UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003 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)
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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 is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [X] NO [ ],
As of August 7, 2003 there were 41,962,873 shares of the Registrant's Common Stock outstanding.
Stericycle, Inc.
Table of Contents
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002 |
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Condensed Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002 (Unaudited) |
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (Unaudited) |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Qualitative and Quantitative Disclosures about Market Risk |
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| Item 4. Controls and Procedures |
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| PART II. Other Information |
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| Item 1. Legal Proceedings |
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| Item 2-3. None | |
| Item 4. Submission of Matters to a Vote of Security Holders |
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| Item 5. None. | |
| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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| Certifications |
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31
2003 2002
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 6,099 8,375
Short-term investments....................................... 700 512
Accounts receivable, less allowance for doubtful
accounts of $4,556 in 2003 and $3,779 in 2002.............. 64,730 62,013
Parts and supplies........................................... 4,820 4,494
Prepaid expenses............................................. 4,011 7,170
Notes receivable............................................. 823 823
Deferred tax asset........................................... 7,363 6,720
Other........................................................ 3,820 4,249
----------- -----------
Total current assets................................ 92,366 94,356
Property, plant and equipment, net........................... 92,938 88,501
----------- -----------
Other assets:
Goodwill, net................................................ 466,159 447,272
Intangible assets, less accumulated amortization of
$7,165 in 2003 and $3,609 in 2002.......................... 29,368 20,110
Notes receivable............................................. 7,717 7,717
Other........................................................ 7,302 9,139
----------- -----------
Total other assets......................................... 510,546 484,238
----------- -----------
Total assets........................................ $ 695,850 $ 667,095
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt............................ $ 18,576 $ 3,933
Accounts payable............................................. 11,281 14,330
Accrued liabilities.......................................... 39,164 31,810
Deferred revenue............................................. 4,783 3,681
----------- -----------
Total current liabilities........................... 73,804 53,754
----------- -----------
Long-term debt, net of current portion....................... 185,822 224,124
Deferred income taxes........................................ 37,386 30,729
Other liabilities............................................ 4,435 3,710
Redeemable preferred stock:
Series A convertible preferred stock (par value $.01 share,
75,000 shares authorized, 22,799 outstanding in 2003 and
29,326 outstanding in 2002, liquidation preference of $24,814
at June 30, 2003 and $31,919 at December 31, 2002)....... 21,032 28,049
Common shareholders' equity:
Common stock (par value $.01 per share, 80,000,000
shares authorized, 41,752,873 issued and outstanding in
in 2003, 40,437,023 issued and outstanding in 2002)........ 418 404
Additional paid-in capital................................... 293,808 277,531
Treasury stock of 50,000 shares.............................. (1,435) (1,435)
Accumulated other comprehensive loss......................... (81) (229)
Retained earnings............................................ 80,661 50,458
----------- -----------
Total shareholders' equity................................... 373,371 326,729
----------- -----------
Total liabilities and shareholders' equity................. $ 695,850 $ 667,095
=========== ===========
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ------------ ----------- ------------
Revenues........................... $ 113,135 $ 99,269 $ 225,446 $ 196,333
Costs and expenses:
Cost of revenues................. 61,127 56,271 122,841 111,672
Selling, general and
administrative expenses........ 16,594 13,992 32,478 27,898
Depreciaton and amortization..... 4,035 3,647 8,299 7,210
Acquisition related costs........ 123 22 214 175
----------- ----------- ----------- -----------
Total costs and expenses...... 81,879 73,932 163,832 146,955
----------- ----------- ----------- -----------
Income from operations............. 31,256 25,337 61,614 49,378
----------- ----------- ----------- -----------
Other income (expense):
Interest income.................. 71 98 260 261
Interest expense................. (3,385) (5,516) (7,312) (11,325)
Debt extinguishments............. (1,640) (475) (3,268) (475)
Other expense.................... (561) (350) (1,206) (1,021)
----------- ----------- ----------- -----------
Total other income (expense).. (5,515) (6,243) (11,526) (12,560)
----------- ----------- ----------- -----------
Income before income taxes......... 25,741 19,094 50,088 36,818
Income tax expense................. 10,219 7,571 19,885 14,664
----------- ----------- ----------- -----------
Net income......................... $ 15,522 $ 11,523 $ 30,203 $ 22,154
=========== =========== =========== ===========
Earnings per share - Basic......... $ 0.38 $ 0.30 $ 0.74 $ 0.57
=========== =========== =========== ===========
Earnings per share - Diluted....... $ 0.34 $ 0.26 $ 0.66 $ 0.49
=========== =========== =========== ===========
Weighted average number of
common shares outstanding--Basic. 41,151,941 37,523,591 40,838,510 37,371,309
=========== =========== =========== ===========
Weighted average number of common
shares outstanding--Diluted...... 46,105,360 45,146,640 45,976,560 44,959,087
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
For the Six
Months Ended June 30,
----------------------
2003 2002
---------- ----------
OPERATING ACTIVITIES:
Net income.................................................. $ 30,203 $ 22,154
Adjustments to reconcile net income to net cash
provided by operating activities:
Ineffective portion of cash flow hedges................... -- (381)
Stock compensation expense.............................. 76 --
Write-off deferred financing fees....................... 484 --
Deferred tax expense.................................... 6,014 --
Tax benefit of disqualifying dispositions of stock optio 3,537 1,168
Loss on sale of fixed assets............................ 72 201
Depreciation............................................ 7,613 6,194
Amortization............................................ 686 1,016
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable..................................... 930 5,381
Parts and supplies...................................... 144 1,453
Prepaid expenses and other assets....................... 7,105 2,032
Accounts payable........................................ (3,978) (1,931)
Accrued liabilities..................................... 6,406 13,956
Deferred revenue........................................ 547 (1,805)
---------- ----------
Net cash provided by operating activities................... 59,839 49,438
---------- ----------
INVESTING ACTIVITIES:
Payments for acquisitions and international
investments, net of cash acquired....................... (33,713) (10,070)
Short-term investments.................................... (188) (358)
Proceeds from sale of equipment........................... 183 55
Capital expenditures...................................... (9,158) (7,413)
---------- ----------
Net cash used in investing activities....................... (42,876) (17,786)
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FINANCING ACTIVITIES:
Net proceeds from issuance of note payable................ 1,132 1,181
Net repayments of senior credit facility.................. (4,186) (894)
Repurchase of senior subordinated debt.................... (17,775) (1,626)
Repayment of long-term debt............................... (3,093) (37,687)
Payments of deferred financing costs...................... (395) --
Principal payments on capital lease obligations........... (496) (376)
Proceeds from issuances of common stock................... 5,661 3,817
---------- ----------
Net cash used in financing activities....................... (19,152) (35,585)
Effect of exchange rate changes on cash..................... (87) 106
---------- ----------
Net decrease in cash and cash equivalents................... (2,276) (3,827)
Cash and cash equivalents at beginning of period............ 8,375 12,737
---------- ----------
Cash and cash equivalents at end of period.................. $ 6,099 $ 8,910
========== ==========
Non-cash activities:
Net issuances of common stock for certain acquisitions $ 70 $ 2,298
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
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; but the Company believes the disclosures 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 Consolidated Financial Statements and notes thereto for the year ended December 31, 2002, as filed with our Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations for the three and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2003.
