOJ agreed to defer criminal prosecution of the Company for a period of three years for charges of conspiring to violate the anti-bribery and books and records provisions of the FCPA. If the Company remains in compliance with the DPA during its -year term, the deferred charge against the Company will be dismissed with prejudice. Under the Company's settlement with the SEC, the Company entered into an administrative resolution with the SEC with respect to violations of the anti-bribery, books and records and internal controls provisions of the FCPA. The Company also agreed to pay fines, penalties and disgorgement to the DOJ, SEC and various Brazil authorities in a total amount of approximately $90 million. In April 2023, the last settlement with a foreign authority obtained final approval. In the second quarter of 2023, the Company substantially completed its payment obligations under the settlements. In addition, under the settlements with the DOJ and with the SEC, the Company has engaged an independent compliance monitor for two years and will undertake compliance with self-reporting obligations for an additional year.
The Company is cooperating with an investigation by the office of the United States Attorney for the Southern District of New York (“SDNY”) and the United States Environmental Protection Agency into the Company’s historical compliance with federal environmental statutes, including the Resource Conservation and Recovery Act, in connection with the collection, transportation and disposal of hazardous waste by the Company’s former Domestic Environmental Solutions business unit. The Company has made an accrual in respect of this matter consistent with its accrual policies described above, which is not material.
The Company understands that the SDNY investigation discussed above also concerned allegations of False Claims Act (“FCA”) violations made in a qui tam action filed under seal in the United States District Court for the Southern District of New York, purportedly on behalf of the United States, California and several other states. The Company understands that the United States, California, and the other states named in the qui tam action have completed their investigations into alleged FCA violations and have declined to participate in the qui tam action. The Company has not been served with the qui tam Complaint but intends to defend itself vigorously if the qui tam relator pursues its action. The Company has not accrued any amounts in respect of this action and cannot estimate the reasonably possible loss or any range of reasonably possible losses that the Company may incur. The Company is unable to make such an estimate because, based on what the Company knows now, in the Company’s judgment, the factual and legal issues presented in this matter are sufficiently unique that the Company is unable to identify other circumstances sufficiently comparable to provide guidance in making estimates.
Environmental, Regulatory and Indemnity Matters. The Company is subject to various federal, state and local laws and regulations. In the ordinary course of business, we are routinely involved in government enforcement proceedings, private lawsuits, and other matters alleging non-compliance by the Company with applicable law. The issues involved in these proceedings generally relate to alleged violations of existing permits or other requirements, or alleged liability due to our current operations, pre-existing conditions at the locations where we operate, and/or successor or predecessor liability associated with our portfolio optimization strategy. From time to time, the Company may be subject to fines or penalties in regulatory proceedings relating primarily to waste treatment, storage or disposal facilities.
Enviri Indemnification. Effective April 6, 2020, the Company completed the divestiture of its Domestic Environmental Solutions business to Enviri Corporation. Pursuant to the Purchase Agreement, the Company may have liability under certain indemnification claims for matters relating to the Domestic Environmental Solutions business, including potentially with respect to the SDNY investigation described above, the DEA Investigation matter discussed below, and other matters. Consistent with its accrual policies described previously, the Company has made accruals on various of these matters, which are neither individually nor collectively material.
Rancho Cordova, California, NOVs. On June 25 and 26, 2018, the California DTSC conducted a Compliance Enforcement Inspection of the Company’s former Domestic Environmental Solutions facility in Rancho Cordova, California. On February 14, 2020, DTSC filed an action in the Superior Court for the State of California, Sacramento County Division, alleging violations of California’s Hazardous Waste Control Law and the facility’s hazardous waste permit arising from the inspection. The Company has reached a settlement in principle with the DTSC, subject to final documentation, with respect to these claims and any potential claims stemming from the search warrant executed in conjunction with the DEA inspection of the Rancho Cordova facility described below. The Company has made an accrual in respect of the settlement consistent with its accrual policies described above, which is not material.
Rancho Cordova, California, Permit Revocation. Separately, on August 15, 2019, the Company received from DTSC a written Intent to Deny Hazardous Waste Facility Permit Application for the Rancho Cordova facility. Following legal
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challenges, that DTSC action became final as of April 8, 2022, triggering an obligation to execute the closure plan set forth in the facility's permit. Consistent with its accrual policies described previously, the Company has made an accrual in the amount of its estimate of closure costs reasonably likely to be incurred and indemnified to Enviri under the Purchase Agreement, which is not material.
DEA Investigation. On February 11, 2020, the Company received an administrative subpoena from the DEA, which executed a search warrant at the Company’s former Domestic Environmental Solutions facility at Rancho Cordova, California and an administrative inspection warrant at the Company’s former facility in Indianapolis, Indiana for materials related to the former Domestic Environmental Solutions business of collecting, transporting, and destroying controlled substances from retail customers (the “ESOL Retail Controlled Substances Business”). On that same day, agents from the DTSC executed a separate search warrant at the Rancho Cordova facility. Since that time, the U.S. Attorney’s Office for the Eastern District of California (“USAO EDCA”) has been overseeing criminal and civil investigations of the ESOL Retail Controlled Substances Business. The USAO EDCA has informed the company that the investigations relate to the Company’s operation and sale of its former ESOL Retail Controlled Substances Business, that the Company may have civil liability under the Controlled Substances Act related to that business, and that the USAO EDCA is continuing the criminal investigation of the Company for potential violations of the Controlled Substances Act and other federal criminal statutes. The Company is cooperating with the civil and criminal investigations, which are ongoing.
