Stericycle Inc. (SRCL) delivered earnings per share (EPS) of 65 cents in its third quarter ended September 30, 2010, beating the Zacks Consensus Estimate by 2 cents, and surpassing the year-ago result of 55 cents by 18%.
The reported and year-ago quarters’ EPS excluded expenses related to acquisitions and release of prior-year tax reserves. In addition, the EPS in the quarter under review excluded restructuring costs. Including these items, EPS stood at 65 cents in the reported quarter (at par with the adjusted EPS) versus 54 cents in the year-earlier quarter.
Revenues climbed 22% to $363 million, outpacing the Zacks Consensus Estimate of $350 million. Acquisitions less than 12 months old contributed approximately $29.2 million to top-line growth. Foreign exchange had an unfavorable impact of $1.6 million in the quarter.
Cost & Margin Performance
Cost of sales increased 24% to $194.7 million in the quarter, and as a percentage of revenue, it increased 90 basis points to 53.6%. Even though adjusted gross profit went up 19% to $168.3 million, gross margin dipped 90 basis points to 46.4%. This, however, excluded the impact of restructuring costs of $185,000. Including the effect of these costs, gross profit was $168.1 million with a gross margin of 46.3%.
Selling, general, administrative and engineering expenses soared 19% to $66.9 million in the quarter, and as a percentage of revenue, dipped 50 basis points to 18.4%. Stericycle’s operating income (excluding the above-mentioned restructuring cost) was $98.9 million, up 19% year over year. However, operating margin contracted 80 basis points to 27.2%. Including the effect of the cost, operating income was $98.7 million with an operating margin of 27.2%.
Financial Position
As of September 30, 2010, Stericycle had cash and cash equivalents of $20.6 million, up from $8.25 million as of June 30, 2010. During the quarter, the company generated operating cash flow of $30.4 million, substantially up from $5.03 million in the year-ago quarter.
As of September 30, 2010, the debt-to-capitalization ratio improved marginally to 49% from 50% as of June 30, 2010.
On September 29, 2010, Stericycle announced its agreement to acquire Healthcare Waste Solutions Inc (HWS) for $245 million in cash. The merger consideration is however subject to various adjustments, including a reduction of Healthcare Waste’s indebtedness as of the closing date. Upon completion of the acquisition, Healthcare Waste will become a wholly owned subsidiary of Stericycle.
Our Take
A significant portion of Stericycle’s historical growth came from the successful integration of acquisitions in both domestic and international markets. The company is continuously looking for strategic acquisitions that will further strengthen its existing market position and expand its geographic base.
In addition to the core medical waste disposal business, Stericycle has been successful in extending its footprint into ancillary services such as Steri-Safe for OSHA (Occupational Safety and Health Administration) compliance and the Bio Systems’ sharps management solution, which offer additional opportunities for revenue growth.
The company’s Steri-Safe program remains a key driver of long-term cash flow growth, given its significant market potential and high incremental margins. Further, only 20% of Stericycle’s large quantity customers use its multiple services, leaving more than 80% of its large customer base available for adding services such as Sharps Management and RX Waste. By adding these multiple service offerings, the company can potentially triple the value of each account. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
Lake Forest, Illinois-based Stericycle is a leading provider of regulated medical waste management as well as product recall and return services in the U.S. The company’s customers fall into two categories, small-accounts (outpatient clinics, medical and dental offices, long-term and sub-acute care facilities, and retail pharmacies) and large-accounts (hospitals, blood banks, and pharmaceutical manufacturers). The company caters to a wide clientele spanning domestic and international markets.
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