NOTE 2-ACQUISITIONS
During the quarter ended June 30, 2003 we completed one acquisition and our majority owned subsidiary, 3CI Complete Compliance Corporation ("3CI"), completed one acquisition. In June, we acquired selected assets of Environmental Management Group, Inc., which operated in Ohio and Kentucky. Also in June, 3CI acquired selected assets of PMT USA, Inc, dba Air & Sea Environmental, which operated in southeast Texas.
During the quarter ended March 31, 2003 we completed two acquisitions. In January, we completed our acquisition, by a reverse subsidiary merger, of all the common and preferred stock of Scherer Healthcare, Inc., which operated two business lines: (i) consumer healthcare products and (ii) waste management services, the latter of which focuses primarily on containment, control, collection and processing of sharp-edged medical waste. Scherer's reusable sharps programs are marketed through its Bio Systems subsidiaries in 10 northeastern and mid-Atlantic states plus the District of Columbia. In addition in January, we completed our acquisition of selected assets from Kuglen Services, Ltd., LLP, which operated in Texas.
The aggregate purchase price of the four acquisitions in the six months ended June 30, 2003 was $33.7 million in cash, net of cash acquired.
NOTE 3--STOCK OPTIONS
During the quarter ended June 30, 2003, options to purchase 68,100 shares of common stock were granted to employees. These options vest ratably over a five-year period and have exercise prices of $37.92-$41.29 per share. Also during the quarter ended June 30, 2003, options to purchase 46,488 shares of common stock were granted to outside directors. These options vest ratably over a one-year period and have an exercise price of $41.00 per share.
During the quarter ended March 31, 2003, options to purchase 840,279 shares of common stock were granted to employees. These options vest ratably over a five-year period and have exercise prices of $33.05-$35.79 per share.
Pro forma information regarding net income and net income per share is required by FAS 123 as if we had accounted for our employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. Options granted were valued using the Black-Scholes option- pricing model.
Option value models require the input of highly subjective assumptions. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing method does not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option-vesting period. Our pro forma information follows (in thousands, except for per share information):
Quarter Ended June 30, Six Months Ended June 30,
-------------------------------------------------
2003 2002 2003 2002
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As reported net income.................. $ 15,522 $ 11,523 $ 30,203 $ 22,154
Pro forma impact of stock options,
net of tax............................ 1,578 1,387 3,636 2,883
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Pro forma net income.................... $ 13,944 $ 10,136 $ 26,567 $ 19,271
========== ========= ========== ===========
Pro forma net income per share-basic.... $ 0.34 $ 0.26 $ 0.65 $ 0.50
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Pro forma net income per share-diluted.. $ 0.31 $ 0.23 $ 0.58 $ 0.43
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NOTE 4-COMMON STOCK.
During the quarter ended June 30, 2003, options to purchase 287,403 shares of common stock were exercised at prices ranging from $3.875-$34.47 per share. We also issued 11,554 shares of common stock in connection with our employee stock purchase plan. In addition, the holders of our convertible preferred stock converted 6,527 shares into 812,000 shares of our common stock during the quarter.
During the quarter ended March 31, 2003, options to purchase 219,570 shares of common stock were exercised at prices ranging from $1.00- $27.37 per share. In addition, warrants with rights to purchase 7,666 shares of common stock were exercised at a price of $8.75 per share. We also issued 2,011 shares of common stock in connection with an acquisition agreement made in a previous quarter and cancelled 2,918 shares of common stock previously issued in connection with an acquisition in a previous quarter.
NOTE 5-NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per share:
STERICYCLE, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ------------ -----------
Numerator:
Net Income................................ $ 15,522 $ 11,523 $ 30,203 $ 22,154
Preferred stock dividends................. 0 (274) 0 (678)
----------- ----------- ----------- -----------
Numerator for basic earnings
per share.............................. $ 15,522 $ 11,249 $ 30,203 $ 21,476
Effective of dilutive securities:
Preferred stock dividends............... 0 274 0 678
----------- ----------- ----------- -----------
Numerator for diluted earnings
per share-income available to
common shareholders after
assumed conversions...................... $ 15,522 $ 11,523 $ 30,203 $ 22,154
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share
Weighted average shares.................. 41,151,941 37,523,591 40,838,510 37,371,309
----------- ----------- ----------- -----------
Effective of dilutive securities:
Employee stock options................... 1,529,665 1,866,479 1,545,564 1,850,349
Warrants................................. 117,306 119,214 116,369 121,848
Convertible preferred stock.............. 3,306,448 5,637,356 3,476,117 5,615,581
----------- ----------- ----------- -----------
Dilutive potential shares.................. 4,953,419 7,623,049 5,138,050 7,587,778
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions................................ 46,105,360 45,146,640 45,976,560 44,959,087
=========== =========== =========== ===========
Earnings per share - Basic................... $ 0.38 $ 0.30 $ 0.74 $ 0.57
=========== =========== =========== ===========
Earnings per share - Diluted................. $ 0.34 $ 0.26 $ 0.66 $ 0.49
=========== =========== =========== ===========
NOTE 6--COMPREHENSIVE INCOME
The components of total comprehensive income are net income, change in cumulative currency translation adjustments and the change in cumulative unrealized losses on derivative instruments recorded in accordance with FAS 133. The following table details the total comprehensive income for the current and prior year periods.
