XNAS:SRCL Stericycle, Inc. Quarterly Report 10-Q Filing - 6/30/2012
Effective Date 6/30/2012
| • FORM 10-Q • SECTION 302 CEO CERTIFICATION • SECTION 302 CFO CERTIFICATION • SECTION 906 CEO AND CFO CERTIFICATION • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 June 30, 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)
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 August 1, 2012 there were 85,651,695 shares of the registrant’s Common Stock outstanding.
Table of Contents
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.
1
Table of ContentsSTERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
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.
3
Table of ContentsSTERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Six Months Ended June 30, 2012 (Unaudited) and Year Ended December 31, 2011 (Audited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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 six months ended June 30, 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 six months ended June 30, 2012:
5
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 to 100%. During the quarter ended June 30, 2012, we completed eight acquisitions. Domestically we acquired selected assets of one regulated waste business, and selected assets of two compliance businesses. Internationally, we acquired 100% of the stock of two regulated waste businesses and selected assets of another regulated waste business in Spain. In the United Kingdom, we acquired selected assets of a compliance business. Finally, in Argentina, we acquired selected assets of a regulated waste business. We also increased our majority share in a previous acquisition in Chile to 90%. The following table summarizes the aggregate purchase price paid for acquisitions and other adjustments of consideration to be paid on acquisitions during the six months ended June 30, 2012:
During the six months ended June 30, 2012, we recognized a net increase in goodwill of $56.5 million excluding the effect of foreign currency translation (see Note 10 - Goodwill, in the Notes to the Condensed Consolidated Financial Statements). A net of $56.8 million was assigned to our United States reporting segment while our International reporting segment had a $0.3 million net decrease. Approximately $57.5 million of the goodwill recognized during the six months ended June 30, 2012 will be deductible for income taxes. During the six months ended June 30, 2012, we recognized a net increase in intangible assets of $70.1 million excluding the effect of foreign currency translation. The changes include $43.9 million in the estimated fair value of acquired customer relationships with amortizable lives of 15-40 years, $23.4 million in permits with indefinite lives, $2.7 million in a tradename with an amortizable life of 15 years, and $0.1 million in other intangible asset with amortizable life of 20 years.
6
Table of ContentsThe following table summarizes the preliminary purchase price allocation for current period acquisitions and other adjustments to purchase price allocations during the six months ended June 30, 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 complementary to our existing operations and fit our strategy. During the six months ended June 30, 2012 and 2011, the Company incurred $3.7 million and $11.2 million, respectively, of acquisition related expenses. These expenses are included with “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Income and Comprehensive Income. The purchase prices for these acquisitions in excess of acquired tangible assets have been primarily allocated to goodwill and other intangibles and are preliminary pending completion of certain intangible asset valuations and completion accounts. 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.
7
Table of ContentsGoodwill 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, these changes did 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. Accounting Standards Issued But Not Yet Adopted Testing Indefinite-Lived Intangible Assets for Impairment On July 27, 2012 the FASB issued guidance allowing a company to perform a qualitative assessment in determining whether an indefinite lived intangible asset is impaired. This new guidance is similar to the previously issued guidance allowing a qualitative assessment when performing annual goodwill impairment testing. The guidance also changes when a company should perform an interim period test for impairment, allowing for positive evidence to offset negative evidence when determining whether an interim impairment test is required. The new guidance should not affect the ultimate outcome of an impairment test; therefore there will be no impact on our financial statements. The effective date of this guidance for our Company is January 1, 2013; however, the guidance allows for early adoption. We are currently evaluating whether we will early adopt this guidance. We perform our annual test for impairment for indefinite lived intangibles in the fourth quarter. 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:
8
Table of ContentsLevel 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 $10.3 million at June 30, 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 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 $13.0 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:
9
Table of ContentsFair Value of Debt: At June 30, 2012, the fair value of the Company’s debt obligations was estimated, using Level 2 inputs, at $1.40 billion compared to a carrying amount of $1.36 billion. At December 31, 2011, the fair value of the Company’s debt obligations was estimated, using Level 2 inputs, at $1.41 billion compared to a carrying amount of $1.38 billion. 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 June 30, 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 June 30, 2012 we had the following stock option plans:
10
Table of ContentsThe 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 June 30, 2012, there was $37.8 million of total unrecognized compensation expense, related to non-vested option awards, which is expected to be recognized over a weighted-average period of 2.04 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 and six months ended June 30, 2012 and 2011 was as follows:
11
Table of ContentsStock option activity for the six months ended June 30, 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 June 30, and the exercise price associated with the respective option).
