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 September 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 November 6, 2003 there were 42,074,282 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 September 30, 2003 (Unaudited) and December 31, 2002 |
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Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002 (Unaudited) |
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Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 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)
September 30, December 31
2003 2002
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 6,542 8,375
Short-term investments.......................................... 1,302 512
Accounts receivable, less allowance for doubtful
accounts of $4,480 in 2003 and $3,779 in 2002................. 62,995 62,013
Parts and supplies.............................................. 4,630 4,494
Prepaid expenses................................................ 3,120 7,170
Notes receivable................................................ 823 823
Deferred tax asset.............................................. 8,164 6,720
Other........................................................... 3,682 4,249
----------- -----------
Total current assets................................... 91,258 94,356
Property, plant and equipment, net.............................. 94,705 88,501
----------- -----------
Other assets:
Goodwill, net................................................... 466,308 447,272
Intangible assets, less accumulated amortization of
$4,744 in 2003 and $3,609 in 2002............................. 29,061 20,110
Notes receivable................................................ 7,717 7,717
Other........................................................... 7,748 9,139
----------- -----------
Total other assets............................................ 510,834 484,238
----------- -----------
Total assets........................................... $ 696,797 $ 667,095
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt............................... $ 9,766 $ 3,933
Accounts payable................................................ 10,254 14,330
Accrued liabilities............................................. 41,998 31,810
Deferred revenue................................................ 4,758 3,681
----------- -----------
Total current liabilities.............................. 66,776 53,754
----------- -----------
Long-term debt, net of current portion.......................... 169,988 224,124
Deferred income taxes........................................... 38,807 30,729
Other liabilities............................................... 4,614 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 September 30, 2003 and $31,919 at December 31, 2002)..... 20,944 28,049
Common shareholders' equity:
Common stock (par value $.01 per share, 80,000,000
shares authorized, 42,042,289 issued and outstanding in
in 2003, 40,437,023 issued and outstanding in 2002)........... 421 404
Additional paid-in capital...................................... 298,276 277,531
Treasury stock of 50,000 shares................................. (1,435) (1,435)
Accumulated other comprehensive income (loss)................... 574 (229)
Retained earnings............................................... 97,832 50,458
----------- -----------
Total shareholders' equity...................................... 395,668 326,729
----------- -----------
Total liabilities and shareholders' equity.................... $ 696,797 $ 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ------------ ----------- ------------
Revenues........................... $ 113,228 $ 101,979 $ 338,674 $ 298,312
Costs and expenses:
Cost of revenues................. 60,369 56,983 183,210 168,655
Selling, general and
administrative expenses........ 16,781 14,442 49,259 42,340
Depreciaton and amortization..... 4,243 3,901 12,542 11,111
Acquisition related costs........ 216 48 430 223
----------- ----------- ----------- -----------
Total costs and expenses...... 81,609 75,374 245,441 222,329
----------- ----------- ----------- -----------
Income from operations............. 31,619 26,605 93,233 75,983
----------- ----------- ----------- -----------
Other income (expense):
Interest income.................. 232 113 492 374
Interest expense................. (2,829) (5,382) (10,141) (16,707)
Debt extinguishments............. -- (1,220) (3,268) (1,695)
Other expense.................... (641) (257) (1,847) (1,278)
----------- ----------- ----------- -----------
Total other income (expense).. (3,238) (6,746) (14,764) (19,306)
----------- ----------- ----------- -----------
Income before income taxes......... 28,381 19,859 78,469 56,677
Income tax expense................. 11,210 7,723 31,095 22,387
----------- ----------- ----------- -----------
Net income......................... $ 17,171 $ 12,136 $ 47,374 $ 34,290
=========== =========== =========== ===========
Earnings per share - Basic......... $ 0.41 $ 0.32 $ 1.15 $ 0.90
=========== =========== =========== ===========
Earnings per share - Diluted....... $ 0.37 $ 0.27 $ 1.03 $ 0.76
=========== =========== =========== ===========
Weighted average number of
common shares outstanding--Basic. 41,969,757 37,693,175 41,221,421 37,479,776