The Company has not accrued any amounts in respect of these investigations and cannot estimate the reasonably possible loss or any range of reasonably possible losses that the Company may incur. The Company is unable to make such an estimate because, based on what the Company knows now, in the Company’s judgment, the factual and legal issues presented in this matter are sufficiently unique that the Company is unable to identify other circumstances sufficiently comparable to provide guidance in making estimates.
European Retrovirus Investigations. In conjunction with Europol, governmental authorities of Spain and Portugal have conducted coordinated inspections of a large number of medical waste management facilities, including Stericycle facilities, relating to the transportation, management and disposal of waste that may be infected with the COVID-19 virus, and related matters. The inspections have resulted in proceedings in Spain, in which the Company is vigorously defending itself.
The Company has not accrued any amounts in respect of these investigations, as it cannot estimate the reasonably possible loss or any range of reasonably possible losses that the Company may incur. The Company is unable to make such an estimate because, based on what the Company knows now, in the Company’s judgment, the factual and legal issues presented in this matter are sufficiently unique that the Company is unable to identify other circumstances sufficiently comparable to provide guidance in making estimates.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Statement
This document may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. When we use words such as “believes”, “expects”, “anticipates”, “estimates”, “may”, “plan”, “will”, “goal”, or similar expressions, we are making forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are therefore subject to risks and uncertainties, which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. Factors that could cause such differences include, among others, SOP pricing volatility or pricing volatility in other commodities, decreases in the volume of regulated waste or personal and confidential information collected from customers, the ability to complete our system modernization efforts, and disruptions resulting from deployment of our ERP system, disruptions in our supply chain, disruptions in or attacks on information technology systems, labor shortages, a recession or economic disruption in the U.S. and other countries, inflationary cost pressure in labor, supply chain, energy, and other expenses, rising interest rates or a downgrade in our credit rating resulting in an increase in interest expense, changing market conditions in the healthcare industry, competition and demand for services in the regulated waste and secure information destruction industries, foreign exchange rate volatility in the jurisdictions in which we operate, changes in governmental regulation of the collection, transportation, treatment and disposal of regulated waste or the proper handling and protection of personal and confidential information, the level of government enforcement of regulations governing regulated waste collection and treatment or the proper handling and protection of personal and confidential information, reliance on third parties to provide a variety of services, our ability to realize expected financial benefits from our continuous improvement efforts, charges related to portfolio optimization or the failure of acquisitions or divestitures to achieve the desired results, failure to consummate transactions with respect to non-core businesses, the obligations to service substantial indebtedness and comply with the covenants and restrictions contained in our credit agreements and notes, political, economic, and other risks related to our foreign operations, pandemics and the resulting impact on the results of operations, long-term remote work arrangements which may adversely affect our business, supply chain disruptions, disruptions in transportation services, restrictions on the ability of our team members to travel, closures of our facilities or the facilities of our customers and suppliers, changes in the volume of paper processed by our secure information destruction business and the revenue generated from the sale of SOP, weather and environmental changes related to climate change, requirements of customers and investors for net carbon zero emissions strategies, and the introduction of regulations for greenhouse gases, which could negatively affect our costs to operate, the outcome of pending, future or settled litigation or investigations, including the investigation by the DEA discussed in our SEC reports and litigation or investigations with respect to the U.S. Foreign Corrupt Practices Act and foreign anti-corruption laws, failure to maintain an effective system of internal control over financial reporting, as well as other factors described in our filings with the SEC, including our 2022 Form 10-K and subsequent Quarterly Reports on Form 10-Q. As a result, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking or other statements contained herein other than in accordance with legal and regulatory obligations.
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Overview
Stericycle, Inc., is a U.S. based business-to-business services company and leading provider of compliance-based solutions that protect people and brands, promote health and well-being and safeguard the environment. Stericycle serves customers in North America and Europe with solutions for regulated waste and compliance services and secure information destruction.
Key business highlights include:
•Successfully deployed the ERP in the U.S. Regulated Waste and Compliance Services business in the third quarter of 2023.
•Improved cash flow from operations by $150.2 million for the nine months ended September 30, 2023, compared to 2022.
•Divested our dental recycling business in the Netherlands and UAE SID joint venture in the third quarter and our Romania regulated waste business in October 2023.
Other Developments
Continuing through the third quarter of 2023, we have experienced inflationary cost increases in our underlying expenses, including fleet and facilities. Our quality of revenue initiative has continued to work to create a more flexible pricing model with necessary levers to adjust for inflationary cost challenges. We have the following pricing levers: (i) standardization of contractual language to build in pricing flexibility, affording us the opportunity to adjust pricing at contract anniversary and renewal, (ii) ability to adjust our rates at point of contracting for all new customers and purchasers of our one-time services, and (iii) ability to adjust surcharges and fees providing inflationary cost protection for commodity and other price volatility (e.g., fuel, SOP, environmental surcharges and service cost recovery fee).
Within RWCS, we are seeing evolving dynamics among our national accounts, which includes customers like retail pharmacies and nationwide healthcare service providers. Our national account customer base generally remained consistent, despite the economic headwinds they're facing. As some of these customers reduce their footprint, our service stops in this segment have also contracted. Similar to RWCS, our national SID customers are experiencing a reset in their post-COVID pandemic office footprint. Across the SID business, we believe we remain an essential service and are retaining these customer relationships, but have seen service stops decline, mainly driven by customer site closures and reduced service frequencies.
