XNAS:SRCL Stericycle Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012 or

 

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

For the transition period from                     to                    

Commission File Number 0-21229

 

 

Stericycle, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-3640402

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

28161 North Keith Drive

Lake Forest, Illinois 60045

(Address of principal executive offices, including zip code)

(847) 367-5910

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x     NO  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

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

As of April 30, 2012 there were 85,082,990 shares of the registrant’s Common Stock outstanding.

 

 

 


Table of Contents

 

LOGO

Stericycle, Inc.

Table of Contents

 

     Page No.  

PART I. Financial Information

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011 (Audited)

     1   

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 (Unaudited)

     2   

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (Unaudited)

     3   

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2012 (Unaudited) and year ended December 31, 2011 (Audited)

     4   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     5   

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

     16   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     21   

Item 4. Controls and Procedures

     21   

PART II. Other Information

  

Item 1. Legal Proceedings

     23   

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

     23   

Item 6. Exhibits

     25   

Signatures

     25   

Certifications

     25   


Table of Contents

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

In thousands, except share and per share data

 
     March 31,
2012
    December 31,
2011
 
     (Unaudited)     (Audited)  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 30,262      $ 22,511   

Short-term investments

     420        416   

Accounts receivable, less allowance for doubtful accounts of $19,395 in 2012 and $18,905 in 2011

     315,144        290,854   

Deferred income taxes

     19,055        19,314   

Prepaid expenses

     23,151        22,466   

Other current assets

     39,046        35,035   
  

 

 

   

 

 

 

Total Current Assets

     427,078        390,596   

Property, Plant and Equipment, net

     301,274        293,912   

Goodwill

     1,924,240        1,913,703   

Intangible assets, less accumulated amortization of $47,582 in 2012 and $42,050 in 2011

     582,467        546,618   

Other assets

     40,175        32,261   
  

 

 

   

 

 

 

Total Assets

   $ 3,275,234      $ 3,177,090   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 91,038      $ 100,526   

Accounts payable

     71,806        66,635   

Accrued liabilities

     146,333        140,521   

Deferred revenues

     13,941        12,855   

Other current liabilities

     10,699        6,377   
  

 

 

   

 

 

 

Total Current Liabilities

     333,817        326,914   

Long-term debt, net of current portion

     1,250,769        1,284,113   

Deferred income taxes

     335,913        313,733   

Other liabilities

     26,997        25,079   

Equity:

    

Common stock (par value $.01 per share, 120,000,000 shares authorized, 84,994,111 issued and outstanding in 2012 and 84,696,227 issued and outstanding in 2011)

     850        847   

Additional paid-in capital

     22,798        0   

Accumulated other comprehensive loss

     (29,538     (45,984

Retained earnings

     1,305,215        1,243,303   
  

 

 

   

 

 

 

Total Stericycle, Inc.’s Equity

     1,299,325        1,198,166   

Noncontrolling interest

     28,413        29,085   
  

 

 

   

 

 

 

Total Equity

     1,327,738        1,227,251   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 3,275,234      $ 3,177,090   
  

 

 

   

 

 

 

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

 

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Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

In thousands, except for share and per share data

 
     Three Months Ended March 31,  
     2012     2011  

Revenues

   $ 460,077      $ 398,126   

Costs and Expenses:

    

Cost of revenues (exclusive of depreciation shown below)

     244,182        205,878   

Depreciation – cost of revenues

     10,588        9,818   

Selling, general and administrative expenses (exclusive of depreciation and amortization shown below)

     81,915        74,732   

Depreciation – SG&A

     2,151        1,938   

Amortization

     4,979        3,347   
  

 

 

   

 

 

 

Total Costs and Expenses

     343,815        295,713   
  

 

 

   

 

 

 

Income from Operations

     116,262        102,413   
  

 

 

   

 

 

 

Other Income (Expense):

    

Interest income

     92        184   

Interest expense

     (12,766     (11,372

Other expense, net

     (558     (263
  

 

 

   

 

 

 

Total Other Expense

     (13,232     (11,451
  

 

 

   

 

 

 

Income Before Income Taxes

     103,030        90,962   

Income Tax Expense

     37,715        34,376   
  

 

 

   

 

 

 

Net Income

   $ 65,315      $ 56,586   

Less: Net Income Attributable to Noncontrolling Interests

     458        912   
  

 

 

   

 

 

 

Net Income Attributable to Stericycle, Inc.

   $ 64,857      $ 55,674   
  

 

 

   

 

 

 

Earnings Per Common Share Attributable to Stericycle Inc. Common Shareholders:

    

Basic

   $ 0.76      $ 0.65   
  

 

 

   

 

 

 

Diluted

   $ 0.75      $ 0.64   
  

 

 

   

 

 

 

Weighted Average Number of Common Shares Outstanding:

    

Basic

     84,828,280        85,459,302   

Diluted

     86,587,944        87,526,683   
  

 

 

   

 

 

 

Comprehensive Income

     82,827        69,662   

Less: Comprehensive Income Attributable to Noncontrolling Interests

     1,524        1,050   
  

 

 

   

 

 

 

Comprehensive Income Attributable to Stericycle, Inc.