=========== =========== =========== ===========
Weighted average number of common
shares outstanding--Diluted...... 46,285,458 45,124,354 46,000,142 45,015,659
=========== =========== =========== ===========
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 Nine Months
Ended September 30,
----------------------
2003 2002
---------- ----------
OPERATING ACTIVITIES:
Net income...................................................... $ 47,374 $ 34,290
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........................................ 6,634 13,545
Tax benefit of disqualifying dispositions of stock options.. 5,645 1,168
Loss on sale of fixed assets................................ 212 341
Depreciation................................................ 11,467 9,555
Amortization................................................ 1,075 1,556
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable......................................... 2,699 3,404
Parts and supplies.......................................... 334 1,795
Prepaid expenses and other assets........................... 7,539 1,346
Accounts payable............................................ (5,002) (3,725)
Accrued liabilities......................................... 9,224 11,554
Deferred revenue............................................ 522 (1,551)
---------- ----------
Net cash provided by operating activities....................... 88,283 72,897
---------- ----------
INVESTING ACTIVITIES:
Payments for acquisitions and international
investments, net of cash acquired........................... (33,411) (10,884)
Short-term investments........................................ (790) (47)
Proceeds from sale of equipment............................... 384 98
Capital expenditures.......................................... (14,561) (11,363)
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Net cash used in investing activities........................... (48,378) (22,196)
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FINANCING ACTIVITIES:
Net proceeds from issuance of note payable.................... 1,132 882
Net repayments of senior credit facility...................... (27,792) (50,187)
Repurchase of senior subordinated debt........................ (17,775) (10,537)
Repayment of long-term debt................................... (3,714) (913)
Payments of deferred financing costs.......................... (395) --
Purchase of treasury stock.................................... -- (1,435)
Principal payments on capital lease obligations............... (913) (619)
Proceeds from issuances of common stock....................... 8,024 5,176
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Net cash used in financing activities........................... (41,433) (57,633)
Effect of exchange rate changes on cash......................... (305) 106
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Net decrease in cash and cash equivalents....................... (1,833) (6,826)
Cash and cash equivalents at beginning of period................ 8,375 12,737
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Cash and cash equivalents at end of period...................... $ 6,542 $ 5,911
========== ==========
Non-cash activities:
Net issuances of common stock for certain acquisitions $ 70 $ 2,298
Net issuances of notes payable for certain acquisitions $ -- $ 180
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2003.
NOTE 2-ACQUISITIONS
We did not complete any acquisitions during the quarter ended September 30, 2003.
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 focused primarily on containment, control, collection and processing of sharp-edged medical waste. Scherer's reusable sharps programs were 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 nine months ended September 30, 2003 was $33.4 million in cash, net of cash acquired. The four acquisitions are not material to our operations.
NOTE 3--STOCK OPTIONS
During the quarter ended September 30, 2003, options to purchase 8,750 shares of common stock were granted to employees. These options vest ratably over a five-year period and have exercise prices of $40.43-$48.80 per share.
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 our 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):
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------------------
2003 2002 2003 2002
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As reported net income................. $ 17,171 $ 12,136 $ 47,374 $ 34,290
Pro forma impact of stock options,
net of tax........................... 1,519 1,254 5,155 4,140
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Pro forma net income................... $ 15,652 $ 10,882 $ 42,219 $ 30,150
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Pro forma net income per share-basic... $ 0.37 $ 0.29 $ 1.02 $ 0.79
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Pro forma net income per share-diluted. $ 0.34 $ 0.24 $ 0.93 $ 0.68
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NOTE 4-COMMON STOCK.
During the quarter ended September 30, 2003, options to purchase 168,733 shares of common stock were exercised at prices ranging from $4.00-$34.47 per share. In addition, warrants with rights to purchase 137,434 shares of common stock were exercised at a prices ranging from $7.25- $8.75 per share.