Restricted stock units (“RSUs”) activity for the quarter ended June 30, 2012 is summarized below. RSUs vest at the end of three or five 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 six months ended June 30, 2012.
12
Table of Contents
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 and six months ended June 30, 2012 and 2011:
13
Table of Contents
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 29.3 years. We have covenants not-to-compete intangibles with useful lives from two to ten years, with a weighted average remaining useful life of 5.0 years. We have tradename intangibles with useful lives from 15 to 40 years, with a weighted average remaining useful life of 20.2 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, 2011 were as follows by reporting segment:
The adjustments to goodwill for 2011 acquisitions are primarily due to the finalization of intangible asset valuations.
14
Table of ContentsAs of June 30, 2012 and December 31, 2011, the values of the intangible assets were as follows:
During the quarters ended June 30, 2012 and 2011, the aggregate amortization expense was $5.1 million and $3.5 million, respectively. For the six months ended June 30, 2012 and 2011, the aggregate amortization expense was $10.1 million and $6.9 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 June 30, 2012. During the quarter ended June 30, 2012, we performed our annual goodwill impairment evaluation for our three reporting units, Domestic Regulated Waste, Domestic Regulated Returns and Recall Management Services, and International. We calculated fair value for our reporting units using two methods, one a market approach and the other an income approach. Both the market and income approaches indicated no impairment to goodwill to any of our three reporting units. Market Approach: Our market approach begins by calculating the market capitalization of the Company using the average stock price for the prior 30 days and the outstanding share count at June 30, 2012. We then look at the Company’s Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”), adjusted for stock compensation expense and other items, such as change in fair value of contingent consideration, restructuring costs and plant closure expenses, for the prior twelve months. The calculated market capitalization is divided by the modified EBITDA to arrive at a valuation multiple. The fair value of each reporting unit is then calculated by taking the product of the valuation multiple and the trailing twelve month modified EBITDA of that reporting unit. The fair value was then compared to the reporting units’ book value and determined to be in excess of the book value. We believe that starting with the fair value of the company as a whole is a reasonable measure as that fair value is then allocated to each reporting unit based on that reporting unit’s individual earnings. A sustained drop in our stock price would have a negative impact to our fair value calculations. A temporary drop in earnings of a reporting unit would have a negative impact to our fair value calculations.
15
Table of ContentsThe results of our goodwill impairment test using the market approach indicated the fair value of our reporting units exceeded book value by a substantial amount, in excess of 100% of book value. Income Approach: The income approach uses expected future cash flows of each reporting unit and discounts those cash flows to a present values. Expected future cash flows are calculated using management assumptions of internal growth, capital expenditures, and cost efficiencies. Future acquisitions are not included in the expected future cash flows. We use a discount rate based on our Company calculated Weighted Average Cost of Capital which is adjusted for each of our reporting units based on risk size premium and foreign country premium. Significant assumptions used in the income approach include realization of future cash flows and the discount rate used to present value those cash flows. The results of our goodwill impairment test using the income approach indicated the fair value of our reporting units exceeded book value by a substantial amount; in excess of 100%. We complete our annual impairment analysis of our indefinite lived intangibles (facility permits) during the quarter ended December 31 of each year. NOTE 11 – DEBT Long-term debt consisted of the following:
16
Table of ContentsOur $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 June 30, 2012, we were in compliance with all of our financial debt covenants. As of June 30, 2012 and December 31, 2011, we had $156.2 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 June 30, 2012 and December 31, 2011 was $327.7 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 $6.2 million with JPMorganChase Bank N.A. that matures on March 31, 2013. We also have extended notes receivable to Shiraishi for approximately $15.4 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. 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:
17
Table of ContentsDetailed information for our International reporting segment is as follows:
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 535,000 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.