   $ 81,303      $ 68,612   
  

 

 

   

 

 

 

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

 

2


Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

In thousands

 
     Three Months Ended March 31,  
     2012     2011  

OPERATING ACTIVITIES:

    

Net income

   $ 65,315      $ 56,586   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Change in fair value of contingent consideration

     1,204        (2,140

Stock compensation expense

     4,085        3,863   

Excess tax benefit of stock options exercised

     (5,061     (8,092

Depreciation

     12,739        11,756   

Amortization

     4,979        3,347   

Deferred income taxes

     11,921        16,051   

Changes in operating assets and liabilities, net of effect of

acquisitions and divestitures:

    

Accounts receivable

     (14,493     (11,615

Accounts payable

     2,101        (433

Accrued liabilities

     12,623        799   

Deferred revenues

     1,029        (34

Other assets and liabilities

     3,119        (4,503
  

 

 

   

 

 

 

Net cash provided by operating activities

     99,561        65,585   
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Payments for acquisitions, net of cash acquired

     (28,182     (19,543

Purchases of short-term investments

     (2     (1,240

Proceeds from sale of business and other assets

     0        389   

Capital expenditures

     (17,049     (11,692
  

 

 

   

 

 

 

Net cash used in investing activities

     (45,233     (32,086
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Repayment of long-term debt and other obligations

     (8,571     (24,100

Borrowings on senior credit facility

     185,434        139,290   

Repayments on senior credit facility

     (238,290     (225,334

Payments on capital lease obligations

     (640     (463

Purchase and cancellation of treasury stock

     (2,945     0   

Proceeds from other issuance of common stock

     12,494        14,811   

Excess tax benefit of stock options exercised

     5,061        8,092   
  

 

 

   

 

 

 

Net cash used in financing activities

     (47,457     (87,704

Effect of exchange rate changes on cash

     880        1,808   
  

 

 

   

 

 

 

Net increase/ (decrease) in cash and cash equivalents

     7,751        (52,397

Cash and cash equivalents at beginning of period

     22,511        77,053   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 30,262      $ 24,656   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES:

    

Net issuance of obligations for acquisitions

   $ 14,883      $ 730   

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

 

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Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Three Months Ended March 31, 2012 (Unaudited) and

Year Ended December 31, 2011 (Audited)

 

In thousands

                                          
     Stericycle, Inc. Equity     Noncontrolling
Interest
    Total Equity  
     Issued
and
Outstanding
Shares
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated Other
Comprehensive
Income (Loss)
     

Balance at December 31, 2010

     85,242      $ 852      $ 46,945      $ 1,017,497      $ (16,869   $ 31,925      $ 1,080,350   

Net income

           234,751          2,592        237,343   

Currency translation adjustment

             (29,456     (3,437     (32,893

Amortization of treasury lock into income, net of tax of $216

             341          341   
              

 

 

 

Comprehensive income

                 204,791   

Issuance of common stock for exercise of options and employee stock purchases

     1,016        11        36,394              36,405   

Purchase/ cancellation of treasury stock

     (1,562     (16     (115,095     (8,945         (124,056

Stock compensation expense

         15,367              15,367   

Excess tax benefit of stock options exercised

         17,410              17,410   

Noncontrolling interests acquired from new acquisitions

               10,708        10,708   

Reduction to noncontrolling interests due to additional ownership

         (1,021         (10,210     (11,231

Reduction to noncontrolling interests due to divestiture

               (1,959     (1,959

Payments to noncontrolling interests

               (534     (534
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     84,696      $ 847      $ 0      $ 1,243,303      $ (45,984   $ 29,085      $ 1,227,251   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

           64,857          458        65,315   

Currency translation adjustment

             16,361        1,066        17,427   

Amortization of treasury lock into income, net of tax of $54

             85          85   
              

 

 

 

Comprehensive income

                 82,827   

Issuance of common stock for exercise of options and employee stock purchases

     336        3        13,652              13,655   

Purchase/ cancellation of treasury stock

     (38     0        0        (2,945         (2,945

Stock compensation expense

         4,085              4,085   

Excess tax benefit of stock options exercised

         5,061              5,061   

Reduction to noncontrolling interests due to additional ownership

               (2,196     (2,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     84,994      $ 850      $ 22,798      $ 1,305,215      $ (29,538   $ 28,413      $ 1,327,738   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

NOTE 1 – BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes the disclosures included in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the Stericycle, Inc. and Subsidiaries Consolidated Financial Statements and notes thereto for the year ended December 31, 2011, as filed with our Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2012.

There were no material changes in the Company’s critical accounting policies since the filing of its 2011 Form 10-K. As discussed in the 2011 Form 10-K, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.

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

NOTE 2 – ACQUISITIONS AND DIVESTITURES

The following table summarizes the locations of our acquisitions for the three months ended March 31, 2012:

 

Acquisition Locations

   2012  

United States

     6   

Japan

     1   

Romania

     1   

Spain

     3   
  

 

 

 

Total

     11   

 

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During the quarter ended March 31, 2012, we completed eleven acquisitions. Domestically, we acquired 100% of the stock of one regulated waste business, selected assets of one regulated waste business, and selected assets of four compliance businesses. We also placed an amount into escrow for a potential future acquisition. Internationally, we acquired 100% of the stock of one regulated waste business in Romania. In Spain, we acquired 100% of the stock of two regulated waste businesses and selected assets of another regulated waste business. In Japan, we acquired selected assets of a regulated waste business. We also increased our majority share in a previous acquisition in Brazil from 70% to 100%.

The following table summarizes the aggregate purchase price paid for acquisitions and other adjustments of consideration to be paid on acquisitions during the three months ended March 31, 2012:

 

In thousands

      

Cash

   $ 28,182   

Promissory notes

     8,070   

Deferred consideration

     6,053   

Contingent consideration

     760   
  

 

 

 

Total purchase price

   $ 43,065   

During the three months ended March 31, 2012, we recognized a net decrease in goodwill of $1.7 million of which $11.1 million increase was assigned to our United States reporting segment and $12.8 million decrease to our International reporting segment. Approximately $10.5 million of the goodwill recognized during the three months ended March 31, 2012 will be deductible for income taxes.

During the three months ended March 31, 2012, we recognized $35.9 million in intangible assets of which $9.8 million represents the estimated fair value of acquired customer relationships with amortizable lives of 15-40 years, $23.4 million in permits with indefinite lives, and $2.7 million in a tradename with an amortizable life of 15 years. The allocation of the acquisition price paid is preliminary pending completion of certain intangible asset valuations and completion accounts.