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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ------------ -----------
Numerator:
Net Income................................ $ 17,171 $ 12,136 $ 47,374 $ 34,290
Preferred stock dividends................. 0 0 0 (678)
----------- ----------- ----------- -----------
Numerator for basic earnings
per share.............................. $ 17,171 $ 12,136 $ 47,374 $ 33,612
Effective of dilutive securities:
Preferred stock dividends............... 0 0 0 678
----------- ----------- ----------- -----------
Numerator for diluted earnings
per share-income available to
common shareholders after
assumed conversions...................... $ 17,171 $ 12,136 $ 47,374 $ 34,290
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share
Weighted average shares.................. 41,969,757 37,693,175 41,221,421 37,479,776
----------- ----------- ----------- -----------
Effective of dilutive securities:
Employee stock options................... 1,471,440 1,667,401 1,934,766 1,789,579
Warrants................................. 8,591 116,110 8,287 119,910
Convertible preferred stock.............. 2,835,668 5,647,668 2,835,668 5,626,394
----------- ----------- ----------- -----------
Dilutive potential shares.................. 4,315,699 7,431,179 4,778,721 7,535,883
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions................................ 46,285,456 45,124,354 46,000,142 45,015,659
=========== =========== =========== ===========
Earnings per share - Basic................... $ 0.41 $ 0.32 $ 1.15 $ 0.90
=========== =========== =========== ===========
Earnings per share - Diluted................. $ 0.37 $ 0.27 $ 1.03 $ 0.76
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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 September 30, 2003 $ 12,136 $ (27) $ 1,185 $ 13,294
Three months ended September 30, 2003 17,171 655 -- 17,826
Nine months ended September 30, 2002 34,290 10 2,647 36,947
Nine months ended September 30, 2003 47,374 571 232 48,177
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 nine months ended September 30, 2003, was as follows (in thousands):
United Foreign
States Countries Total
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Balance as of January 1, 2003 $ 441,087 $ 6,185 $ 447,272
Goodwill acquired during year 19,036 -- 19,036
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Balance as of September 30, 2003 $ 460,123 $ 6,185 $ 466,308
========== ========= ==========
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, $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.
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 variability 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 ending after December 15, 2003, to variable interest entities in which a company holds a variable interest that it acquired before February 1, 2003. Management believes there will be no material impact of this Statement 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. There was 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 ours and of 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. These six lawsuits have now been consolidated in federal court in Utah. In November 2003, a seventh lawsuit was filed by a private plaintiff in federal court in Utah alleging monopolistic and other anticompetitive conduct in California during the prior four years and seeking certification of the suit as a class action on behalf of all California customers of ours during this four-year period. We believe that none of these seven suits has merit, and anticipate that we will move to consolidate the seventh suit with the other six suits in federal court in Utah.
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"). In August 2003, this action was dismissed by the court on procedural grounds, and 3CI refiled its action as a new suit. In September 2003, WSI filed its own action for a judicial interpretation of the conversion provisions of 3CI's preferred stock, and 3CI has moved to consolidate WSI's action with its own. These matters are 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 September 30, 2003 and December 31, 2002 and for the three and nine month periods ended September 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
SEPTEMBER 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 4,321 $ 93 $ 4,414 $ 2,128 $ -- $ 6,542
Other current assets................... 78,481 23,622 102,103 8,981 (26,368) 84,716
---------- ----------- ------------ ----------- ----------- ------------
Total current assets...................... 82,802 23,715 106,517 11,109 (26,368) 91,258
Property, plant and equipment,
net.................................... 80,208 4,697 84,905 9,800 -- 94,705
Goodwill, net............................. 436,982 17,336 454,318 11,990 -- 466,308
Investment in subsidiaries................ 72,705 1,233 73,938 -- (73,938) --
Other assets.............................. 37,906 11,193 49,099 1,412 (5,985) 44,526
---------- ----------- ------------ ----------- ----------- ------------
Total assets.............................. $ 710,603 $ 58,174 $ 768,777 $ 34,311 $ (106,291) $ 696,797
========== =========== ============ =========== =========== ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt....................... $ 9,506 $ 250 $ 9,756 $ 10 $ $ 9,766
Other current liabilities.............. 75,638 565 76,203 7,175 (26,368) 57,010