18
Table of ContentsThere 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 June 30, 2012:
Highlights of the six months ended June 30, 2012:
During the quarter ending June 30, 2012 we completed our annual goodwill impairment test. The results of that test did not indicate any impairment to our goodwill (See Note 10 - Goodwill, in the Notes to the Condensed Consolidated Financial Statements (Item 1 of Part 1)).
19
Table of ContentsTHREE MONTHS ENDED JUNE 30, 2012 COMPARED TO THREE MONTHS ENDED JUNE 30, 2011 The following summarizes the Company’s operations:
Revenues: Our revenues increased $58.5 million, or 14.3%, in the second quarter of 2012 to $468.9 million from $410.4 million in the same period in 2011. Domestic revenues increased $37.1 million, or 12.3%, to $337.8 million from $300.7 million in the same period in 2011. Internal revenue growth for domestic small account customers increased by $17.0 million, or approximately 10%, and internal revenue growth for large quantity customers increased by $8.0 million, or approximately 8%. Internal revenues for returns and recall management services decreased by $0.7 million in 2012. Internal revenues excludes acquisitions less than one year old. Total regulated waste and returns and recall management domestic acquisitions less than one year old contributed approximately $12.8 million to the increase in revenues, of which $2.7 million was related to our returns and recall management services. International revenues increased $21.4 million, or 19.5%, in the second quarter of 2012, to $131.1 million from $109.7 million in the same period in 2011. Internal growth in the international segment contributed $5.7 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 $8.1 million while acquisitions, net of divestitures, less than one year old contributed an additional $23.8 million in revenues. Cost of Revenues: Our cost of revenues increased $35.8 million, or 16.0%, in the second quarter of 2012 to $259.5 million from $223.7 million in the same period in 2011. Our domestic cost of revenues increased $20.6 million, or 13.5%, in the second quarter of 2012 to $173.1 million from $152.5 million in the same period in 2011 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth.
20
Table of ContentsOur international cost of revenues increased $15.2 million, or 21.3%, in the second quarter of 2012 to $86.4 million from $71.2 million in the same period in 2011 as a result of costs related to proportional increase in revenues, partially driven by the impact of exchange rates. Our Company wide gross margin percentage decreased to 44.7% during the second quarter of 2012 from 45.5% 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 $10.0 million, or 12.8%, in the second quarter of 2012 to $88.0 million from $78.0 million in the same period in 2011. As a percentage of revenue, these costs decreased by 0.2% for the second quarter 2012 compared to the same period in 2011. Domestically, second quarter SG&A expenses increased $4.7 million, or 8.0%, to $63.6 million from $58.9 million in the same period in 2011. As percentage of revenues, SG&A was lower at 18.8% in the second quarter of 2012 compared to 19.6% in 2011. As a percentage of revenues, amortization expense of acquired intangible assets increased by 0.1%. Internationally, second quarter SG&A expenses increased $5.3 million or 27.7% to $24.4 million from $19.1 million in the same period in 2011. As a percentage of revenues, SG&A was 18.7% in 2012 compared to 17.5% in 2011. The increase in SG&A was primarily due to the increased number of international acquisitions partially offset by cost savings from the 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 $15.8 million, or 15.5%, in the second quarter of 2012 to $117.7 million from $101.9 million in same period in 2011. During the quarter ended June 2012, we recognized $2.2 million in acquisition expenses, $1.0 million of expense related to the integration of new acquisitions, $1.1 million of restructuring and plant closure costs, partially offset by $0.6 million related to a change in fair value of contingent consideration. Of the $1.1 million of restructuring and plant closure costs, $0.7 million was related to a facility closure. During the quarter ended June 2011, we recognized $5.3 million in acquisition expenses, $1.3 million of expense related to the integration of new acquisitions, and $0.2 million of restructuring costs. Net Interest Expense: Net interest expense decreased to $12.7 million during the second quarter in 2012 from $12.9 million during the same period in 2011. Our interest expense was higher in second quarter of 2011 due to the acceleration of amortization of finance fees of $0.2 million related to our term loan that was repaid prior to scheduled maturity of June 2012.