The following table summarizes the preliminary purchase price allocation for current period acquisitions and other adjustments to purchase price allocations during the three months ended March 31, 2012:

 

In thousands

      

Fixed assets

   $ 901   

Intangibles

     35,860   

Goodwill

     (1,738

Net other assets/ (liabilities)

     14,768   

Debt

     (124

Net deferred tax liabilities

     (8,798

Noncontrolling interests

     2,196   
  

 

 

 

Total purchase price allocation

   $ 43,065   

For financial reporting purposes, our 2012 and 2011 acquisitions were accounted for using the acquisition method of accounting. These acquisitions resulted in recognition of goodwill in our financial statements reflecting the premium paid to acquire businesses that we believe are

 

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complementary to our existing operations and fit our strategy. During the three months ended March 31, 2012 and 2011, the Company incurred $1.5 million and $5.9 million, respectively, of acquisition related expenses. These expenses are identified on our Condensed Consolidated Statements of Income as part of “Selling, general and administrative expenses”. The purchase prices in excess of acquired tangible assets for these acquisitions have been primarily allocated to goodwill and other intangibles and are preliminary pending completion of certain intangible asset valuations.

NOTE 3 – NEW ACCOUNTING STANDARDS

Accounting Standards Recently Adopted

Other Comprehensive Income

On January 1, 2012, Stericycle adopted changes issued by the Financial Accounting Standards Board (“FASB”) to guidance on the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. Part of the adopted standard related to presentation of reclassification of items out of accumulated other comprehensive income have been deferred. Other than the change in presentation, these changes did not have an impact on our financial statements.

Goodwill Impairment Testing

On January 1, 2012, Stericycle adopted changes issued by the FASB to guidance on the testing for impairment of goodwill. Previous guidance required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments, an entity is not required to calculate the fair value of a reporting unit unless the entity determines, using qualitative assessment, that it is more likely than not (greater than 50%) that its fair value is less than its carrying amount. As these changes should not affect the outcome of the impairment analysis of a reporting unit, management has determined these changes will not have an impact on our financial statements. We perform our annual test for goodwill impairment during the second quarter.

Fair Value Measurement

On January 1, 2012, Stericycle adopted changes issued by the FASB for additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for those items categorized as Level 3, a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured at fair value for disclosure purposes only. Other than the change in presentation, these changes did not have an impact on our financial statements.

 

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NOTE 4 – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

In thousands

 
     Total as of
March 31, 2012
     Fair Value Measurements Using  
        Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Assets:

           

Cash and cash equivalents

   $ 30,262       $ 30,262       $ 0       $ 0   

Short-term investments

     420         420         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 30,682       $ 30,682       $ 0       $ 0   

Liabilities:

           

Contingent consideration

   $ 12,005       $ 0       $ 0       $ 12,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 12,005       $ 0       $ 0       $ 12,005   

 

In thousands

 
     Total as of
December 31, 2011
     Fair Value Measurements Using  
        Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Assets:

           

Cash and cash equivalents

   $ 22,511       $ 22,511       $ 0       $ 0   

Short-term investments

     416         416         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 22,927       $ 22,927       $ 0       $ 0   

Liabilities:

           

Contingent consideration

   $ 9,921       $ 0       $ 0       $ 9,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 9,921       $ 0       $ 0       $ 9,921   

We had contingent consideration liabilities recorded in the amounts of $12.0 million at March 31, 2012, and $9.9 million at December 31, 2011 using Level 3 inputs. Contingent consideration represents amounts to be paid as part of acquisition consideration only if certain future events occur. These events are usually acquisition targets for revenues or earnings. We arrive at the fair value of contingent consideration by applying a weighted probability of potential outcomes to the maximum possible payout. The calculation

 

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of these potential outcomes is dependent on both past financial performance and management assumptions about future performance. If the financial performance measures were all fully met, our maximum liability would be $15.6 million. Contingent consideration liabilities are reassessed each quarter and are reflected in the condensed consolidated balance sheets as part of “Other current liabilities” or “Other liabilities”. Changes to contingent consideration are reflected in the table below:

 

In thousands

      

Contingent consideration at December 31, 2011

   $ 9,921   

Increases due to acquisitions

     760   

Changes due to currency fluctuations

     120   

Changes in fair value reflected in income statement (SG&A)

     1,204   
  

 

 

 

Contingent consideration at March 31, 2012

   $ 12,005   
  

 

 

 

Fair Value of Debt: At March 31, 2012, the fair value of the Company’s debt obligations was estimated at $1.36 billion compared to a carrying amount of $1.34 billion. At December 31, 2011, the fair value of the Company’s debt obligations was estimated at $1.41 billion, compared to a carrying amount of $1.38 billion using Level 2 inputs. The fair values were estimated using market interest rates for comparable instruments. The Company has no current plans to retire a significant amount of its debt prior to maturity.

There were no movements of items between fair value hierarchies.

NOTE 5 – INCOME TAXES

We and our subsidiaries file U.S. federal income tax returns and income tax returns in various states and foreign jurisdictions.

The Company has recorded accruals to cover uncertain tax positions taken on previously filed tax returns. Such liabilities relate to additional taxes, interest and penalties the Company may be required to pay in various tax jurisdictions. During the course of examinations by various taxing authorities, proposed adjustments may be asserted. The Company evaluates such items on a case-by-case basis and adjusts the accrual for uncertain tax positions. During the quarter ended March 31, 2012 we had net increases to our accruals related to a reassessment of previous and current uncertain tax positions.

NOTE 6 – STOCK BASED COMPENSATION

At March 31, 2012 we had the following stock option plans:

 

   

the 2011 Incentive Compensation Plan, which expires May 2021;

 

   

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

 

   

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

 

   

the 2000 Nonstatutory Stock Option Plan, which expired in February 2010;

 

   

the 1997 Stock Option Plan, which expired in January 2007;

 

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the 1996 Directors Stock Option Plan, which expired in May 2006;

 

   

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

The following table presents the total stock-based compensation expense resulting from stock option awards and the ESPP included in the condensed consolidated statements of comprehensive income:

 

In thousands

 
     Three Months Ended March 31,  
             2012                      2011          

Cost of revenues – stock option plan

   $ 38       $ 26   

Selling, general and administrative – stock option plan

     3,480         3,424   

Selling, general and administrative – restricted stock unit

     303         158   

Selling, general and administrative – ESPP

     264         255   
  

 

 

    

 

 

 

Total pre-tax expense

   $ 4,085       $ 3,863   
  

 

 

    

 

 

 

As of March 31, 2012, there was $41.3 million of total unrecognized compensation expense, related to non-vested option awards, which is expected to be recognized over a weighted-average period of 2.24 years.