Key Business Priorities
In 2023, our five key business priorities remain the following:
•Quality of revenue – We have been executing against our foundational initiatives we launched to drive revenue quality and are executing against our next phase: (i) expanding service penetration, (ii) improving customer implementation velocity, and (iii) deepening customer partnerships by developing enhanced solutions.
•Operational efficiency, modernization, and innovation – We have been executing on our foundational initiatives we launched to drive operational efficiency, modernization and innovation and are executing on our next phase: (i) infrastructure and system modernization, (ii) fleet replacement and route and long-haul network improvements and (iii) SafeShield container rationalization and modernization.
•ERP implementation – We successfully deployed the North America ERP to the U.S. RWCS business in the third quarter of 2023. Almost all of our U.S. team members are now leveraging the new technology. We continue to observe improvement in our team members' performance as they leveraged the technology and data flow. We commenced activities for the international system modernization in the second half of 2022.
•Portfolio optimization – We expect to continue evaluating opportunities to further optimize our portfolio through a combination of asset rationalizations and strategic accretive tuck-in acquisitions, which streamline our portfolio of businesses and allow us to focus more deeply on our core businesses. Throughout 2023, we divested eight businesses, demonstrating significant progress in executing our portfolio optimization priority. These divestitures primarily included Brazil, Republic of Korea, Australia, Singapore, and Romania operations for net proceeds of approximately $85 million.
•Debt reduction and leverage improvement – We have reduced total net debt to $1.28 billion as of September 30, 2023. As of September 30, 2023, we have maintained our amended Credit Agreement defined Debt Leverage Ratio target of below 3.00X.
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Certain Key Priorities and Other Significant Matters
The following table identifies certain key priorities and other significant matters impacting our business and how they are classified in the Condensed Consolidated Statements of Income (Loss):
| In millions | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Pre-tax items: | |||||||||||||||||||||||
| Included in COR | |||||||||||||||||||||||
| Asset Impairments | $ | — | $ | — | $ | 3.4 | $ | — | |||||||||||||||
| Total included in COR | — | — | 3.4 | — | |||||||||||||||||||
| Included in SG&A | |||||||||||||||||||||||
| ERP and System Modernization | 4.8 | 3.9 | 12.9 | 13.0 | |||||||||||||||||||
| Intangible Amortization | 27.9 | 31.5 | 84.2 | 94.7 | |||||||||||||||||||
| Portfolio Optimization | 0.8 | 1.4 | 1.4 | 2.7 | |||||||||||||||||||
| Litigation, Settlements and Regulatory Compliance | 5.3 | 2.6 | 22.4 | 26.0 | |||||||||||||||||||
| Asset Impairments | 3.1 | 2.0 | 3.1 | 2.0 | |||||||||||||||||||
| Total included in SG&A | 41.9 | 41.4 | 124.0 | 138.4 | |||||||||||||||||||
| Divestiture losses, net | 4.2 | — | 63.4 | — | |||||||||||||||||||
| Total included in Income from operations | $ | 46.1 | $ | 41.4 | $ | 190.8 | $ | 138.4 | |||||||||||||||
ERP and System Modernization
For the periods presented of the ERP and System Modernization, we have recognized the following, reported in Other Costs:
| In millions | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| North America | |||||||||||||||||||||||
| Operating expenditures | $ | 3.6 | $ | 3.9 | $ | 11.3 | $ | 13.0 | |||||||||||||||
| Capital expenditures | 5.6 | 5.0 | 14.3 | 9.1 | |||||||||||||||||||
| Total North America | $ | 9.2 | $ | 8.9 | $ | 25.6 | $ | 22.1 | |||||||||||||||
| International | |||||||||||||||||||||||
| Operating expenditures | $ | 1.2 | $ | — | $ | 1.6 | $ | — | |||||||||||||||
| Capital expenditures | — | — | — | — | |||||||||||||||||||
| Total International | $ | 1.2 | $ | — | $ | 1.6 | $ | — | |||||||||||||||
| Total operating expenditures | $ | 4.8 | $ | 3.9 | $ | 12.9 | $ | 13.0 | |||||||||||||||
| Total capital expenditures | 5.6 | 5.0 | 14.3 | 9.1 | |||||||||||||||||||
| Total ERP and System Modernization | $ | 10.4 | $ | 8.9 | $ | 27.2 | $ | 22.1 | |||||||||||||||
Upon the deployment of the ERP in our U.S. RWCS business in the third quarter of 2023, certain costs became incremental information technology ongoing costs for running the new system, including maintenance, licensing, and depreciation expenses. Our international ERP system modernization commenced in 2022, which includes enhancements and upgrades associated with European based RWCS and SID operations. We will continue to incur the current level of costs to maintain the legacy suite of applications also used by our European businesses during the system modernization.
Intangible Amortization
See table above of certain key priorities and other significant matters for intangible amortization expenses from acquisitions for the periods presented and how they are classified in the Condensed Consolidated Statements of Income (Loss). The decrease in amortization expense is a result of divestitures and certain intangible assets that have reached the end of their useful lives.
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Operational Optimization
In October 2023, the Company recognized Operational Optimization charges of approximately $3.0 million, split between our North America and International segments, related to headcount reduction which is expected to provide annual savings of approximately $8.0 million. As we execute our operational efficiency priorities, system modernization, and portfolio optimization, we will continue to evaluate our operating needs and prospectively adjust our work force to align. As we continue to consider each Operational Optimization activity, the amount, the timing and recognition of charges will be affected by the occurrence of commitments and triggering events as defined under U.S. GAAP, among other factors. We may incur more charges and cash expenditures than estimated and may not realize the expected improvement or cost savings on its planned time frame or at all. For additional information, see Part I, Item I. Financial Statements; Note 3 — Restructuring, Divestitures, and Asset Impairments in the Condensed Consolidated Financial Statements.