---------- ----------- ------------ ----------- ----------- ------------
Total current liabilities................. 85,144 815 85,959 7,185 (26,368) 66,776
Long-term debt, net of current
portion................................ 167,031 326 167,357 8,616 (5,985) 169,988
Other liabilities......................... 41,816 -- 41,816 1,605 -- 43,421
Redeemable preferred stock................ 20,944 -- 20,944 -- -- 20,944
Common shareholders' equity............... 395,668 57,033 452,701 16,905 (73,938) 395,668
---------- ----------- ------------ ----------- ----------- ------------
Total liabilities and
shareholders' equity................... $ 710,603 $ 58,174 $ 768,777 $ 34,311 $ (106,291) $ 696,797
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
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 SEPTEMBER 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 99,378 $ 5,780 $ 105,158 $ 8,861 $ (791) $ 113,228
Cost of revenues.......................... 54,354 4,324 58,678 5,799 (749) 63,728
Selling, general, and
administrative expenses................ 14,836 904 15,740 1,925 -- 17,665
Acquisition related costs................. 216 -- 216 -- -- 216
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 69,406 5,228 74,634 7,724 (749) 81,609
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 29,972 552 30,524 1,137 (42) 31,619
Equity in net income of
subsidiaries........................... 1,779 315 2,094 -- (2,094) --
Other (expense) income, net............... (3,087) 16 (3,071) (209) 42 (3,238)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 28,664 883 29,547 928 (2,094) 28,381
Income tax expense (benefit).............. 11,493 214 11,707 (497) -- 11,210
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 17,171 $ 669 $ 17,840 $ 1,425 $ (2,094) $ 17,171
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 89,454 $ 4,274 $ 93,728 $ 9,290 $ (1,039) $ 101,979
Cost of revenues.......................... 51,885 2,635 54,520 6,430 (1,018) 59,932
Selling, general, and
administrative expenses................ 13,387 172 13,559 1,856 (21) 15,394
Acquisition related costs................. 48 -- 48 -- -- 48
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 65,320 2,807 68,127 8,286 (1,039) 75,374
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 24,134 1,467 25,601 1,004 -- 26,605
Equity in net income of
subsidiaries........................... 1,347 544 1,891 -- (1,891) --
Other (expense) income, net............... (6,571) 57 (6,514) (232) -- (6,746)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 18,910 2,068 20,978 772 (1,891) 19,859
Income tax expense........................ 6,774 564 7,338 385 -- 7,723
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 12,136 $ 1,504 $ 13,640 $ 387 $ (1,891) $ 12,136
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 298,269 $ 16,807 $ 315,076 $ 26,009 $ (2,411) $ 338,674
Cost of revenues.......................... 166,325 11,878 178,203 17,293 (2,308) 193,188
Selling, general, and
administrative expenses................ 43,344 3,006 46,350 5,473 -- 51,823
Acquisition related costs................. 430 -- 430 -- -- 430
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 210,099 14,884 224,983 22,766 (2,308) 245,441
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 88,170 1,923 90,093 3,243 (103) 93,233
Equity in net income of
subsidiaries........................... 4,079 660 4,739 -- (4,739) --
Other (expense) income, net............... (14,292) 41 (14,251) (616) 103 (14,764)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 77,957 2,624 80,581 2,627 (4,739) 78,469
Income tax expense (benefit).............. 30,583 738 31,321 (226) -- 31,095
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 47,374 $ 1,886 $ 49,260 $ 2,853 $ (4,739) $ 47,374
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 260,111 $ 13,722 $ 273,833 $ 27,320 $ (2,841) $ 298,312
Cost of revenues.......................... 152,671 8,432 161,103 18,866 (2,820) 177,149
Selling, general, and
administrative expenses................ 39,509 552 40,061 4,917 (21) 44,957
Acquisition related costs................. 223 -- 223 -- -- 223
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 192,403 8,984 201,387 23,783 (2,841) 222,329
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 67,708 4,738 72,446 3,537 -- 75,983
Equity in net income of
subsidiaries........................... 5,444 1,127 6,571 -- (6,571) --
Other (expense) income, net............... (18,702) 318 (18,384) (922) -- (19,306)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 54,450 6,183 60,633 2,615 (6,571) 56,677
Income tax expense........................ 20,160 1,864 22,024 363 -- 22,387
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 34,290 $ 4,319 $ 38,609 $ 2,252 $ (6,571) $ 34,290
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 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 (used in)
operating activities................. $ 85,714 $ (203) $ 85,511 $ 2,772 $ -- $ 88,283
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (12,802) (254) (13,056) (1,505) -- (14,561)
Proceeds from sale of equipment........ 323 -- 323 61 384
Payments for acquisitions and
international investments, net of
cash acquired........................ (4,982) (27,932) (32,914) (497) -- (33,411)
Short-term investments................ (558) -- (558) (232) -- (790)
---------- ----------- ------------ ----------- ----------- ------------
