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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, 2006 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.
28161 North Keith Drive
(847) 367-5910
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 a large accelerated filer, and accelerated
filer, or a non-accelerated filer. See the definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [X] Accelerated filer [ ] Non-Accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act
Rule 12b-2). YES [] NO [X]
As of August 3, 2006 there were 44,092,836 shares of the Registrant's Common Stock outstanding.
Stericycle, Inc.
PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
STERICYCLE, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES 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, 2005, as filed with
our Annual Report on Form 10-K for the year ended December 31, 2005. The results
of operations for the three and six months ended June 30, 2006 are not
necessarily indicative of the results that may be achieved for the entire year
ending December 31, 2006. NOTE 2--ACQUISITIONS In April 2006, our Canadian subsidiary, Stericycle, Inc., (a New
Brunswick corporation), acquired selected assets of Mr. Shredding Waste
Management LTD., which operated a medical waste business in the New Brunswick
province of Canada. In addition, our Mexican subsidiary, Medam S.A. de C.V.
acquired selected assets of Biocen, S.A. de C.V., which operated a medical waste
business in Mexico. On February 27, 2006, our U.S. subsidiary, Stericycle International Ltd.,
acquired all of the stock of Sterile Technologies Group Limited ("STG"), for
approximately $131.0 million, of which $114.0 million was paid in cash and $17.0
million was paid by the assumption of debt. STG operates medical waste
businesses in the United Kingdom and the Republic of Ireland. In addition during the quarter ended March 31, 2006, our Mexican subsidiary,
Medam S.A. de C.V. acquired selected assets of Desarrollo Y Calidad Ambiental,
S.A. de C.V. (formerly known as Dycasa), which operated a medical waste business
in Mexico. In addition, our United Kingdom subsidiary, Stericycle International
Ltd. and our Canadian subsidiary, Stericycle, Inc., acquired all of the stock of
Habitat Ecologico S.A., which operates a medical waste business in
Argentina. The aggregate net purchase price of all our acquisitions during the six
months ended June 30, 2006 was approximately $153.3 million, of which $126.1
million was paid in cash and $27.2 million was paid by the issuance and
assumption of promissory notes. These acquisitions were not significant to our
operations, either individually or in the aggregate. The purchase price has been allocated
primarily to goodwill and is preliminary pending completion of certain intangible asset
valuations. For financial reporting purposes these acquisition transactions were accounted for
using the purchase method of accounting. The results of operations of these acquired
businesses have been included in the consolidated statements of income from the date of
the acquisition. These acquisitions resulted in the recognition of goodwill in the
Company's financial statements because the purchase price reflects the complimentary
strategic fit that the acquired business brings to the Company. NOTE 3--STOCK BASED COMPENSATION In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123R, Shared-Based Payment ("SFAS No. 123R"). SFAS No. 123R is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), and supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25"), and its related implementation
guidance. No stock based compensation expense was recognized in 2005 for stock options
issued in connection under our stock option plans and through our employee stock purchase
plan ("ESPP") under the "intrinsic value" rules in APB No. 25. On January 1, 2006, we
adopted the provisions of SFAS No. 123R using the modified prospective method.
SFAS No. 123R requires entities to recognize compensation expense for awards of
equity instruments to employees based on the grant-date fair value of those
awards (with limited exceptions). SFAS No. 123R also requires the benefits of
tax deductions in excess of recognized compensation expense to be reported as a
financing cash flow, rather than as an operating cash flow as prescribed under
the prior accounting rules. This requirement reduces net operating cash flow and
increases net financing cash flows in periods after adoption. Total cash flow
remains unchanged from what would have been reported under prior accounting
rules. Stock Plans We have adopted five stock option plans: (i) the 2005 Incentive Stock
Option Plan (the "2005 Plan"), which our stockholders approved in April 2005;
(ii) the 2000 Nonstatutory Stock Option Plan (the "2000 Plan"), which our Board
of Directors adopted in February 2000; (iii) the 1997 Stock Option Plan (the
"1997 Plan"), which our stockholders approved in April 1997; (iv) the Directors
Stock Option Plan (the "Directors Plan"), which our stockholders approved in
July 1996 (prior to our initial public offering in August 1996 and which expired
in May 2006); and (v) the 1995 Incentive Compensation Plan (the "1995 Plan"),
which our stockholders approved in September 1995 (and which expired in July
2005). The 2005 Plan authorizes awards of stock options and stock appreciation
rights for a total of 2,400,000 shares; as amended, the 2000 Plan authorizes
stock option grants for a total of 3,500,000 shares; the 1997 and 1995 Plans
each authorize stock option grants for a total of 3,000,000 shares; and as
amended, the Directors Plan authorizes stock option grants for a total of
1,170,000 shares. The 2005 Plan provides for the grant of nonstatutory stock options ("NSOs")
and incentive stock options intended to qualify under section 422 of the
Internal Revenue Code ("ISOs") as well as stock appreciation rights; the 2000
Plan provides for the grant of NSOs; the 1997 and 1995 Plans each provide for
the grant of NSOs and ISOs; and the Directors Plan provides for the grant of
NSOs. The 2005 Plan authorizes awards to our officers, employees and consultants
and, following the expiration of the Directors Plan in May 2006, to our
directors; the 2000 Plan authorizes stock option grants to our employees and
consultants but not to our officers and directors; the 1997 and 1995 Plans each
authorize stock option grants to our officers, directors, employees and
consultants; and the Directors Plan authorizes stock option grants to our
outside directors. Stock Options Options granted to officers and employees generally vest over five
years. During 2005, options granted to officers and employees generally vested
at the rate of 20% of the option shares on each of the first five anniversaries
of the option grant date. During 2004, options granted to officers and employees
generally vested at the rate of 20% of the option shares on the first
anniversary of the option grant date and then at the rate of 1/60 of the option
shares for each of the next 48 months. Expense related to the graded vesting
options is recognized using the straight-line method over the vesting
period. The exercise price per share of an option granted under any of our stock
option plans may not be less than the closing price of a share of our common
stock on the date of grant. The maximum term of an option granted under any plan
may not exceed 10 years. An option may be exercised only when it is vested and,
in the case of an option granted to an employee (including an officer), only
while he or she remains an employee and for a limited period following the
termination of his or her employment. New shares are issued upon exercise of
stock options. Option activity for the first six months of 2006 is summarized as
follows: The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between our closing stock price on the last day
of trading for the six months ended June 30, 2006 and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders assuming all option holders had exercised their options
on June 30, 2006. This amount changes based on the fair market value of our
stock. The total intrinsic value of options exercised for the six months ended
June 30, 2006 was $14.5 million. In the quarter ended June 30, 2006, we granted 105,703 of stock options to
purchase shares of common stock with a weighted average fair value grant per
share of $17.13. The Black-Scholes option-pricing model was used in determining
the fair value of each option grant. The expected term of options granted is
based on historical experience. Expected volatility is based upon historical
experience. The expected dividend yield is zero. The risk-free interest rate is
based on the average of the U.S. Treasury three and five year yield rates.