Portfolio Optimization
See table above of certain key priorities and other significant matters for portfolio optimization (including Divestiture losses, net) for the periods presented, and how they are classified in the Condensed Consolidated Statements of Income (Loss). Consulting and professional fees are reported in Other Costs, while Divestiture losses, net are included in their respective segment.
Divestitures
We evaluate our portfolio of services on an ongoing basis with a country-by-country and service line-by-service line approach to assess long-term potential and identify potential business candidates for divestiture. Divestitures resulting from this evaluation may cause us to record significant charges, including those related to goodwill, other intangible assets, long-lived assets, and cumulative translation adjustments. For additional information, see Part I, Item I. Financial Statements; Note 3 — Restructuring, Divestitures, and Asset Impairments in the Condensed Consolidated Financial Statements.
Litigation, Settlements and Regulatory Compliance
We operate in highly regulated industries and must address regulatory inquiries or respond to investigations from time to time. We have also been involved in a variety of civil litigation from time to time. Certain of these matters are detailed in Part I, Item I. Financial Statements; Note 8 — Commitments and Contingencies in the Condensed Consolidated Financial Statements. Our financial results may also include considerations of non-recurring matters including settlements, environmental remediation, and legal related consulting and professional fees.
See table above of certain key priorities and other significant matters for litigation, settlements and regulatory compliance charges. Among other things, the table reflects consulting and professional fees (including FCPA monitoring fees which commenced in 2023), contingent liability provisions and settlements, net of insurance recoveries, impacting our business for the periods presented, primarily in Other Costs. The three months ended September 30, 2023 includes professional fees and certain contingent liability provisions of $5.3 million. The nine months ended September 30, 2023 includes professional fees and certain contingent liability provisions of $17.7 million, a value-added tax reclaim credit of $6.0 million, a settlement charge associated with a vendor dispute of $6.0 million, and other settlement charges of $5.6 million, of which $11.6 million was paid in the third quarter of 2023. In the nine months ended September 30, 2022, we accrued an additional $9.6 million for the FCPA Settlement, bringing the total cumulative charge to approximately $90 million. In nine months ended September 30, 2022, the Company paid a total of $81.0 million due to the DOJ, the SEC, and Brazil authorities in accordance with the FCPA Settlement. In the second quarter of 2023, the Company paid substantially all of the remaining settlement amounts due to the DOJ and Brazil authorities. See Part I, Item I. Financial Statements; Note 8 — Commitments and Contingencies in the Condensed Consolidated Financial Statements for additional details.
Asset Impairments
See table above of certain key priorities and other significant matters for asset impairments for the periods presented and how they are classified in the Condensed Consolidated Statements of Income (Loss).
Impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur, including deterioration in the macroeconomic environment or in the equity markets, including the market value of our common shares, deterioration in our performance or our future projections, or changes in our plans for one or more reporting units or specified long-lived assets, among other factors. For additional information, see Part I, Item I. Financial Statements; Note 3 — Restructuring, Divestitures, and Asset Impairments in the Condensed Consolidated Financial Statements.
2023 Q3 10-Q Report | Stericycle, Inc. ● | 23 | ||||||
Results of Operations
Three and Nine Months Ended September 30, 2023 Compared to Three and Nine Months Ended September 30, 2022:
Revenues (including Segment Revenues)
We analyze revenues by revenue service category and reportable segment which were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||
| In millions | Components of Change (%)(1) | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change ($) | Change (%) | Organic Growth(2) | Divestitures | Foreign Exchange(3) | |||||||||||||||||||||||||||||||||||
| Revenue by Service | |||||||||||||||||||||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | 439.9 | $ | 447.8 | $ | (7.9) | (1.8) | % | 4.1 | % | (6.7) | % | 1.1 | % | |||||||||||||||||||||||||||
| Secure Information Destruction Services | 213.6 | 242.5 | (28.9) | (11.9) | % | (11.6) | % | (1.0) | % | 0.5 | % | ||||||||||||||||||||||||||||||
| Total Revenues | $ | 653.5 | $ | 690.3 | $ | (36.8) | (5.3) | % | (1.6) | % | (4.7) | % | 0.9 | % | |||||||||||||||||||||||||||
| North America | |||||||||||||||||||||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | 368.0 | $ | 369.7 | $ | (1.7) | (0.5) | % | 3.9 | % | (4.1) | % | (0.1) | % | |||||||||||||||||||||||||||
| Secure Information Destruction Services | 189.1 | 215.1 | (26.0) | (12.1) | % | (11.9) | % | — | % | (0.2) | % | ||||||||||||||||||||||||||||||
| Total North America Segment | $ | 557.1 | $ | 584.8 | $ | (27.7) | (4.7) | % | (2.1) | % | (2.6) | % | (0.1) | % | |||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | 71.9 | $ | 78.1 | $ | (6.2) | (7.9) | % | 5.4 | % | (18.9) | % | 6.6 | % | |||||||||||||||||||||||||||
| Secure Information Destruction Services | 24.5 | 27.4 | (2.9) | (10.6) | % | (9.2) | % | (8.7) | % | 6.4 | % | ||||||||||||||||||||||||||||||