Net cash used in investing activities (18,019) (28,186) (46,205) (2,173) -- (48,378)
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of senior credit facilit (27,792) -- (27,792) -- -- (27,792)
Principal payments on capital lease
obligations.......................... (747) (183) (930) 17 -- (913)
Repayment of long term debt............ (2,575) -- (2,575) (1,139) -- (3,714)
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................................ 8,024 -- 8,024 -- -- 8,024
Intercompany financing of acquisitions. (27,932) 27,932 -- -- -- --
---------- ----------- ------------ ----------- ----------- ------------
Net cash provided by (used in) financing a (69,192) 27,749 (41,443) 10 -- (41,433)
---------- ----------- ------------ ----------- ----------- ------------
Effect of exchange rate changes on cash... -- -- -- (305) -- (305)
---------- ----------- ------------ ----------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents....................... $ (1,497) $ (640) $ (2,137) $ 304 $ -- (1,833)
========== =========== ============ =========== ===========
Cash and cash equivalents at beginning
of period.............................. 8,375
------------
Cash and cash equivalents at end of
period................................. $ 6,542
============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 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 (used in)
operating activities................. $ 72,740 $ 205 $ 72,945 $ (48) $ -- $ 72,897
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (9,577) (78) (9,655) (1,708) -- (11,363)
Proceeds from sale of equipment........ 41 -- 41 57 98
Payments for acquisitions and
international investments, net of
cash acquired........................ (5,645) (4,288) (9,933) (951) -- (10,884)
Short-term investments................. (47) -- (47) -- -- (47)
---------- ----------- ------------ ----------- ----------- ------------
Net cash used in investing activities (15,228) (4,366) (19,594) (2,602) -- (22,196)
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on senior credit facilit (50,187) -- (50,187) -- -- (50,187)
Principal payments on capital lease
obligations.......................... (417) (178) (595) (24) -- (619)
Net proceeds from issuance
of notes payable..................... (299) -- (299) 1,181 -- 882
Repayments on long-term debt........... 25 -- 25 (938) -- (913)
Purchase of treasury stock............. (1,435) -- (1,435) -- -- (1,435)
Repurchase of senior subordinated debt. (10,537) -- (10,537) -- -- (10,537)
Proceeds from issuance of common
stock................................ 5,176 -- 5,176 -- -- 5,176
Intercompany financing of acquisitions. (5,239) 4,288 (951) 951 -- --
---------- ----------- ------------ ----------- ----------- ------------
Net cash provided by (used in) financing a (62,913) 4,110 (58,803) 1,170 -- (57,633)
---------- ----------- ------------ ----------- ----------- ------------
Effect of exchange rate changes on cash... -- -- -- 106 -- 106
---------- ----------- ------------ ----------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents....................... $ (5,401) $ (51) $ (5,452) $ (1,374) $ -- (6,826)
========== =========== ============ =========== ===========
Cash and cash equivalents at beginning
of period.............................. 12,737
------------
Cash and cash equivalents at end of
period................................. $ 5,911
============
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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002
The following summarizes (in thousands) the Company's operations:
Three Months Ended September 30,
-----------------------------------------
2003 2002
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $113,228 100.0 $ 101,979 100.0
Cost of revenues..................................... 60,369 53.3 56,983 55.9
Depreciation......................................... 3,359 3.0 2,949 2.9
-------- -------- -------- -------
Total cost of revenues............................... 63,728 56.3 59,932 58.8
Gross profit......................................... 49,500 43.7 42,047 41.2
Selling, general and
administrative expenses............................ 16,781 14.8 14,442 14.2
Depreciation......................................... 495 0.4 412 0.4
Amortization......................................... 389 0.3 540 0.5
Acquisition related costs............................ 216 0.2 48 0.0
-------- -------- -------- -------
Total selling, general and administrative expenses... 17,881 15.8 15,442 15.1
-------- -------- -------- -------
Income from operations............................... 31,619 27.9 26,605 26.1
Net income........................................... 17,171 15.2 12,136 11.9
Depreciation and amortization........................ 4,243 3.7 3,901 3.8
Interest income...................................... (232) (113)
Interest expense..................................... 2,829 5,382
Debt extinguishment expense.......................... -- 1,220
Income tax expense................................... 11,210 7,723
-------- --------
EBITDA(1)............................................ 35,221 31.1 30,249 29.7
Earnings per share-diluted........................... $ 0.37 $ 0.27
(1) Calculated for a period as the sum of net income, plus depreciation expense and amortization expense, net interest expense, debt extinguishment 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.