The following table sets forth the tax benefits related to stock compensation:

 

In thousands

 
     Three Months Ended March 31,  
             2012                      2011          

Tax benefit recognized in the income statement

   $ 1,119       $ 1,268   

Excess tax benefit realized

     5,061         8,092   

The Black-Scholes option-pricing model is used in determining the fair value of each option grant. The expected term of options granted is based on historical experience. Expected volatility is based upon historical volatility. The expected dividend yield is zero. The risk-free interest rate is based upon the U.S. Treasury yield rates for a comparable period. The assumptions that we used in the Black-Scholes model are as follows:

 

     Three Months Ended March 31,  
             2012                     2011          

Expected term (in years)

     6.0        5.75   

Expected volatility

     27.87     26.88

Expected dividend yield

     0.00     0.00

Risk free interest rate

     1.076     2.28

The weighted average grant date fair value of the stock options granted during the three months ended March 31, 2012 and 2011 was as follows:

 

     Three Months Ended March 31,  
             2012                      2011          

Weighted average fair value at grant date

   $ 19.90       $ 20.51   

 

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Stock option activity for the three months ended March 31, 2012, was as follows:

 

     Number of
Options
    Weighted
Average
Exercise
Price per
Share
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic

Value
 
                  (in years)         

Outstanding at December 31, 2011

     6,342,337      $ 50.06         

Granted

     983,755        86.22         

Exercised

     (336,436     37.14         

Cancelled or expired

     (16,435     57.94         
  

 

 

         

Outstanding at March 31, 2012

     6,973,221      $ 55.74         6.81       $ 198,903,742   
  

 

 

         

Exercisable at March 31, 2012

     3,981,153      $ 44.43         5.56       $ 156,678,425   

Vested and expected to vest in the future at March 31, 2012

     6,174,592      $ 53.35         6.56       $ 190,203,151   

The total exercise intrinsic value represents the total pre-tax value (the difference between the sales price on that trading day in the quarter ended March 31, and the exercise price associated with the respective option).

 

In thousands

   Three Months Ended March 31,  
     2012      2011  

Total exercise intrinsic value of options exercised

   $ 16,582       $ 24,274   

Restricted stock units (“RSUs”) activity for the quarter ended March 31, 2012 is summarized below. RSUs vest at the end of three years. Our 2008 Plan includes a share reserve related to RSUs granted at a 2-1 ratio.

 

     March 31, 2012  
     Number
of
Units
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic

Value
 
            (in years)         

Outstanding at beginning of year

     34,738         

Granted

     39,237         

Forfeited

     0         
  

 

 

       

Outstanding at end of year

     73,975         3.24       $ 6,187,269   
  

 

 

       

Exercisable at end of year

     0         0.00         0   

Vested and expected to vest in the future

     46,472         2.74       $ 3,886,902   

NOTE 7 – COMMON STOCK

The following table provides information about our repurchase of shares of our common stock during the three months ended March 31, 2012.

 

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     Number of
Shares
Repurchased
and
Cancelled
     Amount Paid
for
Repurchases
(000’s)
     Average
Price Paid
per Share
 

Three months ended March 31, 2012

     38,552       $ 2,945       $ 76.38   

Three months ended March 31, 2011

     0       $ 0       $ 0   

NOTE 8 – NET INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted net income per share:

 

    

In thousands, except share and per share data

   Three Months Ended March 31,  
     2012      2011  

Numerator:

     

Numerator for basic earnings per share net income attributable to Stericycle, Inc.

   $ 64,857       $ 55,674   
  

 

 

    

 

 

 

Denominator:

     

Denominator for basic earnings per share-weighted average shares

     84,828,280         85,459,302   

Effect of diluted securities:

     

Employee stock options

     1,759,664         2,067,381   
  

 

 

    

 

 

 

Denominator for diluted earnings per share-adjusted weighted average shares and after assumed exercises

     86,587,944         87,526,683   
  

 

 

    

 

 

 

Earnings per share – Basic

   $ 0.76       $ 0.65   
  

 

 

    

 

 

 

Earnings per share – Diluted

   $ 0.75       $ 0.64   
  

 

 

    

 

 

 

NOTE 9 – COMPREHENSIVE INCOME

The components of total comprehensive income are net income, net income attributable to noncontrolling interests, the change in cumulative currency translation adjustments, and gains and losses on derivative instruments qualifying as cash flow hedges. The following table sets forth the components of total comprehensive income for the three months ended March 31, 2012 and 2011:

 

In thousands

   Three Months Ended March 31,  
     2012      2011  

Net income

   $ 65,315       $ 56,586   

Other comprehensive income:

     

Currency translation adjustments

     17,427         12,991   

Amortization of treasury lock into income, net of tax of $54

     85         85   
  

 

 

    

 

 

 

Other comprehensive income/ (loss)

     17,512         13,076   
  

 

 

    

 

 

 

Comprehensive income

     82,827         69,662   

Less: comprehensive income attributable to noncontrolling interests

     1,524         1,050   

Comprehensive income attributable to Stericycle, Inc.

   $ 81,303       $ 68,612   
  

 

 

    

 

 

 

 

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NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and identifiable indefinite lived intangible assets are not amortized, but are subject to an annual impairment test. Other intangible assets are amortized over their useful lives. We have determined that our customer relationships have useful lives from 14 to 40 years based upon the type of customer, with a weighted average remaining useful life of 28.1 years. We have covenants not-to-compete intangibles with useful lives from two to ten years, with a weighted average remaining useful life of 5.2 years. We have tradename intangibles with useful lives from 15 to 40 years, with a weighted average remaining useful life of 15.4 years. We have determined that our permits have indefinite lives due to our ability to renew these permits with minimal additional cost, and therefore they are not amortized.