Changes in Balance Sheet
----------------------------- Total
Net Currency Derivative Comprehensive
Income Translation Instruments Income
-------------------------------------------------------
Three months ended June 30, 2002 $ 11,523 $ 37 $ -- $ 11,560
Three months ended June 30, 2003 15,522 (60) -- 15,462
Six months ended June 30, 2002 22,154 37 1,462 23,653
Six months ended June 30, 2003 30,203 (84) 232 30,351
NOTE 7 -GOODWILL AND OTHER INTANGIBLES
We have two geographical reporting segments, United States and Foreign Countries, both of which have goodwill. The changes in the carrying amount of goodwill for the six months ended June 30, 2003, was as follows (in thousands):
United Foreign
States Countries Total
---------- --------- ----------
Balance as of January 1, 2003 $ 441,087 $ 6,185 $ 447,272
Goodwill acquired during year 18,887 -- 18,887
---------- --------- ----------
Balance as of June 30, 2003 $ 459,974 $ 6,185 $ 466,159
========== ========= ==========
According to FAS 142, other intangible assets will continue to be amortized over their useful lives. During the quarter ended June 30, 2003 we recorded at fair value the intangibles acquired in connection with our acquisitions of Scherer Healthcare, Inc. in January 2003 and Environmental Management Group in June 2003. We assigned $5.1 million to customer relationships with an amortization period of 40 years, similar to that of our other customer relationship intangibles, $1.5 million to trademarks with an amortization period of 40 years and $1.8 million to environmental permits which have been determined to have an indefinite life. Also, our majority owned subsidiary, 3CI, assigned $0.2 million to customer relationships with an amortization period of 40 years in connection with their acquisiton of PMT USA, Inc. in June 2003.
During the quarter ended March 31, 2003 we recorded at fair market value the intangibles acquired in connection with our acquisition during the quarter of certain of the assets of Kuglen Services Ltd, LLP. We assigned $1.14 million to customer relationships with an amortization period of 40 years, similar to that of our other customer relationship intangibles.
During the quarter ended June 30, 2003 we performed our annual goodwill impairment evaluation and determined that none of our recorded goodwill was impaired.
NOTE 8-NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, and Interpretation of Accounting Research Bulletin (ARB) No. 51" (the "Interpretation"). The Interpretation introduces a new consolidation model which determines control and consolidation based on potential variablility in gains and losses of the entity being evaluated for consolidation. The Interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which a company obtains an interest after that date. The Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which a company holds a variable interest that it acquired before February 1, 2003. We are currently evaluating the impact of the Interpretation on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This standard is effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments as of the beginning of the first interim financial reporting period beginning after June 15, 2003. Management believes there will be no impact of this Statement on our consolidated financial statements.
NOTE 9-LEGAL PROCEEDINGS
We operate in a highly regulated industry and are exposed to regulatory inquiries or investigations from time to time. Investigations can be initiated for a variety of reasons. We have been involved in several legal and administrative proceedings that have been settled or otherwise resolved on terms acceptable to us, without having a material adverse effect on our business, financial condition or results of operations. We are also a party to various legal proceedings arising in the ordinary course of business. We believe that the resolutions of these other matters will not have a material adverse affect on our business, financial condition or results of operation.
In September 2002, we entered into a consent decree implementing the terms of settlement with the Arizona Attorney General's office of its antitrust investigation relating to our December 1997 sale and purchase of medical waste assets in Utah and Arizona with Browning-Ferris Industries, Inc. ("BFI") and our subsequent failure to provide treatment services to certain third-party haulers of medical waste at our treatment facilities in Arizona and Utah. Under the consent decree, we are required to pay a total of $0.3 million in civil penalties and attorneys' fees in quarterly installments over a three-year period, with an initial payment of $0.1 million. We are also required to provide up to 50,000 pounds per month of incineration treatment services to third-party haulers at our Chandler, Arizona treatment facility for a five-year period at commercially competitive prices. In addition, we are required, for a two-year period, to rebate 25% of the amounts billed and collected from the two third-party haulers whose complaints prompted the initial investigation.
In January 2003, we reached a definitive settlement of the antitrust investigation by the Utah Attorney General's office relating to the same issues. Under the terms of the consent decree incorporating this settlement, we agreed to pay a total of $0.6 million to the Attorney General's office over a three- year period. We also agreed to make certain operational changes in Utah to enhance competition, including providing incineration treatment services to third party haulers at our Salt Lake City treatment facility.
In January 2003, we were sued in federal court in Arizona by a private plaintiff alleging anticompetitive conduct in Arizona, Colorado and Utah from November 1997 to the present and seeking certification of the lawsuit as a class action on behalf of all customers of Stericycle and BFI in the three-state area during the period in question. In February and March 2003, three similar suits were filed in federal court in Arizona, Colorado and Utah, and in April 2003, a fifth similar suit was filed in federal court in New Mexico. In addition, in February 2003, a sixth suit, alleging substantially the same anticompetitive conduct but not seeking class action certification, was filed in federal court in Utah. We have moved to transfer and consolidate all six lawsuits in federal court in Utah. We believe that none of the lawsuits has any merit.
