XNAS:SRCL Stericycle, Inc. Quarterly Report 10-Q Filing - 3/31/2012
Effective Date 3/31/2012
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2012 or
For the transition period from to Commission File Number 0-21229
Stericycle, Inc. (Exact name of registrant as specified in its charter)
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.
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.
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Stericycle, Inc.
Table of ContentsPART I. – FINANCIAL INFORMATION STERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of ContentsSTERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of ContentsSTERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of ContentsSTERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Three Months Ended March 31, 2012 (Unaudited) and Year Ended December 31, 2011 (Audited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of ContentsSTERICYCLE, 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:
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Table of ContentsDuring 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:
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:
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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Table of Contentscomplementary 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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Table of ContentsNOTE 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.
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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Table of Contentsof 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:
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:
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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:
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:
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:
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:
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Table of ContentsStock option activity for the three months ended March 31, 2012, was as follows:
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).
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.
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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NOTE 8 – NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted net income per share:
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:
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Table of ContentsNOTE 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:
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:
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Table of ContentsDuring 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:
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:
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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Table of ContentsAs 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:
Detailed information for our International reporting segment is as follows:
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Table of ContentsNOTE 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.
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:
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THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011. The following summarizes the Company’s operations:
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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Table of ContentsInternal 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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Table of ContentsDuring 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:
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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Table of ContentsAs 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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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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Table of ContentsFROM 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 ContentsSee Note 13—Legal Proceedings, in the Notes to the Condensed Consolidated Financial Statements (Item 1 of Part I).
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 ContentsThe 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
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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
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