| Total International Segment | $ | 96.4 | $ | 105.5 | $ | (9.1) | (8.6) | % | 1.3 | % | (16.2) | % | 6.6 | % | |||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||
| In millions | Components of Change (%)(1) | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change ($) | Change (%) | Organic Growth(2) | Divestitures | Foreign Exchange(3) | |||||||||||||||||||||||||||||||||||
| Revenue by Service | |||||||||||||||||||||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | 1,335.9 | $ | 1,348.9 | $ | (13.0) | (1.0) | % | 4.6 | % | (5.2) | % | (0.2) | % | |||||||||||||||||||||||||||
| Secure Information Destruction Services | 671.4 | 685.5 | (14.1) | (2.1) | % | (1.1) | % | (0.5) | % | (0.5) | % | ||||||||||||||||||||||||||||||
| Total Revenues | $ | 2,007.3 | $ | 2,034.4 | $ | (27.1) | (1.3) | % | 2.6 | % | (3.6) | % | (0.3) | % | |||||||||||||||||||||||||||
| North America | |||||||||||||||||||||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | 1,103.1 | $ | 1,097.5 | $ | 5.6 | 0.5 | % | 5.0 | % | (4.1) | % | (0.2) | % | |||||||||||||||||||||||||||
| Secure Information Destruction Services | 592.6 | 599.7 | (7.1) | (1.2) | % | (0.7) | % | — | % | (0.4) | % | ||||||||||||||||||||||||||||||
| Total North America Segment | $ | 1,695.7 | $ | 1,697.2 | $ | (1.5) | (0.1) | % | 2.9 | % | (2.7) | % | (0.3) | % | |||||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||||||||||||||
| Regulated Waste and Compliance Services | $ | 232.8 | $ | 251.4 | $ | (18.6) | (7.4) | % | 2.5 | % | (9.7) | % | — | % | |||||||||||||||||||||||||||
| Secure Information Destruction Services | 78.8 | 85.8 | (7.0) | (8.2) | % | (3.8) | % | (3.9) | % | (0.6) | % | ||||||||||||||||||||||||||||||
| Total International Segment | $ | 311.6 | $ | 337.2 | $ | (25.6) | (7.6) | % | 0.8 | % | (8.2) | % | (0.2) | % | |||||||||||||||||||||||||||
(1)Components of Change % in summation may not crossfoot to the total Change % due to rounding.
(2)Organic growth is change in Revenues which includes SOP pricing and volume and excludes the impact of divestitures and foreign exchange.
(3)The comparisons at constant currency rates (foreign exchange) reflect comparative local currency balances at prior period’s foreign exchange rates. We calculated these percentages by taking current period reported Revenues less the respective prior period reported Revenues, divided by the prior period reported Revenues, all at the respective prior period’s foreign exchange rates. This measure provides information on the change in Revenues assuming that foreign currency exchange rates have not changed between the prior and the current period. Management believes the use of this measure aids in the understanding of changes in Revenues without the impact of foreign currency.
Revenues for the third quarter of 2023 were $653.5 million, a decrease of $36.8 million, or 5.3%, compared to $690.3 million for the third quarter of 2022. The decrease was primarily due to impacts of divestitures of $32.4 million or 4.7%, which includes the divestiture of CRS in the fourth quarter of 2022 and International businesses in 2023, partially offset by favorable foreign exchange rates of $6.1 million or 0.9%. Organic revenues decreased $10.5 million, or 1.6%. RWCS organic revenues grew $17.4 million, or 4.1%, mainly driven by our pricing actions, which include pricing in existing contracts, new customer pricing, surcharges and fees. SID organic revenues declined $27.9 million, or 11.6%, which was primarily due to lower commodity indexed revenues, including lower sorted office paper and lower SID fuel and environmental surcharges.
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Revenues for the nine months ended September 30, 2023, were $2,007.3 million, a decrease of $27.1 million, or 1.3%, compared to $2,034.4 million for the nine months ended September 30, 2022. The decrease was primarily due to impacts of divestitures of $73.0 million, or 3.6%, which includes the divestiture of CRS in the fourth quarter of 2022 and certain International operations in 2023, and unfavorable foreign exchange rates of $5.2 million, or 0.3%. Organic revenues increased $51.1 million, or 2.6%. RWCS organic revenues grew $58.7 million, or 4.6%, mainly driven by our pricing actions. SID organic revenue declined $7.7 million, or 1.1%, which was mainly due to lower commodity indexed revenues, including lower sorted office paper and lower SID fuel and environmental surcharges.
North America revenues decreased $27.7 million, or 4.7%, in the third quarter of 2023, to $557.1 million from $584.8 million in the third quarter of 2022. The decrease was primarily due to the impacts of the CRS divestiture in the fourth quarter of 2022 of $15.3 million, or 2.6% and unfavorable foreign exchange rates of $0.8 million, or 0.1%. Organic revenues decreased $11.6 million, or 2.1%, primarily due to lower commodity indexed revenues, including lower sorted office paper and lower SID fuel an environmental surcharges. These decreases were partially offset by higher RWCS organic revenues which were mainly driven by our pricing actions.
North America revenues decreased $1.5 million, or 0.1%, for the nine months ended September 30, 2023, to $1,695.7 million from $1,697.2 million for the nine months ended September 30, 2022. Organic revenues increased $48.6 million, or 2.9%, primarily due to RWCS organic revenue increases which were mainly driven by our pricing actions. SID organic revenues decreased due to lower sorted office paper and lower SID fuel and environmental surcharges. Additionally, the impact of the CRS divestiture was $45.4 million, or 2.7%, and unfavorable foreign exchange rates were $4.6 million, or 0.3%.