21
Table of ContentsIncome Tax Expense: Income tax expense increased to $37.2 million in the second quarter of 2012 from $32.3 million in the same period in 2011. The effective tax rates for the quarters ended June 30, 2012 and 2011 were 35.2% and 36.6%, respectively. The reduction in our consolidated effective tax rate is primarily due to the increase in our international businesses which have lower effective rates. SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO SIX MONTHS ENDED JUNE 30, 2011 The following summarizes the Company’s operations:
Revenues: Our revenues increased $120.5 million, or 14.9%, to $929.0 million in 2012 from $808.5 million in 2011. Domestic revenues increased $75.7 million, or 12.8%, to $667.0 million from $591.3 million in 2011. Internal revenue growth for domestic small account customers increased by approximately $33.0 million, or 10%, and internal revenue growth for large quantity customers increased by approximately $15.0 million, or 8%. Internal revenue for returns management decreased by $3.2 million, and domestic acquisitions less than one year old contributed approximately $30.9 million to the increase in domestic revenues.
22
Table of ContentsInternational revenues increased $44.8 million to $262.0 million, or 20.6%, from $217.2 million in 2011. Internal growth in the international segment contributed $9.5 million, or approximately 4% in increased revenues, excluding the effect of exchange rates and acquisitions. The effect of exchange rate fluctuations unfavorably impacted international revenues approximately $11.4 million, and acquisitions less than one year old contributed an additional $46.7 million in international revenues. Cost of Revenues: Our cost of revenues increased $74.8 million, or 17.0%, to $514.2 million during 2012 from $439.4 million during 2011. Our domestic cost of revenues increased $43.2 million, or 14.5%, to $342.1 million from $298.9 million in 2011 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth. Our international cost of revenues increased $31.6 million, or 22.5% to $172.1 million from $140.5 million in 2011 as a result of costs related to proportional increase in revenues from acquisitions and partially driven by the impact of exchange rates. Our company wide gross margin percentage decreased to 44.6% during 2012 from 45.7% during 2011 due to the inclusion of lower margin acquired revenues. Selling, General and Administrative Expenses: SG&A increased $19.7 million, or 12.8%, to $173.0 million, for the six months ended June 30, 2012 from $153.3 million for the comparable period in 2011. As a percentage of revenue, these costs decreased by 0.4% for the six months ended June 30, 2012 compared to the same period in 2011. Domestically, 2012 SG&A increased $8.9 million, or 7.7%, to $124.3 million from $115.4 million in 2011. The increase was primarily due to SG&A expenses related to the acquired revenues, higher amortization, market penetration for our Sharps Management and Pharmaceutical Waste programs, investment in the Steri-Safe services, and compliance related services. Internationally, our SG&A increased $10.8 million, or 28.5%, to $48.7 million in 2012 from $37.9 million in 2011. As a percentage of revenues, SG&A was 18.6% in 2012 and 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 $29.6 million, or 14.5%, to $234.0 million for the six months ended June 30, 2012 from $204.4 million for the comparable period in 2011. During the six months ended June 30, 2012, we recognized $3.7 million in acquisition expenses, $2.3 million related to the integration of new acquisitions, $0.6 million of expense related to a change in fair value of contingent consideration, and $1.2 million of restructuring and plant closure costs.