We and certain of our officers and directors are parties to a lawsuit filed in state court in Louisiana in July 2002 by a shareholder of our majority-owned subsidiary, 3CI Complete Compliance Corporation ("3CI"). The lawsuit, which was filed on behalf of the minority shareholders of 3CI and derivatively on behalf of 3CI itself, alleges, among other things, that we and 3CI's directors (who, in all but one case, are also officers or directors of ours) unjustly enriched Stericycle at the expense of 3CI and its other shareholders. The plaintiff seeks, among other relief, damages and an order requiring the buyout of 3CI's minority shareholders. The lawsuit is still at a very early stage. We believe that the plaintiff's claims are without merit.
In May 2003, 3CI, at the direction of its independent directors, filed a declaratory judgment action in state court in Texas to resolve a disagreement with us over the proper rate of conversion of the shares of 3CI's preferred stock held by our wholly-owned subsidiary, Waste Systems, Inc. ("WSI"). The plaintiff in the Louisiana lawsuit described in the preceding paragraph has intervened in this declaratory judgement action, making substantially the same allegations. The declaratory judgement action is at a very early stage.
NOTE 10--CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Payments under our senior subordinated notes (the Notes) are unconditionally guaranteed, jointly and severally, by certain of our wholly-owned domestic subsidiaries (collectively, "the guarantors"). Financial information concerning the guarantors as of June 30, 2003 and December 31, 2002 and for the three and six month periods ended June 30, 2003 and 2002 is presented below for purposes of complying with the reporting requirements of the guarantor subsidiaries. The financial information concerning the guarantors is being presented through condensed consolidating financial statements since we have more than minimal independent operations and the guarantees are full and unconditional and are joint and several. Financial statements for the guarantors have not been presented because management does not believe that such financial statements are material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 2,335 $ 735 $ 3,070 $ 3,029 $ -- $ 6,099
Other current assets................... 78,544 24,830 103,374 9,154 (26,261) 86,267
---------- ----------- ------------ ----------- ----------- ------------
Total current assets...................... 80,879 25,565 106,444 12,183 (26,261) 92,366
Property, plant and equipment,
net.................................... 77,989 5,025 83,014 9,924 -- 92,938
Goodwill, net............................. 436,228 18,029 454,257 11,902 -- 466,159
Investment in subsidiaries................ 68,563 143 68,706 -- (68,706) --
Other assets.............................. 38,305 11,154 49,459 1,234 (6,306) 44,387
---------- ----------- ------------ ----------- ----------- ------------
Total assets.............................. $ 701,964 $ 59,916 $ 761,880 $ 35,243 $ (101,273) $ 695,850
========== =========== ============ =========== =========== ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt....................... $ 17,970 $ 270 $ 18,240 $ 336 $ $ 18,576
Other current liabilities.............. 67,719 2,773 70,492 10,997 (26,261) 55,228
---------- ----------- ------------ ----------- ----------- ------------
Total current liabilities................. 85,689 3,043 88,732 11,333 (26,261) 73,804
Long-term debt, net of current
portion................................ 182,578 379 182,957 9,171 (6,306) 185,822
Other liabilities......................... 39,294 -- 39,294 2,527 -- 41,821
Redeemable preferred stock................ 21,032 -- 21,032 -- -- 21,032
Common shareholders' equity............... 373,371 56,494 429,865 12,212 (68,706) 373,371
---------- ----------- ------------ ----------- ----------- ------------
Total liabilities and
shareholders' equity................... $ 701,964 $ 59,916 $ 761,880 $ 35,243 $ (101,273) $ 695,850
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
AUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 5,818 $ 733 $ 6,551 $ 1,824 $ -- $ 8,375
Other current assets................... 75,798 31,453 107,251 10,666 (31,936) 85,981
---------- ----------- ------------ ----------- ----------- ------------
Total current assets...................... 81,616 32,186 113,802 12,490 (31,936) 94,356
Property, plant and equipment,
net.................................... 72,638 6,026 78,664 9,837 -- 88,501
Goodwill, net............................. 399,646 35,972 435,618 11,654 -- 447,272
Investment in subsidiaries................ 98,772 767 99,539 -- (99,539) --
Other assets.............................. 30,768 12,216 42,984 887 (6,905) 36,966
---------- ----------- ------------ ----------- ----------- ------------
Total assets.............................. $ 683,440 $ 87,167 $ 770,607 $ 34,868 $ (138,380) $ 667,095
========== =========== ============ =========== =========== ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt....................... $ 3,881 $ -- $ 3,881 $ 52 $ -- $ 3,933
Other current liabilities.............. 70,958 908 71,866 9,891 (31,936) 49,821
---------- ----------- ------------ ----------- ----------- ------------
Total current liabilities................. 74,839 908 75,747 9,943 (31,936) 53,754
Long-term debt, net of current
portion................................ 221,545 -- 221,545 9,484 (6,905) 224,124
Other liabilities......................... 32,278 (387) 31,891 2,548 -- 34,439
Redeemable preferred stock................ 28,049 -- 28,049 -- -- 28,049
Common shareholders' equity............... 326,729 86,646 413,375 12,893 (99,539) 326,729
---------- ----------- ------------ ----------- ----------- ------------
Total liabilities and
shareholders' equity................... $ 683,440 $ 87,167 $ 770,607 $ 34,868 $ (138,380) $ 667,095
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 99,707 $ 5,738 $ 105,445 $ 8,547 $ (857) $ 113,135
Cost of revenues.......................... 55,867 3,830 59,697 5,416 (820) 64,293
Selling, general, and
administrative expenses................ 14,627 1,043 15,670 1,793 -- 17,463
Acquisition related costs................. 123 -- 123 -- -- 123
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 70,617 4,873 75,490 7,209 (820) 81,879
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 29,090 865 29,955 1,338 (37) 31,256
Equity in net income (loss) of
subsidiaries........................... 1,296 328 1,624 -- (1,624) --
Other (expense) income, net............... (5,351) (28) (5,379) (173) 37 (5,515)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 25,035 1,165 26,200 1,165 (1,624) 25,741
Income tax expense........................ 9,513 320 9,833 386 -- 10,219
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 15,522 $ 845 $ 16,367 $ 779 $ (1,624) $ 15,522
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2002
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 87,049 $ 4,584 $ 91,633 $ 8,546 $ (910) $ 99,269