Assumptions used in the Black-Scholes model are presented below: In the quarter ended March 31, 2006, we granted 677,306 of stock options with
a weighted average fair value grant per share of $17.58. The Black-Scholes
option-pricing model was used in determining the fair value of each option
grant. The expected term of options granted is based on historical experience.
Expected volatility is based upon historical experience. The expected dividend
yield is zero. The risk-free interest rate is based on the average of the U.S.
Treasury three and five year yield rates. Assumptions used in the Black-Scholes
model are presented below: Stock Based Compensation Expense As a result of adopting SFAS No. 123R, total pre-tax stock based
compensation expense in the condensed consolidated statements of income for the
three and six months ended June 30, 2006 was $2.7 million and $5.3 million,
respectively. Net income for the three and six months ended June 30, 2006 was
negatively impacted by $1.6 million and $3.2 million, respectively, because we
were no longer accounting for stock-based compensation under APB No. 25. Basic
and diluted earnings per share for the quarter ended June 30, 2006 of $0.57 and
$0.56, respectively, were negatively impacted by $0.04 and $0.03, respectively,
due to the adoption of SFAS No. 123R. For the six months ended June 30, 2006
basic and diluted earnings per share of $1.10 and $1.08, respectively, were
negatively impacted by $0.07 and $0.07, respectively, due to the adoption of SFAS
No. 123R. The pre-tax stock based compensation consisted of the following: As of June 30, 2006, there was $22.8 million of total unrecognized
compensation expense, related to non-vested option awards, which is
expected to be recognized over a weighted-average period of 2.02 years. In October 2000, our Board of Directors adopted the Stericycle, Inc. Employee
Stock Purchase Plan (the "ESPP") effective as of July 1, 2001. Our stockholders
approved the ESPP in May 2001. The ESPP authorizes 300,000 shares of our common
stock to be purchased by employees at a 15% discount from the market price of
the stock through payroll deductions during two six-month offerings each year.
An employee who elects to participate in an offering is granted an option on the
first day of the offering for a number of shares equal to the employee's payroll
deductions under the ESPP during the offering period (which may not exceed
$5,000) divided by the option price per share. The option price per share is the
lower of 85% of the closing price of a share of our common stock on the first
trading day of the offering period or 85% of the closing price on the last
trading day of the offering period. Every employee who has completed one year's
employment as of the first day of an offering and who is a full-time employee,
or a part-time employee who customarily works at least 20 hours per week, is
eligible to participate in the offering. Prior to the adoption of SFAS No. 123R, the
ESPP was accounted for as a non-compensatory plan and no expense was recognized.
Under SFAS No. 123R expense is recognized. Prior to the adoption of SFAS No. 123R, we accounted for our stock plans
using the intrinsic value method in accordance with APB No. 25 and applied the
disclosure-only provisions of SFAS No. 123. Accordingly, no stock based
compensation expense had been recognized in the condensed consolidated
statements of income. The pro forma disclosures permitted under SFAS No. 123 are
no longer an alternative to financial statement recognition. In 2005, in
anticipation of the adoption of SFAS No. 123R on January 1, 2006, we reviewed the
values of the variables used to determine the fair value of our stock options
granted in 2003, 2004 and 2005. We determined that the values of the expected
volatility, weighted average expected life of the option and risk-free interest
rate variables should be modified slightly in order to provide a better estimate
of the fair value of the employee stock options. The modifications resulted in
an immaterial reduction in the pro forma stock option expense originally
reported for the first quarter in 2005. The following revised assumptions were
used in 2005, 2004 and 2003: expected volatility of 32% in 2005, 42% in 2004 and
49% in 2003; risk-free interest rates of 4.05% in 2005, 3.43% in 2004, and 2.97%
in 2003; a dividend yield of 0%; and a weighted-average expected life of the
option of 52 months in 2005, 56 months in 2004 and 56 months in 2003. The following table presents pro forma income and income per share data as if
a fair value based method had been used to account for stock based
compensation: NOTE 4--COMMON STOCK. During the quarter ended June 30, 2006, options to purchase 61,556 shares
of common stock were exercised at prices ranging from $6.38- $50.14 per share.
During the quarter, we repurchased on the open market and subsequently cancelled
62,600 shares of common stock. The weighted average repurchase price was $62.61
per share. During the quarter ended March 31, 2006, options to purchase 282,080 shares
of common stock were exercised at prices ranging from $4.00- $62.31 per share.