23
Table of ContentsDuring the six months ended June 30, 2011, we recognized $11.2 million in acquisition expenses, $2.1 million related to the integration of new acquisitions, and $0.4 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 $25.3 million during the six months ended June 30, 2012 from $24.1 million during the comparable period in 2011 primarily due to increased borrowings. Our interest expense was higher in 2012 due to higher rate on our revolver borrowings and higher debt levels, partially offset by an additional interest expense of $1.2 million in the second quarter of 2011 due to the acceleration of amortization of finance fees related to our term loan that was repaid prior to scheduled maturity of June 2012. Income Tax Expense: Income tax expense increased to $74.9 million for the six months ended June 30, 2012 from $66.7 million for the comparable period in 2011. The increase was due to higher taxable income. The effective tax rates for the six months ended June 30, 2012 and 2011 were 35.9% and 37.2%, respectively. 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 June 30, 2012, we were in compliance with all of our financial debt covenants. As of June 30, 2012, we had $516.1 million of borrowings outstanding under our $1.0 billion senior unsecured credit facility, which includes foreign currency borrowings of $95.6 million. We also had $156.2 million committed to outstanding letters of credit under this facility. The unused portion of the revolving credit facility as of June 30, 2012 was $327.7 million. At June 30, 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 1.68% per annum. As of June 30, 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.
24
Table of ContentsAs of June 30, 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 June 30, 2012, we had $348.5 million in other debt outstanding, which includes promissory notes issued in connection with acquisitions during 2004 through 2012, other foreign subsidiary bank debt, and capital lease obligations. Working Capital: At June 30, 2012, our working capital increased $70.4 million to $134.1 million compared to $63.7 million at December 31, 2011. Our current assets increased by $45.5 million in 2012 of which $15.8 million was related to acquisitions. Our cash and cash equivalents increased by $31.7 million primarily related to increased collections. Our current liabilities decreased by $24.9 million primarily related to income tax payments made in the quarter. During the second quarter of any year, we make two quarterly payments to the internal revenue service for estimated taxes, one related to the first quarter and one related to the second quarter. Net Cash Provided or Used: Net cash provided by operating activities increased $69.1 million, or 57.7%, to $188.8 million during the six months ended June 30, 2012 compared to $119.7 million for the comparable period in 2011. This increase was driven by strong collections and higher revenues both domestically and internationally. Our days sales outstanding (“DSO”) was at 58 days in 2012 and 53 days for the comparable period 2011, while our DSO at December 31, 2011 was at 59 days. This increase was primarily due to acquisitions during 2011. Cash provided by operations as a ratio to net income is 141% and 106% for the six months ended June 30, 2012 and 2011, respectively. Net cash used in investing activities for the six months ended June 30, 2012 was $145.5 million compared to $304.5 million in the comparable period in 2011. We had $169.1 million decrease in cash spent to acquire new businesses; during April of 2011 we acquired Healthcare Waste Solutions, Inc. for $237.0 million in cash. Our capital expenditures increased $10.2 million and as a percentage of revenue it increased to 3.6% in 2012 from 2.9% for the comparable period 2011. Net cash used in financing activities was $12.8 million during the six months ended June 30, 2012 compared to $144.4 million net cash provided in the comparable period in 2011. The period over period variance of $157.2 million is primarily due to our funding of acquisitions in the 2011 period with our senior credit facility and other foreign bank borrowings, compared to our net repayments of these sources of funds in 2012.
25
Table of ContentsGuarantees: 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 $6.2 million with JPMorganChase Bank N.A. that matures on March 31, 2013. We also have extended notes receivable to Shiraishi for approximately $15.4 million in support of their medical waste business. These amounts are collateralized with the assets of Shiraishi and related companies. Annual Impairment Test: We completed our annual goodwill impairment test during the second quarter of 2012. We used both a market approach and an income approach to determine the fair value of our reporting units. The market approach compares the market capitalization of the company as a whole, which is the fair value, and allocates a portion of that fair value to each reporting unit based on that reporting unit’s historic cash flows, as measured by a modified Earnings Before Interest, Taxes, Depreciation, and Amortization. The income approach uses estimates of future cash flows discounted to a present value to arrive at a fair value. Both the market and income approaches indicated no impairment to any of our three reporting units. 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 $6.3 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.
26
Table of ContentsThe 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 June 30, 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. 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.
27
Table of ContentsPART II. – OTHER INFORMATION 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
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 June 30, 2012, we had purchased a cumulative total of 16,248,265 shares.
28
Table of ContentsThe following table provides information about our purchases during the six months ended June 30, 2012 of shares of our common stock: Issuer Purchase of Equity Securities
29
Table of Contents
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: August 8, 2012
30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