Cost of revenues.......................... 51,298 2,726 54,024 5,928 (910) 59,042
Selling, general, and
administrative expenses................ 13,224 156 13,380 1,488 -- 14,868
Acquisition related costs................. 22 -- 22 -- -- 22
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 64,544 2,882 67,426 7,416 (910) 73,932
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 22,505 1,702 24,207 1,130 -- 25,337
Equity in net income (loss) of
subsidiaries........................... 1,921 224 2,145 -- (2,145) --
Other (expense) income, net............... (6,006) 190 (5,816) (427) -- (6,243)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 18,420 2,116 20,536 703 (2,145) 19,094
Income tax expense (benefit).............. 6,897 675 7,572 (1) -- 7,571
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 11,523 $ 1,441 $ 12,964 $ 704 $ (2,145) $ 11,523
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 198,891 $ 11,027 $ 209,918 $ 17,148 $ (1,620) $ 225,446
Cost of revenues.......................... 111,971 7,554 119,525 11,494 (1,559) 129,460
Selling, general, and
administrative expenses................ 28,508 2,102 30,610 3,548 -- 34,158
Acquisition related costs................. 214 -- 214 -- -- 214
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 140,693 9,656 150,349 15,042 (1,559) 163,832
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 58,198 1,371 59,569 2,106 (61) 61,614
Equity in net income (loss) of
subsidiaries........................... 2,300 345 2,645 -- (2,645) --
Other (expense) income, net............... (11,205) 25 (11,180) (407) 61 (11,526)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 49,293 1,741 51,034 1,699 (2,645) 50,088
Income tax expense........................ 19,090 524 19,614 271 -- 19,885
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 30,203 $ 1,217 $ 31,420 $ 1,428 $ (2,645) $ 30,203
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2002
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 170,657 $ 9,448 $ 180,105 $ 18,030 $ (1,802) $ 196,333
Cost of revenues.......................... 100,809 5,797 106,606 12,436 (1,825) 117,217
Selling, general, and
administrative expenses................ 26,155 380 26,535 3,061 (33) 29,563
Acquisition related costs................. 175 -- 175 -- -- 175
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 127,139 6,177 133,316 15,497 (1,858) 146,955
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 43,518 3,271 46,789 2,533 56 49,378
Equity in net income (loss) of
subsidiaries........................... 4,097 583 4,680 -- (4,680) --
Other (expense) income, net............... (12,132) 262 (11,870) (690) -- (12,560)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 35,483 4,116 39,599 1,843 (4,624) 36,818
Income tax expense (benefit).............. 13,386 1,300 14,686 (22) -- 14,664
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 22,097 $ 2,816 $ 24,913 $ 1,865 $ (4,624) $ 22,154
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by
operating activities................. $ 57,954 $ 429 $ 58,383 $ 1,456 $ -- $ 59,839
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (8,350) (317) (8,667) (491) -- (9,158)
Proceeds from sale of equipment........ 175 -- 175 8 183
Payments for acquisitions and
international investments, net of
cash acquired........................ (4,845) (28,868) (33,713) -- -- (33,713)
Short-term investments................ 63 -- 63 (251) -- (188)
---------- ----------- ------------ ----------- ----------- ------------
Net cash (used in) investing activities (12,957) (29,185) (42,142) (734) -- (42,876)
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of senior credit facility (4,186) -- (4,186) -- -- (4,186)
Principal payments on capital lease
obligations.......................... (404) (110) (514) 18 -- (496)
Repayment of long term debt............ (2,513) -- (2,513) (580) -- (3,093)
Repurchase of senior subordinated debt. (17,775) -- (17,775) -- -- (17,775)
Payments of deferred financing costs... (395) -- (395) -- -- (395)
Net proceeds from issuance
of notes payable..................... -- -- -- 1,132 -- 1,132
Proceeds from issuance of common
stock................................ 5,661 -- 5,661 -- -- 5,661
Intercompany financing of acquisitions. (28,868) 28,868 -- -- -- --
---------- ----------- ------------ ----------- ----------- ------------
Net cash (used in) financing activities... (48,480) 28,758 (19,722) 570 -- (19,152)
---------- ----------- ------------ ----------- ----------- ------------
Effect of exchange rate changes on cash... -- -- (87) (87)
---------- ----------- ------------ ----------- ----------- ------------
Net (decrease)/increase in cash and
cash equivalents....................... $ (3,483) $ 2 $ (3,481) $ 1,205 $ -- (2,276)
========== =========== ============ =========== ===========
Cash and cash equivalents at beginning
of period.............................. 8,375
------------
Cash and cash equivalents at end of
period................................. $ 6,099
============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by
operating activities................. $ 50,533 $ (317) $ 50,216 $ (778) $ -- $ 49,438
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (6,977) (78) (7,055) (358) -- (7,413)
Proceeds from sale of equipment........ 54 -- 54 1 55
Payments for acquisitions and
international investments, net of
cash acquired........................ (5,077) (4,184) (9,261) (809) -- (10,070)
Short-term investments................. (358) -- (358) -- -- (358)
---------- ----------- ------------ ----------- ----------- ------------
Net cash (used in) investing activities (12,358) (4,262) (16,620) (1,166) -- (17,786)
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on senior credit facility (37,687) -- (37,687) -- -- (37,687)
Principal payments on capital lease
obligations.......................... (180) (178) (358) (18) -- (376)
Net proceeds from issuance
of notes payable..................... -- -- -- 1,181 -- 1,181
Repayments on long-term debt........... (485) -- (485) (409) -- (894)
Repurchase of senior subordinated debt. (1,626) -- (1,626) -- -- (1,626)
Proceeds from issuance of common
stock................................ 3,817 -- 3,817 -- -- 3,817
Intercompany financing of acquisitions. (4,184) 4,184 -- -- -- --
---------- ----------- ------------ ----------- ----------- ------------
Net cash (used in) financing activities... (40,345) 4,006 (36,339) 754 -- (35,585)
---------- ----------- ------------ ----------- ----------- ------------
Effect of exchange rate changes on cash... -- -- 106 106
---------- ----------- ------------ ----------- ----------- ------------
Net (decrease)/increase in cash and
cash equivalents....................... $ (2,170) $ (573) $ (2,743) $ (1,084) $ -- (3,827)
========== =========== ============ =========== ===========
Cash and cash equivalents at beginning
of period.............................. 12,737
------------
Cash and cash equivalents at end of
period................................. $ 8,910