Revenues. Revenues increased $11.2 million, or 11.0%, to $113.2 million during the quarter ended September 30, 2003 from $102.0 million during the comparable quarter in 2002 as a result of our continued strategy of focusing on sales to higher-margin small account customers. International equipment related revenues were $0.2 million during the quarter as compared to $2.2 million during the comparable quarter in 2002. During the quarter ended September 30, 2003, acquisitions less than one year old contributed approximately $10.1 million to the increase in revenues as compared to the same quarter in 2002. For the quarter, our base internal revenue growth for small account customers increased approximately 9.5% while revenues from large account customers decreased by approximately 2.9%.
Cost of revenues. Cost of revenues increased $3.8 million to $63.7 million during the quarter ended September 30, 2003 from $59.9 million during the comparable quarter in 2002. The increase was primarily due to volume growth and higher insurance and employee benefit costs. Our gross margin percentage increased to 43.7% during the quarter from 41.2% during the same quarter in 2002 as a result of 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 by benefit and insurance costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $17.9 million for the quarter ended September 30, 2003 from $15.4 million for the comparable quarter in 2002. The increase was the result of higher revenues from internal growth, 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 15.8% during the quarter from 15.1% during the comparable quarter in 2002.
Income from operations. Income from operations increased to $31.6 million for the quarter ended September 30, 2003 from $26.6 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 27.9% during the quarter from 26.1% during the same quarter in 2002 as a result of better margins.
EBITDA. EBITDA increased by 16.4% to $35.2 million or 31.1% of revenue for the quarter ended September 30, 2003, as compared to $30.2 million or 29.7% 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 $2.6 million during the quarter ended September 30, 2003 from $5.3 million during the comparable quarter in 2002 primarily due to reduced debt and lower interest rates.
Debt extinguishments. We did not repurchase any of our 12 3/8% senior subordinated notes in the quarter ended September 30, 2003. During the same period in 2002 we incurred a $1.2 million expense related to the repurchase of $8.9 million of our 12 3/8% senior subordinated notes.
Income tax expense. Income tax expense increased to $11.2 million for the quarter ended September 30, 2003 from $7.7 million for the comparable quarter in 2002. The increase was due to higher taxable income. The effective tax rates for the quarter ended September 30, 2003 and 2002 were 39.5% and 38.9%, respectively.