We have two geographical reporting segments, “United States” and “International”, both of which have goodwill. The changes in the carrying amount of goodwill since December 31, 2010 were as follows by reporting segment:

 

In thousands

   United
States
    International     Total  

Balance as of December 31, 2010

   $ 1,279,758      $ 316,006      $ 1,595,764   

Goodwill acquired during year

     232,850        120,750        353,600   

Goodwill allocation adjustments

     (6,192     (4,922     (11,114

Sale of business

     0        (2,887     (2,887

Changes due to currency fluctuation

     0        (21,660     (21,660
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 1,506,416      $ 407,287      $ 1,913,703   
  

 

 

   

 

 

   

 

 

 

Goodwill acquired during year

     12,581        9,004        21,585   

Goodwill allocation adjustments

     (1,535     (21,788     (23,323

Changes due to currency fluctuation

     0        12,275        12,275   
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 1,517,462      $ 406,778      $ 1,924,240   
  

 

 

   

 

 

   

 

 

 

The changes to goodwill for 2011 acquisitions are primarily due to the finalization of intangible valuations.

As of March 31, 2012 and December 31, 2011, the values of the intangible assets were as follows:

 

In thousands

   March 31, 2012      December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Value
 

Amortizable intangibles:

                 

Covenants not-to-compete

   $ 10,981       $ 4,782       $ 6,199       $ 10,903       $ 4,350       $ 6,553   

Customer relationships

     495,946         41,942         454,004         480,033         36,994         443,039   

Tradenames

     5,008         517         4,491         2,556         391         2,165   

License agreements

     720         341         379         720         315         405   

Indefinite lived intangibles:

                 

Operating permits

     117,394         0         117,394         94,456         0         94,456   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 630,049       $ 47,582       $ 582,467       $ 588,668       $ 42,050       $ 546,618   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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During the quarters ended March 31, 2012 and 2011, the aggregate amortization expense was $5.0 million and $3.3 million, respectively.

The estimated amortization expense for each of the next five years, assuming no additional amortizable intangible assets, is as follows for the years ended December 31:

 

In thousands

 

2012

   $ 19,880   

2013

     19,825   

2014

     19,614   

2015

     19,378   

2016

     19,169   

Future amortization expense may fluctuate depending on changes in foreign currency rates, future acquisitions, or changes to the estimated amortizable life of the intangibles. The estimates for amortization expense noted above are based upon foreign exchange rates as of March 31, 2012.

NOTE 11 – DEBT

Long-term debt consisted of the following:

 

In thousands

   March 31, 2012      December 31, 2011  

Obligations under capital leases

   $ 4,601       $ 4,679   

$1 billion revolver weighted average rate 1.74%, due in 2016

     477,311         527,884   

$100 million Private Placement notes 5.64%, due in 2015

     100,000         100,000   

$175 million Private Placement notes 3.89%, due in 2017

     175,000         175,000   

$225 million Private Placement notes 4.47%, due in 2020

     225,000         225,000   

Acquisition notes weighted average rate of 2.91% and weighted average maturity of 4.0 years

     246,459         240,138   

Foreign bank debt weighted average rate 6.9% and Weighted average maturity of 2.3 years

     113,436         111,938   
  

 

 

    

 

 

 
     1,341,807         1,384,639   

Less: current portion

     91,038         100,526   
  

 

 

    

 

 

 

Total

   $ 1,250,769       $ 1,284,113   
  

 

 

    

 

 

 

Our $1.0 billion senior credit facility maturing in September 2016, our $100.0 million private placement notes maturing April 2015, our $175.0 million private placement notes maturing in October 2017, and our $225.0 million private placement notes maturing in October 2020, all require us to comply with various financial, reporting and other covenants and restrictions, including a restriction on dividend payments. The financial debt covenants are the same for the senior credit facility and the private placement notes. At March 31, 2012, we were in compliance with all of our financial debt covenants.

 

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As of March 31, 2012 and December 31, 2011, we had $140.5 million and $159.1 million, respectively, committed to outstanding letters of credit under our senior credit facility. The unused portion of the revolving credit facility as of March 31, 2012 and December 31, 2011 was $382.2 million and $313.0 million, respectively.

Guarantees

We have guaranteed a loan to JPMorganChase Bank N.A. on behalf of Shiraishi-Sogyo Co. Ltd (“Shiraishi”). Shiraishi is a customer in Japan that is expanding its medical waste management business and has a one year loan with a current balance of $6.0 million with JPMorganChase Bank N.A. that matures in May 2012. We also have extended notes receivable to Shiraishi for approximately $15.2 million in support of its medical waste business. These amounts are collateralized with the assets of Shiraishi and related companies.

NOTE 12 – GEOGRAPHIC INFORMATION

Management has determined that we have two reportable segments, United States (which includes Puerto Rico) and International. Revenues are attributed to countries based on the location of customers. Intercompany revenues recorded by the United States for work performed in Canada are eliminated prior to reporting United States revenues. The same accounting principles and critical accounting policies are used in the preparation of the financial statements for both reporting segments.

Detailed information for our United States reporting segment is as follows:

 

In thousands

   Three Months Ended
March 31,
 
     2012      2011  

Regulated waste management services

   $ 293,425       $ 254,807   

Regulated returns and recall management services

     35,764         35,805   
  

 

 

    

 

 

 

Total revenue

     329,189         290,612   

Net interest expense

     10,334         9,685   

Income before income taxes

     87,057         72,301   

Income taxes

     34,447         29,150   
  

 

 

    

 

 

 

Net income attributable to Stericycle, Inc.