During the quarter, we repurchased on the open market and subsequently cancelled
193,100 shares of common stock. The weighted average repurchase price was $57.99
per share. NOTE 5--NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted net
income per share (in thousands, except share and per share data): NOTE 6--COMPREHENSIVE INCOME The components of total comprehensive income are net income, the change
in cumulative currency translation adjustments and gains and losses on
derivative instruments qualifying as cash flow hedges. The following table sets
forth the components of total comprehensive income (in thousands): NOTE 7--GUARANTEE We have guaranteed a loan to the Azoroa Bank in Japan on behalf of
Shiraishi-Sogyo Co. Ltd ("Shiraishi"). Shiraishi is a customer in Japan that is
expanding their medical waste management business and has a five- year loan with
a current balance of $5.9 million with the Azoroa Bank that expires in June
2009. NOTE 8--GOODWILL We have two geographical reporting segments, United States and Foreign
Countries, both of which have goodwill. The changes in the carrying amount of
goodwill, net of amortization, for the six months ended June 30, 2006 were as
follows (in thousands): During the quarter ended June 30, 2006 we performed our annual goodwill
impairment evaluation for both of our reportable units, United States and
Foreign Countries, and determined that none of our recorded goodwill was
impaired. During this evaluation we calculated the fair value of the reporting
units by multiplying their EBITDA for the prior twelve months times a valuation
multiple. The valuation multiple was consistent with multiples of EDITDA used to
determine the fair value of acquisitions. The fair value was then compared to
the reporting units' book value and determined to be in excess of the book
value. The book value was determined by subtracting their total liabilities from
their total assets. We complete our annual impairment analysis of our indefinite
lived intangibles (facility permits) during the quarter ended December 31 of
each year. NOTE 9--LEGAL PROCEEDINGS We operate in a highly regulated industry and must deal with regulatory
inquiries or investigations from time to time that may be instituted for a
variety of reasons. We are also involved in a variety of civil litigation from
time to time. On June 28, 2006, the United Kingdom Office of Fair Trading ("OFT")
announced that it had referred to the United Kingdom Competition Commission (the
"Competition Commission") the acquisition by our subsidiary,
Stericycle International, LLC, in February 2006 of all of the stock of The
Sterile Technologies Group Limited, an Irish company providing medical waste
management services in Ireland and the United Kingdom. Under the terms of the OFT's referral, the Competition Commission is to
decide whether, as a result of this acquisition, there has been or is expected
to be a substantial lessening of competition in one or more markets in the
United Kingdom for healthcare risk waste treatment and disposal, and if so, what
remedial or other actions, if any, should be taken or recommended by the
Competition Commission. Remedial actions may include required divestitures and
restrictions on operations. The Competition Commission is expected to issue its
provisional findings in October 2006 and is required to publish its final
report in December 2006. During the quarter ended March 31, 2006, there were two developments
in the litigation that we described in our annual report on Form 10-K for 2005.
First, the preliminary settlement of the 3CI class action litigation in state
court in Louisiana that we entered into in November 2005 received the court's
final approval on March 14, 2006. With the shares of 3CI common stock
transferred to us upon final approval, we were able to complete a short-form
merger under Delaware law of one of our subsidiaries with 3CI, and 3CI became a
wholly-owned subsidiary of ours on April 26, 2006. Secondly, on March 3, 2006, the court denied the consolidated motion for
class certification of the plaintiffs in the private antitrust litigation being
heard in multidistrict proceedings in federal court in Utah. (We described this
litigation in our annual report on Form 10-K for 2005.) The court's ruling left
the plaintiffs free to pursue their remedies on an individual basis but not as
representatives of a class. During the quarter ended June 30, 2006, we settled
the claims of all but one of the individual plaintiffs for an immaterial
amount. NOTE 10--NEW ACCOUNTING STANDARDS In February 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS
No. 155 permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
As of June 30, 2006, we did not have any hybrid financial instruments subject to
fair value election under SFAS No. 155. We are required to adopt SFAS No. 155
effective at the beginning of 2007. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of Accounting Principles Board ("APB") Opinion No.
20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements". The Company is required to adopt SFAS No. 154 for voluntary
accounting changes and error corrections that occur after December 15, 2005. Our
results of operation and financial condition will only be impacted following the
adoption of SFAS No. 154 if we implement voluntary changes in accounting principle that
are addressed by the standard or corrects accounting errors in future
periods. In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN
48). This interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with SFAS
No. 109, "Accounting for Income Taxes." This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact of FIN 48 on our
consolidated results of operations and financial condition. NOTE 11--GEOGRAPHIC INFORMATION Management has determined that we have two reportable segments,
United States and Foreign Countries based on our consideration of the criteria
detailed in FASB Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Revenues are attributed to countries based on the
location of customers. Inter-company revenues recorded by the United States for
work performed in Canada, which are immaterial, are eliminated prior to
reporting United States revenues. The same accounting principles and critical
accounting policies are used in the preparation of the financial statements for
both reporting segments. Detailed information for our United States reporting segment is as
follows: Detailed information for our Foreign Countries reporting segment is as
follows: NOTE 12-SUBSEQUENT EVENT As we reported by a current report on Form 8-K that we filed on August 4,
2006, on July 31, 2006, we and certain of our subsidiaries entered into a new
credit agreement with Bank of America, N.A., and other lenders party to the Credit
Agreement. The new credit agreement is in effect an amendment of our prior senior
