Stericycle Inc. (SRCL) delivered earnings per share of 62 cents in its second quarter ended June 30, 2010, at par with the Zacks Consensus Estimate, and up 19% from 52 cents in the year-ago quarter. In addition to growth fueled by acquisitions, Stericycle also posted healthy internal growth figures in both domestic and international operations.
The reported and year-ago quarters’ EPS excluded transactional expenses of 1 cent pertaining to acquisitions. In addition, the EPS in the quarter under review excluded restructuring costs, litigation settlement costs of 1 cent per share and a 2 cent gain on sale of assets. Including these items, EPS stood at 61 cents in the reported quarter and at 51 cents in the year-earlier quarter.
Revenues climbed 20% to $347.7 million outpacing the Zacks Consensus Estimate of $339 million. Acquisitions less than 12 months old contributed approximately $29.2 million to the growth in revenues. Domestic internal growth excluding returns management was up 8.1%. Growth from small account customers and large account customers contributed 9% and 6%, respectively, to domestic internal growth. International internal growth (adjusted for foreign exchange) was up 9.4%. Regulated recalls and returns management services revenues were $25.4 million.
Stericycle reported 471,000 medical waste customers, of which 459,000 were small quantity (SQ), and the remaining 12,000 were large quantity (LQ) customers, up from 465,000 in the first quarter of fiscal 2010.
Cost & Margin Performance
Cost of sales spiked 21% to $185.5 million in the quarter and as a percentage of revenue, it increased 50 basis points to 53.3%. Even though adjusted gross profit went up 19% to $162.3 million, gross margin dipped 50 basis points to 46.7%. This, however, excluded the impact of restructuring costs of $726,000 for its regulated returns management services business. Including the effect of these costs, gross profit was $161.5 million with a gross margin of 46.5%.
Selling, general, administrative and engineering expenses soared 20% to $65 million in the quarter and as a percentage of sales remained flat at 18.7%. Stericycle’s operating income (excluding the above mentioned restructuring cost) was $95 million, up 17% year over year. However, operating margin contracted 66 basis points to 27.3%. Including the effect of the cost, operating income was $94.3 million with an operating margin of 27.1%.
Financial Position
As of June 30, 2010, Stericycle had cash and cash equivalents of $8.25 million, down from $22.9 million as of March 31, 2010. During the quarter, the company generated operating cash flow of $48.2 million compared with $49.9 million in the year-ago quarter.
As of June 30, 2010, debt-to-capitalization ratio dropped to 50% as of June 30, 2010, from 53% as of March 31, 2010 and 54% as of December 31, 2009.
On July 16, 2010, Stericycle received informal commitments from 22 institutional investors to purchase $175 million of 3.89% seven-year unsecured senior notes and $225 million of new ten-year 4.47% on secured senior notes. The company expects the note purchase agreement to be signed in August 2010, and the new senior notes to be issued in October 2010. The proceeds will be used to repay debt and a portion of its revolver.
During the quarter, Stericycle repurchased 235,436 shares of its common stock for $13 million. Till date, the company has authorization to purchase an additional 2.6 million shares.
Outlook
For fiscal 2010, Stericycle issued its net income guidance of $210 million to $213 million and EPS guidance of $2.42 to $2.46 driven by expected revenues in the range of $1.37 billion to $1.39 billion. Free cash flow is expected to range between $245 million and $255 million and capital expenditures are likely to fall in the $45 million to $50 million range.
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 provides additional opportunities for revenue growth.
The company’s Steri-Safe program accounts for approximately 70% of Stericycle’s SQ revenue and remains a key driver of long-term cash flow growth, given its significant market potential and high incremental margins. Overall, less than one-third of all SQ clients currently purchasing Steri-Safe leave ample room to add services via new client additions as well as existing client upgrade to premium service offerings.
Further, only 20% of Stericycle’s LQ 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 will potentially triple the value of each account.
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-account (outpatient clinics, medical and dental offices, long-term and sub-acute care facilities, and retail pharmacies) and large-account (hospitals, blood banks, and pharmaceutical manufacturers). The company caters to a wide clientele spread across the domestic and international markets.