============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We were incorporated in March 1989. We provide compliance services including regulated medical waste collection, transportation and treatment services to our customers and related training and education programs and consulting services. We also sell ancillary supplies and transport pharmaceuticals, photographic chemicals, lead foil and amalgam for recycling in selected geographic service areas. We are also expanding into international markets through joint ventures and/or by licensing our proprietary technology and selling associated equipment.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
The following summarizes (in thousands) the Company's operations:
Three Months Ended June 30,
-----------------------------------------
2003 2002
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $113,135 100.0 $ 99,269 100.0
Cost of revenues..................................... 61,127 54.0 56,271 56.7
Depreciation......................................... 3,166 2.8 2,771 2.8
-------- -------- -------- -------
Total cost of revenues............................... 64,293 56.8 59,042 59.5
Gross profit......................................... 48,842 43.2 40,227 40.5
Selling, general and
administrative expenses............................ 16,594 14.7 13,992 14.1
Depreciation......................................... 504 0.4 368 0.4
Amortization......................................... 365 0.3 508 0.5
Acquisition related costs............................ 123 0.1 22 0.0
-------- -------- -------- -------
Total selling, general and administrative expenses... 17,586 15.5 14,890 15.0
Income from operations............................... 31,256 27.6 25,337 25.5
Net income........................................... 15,522 13.7 11,523 11.6
Depreciation and amortization........................ 4,035 3.6 3,647 3.7
Interest income...................................... (71) (98)
Interest expense..................................... 3,385 5,516
Income tax expense................................... 10,219 7,571
-------- --------
EBITDA(1)............................................ 33,090 29.2 28,159 28.4
Earnings per share-diluted........................... $ 0.34 $ 0.26
(1) Calculated for a period as the sum of net income, plus depreciation expense and amortization expense, net interest expense and income tax expense to the extent deducted in calculating net income. We consider EBITDA to be a widely accepted financial indicator of a company's operating performance and ability to service debt, fund capital expenditures and expand its business. EBITDA is not calculated in the same way by all companies and therefore may not be comparable to similarly titled measures reported by other companies. EBITDA is not a measure in accordance with accounting principles generally accepted in the United States. EBITDA should not be considered as an alternative to net income, as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity. The funds depicted by the measure may not be available for management's discretionary use due to legal or functional requirements, debt service, other commitments and uncertainties. EBITDA does not add back $1.6 million in 2003 and $0.5 million in 2002 of debt extinguishments and restructuring costs, which were deducted in the calculation of net income.
Revenues. Revenues increased $13.9 million, or 14.0%, to $113.1 million during the quarter ended June 30, 2003 from $99.3 million during the comparable quarter in 2002 as a result of our continued strategy of focusing on sales to higher-margin small account customers, and revenues from acquisitions completed in the quarter. International equipment related revenues were $0.4 million during the quarter as compared to $1.1 million during the comparable quarter in 2002. During the quarter ended June 30, 2003, acquisitions less than one year old contributed approximately $10.9 million to the increase in revenues as compared to the prior year. For the quarter, our base internal revenue growth for small account customers increased over 10.5% while revenues from large account customers decreased by approximately 3%.
Cost of revenues. Cost of revenues increased $5.3 million to $64.3 million during the quarter ended June 30, 2003 from $59.0 million during the comparable quarter in 2002. The increase was primarily due to volume growth, acquisitions and higher insurance and employee benefit costs. Our gross margin percentage increased to 43.2% during the quarter from 40.5% during the same quarter in 2002 as benefits from better margins on our large customer business , integration synergies from acquisitions, the continued success of the Steri- SafeSM OSHA Compliance Program rollout, and lower variable costs partially offset higher benefit and insurance costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $17.6 million for the quarter ended June 30, 2003 from $14.9 million for the comparable quarter in 2002. The increase was the result of higher revenues from internal growth and acquisitions, higher employee benefit costs and spending related to strategic marketing programs such as BioSystems and Steri-SafeSM. Selling, general and administrative expenses as a percent of revenues increased to 15.5% during the quarter from 15.0% during the comparable quarter in 2002.
Income from operations. Income from operations increased to $31.3 million for the quarter ended June 30, 2003 from $25.3 million for the comparable quarter in 2002. The increase was due to higher gross profit margins, partially offset by higher selling, general and administrative expenses during the quarter. Income from operations as a percentage of revenue increased to 27.6% during the quarter from 25.5% during the same quarter in 2002 as a result of better margins.
EBITDA. EBITDA increased by 17.5% to $33.1 million or 29.2% of revenue for the quarter ended June 30, 2003, as compared to $28.2 million or 28.4% of revenue for the comparable quarter in 2002. The increase in EBITDA was primarily due to the factors described above.
Net interest expense. Net interest expense decreased to $3.3 million during the quarter ended June 30, 2003 from $5.4 million during the comparable quarter in 2002 primarily due to reduced debt and lower interest rates.
Debt extinguishments. During the quarter, we incurred a total of $1.6 million in expense related to the repurchase of $8.6 million of our 12 3/8% senior subordinated notes. This amount consisted of a $1.4 million premium to repurchase the notes and a $0.2 million non-cash write- off of associated deferred financing fees. During the same period in 2002 we incurred a $0.3 million expense related to the repurchase of $1.6 million of our 12 3/8% senior subordinated notes and an additional $0.2 million expense related to amending our credit agreement.
Income tax expense. Income tax expense increased to $10.2 million for the quarter ended June 30, 2003 from $7.6 million for the comparable quarter in 2002. The increase was due to higher taxable income. The tax rate for the quarters ended June 30, 2003 and 2002 was 39.7%.