International revenues decreased $9.1 million, or 8.6%, in the third quarter of 2023, to $96.4 million from $105.5 million in the third quarter of 2022. The decrease was primarily due to the impact of divestitures of $17.1 million, or 16.2%, and decreased organic SID revenues due to lower recycled paper rates and volume. These decreases were partially offset by higher organic RWCS revenues due to pricing levers offset by lower waste volumes. Additionally, favorable foreign exchange rates increased revenues by $7.0 million, or 6.6%.
International revenues decreased $25.6 million, or 7.6%, for the nine months ended September 30, 2023, to $311.6 million from $337.2 million for the nine months ended September 30, 2022. The decrease was primarily due to the impact of divestitures of $27.6 million, or 8.2%, and decreased organic SID revenues due to lower recycled paper rates and volume. These decreases were partially offset by higher organic RWCS revenues due to pricing levers.
Gross profit:
| In millions | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Gross profit | 245.7 | 37.6 | % | 266.2 | 38.6 | % | (20.5) | (7.7) | % | ||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Gross profit | 757.8 | 37.8 | % | 771.1 | 37.9 | % | (13.3) | (1.7) | % | ||||||||||||||||||||||||||
For the three months ended September 30, 2023, compared to the 2022 comparable period, the decrease in gross profit was primarily due to lower commodity indexed revenues and the corresponding margin flow through impact and a self-insurance settlement, partially offset by our pricing levers and lower labor costs.
For the nine months ended September 30, 2023, compared to the 2022 comparable period, the decrease in gross profit was primarily due to lower commodity indexed revenues and the corresponding margin flow through impact, higher fleet costs, the impacts of divestitures and foreign exchange rates, partially offset by our pricing levers and lower labor costs.
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SG&A:
| In millions | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| SG&A | 217.3 | 33.3 | % | 215.6 | 31.2 | % | 1.7 | 0.8 | % | ||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| SG&A | 654.2 | 32.6 | % | 676.5 | 33.3 | % | (22.3) | (3.3) | % | ||||||||||||||||||||||||||
For the three months ended September 30, 2023, compared to the 2022 comparable period, SG&A increased, primarily due to higher annual incentive and stock based compensation expense, partially offset by the impacts of divestitures, cost savings, and lower bad debt expense.
For the nine months ended September 30, 2023, compared to the 2022 comparable period, we incurred lower SG&A charges associated with certain key priorities and other significant matters discussed above. Additionally, the remaining change in SG&A was due to the impacts of divestitures and lower bad debt expense. These decreases were partially offset by increased annual incentive and stock based compensation expense.
Divestiture losses, net:
| In millions | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Divestiture losses, net | 4.2 | 0.6 | % | — | — | % | 4.2 | nm | |||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Divestiture losses, net | 63.4 | 3.2 | % | — | — | % | 63.4 | nm | |||||||||||||||||||||||||||
nm - percentage change not meaningful for comparison
For additional information, see Part I, Item I. Financial Statements; Note 3 — Restructuring, Divestitures, and Asset Impairments in the Condensed Consolidated Financial Statements.
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Segment Profitability:
Segment profitability and a reconciliation of the total for segment profitability to Income from operations was as follows:
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change 2023 versus 2022 | 2023 | 2022 | Change 2023 versus 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | % Segment Revenues | $ | % Segment Revenues | $ | % | $ | % Segment Revenues | $ | % Segment Revenues | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted Income from Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| North America | 143.5 | 25.8 | % | 160.4 | 27.4 | % | (16.9) | (10.5) | % | 460.3 | 27.1 | % | 443.9 | 26.2 | % | 16.4 | 3.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| International | 8.9 | 9.2 | % | 7.4 | 7.0 | % | 1.5 | 20.3 | % | 27.6 | 8.9 | % | 27.2 | 8.1 | % | 0.4 | 1.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Costs | (82.1) | nm | (75.8) | nm | (6.3) | (8.3) | % | (256.9) | nm | (238.1) | nm | (18.8) | (7.9) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 70.3 | 10.8 | % | 92.0 | 13.3 | % | (21.7) | (23.6) | % | 231.0 | 11.5 | % | 233.0 | 11.5 | % | (2.0) | (0.9) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reconciliation to Income from operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted Income from Operations | 70.3 | 92.0 | 231.0 | 233.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusting Items Total (1) | (46.1) | (41.4) | (190.8) | (138.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from operations | 24.2 | 50.6 | 40.2 | 94.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
nm - percentage change not meaningful for comparison
(1)See Part I, Item I. Financial Statements; Note 7 — Segment Reporting in the Condensed Consolidated Financial Statements for more detail.
Adjusted Income from Operations for North America decreased for the three months ended September 30, 2023, compared to the 2022 comparable period, primarily due to lower RISI rates impacting sorted office paper and fuel and environmental surcharges and their corresponding margin flow through and a self insurance settlement. These decreases were partially offset by cost savings and lower bad debt expense.
Adjusted Income from Operations for North America increased for the nine months ended September 30, 2023, compared to the 2022 comparable period, primarily due to our pricing levers, lower bad debt expense and cost savings. These increases were partially offset by lower commodity indexed revenues and the corresponding margin flow through impact, and higher fleet costs and the impact of the CRS divestiture.
Adjusted Income from Operations for International increased for the three and nine months ended September 30, 2023, compared to the respective 2022 comparable periods. These increases were primarily due to favorable RWCS pricing levers and foreign exchange rates, which were partially offset by lower SID revenues due to lower recycled paper rates and volume, and higher supply chain and other inflationary costs.