   $ 52,610       $ 43,151   
  

 

 

    

 

 

 

Depreciation and amortization

   $ 10,556       $ 9,449   

Detailed information for our International reporting segment is as follows:

 

In thousands

 
     Three Months Ended
March 31,
 
     2012      2011  

Regulated waste management services revenue

   $ 130,888      $ 107,514  

Net interest expense

     2,340        1,503  

Income before income taxes

     15,973        18,661  

Income taxes

     3,268        5,226  

Net income

     12,705         13,435   

Less: net income attributable to noncontrolling interests

     458         912   
  

 

 

    

 

 

 

Net income attributable to Stericycle, Inc.

   $ 12,247      $ 12,523  
  

 

 

    

 

 

 

Depreciation and amortization

   $ 7,162      $ 5,654  

 

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NOTE 13 – LEGAL PROCEEDINGS

We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from time to time that may be instituted for a variety of reasons. We are also involved in a variety of civil litigation from time to time.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We were incorporated in 1989 and presently serve a diverse customer base of over 528,000 customers throughout the United States, Argentina, Brazil, Canada, Chile, Ireland, Japan, Mexico, Portugal, Romania, Spain, and the United Kingdom. We have fully integrated networks including processing centers, and transfer and collection sites. We use these networks to provide a broad range of services to our customers including regulated waste services, regulated returns and recall management services, patient communications services, and medical safety products. The regulated waste services we provide include medical waste disposal, our Steri-Safe® medical waste and compliance program, our Clinical Services program, our Bio Systems® reusable sharps disposal management services, pharmaceutical waste disposal, and hazardous waste disposal. Our regulated returns and recall management services help pharmacies and manufacturers handle the return of unused and expired pharmaceuticals. Through ExpertRECALL™, we manage all aspects of a product recall or withdrawal for pharmaceutical, medical device, and consumer product manufacturers in a manner compliant with applicable regulations. ExpertRETRIEVAL/QA™ performs retail quality audits, consumer complaint retrieval and product retrieval services, and brand integrity monitoring for retailers, manufacturers, and other businesses. We also provide communications services to healthcare providers to improve office productivity and communications with patients. Our waste treatment technologies include autoclaving, incineration, chemical treatment, and our proprietary electro-thermal-deactivation system.

There were no material changes in the Company’s critical accounting policies since the filing of its 2011 Form 10-K. As discussed in the 2011 Form 10-K, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.

Highlights of the three months ended March 31, 2012:

 

   

revenues grew to $460.1 million, a 15.6% increase over $398.1 million from the first quarter last year;

 

   

first quarter gross margins decreased to 44.6% in 2012 from 45.8% in 2011;

 

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operating income was $116.3 million, a 13.5% increase over $102.4 million from the first quarter last year;

 

   

we incurred a net $2.8 million in expenses related to acquisitions, change in fair value of contingent consideration, and restructuring and plant closure;

 

   

we incurred $1.3 million in integration expenses related to acquisitions;

 

   

cash flow from operations was $99.6 million.

THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011.

The following summarizes the Company’s operations:

 

In thousands, except per share data

   Three Months Ended March 31  
     2012      2011  
     $      %      $     %  

Revenues

   $ 460,077         100.0       $ 398,126        100.0   

Cost of revenues

     244,182         53.1         205,816        51.7   

Depreciation

     10,588         2.3         9,818        2.5   

Restructuring costs

     0         0.0         62        0.0   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of revenues

     254,770         55.4         215,696        54.2   

Gross profit

     205,307         44.6         182,430        45.8   

Selling, general and administrative expenses

     77,807         16.9         69,972        17.6   

Depreciation

     2,151         0.5         1,938        0.5   

Amortization

     4,979         1.1         3,347        0.8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total selling, general and administrative expenses (exclusive of items below)

     84,937         18.5         75,257        18.9   

Acquisition expenses

     1,539         0.3         5,938        1.5   

Change in fair value of contingent consideration

     1,204         0.3         (2,140     -0.5   

Integration expenses

     1,279         0.3         766        0.2   

Restructuring costs and plant closure expense

     86         0.0         196        0.0   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     116,262         25.3         102,413        25.7   

Net interest expense

     12,674         2.8         11,188        2.8   

Income tax expense

     37,715         8.2         34,376        8.6   

Net income

     65,315         14.2         56,586        14.2   

Less: net income attributable to noncontrolling interests

     458         0.1         912        0.2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income attributable to Stericycle, Inc.

   $ 64,857         14.1       $ 55,674        14.0   

Earnings per share- diluted

   $ 0.75          $ 0.64     

Revenues: Our revenues increased $62.0 million, or 15.6%, in the first quarter of 2012 to $460.1 million from $398.1 million in the same period in 2011. Domestic revenues increased $38.6 million, or 13.3%, to $329.2 million from $290.6 million in the same period in 2011. Internal revenue growth for domestic small account customers increased by $16.0 million, or approximately 10%, and internal revenue growth for large quantity customers increased by $7.0 million, or approximately 8%.

 

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Internal revenues for returns and recall management services decreased by $2.5 million in 2012. Internal revenues excludes acquisitions less than one year old. Total regulated waste and returns management domestic acquisitions less than one year old contributed approximately $18.1 million to the increase in revenues.

International revenues increased $23.4 million, or 21.7%, in the first quarter of 2012, to $130.9 million from $107.5 million in the same period in 2011. Internal growth in the international segment contributed $3.8 million in increased revenues. Internal growth excludes the effect of foreign exchange, and the impact of acquisitions and divestitures less than one year old. The effect of exchange rate fluctuations unfavorably impacted international revenues approximately $3.3 million while acquisitions, net of divestitures, less than one year old contributed an additional $22.9 million in revenues.

Cost of Revenues: Our cost of revenues increased $39.1 million, or 18.1%, in the first quarter of 2012 to $254.8 million from $215.7 million in the same period in 2011. Our domestic cost of revenues increased $22.6 million, or 15.4%, in the first quarter of 2012 to $169.0 million from $146.4 million in the same period in 2011 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth as well as an overall increase in fuel and energy charges.