unsecured credit facility. The new credit agreement (i) reduces our costs of
borrowing by using a more favorable pricing grid; (ii) increases our revolving
credit facility from $550 million to $650 million; (iii) increases the
"accordion" (the amount for which we may request an increase in the
size of our revolving credit facility) from $100 million to $200 million, (iv)
increases the letter of credit sublimit from $150 million to $200 million; (v)
increases the foreign currency sublimit from $125 million to $200 million; (vi)
increases the debt-to-EBITDA covenant from 3.00:1.00 to 3.75:1.00; and (vii)
extends the maturity date of our borrowings from June 30, 2010 to July 31,
2011. The new credit agreement reduces our costs of borrowing by reducing the
applicable margin that is added to the relevant interest rate that we are
charged. Our borrowings bear interest at fluctuating interest rates determined,
at our election in advance for any quarterly or other applicable interest
period, by reference to (i) a "base rate" (the higher of the prime
rate at Bank of America, N.A. or 0.5% above the rate on overnight federal funds
transactions) or (ii) the London Interbank Offered Rate, or LIBOR, plus, in
either case, the applicable margin within the relevant range of margins provided
in our credit agreement. Under the new credit agreement, the applicable margin
is based on (i) our consolidated leverage ratio, or, if our long-term non-credit
enhanced debt has been rated by Standard & Poors, (ii) our S&P debt
rating, whichever margin is more favorable to us. As of July 31, 2006, the
margin for interest rates on borrowings under our new credit facility was 0.0%
on base rate loans and 0.875% on LIBOR loans. The new credit agreement contains customary events of default, including our
failure to pay any principal, interest or other amount when due, our violation
of certain of our affirmative covenants or any of our negative covenants, a
breach of our representations and warranties, or a change of control. Upon the
occurrence of an event of default, payment of our indebtedness may be
accelerated and the lending commitments under the credit agreement may be
terminated. 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. In addition, we have begun to provide
pharmaceutical returns services, and we are also expanding into international
markets through acquisitions, joint ventures and/or by licensing our proprietary
technology and selling associated equipment. THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30,
2005 The following summarizes (in thousands) the Company's operations: Revenues. Revenues increased $49.3 million or 33.0%, to $198.4
million during the quarter ended June 30, 2006 from $149.1 million during the
comparable quarter in 2005 as a result of acquisitions completed during both
2005 and 2006, and our continued strategy of focusing on sales to higher-margin
small quantity customers. During the quarter ended June 30, 2006, acquisitions
less than one year old contributed approximately $32.6 million in revenue for
the quarter. For the quarter, our base internal revenue growth for small
quantity customers increased approximately 12% and revenues from large quantity
customers increased by approximately 10% as we continued to increase our number
of Bio Systems customers. We believe the size of the regulated medical waste market in the United
States remained relatively stable during the quarter. Cost of revenues. Cost of revenues increased by $27.0 million
to $110.9 million during the quarter ended June 30, 2006 from $83.9 million
during the comparable quarter in 2005. This increase is primarily related to our
increased revenues during 2006 compared to 2005. Our gross margin percentage
increased to 44.1% during the quarter from 43.8% during the comparable quarter
in 2005 due to an increase in gross margins on our domestic business as we
continued to realize improvements from our ongoing programs to improve the
margins on our large quantity business. In cost of revenues, there was $0.2
million in stock compensation expense that negatively impacted the gross margin
percentage by 0.1% in the quarter. Selling, general and administrative expenses. Selling, general
and administrative expenses, including acquisition related costs, increased to
$37.3 million for the quarter ended June 30, 2006 from $23.3 million for the
comparable quarter in 2005. The increase was primarily due to incremental
overhead expenses as a result of our Pharmaceutical Services acquisitions in
2005 and the acquisition of Sterile Technologies Group Limited in 2006.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 123R, Share-Based Payments ("SFAS No. 123R") using the
modified prospective method, which resulted in a change in our method of
recognizing share-based compensation expense. Amortization expense increased to $0.8 million during the quarter from $0.4
million in the same quarter in 2005. This increase was the result of
amortization expense related to intangible assets associated with acquisitions
completed in 2005 and 2006. Acquisition related expenses increased to $0.7
million in 2006 as compared to $0.2 million in 2005. Selling, general and
administrative expenses as a percent of revenues increased to 18.8% during the
quarter from 15.6% during the comparable quarter in 2005. Of the 3.2% increase
in selling, general and administrative expenses in comparison to the same
quarter in 2005, approximately 1.3% was the result of stock compensation expense
being recorded in 2006. Income from operations. Income from operations increased to
$50.0 million for the quarter ended June 30, 2006 from $42.0 million for the
comparable quarter in 2005. The increase was due to higher gross profit,
partially offset by higher selling, general and administrative expenses during
the quarter. During the quarter ended June 30, 2006 we had a $0.3 million non-cash
write-down of equipment. Income from operations as a percentage of revenue
decreased to 25.2% during the quarter from 28.1% during the same quarter in
2005. Write-down of investment.. During the quarter ended June 30, 2006
we had a $1.0 million non-cash write-down of an investment in securities. Net interest expense. Net interest expense increased to $7.0
million during the quarter ended June 30, 2006 from $3.1 million during the
comparable quarter in 2005 due primarily to higher debt levels and interest
rates on our senior unsecured revolving credit facility. Income tax expense. Income tax expense increased to $16.1
million for the quarter ended June 30, 2006 from $14.8 million for the
comparable quarter in 2005. The increase was due to higher taxable income. The
effective tax rates for the quarters ended June 30, 2006 and 2005 were 39.0% and
39.1%, respectively. SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30,