Net income. Net Income increased to $15.5 million for the quarter ended June 30, 2003 from $11.5 million for the comparable quarter in 2002. The increase was due to higher income from operations and lower interest expense partially offset by higher income tax expense.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
The following summarizes (in thousands) the Company's operations:
Six Months Ended June 30,
-----------------------------------------
2003 2002
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $225,446 100.0 $ 196,333 100.0
Cost of revenues..................................... 122,841 54.5 111,672 56.9
Depreciation......................................... 6,619 2.9 5,545 2.8
-------- -------- -------- -------
Total cost of revenues............................... 129,460 57.4 117,217 59.7
Gross profit......................................... 95,986 42.6 79,116 40.3
Selling, general and
administrative expenses............................ 32,478 14.4 27,898 14.2
Depreciation......................................... 994 0.4 649 0.3
Amortization......................................... 686 0.3 1,016 0.5
Acquisition related costs............................ 214 0.1 175 0.1
-------- -------- -------- -------
Total selling, general and administrative expenses... 34,372 15.2 29,738 15.1
Income from operations............................... 61,614 27.3 49,378 25.2
Net income........................................... 30,203 13.4 22,154 11.3
Depreciation and amortization........................ 8,299 3.7 7,210 3.7
Interest income...................................... (260) (261)
Interest expense..................................... 7,312 11,325
Income tax expense................................... 19,885 14,664
-------- --------
EBITDA (1)........................................... 65,439 29.0 55,092 28.1
Earnings per share-diluted........................... $ 0.66 $ 0.49
(1) Calculated for a period as the sum of net income, plus depreciation expense and amortization expense, net interest expense and income tax expense to the extent deducted in calculating net income. We consider EBITDA to be a widely accepted financial indicator of a company's operating performance and ability to service debt, fund capital expenditures and expand its business. EBITDA is not calculated in the same way by all companies and therefore may not be comparable to similarly titled measures reported by other companies. EBITDA is not a measure in accordance with accounting principles generally accepted in the United States. EBITDA should not be considered as an alternative to net income, as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity. The funds depicted by the measure may not be available for management's discretionary use due to legal or functional requirements, debt service, other commitments and uncertainties. EBITDA does not add back $3.3 million in 2003 and $0.5 million in 2002 of debt extinguishments and restructuring costs, which were deducted in the calculation of net income.
Revenues. Revenues increased $29.1 million, or 14.8%, to $225.4 million during the six months ended June 30, 2003 from $196.3 million during the comparable period in 2002 as a result of our continued strategy of focusing on sales to higher-margin small account customers and revenues from acquisitions completed in the period. International equipment related revenues were $1.1 million during the period as compared to $3.8 million during the comparable period in 2002. During the period ended June 30, 2003, acquisitions less than one year old contributed approximately $21.4 million to the increase in revenues as compared to the prior year. For the six months, our base internal revenue for small account customers increased approximately 11% while revenues from large account customers remained at approximately the same level as the previous year.
Cost of revenues. Cost of revenues increased $12.2 million to $129.5 million during the six months ended June 30, 2003 from $117.2 million during the comparable period in 2002. The increase was primarily due to volume growth, acquisitions and higher insurance, fuel and employee benefit costs. Our gross margin percentage increased to 42.6% during the period from 40.3% during the same period in 2002 as benefits from better margins on our large customer business, the continued success of the Steri-SafeSM OSHA Compliance Program rollout, and lower variable costs offset higher fuel, supply, benefit and insurance costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $34.4 million for the six months ended June 30, 2003 from $29.7 million for the comparable period in 2002. The increase was the result of higher insurance and benefit costs and spending on the Steri-SafeSMOSHA Compliance Program and other strategic marketing investments. Selling, general and administrative expenses as a percent of revenues increased to 15.2% during the period from 15.1% during the comparable period in 2002.
Income from operations. Income from operations increased to $61.6 million for the six months ended June 30, 2003 from $49.4 million for the comparable quarter in 2002. The increase was due to higher gross profit margins, partially offset by higher selling, general and administrative expenses during the period. Income from operations as a percentage of revenue increased to 27.3% during the period from 25.2% during the same period in 2002 as a result of better margins.
EBITDA. EBITDA increased by 18.8% to $65.4 million or 29.0% of revenue for the six months ended June 30, 2003, as compared to $55.1 million or 28.1% of revenue for the comparable period in 2002. The increase in EBITDA was primarily due to the factors described above.
Net interest expense. Net interest expense decreased to $7.1 million during the six months ended June 30, 2003 from $11.1 million during the comparable period in 2002 primarily due to reduced debt and lower interest rates.
Debt extinguishments. During the six-month period, we incurred a total of $3.3 million in expense related to the repurchase of $17.8 million of our 12 3/8% senior subordinated notes. This amount consisted of a $2.8 million premium to repurchase the notes and a $0.5 million non-cash write- off of associated deferred financing fees. During the same period in 2002 we incurred a $0.3 million expense related to the repurchase of $1.6 million of our 12 3/8% senior subordinated notes and an additional $0.2 million expense related to amending our credit agreement.
Income tax expense. Income tax expense increased to $19.9 million for the six months ended June 30, 2003 from $14.7 million for the comparable period in 2002. The increase was due to higher taxable income. The tax rate for the six months ended June 30, 2003 decreased to 39.7% from 39.8% in the comparable period in 2002.
Net income. Net income increased to $30.2 million for the six months ended June 30, 2003 from $22.2 million for the comparable period in 2002. The increase was due to higher income from operations and lower interest expense partially offset by higher income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, our working capital was $18.6 million compared to working capital of $40.6 million at December 31, 2002. The decrease in working capital was primarily due to higher current debt and accrued liability balances and lower cash balances. At June 30, 2003, we had available a $105.0 million revolving line of credit under our senior secured credit facility which was secured by our accounts receivable and all of our others assets. At June 30, 2003 we had $3.0 million outstanding under our revolving credit facility.