Our international cost of revenues increased $16.5 million, or 23.8%, in the first quarter of 2012 to $85.8 million from $69.3 million in the same period in 2011 primarily driven by the impact of exchange rates, revenues growth and impact from integration of acquisitions.

Our Company wide gross margin percentage decreased to 44.6% during the first quarter of 2012 from 45.8% during the same period in 2011 primarily due to lower margin newly acquired revenues offset partially by improvements in the base business margins.

Selling, General and Administrative Expenses: Selling, general and administrative (“SG&A”) expenses increased approximately $9.7 million, or 12.9%, in the first quarter of 2012 to $84.9 million from $75.3 million in the same period in 2011. As a percentage of revenue, these costs decreased by 0.4% for the first quarter 2012 compared to the same period in 2011.

Domestically, first quarter SG&A expenses increased $4.2 million, or 7.4%, to $60.7 million from $56.5 million in the same period in 2011. As percentage of revenues, SG&A was lower at 18.4% in the first quarter of 2012 compared to 19.4% in 2011. As a percentage of revenues, amortization expense of acquired intangible assets increased by 0.1%.

Internationally, first quarter SG&A expenses increased $5.4 million or 28.7% to $24.2 million from $18.8 million in the same period in 2011. As a percentage of revenues, SG&A was 18.5% in 2012 compared to 17.4% in 2011. The increase in SG&A was due to the increased number of international acquisitions partially offset by restructuring of the international management structure and the continued integration of acquisitions. SG&A expense, as a percentage to revenue, was up due to a higher ratio of amortization expense to revenues and the inclusion of stock compensation expense.

Income from Operations: Income from operations increased $13.8 million, or 13.5%, in the first quarter of 2012 to $116.3 million from $102.4 million in same period in 2011. During the quarter ended March 2012, we recognized $1.5 million in acquisition expenses, $1.3 million of expense related to the integration of new acquisitions, $1.2 million of expense related to a change in fair value of contingent consideration, and $0.1 million of restructuring and plant closure costs.

 

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During the quarter ended March 2011, we recognized $5.9 million in acquisition expenses, $0.8 million of expense related to the integration of new acquisitions, and $0.3 million of restructuring costs, partially offset by $2.1 million gain related to a change in fair value of contingent consideration.

Net Interest Expense: Net interest expense increased to $12.7 million during the first quarter in 2012 from $11.2 million during the same period in 2011. Our interest expense was higher in 2012 due to a higher rate on our revolver borrowings and higher debt levels.

Income Tax Expense: Income tax expense increased to $37.7 million in the first quarter of 2012 from $34.4 million in the same period in 2011. The effective tax rates for the quarters ended March 31, 2012 and 2011 were 36.6% and 37.8%, respectively. The reduction in our consolidated effective tax rate is primarily due to the increase in our international businesses which have lower effective rates.

LIQUIDITY AND CAPITAL RESOURCES

Our $1.0 billion senior credit facility maturing in September 2016, our $100.0 million private placement notes maturing April 2015, our $175.0 million private placement notes maturing in October 2017, and our $225.0 million private placement notes maturing in October 2020, all require us to comply with various financial, reporting and other covenants and restrictions, including a restriction on dividend payments. The financial debt covenants are the same for the senior credit facility and the private placement notes. At March 31, 2012, we were in compliance with all of our financial debt covenants.

As of March 31, 2012, we had $477.3 million of borrowings outstanding under our $1.0 billion senior unsecured credit facility, which includes foreign currency borrowings of $80.8 million. We also had $140.5 million committed to outstanding letters of credit under this facility. The unused portion of the revolving credit facility as of March 31, 2012 was $382.2 million. At March 31, 2012, our interest rates on borrowings under our revolving credit facility, including our facility fee, were as follows:

 

   

For short-term borrowing (overnight): Federal funds rate plus 0.75% , the Eurocurrency rate plus 1.25% or prime rate plus 0.375%, whichever is higher; and

 

   

For borrowing greater than one month: LIBOR plus 1.375%.

The weighted average rate of interest on the unsecured revolving credit facility was 1.74% per annum.

As of March 31, 2012, we had outstanding $100.0 million of seven-year 5.64% unsecured senior notes issued to nine institutional purchasers in a private placement completed in April 2008. Interest is payable in arrears semi-annually on April 15 and October 15 beginning on October 15, 2009, and principal is payable at the maturity of the notes on April 15, 2015.

 

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As of March 31, 2012, we had outstanding $175.0 million of seven-year 3.89% unsecured senior notes and $225.0 million of 10-year 4.47% unsecured senior notes issued to 39 institutional purchasers in a private placement completed in October 2010. Interest is payable in arrears on April 15 and October 15 beginning on April 15 2011, and principal is payable at the maturity of the notes, October 15, 2017 in the case of the seven-year notes and October 15, 2020 in the case of the 10-year notes.

As of March 31, 2012, we had $364.5 million in other debt outstanding, which includes promissory notes issued in connection with acquisitions during 2004 through 2011, other foreign subsidiary bank debt, and capital lease obligations.

Working Capital: At March 31, 2012, our working capital increased $29.6 million to $93.3 million compared to $63.7 million at December 31, 2011.

Our current assets increased by $36.5 million in 2012. Acquired current assets contributed $7.8 million to the increase, $5.4 million of the increase was due to foreign currency translation (“CTA”), $14.5 million increase in accounts receivables due to incremental revenues (net of acquired assets and CTA), and $6.7 million increase in cash.

Our current liabilities increased by $6.9 million. We acquired $6.9 million in current liabilities of which $6.2 was deferred consideration. Increase in current liabilities due to CTA was $2.4 million, which was offset by other decreases in current liabilities.