2005 The following summarizes (in thousands) the Company's operations: Revenues. Revenues increased $87.9 million or 30.4%, to $377.7
million during the six months ended June 30, 2006 from $289.7 million during the
comparable period in 2005 as a result of acquisitions completed during both 2005
and 2006, and our continued strategy of focusing on sales to higher-margin small
quantity customers. During the six months ended June 30, 2006, acquisitions less
than one year old contributed approximately $57.6 million to our increase in
revenues from 2005. For the six months ended June 30, 2006, our base internal
revenue growth for small quantity customers increased approximately 11% and
revenues from large quantity customers increased by approximately 9% as we
continued to increase our number of Bio Systems customers. We believe the size of the regulated medical waste market in the United
States remained relatively stable during the period. Cost of revenues. Cost of revenues increased by $47.9 million
to $211.4 million during the six months ended June 30, 2006 from $163.5 million
during the comparable period in 2005. This increase is primarily related to our
increased revenues during 2006 compared to 2005. Our gross margin percentage
increased to 44.0% during the period from 43.6% during the same period in 2005
due to an increase in gross margins on our domestic business as we continued to
realize improvements from our ongoing programs to improve the margins on our
large quantity business. In cost of revenues, there was $0.4 million in stock
compensation expense that negatively impacted the gross margin percentage by
0.1% in the period. Selling, general and administrative expenses. Selling, general
and administrative expenses, including acquisition related costs, increased to
$71.3 million for the six months ended June 30, 2006 from $45.1 million for the
comparable period in 2005. The increase was primarily due to incremental
overhead expenses as a result of our Pharmaceutical Services acquisitions in
2005 and the acquisition of Sterile Technologies Group Limited in 2006.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 123R, Share-Based Payments ("SFAS No. 123R") using the
modified prospective method, which resulted in a change in our method of
recognizing share-based compensation expense. Amortization expense increased to $1.3 million during the six months ended
June 30, 2006 from $0.7 million in the same period in 2005. This increase was
the result of amortization expense related to intangible assets associated with
acquisitions completed in 2005 and 2006. Acquisition related expenses increased
to $1.3 million in 2006 as compared to $0.3 million in 2005. Selling, general
and administrative expenses as a percent of revenues increased to 18.9% during
the quarter from 15.6% during the comparable period in 2005. Of the 3.3%
increase in selling, general and administrative expenses in comparison to the
same period in 2005, approximately 1.3% was the result of stock compensation
expense being recorded in 2006. Income from operations. Income from operations increased to
$94.7 million for the six months ended June 30, 2006 from $81.1 million for the
comparable period in 2005. The increase was due to higher gross profit,
partially offset by higher selling, general and administrative expenses during
the period. During the six months ended June 30, 2006 we had a $0.3 million non-cash
write-down of equipment. Income from operations as a percentage of revenue
decreased to 25.1% during the period from 28.0% during the same period in
2005. Write-down of investment.. During the six months ended June 30, 2006
we had a $1.0 million non-cash write-down of an investment in securities. Net interest expense. Net interest expense increased to $12.7
million during the six months ended June 30, 2006 from $5.4 million during the
comparable period in 2005 due primarily to higher debt levels and interest rates
on our senior unsecured revolving credit facility. Income tax expense. Income tax expense increased to $31.1
million for the six months ended June 30, 2006 from $28.9 million for the
comparable period in 2005. The increase was due to higher taxable income. The
effective tax rates for the six months ended June 30, 2006 and 2005 were 39.0%
and 39.2%, respectively. LIQUIDITY AND CAPITAL RESOURCES Our credit agreement requires us to comply with various financial,
reporting, and other covenants and restrictions, including restrictions on
dividend payments. At June 30, 2006 we were in compliance with all of our
financial debt covenants. As of June 30, 2006, we had $379.5 million of
borrowings outstanding under our senior unsecured credit facility, which
includes foreign currency borrowings of $5.5 million. In addition, we had $58.8
million committed to outstanding letters of credit. The weighted average rate of
interest on the unsecured revolving credit facility was 6.10% per annum. At June
30, 2006 we had $90.6 million in other debt outstanding, which includes
promissory notes issued in connection with acquisitions during 2003 through 2006
and foreign subsidiary bank debt. Working Capital. At June 30, 2006, our working capital
increased $12.1 million to $57.4 compared to working capital of $45.3 million at
December 31, 2005. This increase was primarily the result of higher accounts
receivable and short-term investments partially offset by higher accrued
liabilities and deferred revenue. Net Cash Provided or Used. Net cash provided by operating
activities was $64.3 million during the six months ended June 30, 2006 compared
to $57.1 million for the comparable period in 2005. This increase was primarily
due to higher net income, stock compensation expense, depreciation and accrued
liabilities partially offset by increases in accounts receivable and accounts
payable. As a result of adopting SFAS No. 123R effective January 1, 2006, we
recorded $5.3 million in stock compensation expense for employee stock options
and employee stock purchase program for the six months ended June 30, 2006. SFAS
No. 123R also requires the benefits of tax deductions in excess of recognized
compensation expense to be reported as a financing cash flow, rather than as an
operating cash flow as prescribed under the prior accounting rules. This
requirement reduces net operating cash flow and increases net financing cash
flows in periods after adoption. Total cash flow remains unchanged from what
would have been reported under prior accounting rules. As a result, $3.1 million
in tax benefits on stock options exercised was reported as cash provided by
financing activities for the six months ended June 30, 2006 compared to $3.3
million reported as cash provided by operating activities for the six months
ended June 30, 2005. Net cash used in investing activities for the six months ended June 30, 2006
was $143.6 million compared to $48.4 million for the comparable period in 2005.