Net income. Net Income increased to $17.2 million for the quarter ended September 30, 2003 from $12.1 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002
The following summarizes (in thousands) the Company's operations:
Nine Months Ended September 30,
-----------------------------------------
2003 2002
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $338,674 100.0 $ 298,312 100.0
Cost of revenues..................................... 183,210 54.1 168,655 56.5
Depreciation......................................... 9,978 2.9 8,494 2.8
-------- -------- -------- -------
Total cost of revenues............................... 193,188 57.0 177,149 59.4
Gross profit......................................... 145,486 43.0 121,163 40.6
Selling, general and
administrative expenses............................ 49,259 14.5 42,340 14.2
Depreciation......................................... 1,489 0.4 1,061 0.4
Amortization......................................... 1,075 0.3 1,556 0.5
Acquisition related costs............................ 430 0.1 223 0.1
-------- -------- -------- -------
Total selling, general and administrative expenses... 52,253 15.4 45,180 15.1
-------- -------- -------- -------
Income from operations............................... 93,233 27.5 75,983 25.5
Net income........................................... 47,374 14.0 34,290 11.5
Depreciation and amortization........................ 12,542 3.7 11,111 3.7
Interest income...................................... (492) (374)
Interest expense..................................... 10,141 16,707
Debt extinguishment expense.......................... 3,268 1,695
Income tax expense................................... 31,095 22,387
-------- -------- -------- -------
EBITDA (1)........................................... 103,928 30.7 85,816 28.8
Earnings per share-diluted........................... $ 1.03 $ 0.76
(1) Calculated for a period as the sum of net income, plus depreciation expense and amortization expense, net interest expense, debt extinguishment 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.
Revenues. Revenues increased $40.4 million, or 13.5%, to $338.7 million during the nine months ended September 30, 2003 from $298.3 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 $1.3 million during the period as compared to $6.0 million during the comparable period in 2002. During the period ended September 30, 2003, acquisitions less than one year old contributed approximately $31.4 million to the increase in revenues as compared to the prior year. For the nine months, our base internal revenue for small account customers increased approximately 10.5% while revenues from large account customers decreased by approximately 1.0% as compared to the prior year.
Cost of revenues. Cost of revenues increased $16.1 million to $193.2 million during the nine months ended September 30, 2003 from $177.1 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 43.0% during the period from 40.6% during the same period in 2002 as a result of 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 $52.3 million for the nine months ended September 30, 2003 from $45.2 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 15.4% during the period from 15.1% during the comparable period in 2002.
Income from operations. Income from operations increased to $93.2 million for the nine months ended September 30, 2003 from $76.0 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 27.5% during the period from 25.5% during the same period in 2002 as a result of better margins.
EBITDA. EBITDA increased by 21.1% to $103.9 million or 30.7% of revenue for the nine months ended September 30, 2003, as compared to $85.8 million or 28.8% 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 $9.6 million during the nine months ended September 30, 2003 from $16.3 million during the comparable period in 2002 primarily due to reduced debt and lower interest rates.
Debt extinguishments. During the nine-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 $1.5 million expense related to the repurchase of $10.5 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 $31.1 million for the nine months ended September 30, 2003 from $22.4 million for the comparable period in 2002. The increase was due to higher taxable income. The effective tax rate for the nine months ended September 30, 2003 increased to 39.6% from 39.5% in the comparable period in 2002.
Net income. Net income increased to $47.4 million for the nine months ended September 30, 2003 from $34.3 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 September 30, 2003, our working capital was $24.5 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 prepaid and cash balances. At September 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 September 30, 2003 there was nothing outstanding under our revolving credit facility.
Net cash provided by operating activities was $88.3 million during the nine months ended September 30, 2003 compared to $72.9 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 nine months ended September 30, 2003 was $48.4 million compared to $22.2 million for the comparable period in 2002. This increase is primarily attributable to the Scherer acquisition. Capital expenditures were $14.6 million for the nine-month period, or 4.3% of revenues, compared to $11.4 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 September 30, 2003 we had approximately 13% of our treatment capacity in incineration and approximately 87% in non- incineration technologies such as our proprietary patented ETD technology and autoclaving. Cash investments in acquisitions and international joint ventures for the nine months ended September 30, 2003 were $33.4 million versus $10.9 million in the comparable period in 2002.
Net cash used in financing activities was $41.4 million during the nine months ended September 30, 2003 compared to $57.6 million for the comparable period in 2002. During the first nine months of 2003 we made net repayments of $50.2 million in debt and capital leases which consisted of $21.8 million in scheduled payments and $42.4 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.
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 $1.2 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 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 internal 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.
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.
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 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 September 30, 2003, we filed one current report on Form 8-K.
We filed a Form 8-K on July 29, 2003 to report our earnings release on the same day. The report included as an exhibit our earnings release and accompanying financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 7, 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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