Net cash provided by operating activities was $59.8 million during the six months ended June 30, 2003 compared to $49.4 million for the comparable period in 2002. This increase primarily reflects higher net income and other changes in working capital.
Net cash used in investing activities for the six months ended June 30, 2003 was $42.9 million compared to $17.8 million for the comparable period in 2002. This increase is primarily attributable to the Scherer acquisition. Capital expenditures were $9.2 million for the six-month period, or 4.1% of revenues, compared to $7.4 million, or 3.8% of revenues for the same period in 2002. This rate of capital spending is consistent with the 4%-5% of revenues that we anticipate spending during 2003. Consistent with our long-term strategy, we continually evaluate our treatment technology mix. Our preference is to reduce the incineration portion, as customers' preferences, practices and regulations will allow. At June 30, 2003 we had approximately 13% of our treatment capacity in incineration and approximately 87% in non- incineration technologies such as our proprietary ETD technology and autoclaving. Cash investments in acquisitions and international joint ventures for the six months ended June 30, 2003 were $33.7 million versus $10.1 million in the comparable period in 2002.
Net cash used in financing activities was $19.2 million during the six months ended June 30, 2003 compared to $35.6 million for the comparable period in 2002. During the first six months of 2003 we made net repayments of $24.5 million in debt and capital leases which consisted of $14.0 million in scheduled payments and $24.5 million in prepayments, offset by $14.0 million in additional borrowings under our revolving line of credit, which were primarily to fund the Scherer acquisition.
ITEM 3-QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates on our senior secured credit facility. Our interest rate exposure results from changes in LIBOR or the base rate which are used to determine the applicable interest rates under our term loans and revolving credit facility. Our potential loss 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 $1.4 million. Fluctuations in interest rates will not affect the interest payable on our senior subordinated notes, which is fixed.
ITEM 4-CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures designed to ensure the reliability of our consolidated financial statements and other disclosures. Within the 90-day period prior to the date of filing this report, our President and Chief Executive Officer and our Chief Financial Officer carried out, with the participation of other members of management, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of the date of the evaluation and as of the end of the quarter covered by this report, our disclosure controls and procedures were effective in all material respects in alerting them in a timely manner to the material information about us and our subsidiaries that we are required to include in the periodic reports that we file with the Securities and Exchange Commission.
There have been no significant changes in our internal controls, or in other factors that could significantly affect our internal controls, subsequent to the date of this evaluation. There were no changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or that are reasonably likely to materially affect, our interal control 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.
A VARIETY OF FACTORS COULD CAUSE OUR ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN OUR FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES THAT MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATION INCLUDE DIFFICULTIES AND DELAYS IN COMPLETING AND INTEGRATING BUSINESS ACQUISITIONS; DELAYS AND DIVERSION OF ATTENTION RELATING TO PERMITTING AND OTHER REGULATORY COMPLIANCE; DIFFICULTIES AND DELAYS RELATING TO MARKETING AND SALES ACTIVITIES; AND GENERAL UNCERTAINTIES ACCOMPANYING THE EXPANSION INTO NEW GEOGRAPHIC SERVICE AREAS.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9, Legal Proceedings, in the Notes to the Condensed Consolidated Financial Statements (Item 1 of Part 1).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2003 Annual Meeting of Stockholders on May 6, 2003. At the meeting, all nine of our directors were reelected as directors to hold office until the 2004 Annual Meeting of Stockholders.:
For the seven nominees for election by holders of our common stock and holders of our Series A convertible preferred stock voting together as a single class (with each share of preferred stock having a number of votes, 124.39, equal to the number of shares of common stock into which the share of preferred stock is convertible), the voting was as follows
|
Nominee |
Votes For |
Votes Against or Withheld |
|
Jack W. Schuler |
39,510,835 |
220,862 |
|
Mark C. Miller |
39,567,283 |
164,414 |
|
Rod F. Dammeyer |
39,508,050 |
223,647 |
|
Patrick F. Graham |
38,931,966 |
799,731 |
|
John Patience |
39,507,929 |
223,768 |
|
Peter Vardy |
38,934,022 |
797,675 |
|
L. John Wilkerson, Ph.D. |
38,931,496 |
800,201 |
For the one nominee for election by holders of our Series A convertible preferred stock associated with Bain Capital, LLC, voting as a separate class (with each share of preferred stock having one vote), the voting was as follows:
|
Nominee |
Votes For |
Votes Against or Withheld |
|
John P. Connaughton |
14,512.77 |
- |
For the one nominee for election by holders of our Series A convertible preferred stock associated with Madison Dearborn Partners, LLC, voting as a separate class (with each share of preferred stock having one vote), the voting was as follows:
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Nominee |
Votes For |
Votes Against or Withheld |
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Thomas R. Reusché |
14,814.10 |
- |
At the 2003 Annual Meeting the stockholders also considered the ratification of the appointment of Ernst & Young LLP as our independent public accountants for the year ending December 31, 2003. Holders of of our common stock and holders of our Series A convertible preferred stock voted together as a single class (with each share of preferred stock having a number of votes equal to the number of shares of common stock into which the share of preferred stock is convertible). The voting was as follows:
|
Votes For |
Votes Against |
Votes Abstaining |
|
39,090,844 |
601,471 |
39,382 |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Mark C. Miller, President 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, President and Chief Executive Officer, and Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, we filed two current reports on Form 8-K.
We filed a Form 8-K on May 1, 2003 to report our earnings release on the same day. The report included as an exhibit our earnings release and accompanying financial statements.
We filed a Form 8-K on May 29, 2003 to report our repurchase at prevailing market prices of a total of $6.6 million in principal amount of our 12-3/8% senior subordinated notes due 2009 in privately negotiated transactions with two note holders on May 14 and May 19, 2003, respectively.
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: August 8, 2003.
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STERICYCLE, INC. |
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(Registrant) |
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By: |
/s/ Frank J.M. ten Brink |
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Frank J.M. ten Brink |
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Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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