This increase is primarily attributable to an increase in payments for
acquisitions, purchases of short-term investments and higher capital
expenditures. Cash investments in acquisitions and international joint ventures
for the six months ended June 30, 2006 were $126.1 million versus $34.4 million
in the comparable period in 2005 primarily as a result of the Sterile
Technologies Group Limited acquisition. Capital expenditures were $15.7 million
for the period compared to $13.8 million during the same period in 2005. At June 30, 2006 we had approximately 9% of our treatment capacity in North
America in incineration and approximately 91% in non-incineration technologies
such as our proprietary patented ETD technology and autoclaving. The
implementation of our commitment to move away from incineration in North America
may result in a write-down of the incineration equipment as and when we close
incinerators that we are currently operating. Our commitment to move away from
incineration in North America is in the nature of a goal to be accomplished over
an undetermined number of years. Because of uncertainties relating, among other
things, to customer education and acceptance and legal requirements to
incinerate portions of the medical waste, we do not have a timetable for this
transition or specific plans to close any of our existing incinerators. Net cash provided by financing activities was $77.7 million during the six
months ended June 30, 2006 compared to net cash used of $6.8 million for the
comparable period in 2005. This is primarily the result of higher issuances of
notes payable and borrowings under our senior unsecured credit facility to fund
acquisitions along with a reduction in the purchase of treasury stock during the
six months ended June 30, 2006. Net cash provided by financing activities
included $3.1 million in tax benefits on stock options exercised due to the new
reporting requirements under SFAS No. 123R in classifying tax benefits on stock
options exercised as cash provided by financing activities versus prior
presentation as cash provided by operating activities. In addition, we
repurchased and subsequently cancelled 255,700 shares of common stock for $15.1
million in cash in the six months ended June 30, 2006, of which $1.2 million in
cash will be settled in the quarter ended September 30, 2006 compared to 866,200
shares for $39.2 million in cash during the comparable period last year. Guarantees: We have guaranteed a loan to the Azoroa Bank in
Japan on behalf of Shiraishi-Sogyo Co. Ltd ("Shiraishi"). Shiraishi is a
customer in Japan that is expanding their medical waste management business and
has a five-year loan with a current balance of $5.9 million with the Azoroa Bank
that expires in June 2009. Management currently believes no amount will be paid
under the guarantee. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK We are subject to market risks arising from changes
in interest rates on our senior unsecured 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
$3.8 million on a pre-tax basis. We have exposure to currency exchange rate fluctuations between the US dollar
(USD) and UK pound sterling (GBP) related to a 13 million GBP inter-company loan
with Stericycle International, Ltd., the parent company of White Rose
Environmental. In October 2005, we elected cash flow hedge accounting treatment
on our remaining forward contracts. Both the inter-company loan balance and the
forward contracts are marked to market at the end of each reporting period and
the impact on the balances is recorded on the balance sheet to other comprehensive income. We have exposure to commodity pricing for gas and diesel fuel for our trucks
and for the purchase of containers and boxes. We do not hedge these items to
manage the exposure. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our President and Chief
Executive Officer and our Chief Financial Officer, conducted an evaluation of
the effectiveness of our disclosure controls and procedures as of the end of the
fiscal quarter covered by this Report. On the basis of this evaluation, our
President and Chief Executive Officer and our Chief Financial Officer each
concluded that our disclosure controls and procedures were effective. The term "disclosure controls and procedures" is defined in Rule 13a-14(e) of
the Securities Exchange Act of 1934 as "controls and other procedures designed
to ensure that information required to be disclosed by the issuer in the
reports, files or submits under the Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms." Our disclosure controls and procedures are
designed to ensure that material information relating to us and our consolidated
subsidiaries is accumulated and communicated to our management, including our
President and Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding our required disclosures. Internal Control Over Financial Reporting During the quarter ended June 30, 2006, there were no changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely materially to affect, our internal controls over financial
reporting. FROM TIME TO TIME WE ISSUE FORWARD-LOOKING STATEMENTS RELATING TO SUCH
THINGS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, ACQUISITION
ACTIVITIES AND SIMILAR MATTERS. THESE FORWARD-LOOKING STATEMENTS MAY INVOLVE RISKS AND UNCERTAINTIES, SOME OF
WHICH ARE BEYOND OUR CONTROL (FOR EXAMPLE, GENERAL ECONOMIC CONDITIONS). OUR
ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE SUCH DIFFERENCES INCLUDE
DIFFICULTIES IN COMPLETING THE INTEGRATION OF ACQUIRED BUSINESSES, CHANGES IN
GOVERNMENTAL REGULATION OF MEDICAL WASTE COLLECTION AND TREATMENT, AND INCREASES
IN TRANSPORTATION AND OTHER OPERATING COSTS, AS WELL AS VARIOUS OTHER
FACTORS. PART II ITEM 1. LEGAL PROCEEDINGS See Note 9, Legal Proceedings, in the Notes to the Condensed Consolidated
Financial Statements. (Item 1 of Part 1). ITEM 2. CHANGES IN SECURITIES, USES OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES The following table provides information about our purchases
during the six months ended June 30, 2006 of shares of our common stock. Issuer Purchases of Equity Securities In May 2002 our Board of Directors authorized the Company to
repurchase up to 3,000,000 shares of our common stock, in the open market or
through privately negotiated transactions, at times and in amounts in the
Company's discretion. In February 2005, at a time when we had purchased a
cumulative total of 1,478,430 shares, the Board authorized the Company to
purchase up to an additional 1,478,430 shares, thereby giving the Company the
authority to purchase up to a total of 3,000,000 additional shares. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our 2006 Annual Meeting of Stockholders on May 3, 2006 in Rosemont,
Illinois. At the meeting, all eight of our incumbent directors standing for re-
election were reelected by the stockholders, by the following votes: Nominee Votes For Votes Withheld Jack W. Schuler 37,886,513 2,442,707 Mark C. Miller 39,302,658 1,026,562 Rod F. Dammeyer 39,915,143 414,077 Jonathan T. Lord, M.D. 40,018,972 310,248 John Patience 39,274,542 1,054,678 Thomas R. Reusché 40,024,384 304,836 Peter Vardy 39,282,989 1,046,231 L. John Wilkerson, Ph.D. 39,281,927 1,047,293
(Exact name of registrant as specified in its charter)
Lake Forest, Illinois 60045
(Address of principal executive offices including zip code)
(Registrant's telephone number, including area code)
Table of Contents
PART I. Financial Information
Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2006 (Unaudited) and December 31, 2005 (Audited)
Condensed Consolidated Statements of Income
for the three and six months ended June 30, 2006 and 2005 (Unaudited)
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2006 and 2005 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signatures
Certifications
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
2006 2005
------------ -----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 4,608 7,825
Short-term investments............................................... 2,684 720
Accounts receivable, less allowance for doubtful
accounts of $4,350 in 2006 and $4,810 in 2005...................... 130,035 103,703
Parts and supplies................................................... 6,985 5,263
Prepaid expenses..................................................... 7,350 6,523
Notes receivable..................................................... 3,111 3,164
Deferred tax asset................................................... 14,899 13,452
Other................................................................ 4,431 3,392
------------ -----------
Total current assets........................................ 174,103 144,042
------------ -----------
Property, plant and equipment, net................................... 150,730 136,220
Other assets:
Goodwill, net........................................................ 792,961 685,169
Intangible assets, less accumulated amortization of
$10,133 in 2006 and $8,965 in 2005................................. 97,344 61,641
Notes receivable..................................................... 11,807 10,672
Other................................................................ 8,460 9,916
------------ -----------
Total other assets................................................. 910,572 767,398
------------ -----------
Total assets................................................ $ 1,235,405 $ 1,047,660
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt.................................... $ 13,976 $ 12,044
Accounts payable..................................................... 28,393 27,872
Accrued liabilities.................................................. 61,034 48,450
Deferred revenue..................................................... 13,287 10,394
------------ -----------
Total current liabilities................................... 116,690 98,760
------------ -----------
Long-term debt, net of current portion............................... 456,825 348,841
Deferred income taxes................................................ 78,095 71,549
Other liabilities.................................................... 9,387 6,876
Common stock (par value $.01 per share, 80,000,000
shares authorized, 44,230,875 issued and outstanding in
in 2006, 44,149,722 issued and outstanding in 2005)................ 442 442
Additional paid-in capital........................................... 260,664 259,075
Accumulated other comprehensive income............................... 3,039 546
Retained earnings.................................................... 310,263 261,571
------------ -----------
Total shareholders' equity........................................... 574,408 521,634
------------ -----------
Total liabilities and shareholders' equity......................... $ 1,235,405 $ 1,047,660
============ ===========
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2006 2005 2006 2005
----------- ------------ ----------- ------------
Revenues........................................................ $ 198,424 $ 149,148 $ 377,673 $ 289,726
Costs and expenses:
Cost of revenues.............................................. 105,883 79,863 201,726 155,343
Selling, general and
administrative expenses..................................... 34,903 21,980 66,637 42,665
Depreciation and amortization................................. 6,713 5,142 13,008 10,370
Write-down of fixed assets.................................... 300 -- 300 --
Acquisition related costs..................................... 664 180 1,295 270
----------- ----------- ----------- -----------
Total costs and expenses................................... 148,463 107,165 282,966 208,648
----------- ----------- ----------- -----------
Income from operations.......................................... 49,961 41,983 94,707 81,078
----------- ----------- ----------- -----------
Other income (expense):
Interest income............................................... 251 133 507 200
Interest expense.............................................. (7,253) (3,254) (13,159) (5,597)
Write-off of deferred financing fees.......................... -- (197) -- (197)
Write-down of investment in securities........................ (1,000) -- (1,000) --
Other expense................................................. (700) (909) (1,230) (1,807)
----------- ----------- ----------- -----------
Total other income (expense)............................... (8,702) (4,227) (14,882) (7,401)
----------- ----------- ----------- -----------
Income before income taxes...................................... 41,259 37,756 79,825 73,677
Income tax expense.............................................. 16,091 14,774 31,132 28,880
----------- ----------- ----------- -----------
Net income...................................................... $ 25,168 $ 22,982 $ 48,693 $ 44,797
=========== =========== =========== ===========
Earnings per share - Basic...................................... $ 0.57 $ 0.52 $ 1.10 $ 1.01
=========== =========== =========== ===========
Earnings per share - Diluted.................................... $ 0.56 $ 0.51 $ 1.08 $ 0.99
=========== =========== =========== ===========
Weighted average number of
common shares outstanding--Basic.............................. 44,230,875 44,122,836 44,158,851 44,339,738
=========== =========== =========== ===========
Weighted average number of common
shares outstanding--Diluted................................... 45,310,665 45,064,080 45,237,200 45,285,644
=========== =========== =========== ===========
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
For the Six Months
Ended June 30,
------------------------
2006 2005
---------- ------------
OPERATING ACTIVITIES:
Net income...................................................... $ 48,693 $ 44,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense.................................. 5,274 18
Tax benefit of stock options exercised...................... -- 3,291
Write-off deferred financing fees........................... -- 197
Write-down of investment in securities...................... 1,000 --
Write-down of fixed assets.................................. 300 --
Deferred income taxes....................................... 3,716 7,432
Depreciation................................................ 11,713 9,698
Amortization................................................ 1,295 672
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable......................................... (12,181) (8,496)
Parts and supplies.......................................... (996) (419)
Prepaid expenses and other assets........................... 2,212 (6,166)
Accounts payable............................................ (4,999) 1,174
Accrued liabilities......................................... 6,399 1,093
Deferred revenue............................................ 1,923 3,837
---------- ------------
Net cash provided by operating activities....................... 64,349 57,128
---------- ------------