Adjusted Loss from Operations for Other Costs increased for the three and nine months ended September 30, 2023, compared to the respective 2022 comparable periods. These increases were primarily driven by higher incentive and stock-based compensation expense.
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Interest expense, net:
| In millions | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Interest expense, net | 17.4 | 2.7 | % | 19.8 | 2.9 | % | (2.4) | (12.1) | % | ||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Interest expense, net | 56.9 | 2.8 | % | 54.6 | 2.7 | % | 2.3 | 4.2 | % | ||||||||||||||||||||||||||
Interest expense, net decreased for the three months ended September 30, 2023, as compared to 2022, primarily due to the decrease in our net debt.
Interest expense, net increased for the nine months ended September 30, 2023, as compared to 2022, primarily due to higher weighted-average interest rates on the variable portion of our debt; partially offset by the decrease in our net debt. The nine months ended September 30, 2022 also included $1.1 million in interest income associated with income tax refunds. For further information, see Part I, Item I. Financial Statements; Note 4 — Debt in the Condensed Consolidated Financial Statements.
Other income (expense), net:
| In millions | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Other income (expense), net | 0.1 | — | % | 2.3 | 0.3 | % | (2.2) | (95.7) | % | ||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | % Revenues | $ | % Revenues | $ | % | ||||||||||||||||||||||||||||||
| Other income (expense), net | (0.3) | — | % | 0.8 | — | % | (1.1) | (137.5) | % | ||||||||||||||||||||||||||
Other income (expense), net is primarily comprised of foreign exchange (gains) losses.
Income tax expense:
| In millions | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | Effective Rate | $ | Effective Rate | $ | % | ||||||||||||||||||||||||||||||
| Income tax expense | 4.8 | 69.6 | % | 5.1 | 15.4 | % | (0.3) | (5.9) | % | ||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| $ | Effective Rate | $ | Effective Rate | $ | % | ||||||||||||||||||||||||||||||
| Income tax expense | 19.1 | (112.4) | % | 16.4 | 40.2 | % | 2.7 | 16.5 | % | ||||||||||||||||||||||||||
For further information, see Part I, Item I. Financial Statements; Note 5 — Income Taxes in the Condensed Consolidated Financial Statements.
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Liquidity and Capital Resources
The Company believes that it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its shareholders. Operating cash flows and the Company’s $1.2 billion Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s long-term debt obligations, and capital expenditures necessary to support growth and productivity improvements. As of September 30, 2023, we had approximately $1.1 billion of available capacity in the $1.2 billion Credit Facility. If the Company's 2024 Senior Notes are still outstanding 91 days prior to their respective maturity date (the “Springing Maturity Date”), then the Credit Agreement maturity date will be the Springing Maturity Date. The Company currently has the ability and intent to refinance the 2024 Senior Notes on a long-term basis through available capacity under its Revolving Credit Facility. Therefore, as of September 30, 2023, the 2024 Senior Notes remain classified as Long-Term Debt in the Condensed Consolidated Financial Statements. In the nine months ended September 30, 2022, the Company paid a total of $81.0 million due to the DOJ, the SEC, and Brazil authorities in accordance with the FCPA Settlement. The Company has paid substantially all of the settlement amounts due to the DOJ and Brazil authorities. For further details concerning these matters, see Part I, Item I. Financial Statements; Note 4 — Debt and Note 8 — Commitments and Contingencies in the Condensed Consolidated Financial Statements.
Cash Flow Summary:
The following table shows cash flow information for the Company by activity:
| In millions | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash from operating activities | $ | 193.3 | $ | 43.1 | |||||||
| Net cash from investing activities | (15.5) | (103.5) | |||||||||
| Net cash from financing activities | (205.2) | 56.7 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1.1 | (7.9) | |||||||||
| Net change in cash and cash equivalents | $ | (26.3) | $ | (11.6) | |||||||
Operating Cash Flows: Net cash provided from operating activities increased $150.2 million in the first nine months of 2023, to $193.3 million from $43.1 million in the nine months ended September 30, 2022. The year-over-year increase of $150.2 million was primarily driven by lower FCPA settlement payments of $72.8 million; improved accounts receivables collections, net of deferred revenues of $55.0 million; and lower annual incentive compensation payments of $22.3 million.
DSO as reported for September 30, 2023 was 63 days or 55 days, net of deferred revenues. During the third quarter of 2023, Stericycle advanced billing for certain RWCS subscription services, which contributed to the higher as reported DSO for September 30, 2023. DSO as reported for September 30, 2022 was 63 days or 62 days, net of deferred revenues. The September 30, 2023 DSO, net of deferred revenues, was lower as compared to the same period in 2022, mainly driven by the improved timing of SID customer billing and collections.
Investing Cash Flows: Net cash from investing activities increased $88.0 million in the first nine months of 2023, to an outflow of $15.5 million from $103.5 million in the nine months ended September 30, 2022, primarily driven by cash proceeds from divestitures of $84.6 million in 2023. Cash paid for capital expenditures decreased by $3.8 million to $102.2 million from $106.0 million in the nine months ended September 30, 2022.
Financing Cash Flows: Net cash from financing activities decreased $261.9 million in the first nine months of 2023, to an outflow of $205.2 million from an inflow of $56.7 million in the nine months ended September 30, 2022. Net repayments on our Credit Facility and Term Loan were $183.3 million in the nine months ended September 30, 2023, compared to net borrowings of $73.5 million in the nine months ended September 30, 2022.