Net Cash Provided or Used: Net cash provided by operating activities increased $34.0 million, or 51.8%, to $99.6 million during the three months ended March 31, 2012 compared to $65.6 million for the comparable period in 2011, primarily due to an increase in accrued liabilities and increase in revenues. Cash provided by operations as a ratio to net income is 152% and 116% for the three months ended March 31, 2012 and 2011, respectively. Days sales outstanding was at 60 days in 2012 and 51 days for the comparable period 2011. This increase was primarily due to acquisitions during 2011.

Net cash used in investing activities for the three months ended March 31, 2012 was $45.2 million compared to $32.1 million in the comparable period in 2011. The increase is due to acquisitions and capital expenditures for the three months ended March 31, 2012. As a percentage of revenue, capital expenditures increased to 3.7% in 2012 from 2.9% for the comparable period 2011.

We had net cash used in financing activities of $47.5 million during the three months ended March 31, 2012 compared to $87.7 million for the comparable period in 2011, primarily due to an increase of $46.1 million in borrowings to finance certain acquisitions.

Guarantees: We have guaranteed a loan to JPMorganChase Bank N.A. on behalf of Shiraishi-Sogyo Co. Ltd (“Shiraishi”). Shiraishi is a customer in Japan that is expanding their medical waste management business and has a one year loan with a current balance of $6.0 million with JPMorganChase Bank N.A. that expires in May 2012. We also have extended notes receivable to Shiraishi for approximately $15.2 million in support of their medical waste business. These amounts are collateralized with the assets of Shiraishi and related companies.

 

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Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks arising from changes in interest rates. 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 obligations would be approximately $5.8 million on a pre-tax basis.

We have exposure to foreign currency fluctuations. We have subsidiaries in eleven foreign countries whose functional currency is the local currency. Changes in foreign currency exchange rates could unfavorably impact our consolidated results of operations.

We have exposure to commodity pricing for gas and diesel fuel for our trucks and for the purchase of containers and boxes. We do not hedge these items to manage the exposure.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chairman and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter covered by this Report. On the basis of this evaluation, our Chairman and Chief Executive Officer and our Chief Financial Officer each concluded that our disclosure controls and procedures were effective.

The term “disclosure controls and procedures” is defined in Rule 13a-14(e) of the Securities Exchange Act of 1934 as “controls and other procedures designed to ensure that information required to be disclosed by the issuer in the reports, files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.” Our disclosure controls and procedures are designed to ensure that material information relating to us and our consolidated subsidiaries is accumulated and communicated to our management, including our Chairman and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosures.

Internal Control Over Financial Reporting

The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuers’ principal executive and principal financial officers, and effected by the issuer’s Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. During the quarter ended March 31, 2012, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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FROM TIME TO TIME WE ISSUE FORWARD-LOOKING STATEMENTS RELATING TO SUCH THINGS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, ACQUISITION ACTIVITIES AND SIMILAR MATTERS.

THESE FORWARD-LOOKING STATEMENTS MAY INVOLVE RISKS AND UNCERTAINTIES, SOME OF WHICH ARE BEYOND OUR CONTROL (FOR EXAMPLE, GENERAL ECONOMIC CONDITIONS). OUR ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE SUCH DIFFERENCES INCLUDE DIFFICULTIES IN COMPLETING THE INTEGRATION OF ACQUIRED BUSINESSES, CHANGES IN GOVERNMENTAL REGULATION OF MEDICAL WASTE COLLECTION AND TREATMENT, AND INCREASES IN TRANSPORTATION AND OTHER OPERATING COSTS, AS WELL AS VARIOUS OTHER FACTORS.

 

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Table of Contents

PART II. – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 13—Legal Proceedings, in the Notes to the Condensed Consolidated Financial Statements (Item 1 of Part I).

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

   

In May 2002 our Board of Directors authorized the Company to repurchase up to 6,000,000 shares of our common stock, in the open market or through privately negotiated transactions, at times and in amounts in the Company’s discretion.

 

   

In February 2005, at a time when we had purchased a total of 2,956,860 shares, the Board authorized us to purchase an additional 2,956,860 shares.

 

   

In February 2007, at a time when we had purchased an additional 3,142,080 shares since the prior increase in authorization, the Board authorized us to purchase up to an additional 3,142,080 shares.

 

   

In May 2007, at a time when we had purchased an additional 1,187,142 shares since the prior increase in authorization, the Board authorized us to purchase up to an additional 1,187,142 shares.

 

   

In May 2008, at a time when we had purchased an additional 2,938,496 shares since the prior increase in authorization, the Board authorized us to purchase up to an additional 2,938,496 shares.

 

   

In November 2010, at a time when we had purchased an additional 4,312,820 shares since the prior increase in authorization, our Board of Directors authorized us to purchase up to an additional 4,312,820 shares, thereby again giving the Company the authority to purchase up to a total of 6,000,000 additional shares.

Under resolutions that our Board of Directors adopted, we have been authorized to purchase a cumulative total of 20,537,398 shares of our common stock on the open market. As of March 31, 2012, we had purchased a cumulative total of 16,248,265 shares.

 

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Table of Contents

The following table provides information about our purchases during the three months ended March 31, 2012 of shares of our common stock:

Issuer Purchase of Equity Securities

 

Period

   Total
Number of
Share (or
Units)
Purchased
     Average
Price Paid
per Share
(or Unit)
     Number of
Shares (or
Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
     Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
 

January 1 — January 31, 2012

     38,552       $ 76.38         38,552         4,289,133   

February 1 — February 29, 2012

     0         0         0         4,289,133   

March 1 — March 31, 2012

     0         0         0         4,289,133   

 

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Table of Contents

ITEM 6. EXHIBITS

 

31.1 Rules 13a-14(a)/15d-14(a) Certification of Mark C. Miller, Chairman and Chief Executive Officer

 

31.2 Rule 13a-14(a)/15d-14(a) Certification of Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer

 

32 Section 1350 Certification of Mark C. Miller, Chairman and Chief Executive Officer, and Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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: May 9, 2012

 

STERICYCLE, INC.
(Registrant)
By:   /s/ Frank J.M. ten Brink
 

 

Frank J.M. ten Brink

Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)

 

25

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