Critical Accounting Policies and Estimates
As discussed in our 2022 Form 10-K, the preparation of the Condensed 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 liabilities at the date of the Condensed Consolidated Financial Statements and revenues and expenses during the periods reported. There were no material changes from the information provided therein.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to market risks, including changes in interest rates, certain commodity prices, including SOP, diesel fuel, utilities and foreign currency rates. We do not specifically hedge our exposure to these risks.
We are subject to market risks arising from changes in interest rates which relate primarily to our financing activities. We performed a sensitivity analysis to determine how market rate changes might affect the fair value of our market risk-sensitive debt instruments (variable rate debt), which in aggregate as of September 30, 2023 were 13.0% of total aggregate debt. Our potential additional interest expense over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate on all of our variable rate debt would be approximately $1.7 million on a pre-tax basis.
We are subject to market risks arising from changes in the prices for commodities such as SOP, diesel fuel, and utilities. For example, historically diesel fuel has been approximately five percent of our Cost of Revenues. As the market prices for these commodities increase or decrease, our revenues, operating costs and margins may also increase or decrease. Variability in commodity prices can also impact the margins of our business as certain components of our revenue are structured as a pass through of costs, including fuel surcharges as changes in diesel costs may offset in Revenues through our indexed fuel surcharges at certain levels of pricing.
There were no other material changes from the information provided in our 2022 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are effective as of September 30, 2023, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act.
Changes in Internal Control Over Financial Reporting
In the third quarter of 2023, we completed deployment of our ERP system for our U.S. RWCS business. As a result of the ERP system implementation, in the third quarter of 2023 certain internal controls over financial reporting have been automated, modified, or implemented to address the new control environment associated with the ERP system. Additionally, the Company completed pre-implementation and post-implementation internal control monitoring associated with the launch. While Stericycle believes that this new system will enhance its internal control over financial reporting, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes as part of our assessment of the control design and effectiveness throughout 2023.
There have been no other changes in our internal control over financial reporting that occurred during the third quarter of 2023 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II – OTHER INFORMATION | ||
Item 1. Legal Proceedings
Further information pertaining to legal proceedings can be found in Part I, Item I. Financial Statements; Note 8 — Commitments and Contingencies in the Condensed Consolidated Financial Statements and is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information included in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in the 2022 Form 10-K and subsequent Quarterly Reports on Form 10-Q and the factors identified under “Safe Harbor Statement” at the beginning of Part I, Item 2 of this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition, cash flows, or results of operations. The risks described in the 2022 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently considers immaterial also may materially adversely affect its business, financial condition, and/or operating results. There have been no material changes to the risk factors included in the 2022 Form 10-K, other than as described below.
We may not realize the expected financial benefits within the anticipated timeline from our continuous improvement efforts including operational efficiency, modernization and innovation actions, among others.
We remain focused on continuous improvements including HCoperational efficiency, modernization, and innovation to control costs and improve performance and efficiencies. We analyze opportunities in areas such as facility footprint, processing capabilities, equipment needs, team member requirements, fleet replacement and route and long-haul network improvements, managed service opportunities, and container rationalization and modernization. We may incur more charges and cash expenditures than estimated and may not realize the expected improvements or cost savings in the planned timeframe or at all. The amount, timing and recognition of charges, if any, would be affected by the occurrence of commitments and triggering events as defined under U.S. GAAP, among other factors.
We depend on third parties to provide a variety of services.
We depend on third parties to provide a variety of services including information technology, finance and accounting and processing a portion of the regulated waste we collect from our customers, among others. We may continue to increase our dependence on third-party providers for other services. The failure of these service providers to meet their obligations or the development of significant disagreements or other factors may disrupt our ongoing relationship with these providers or the services they provide, which could adversely affect our business, financial condition or results of operations. In addition, failure by waste disposal vendors to properly handle or dispose of the regulated waste we collect from customers could expose us to liability, increase our costs, damage our reputation and generally have an adverse effect on our business, financial condition or results of operations.
Geopolitical tensions and military conflict and the global community’s response may create substantial political and economic disruption, uncertainty and risk.
U.S. and global markets may experience volatility and disruption following the escalation of geopolitical tensions and military conflicts, such as those between Russia and Ukraine and in the Middle East. Although the length and impact of ongoing military conflicts is highly unpredictable, such conflicts could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions, increased cyber-attacks and social unrest in certain regions in which we operate. We are continuing to monitor existing geopolitical tensions and military conflicts and are assessing their potential impact on our business.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
There were no sales of unregistered equity securities during the three months ended September 30, 2023.
Item 5. Other Information
During the three months ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted terminated
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Item 6. Exhibits
The following exhibits are filed or furnished as part of this report:
Exhibit Index
| Exhibit Index | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 3.6 | ||||||||
| 3.7 | ||||||||
| 3.8 | ||||||||
| 3.9 | ||||||||
| 3.10 | ||||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101 | The following information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Income (Loss); (ii) Condensed Consolidated Statements of Comprehensive (Loss) Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Changes in Equity; (vi) Notes to Condensed Consolidated Financial Statements, and (vii) the information under Part II, Item 5, “Other Information” | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 2, 2023
| STERICYCLE, INC. | |||||
| (Registrant) | |||||
| By: /s/ JANET H. ZELENKA | |||||
| Janet H. Zelenka | |||||
Executive Vice President, Chief Financial Officer & Chief Information Officer | |||||
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