INVESTING ACTIVITIES:
Payments for acquisitions and international
investments, net of cash acquired........................... (126,091) (34,390)
Short-term investments........................................ (1,964) (275)
Proceeds from sale of equipment............................... 215 79
Capital expenditures.......................................... (15,720) (13,816)
---------- ------------
Net cash used in investing activities........................... (143,560) (48,402)
---------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of note payable........................ 4,572 642
Repayment of long-term debt................................... (12,452) (1,739)
Net repayments of 2001 senior credit facility................. -- (171,353)
Net borrowings of 2005 senior credit facility................. 89,120 198,853
Payments of deferred financing costs.......................... -- (97)
Principal payments on capital lease obligations............... (749) (425)
Tax benefit of stock options exercised........................ 3,141 --
Purchase/cancellation of treasury stock....................... (13,866) (39,243)
Proceeds from the exercise of stock options................... 7,925 6,535
---------- ------------
Net cash provided by (used in) financing activities............. 77,691 (6,827)
Effect of exchange rate changes on cash......................... (1,697) 1,044
---------- ------------
Net (decrease) increase in cash and cash equivalents............ (3,217) 2,943
Cash and cash equivalents at beginning of period................ 7,825 7,850
---------- ------------
Cash and cash equivalents at end of period...................... $ 4,608 $ 10,793
========== ============
Non-cash activities:
Net issuances of notes payable for certain acquisitions $ 27,245 $ 24,650
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Weighted average Weighted average
Number of exercise price remaining Aggregate
options per share contractual life intrinsic value
---------- ---------------- ---------------- ---------------
(in years)
Outstanding at December 31, 2005............. 3,592,849 $ 33.23
Granted...................................... 783,009 59.97
Exercised.................................... (343,636) 22.66
Cancelled or expired......................... (107,175) 50.10
---------- ---------------
Outstanding at June 30, 2006................. 3,925,047 $ 39.04 7.2 $ 102,325,237
========== ===============
Exercisable at June 30, 2006................. 1,897,515 $ 27.48 5.7 $ 71,380,957
Three Months Ended
June 30, 2006
------------------
Expected term (in years).......................... 4.3
Expected volatility............................... 28.15%
Expected dividend yield........................... 0.00%
Risk free interest rate........................... 5.08%
Three Months Ended
March 31, 2006
-------------------
Expected term (in years).......................... 4.4
Expected volatility............................... 29.08%
Expected dividend yield........................... 0.00%
Risk free interest rate........................... 4.83%
Three Months Ended Six Months Ended
Stock-based compensation expense by caption: June 30, 2006 June 30, 2006
- --------------------------------------------------------------- ------------------ -----------------
(in thousands)
Cost of revenues - stock option plan........................... $ 187 $ 395
Selling, general and administrative - stock option plan....... 2,425 4,731
Selling, general and administrative - employee stock purchase 73 148
----------------- -----------------
Total $ 2,685 $ 5,274
================= =================
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
(in thousands, except per share data )
------------------ --------------------
Stock options expense included in net income $ 0 $ 11
------------------ --------------------
As reported net income............................ $ 22,982 $ 44,797
Pro forma impact of stock options and ESPP,
net of tax ....................................... 1,549 3,034
------------------ --------------------
Pro forma net income.............................. $ 21,433 $ 41,763
================== ====================
Earnings per share
Basic-as reported............................ $ 0.52 $ 1.01
================== ====================
Basic-pro forma.............................. $ 0.49 $ 0.95
================== ====================
Diluted-as reported.......................... $ 0.51 $ 0.99
================== ====================
Diluted-pro forma............................ $ 0.48 $ 0.93
================== ====================
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2006 2005 2006 2005
----------- ----------- ------------ -----------
Numerator:
Numerator for basic earnings per share
Net Income.......................................... $ 25,168 $ 22,982 $ 48,693 $ 44,797
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per share
Weighted average shares............................ 44,230,875 44,122,836 44,158,851 44,339,738
Effect of dilutive securities:
Employee stock options............................. 1,079,515 941,216 1,078,097 945,891
Warrants........................................... 275 28 252 15
----------- ----------- ----------- -----------
Dilutive potential shares............................ 1,079,790 941,244 1,078,349 945,906
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and after assumed
conversions.......................................... 45,310,665 45,064,080 45,237,200 45,285,644
=========== =========== =========== ===========
Earnings per share - Basic............................. $ 0.57 $ 0.52 $ 1.10 $ 1.01
=========== =========== =========== ===========
Earnings per share - Diluted........................... $ 0.56 $ 0.51 $ 1.08 $ 0.99
=========== =========== =========== ===========
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net Income........................................ $ 25,168 $ 22,982 $ 48,693 $ 44,797
Other comprehensive income (loss):
Currency translation adjustments............. 3,017 (1,587) 2,588 (2,084)
Net loss on derivative instruments........... (25) 0 (95) 0
--------- --------- --------- ---------
Other comprehensive income (loss)........ 2,992 (1,587) 2,493 (2,084)
--------- --------- --------- ---------
Total comprehensive income........................ $ 28,160 $ 21,395 $ 51,186 $ 42,713
========= ========= ========= =========
United Foreign
States Countries Total
---------- ----------- -----------
Balance as of January 1, 2006 .................... $ 621,496 $ 63,673 $ 685,169
Change due to currency fluctuation ............... 0 3,362 3,362
Allocated to intangibles ......................... (15,900) (20,000) (35,900)
Changes in Goodwill for
2005 acquistions ............................. 466 2,924 3,390
Goodwill on 2006 acquisitions ................... 562 136,378 136,940
---------- ----------- -----------
Balance as of June 30, 2006 ...................... $ 606,624 $ 186,337 $ 792,961
========== =========== ===========
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands) (in thousands)
Medical waste management services............ $ 139,108 $ 122,746 $ 272,905 $ 239,947
Pharmaceutical return services............... 14,509 1,059 27,071 1,433
--------- --------- --------- ---------
Total revenue................................ 153,617 123,805 299,976 241,380
--------- --------- --------- ---------
Net interest expense......................... 6,135 2,971 11,107 4,853
Income before income taxes................... 35,410 35,298 69,785 70,211
Income taxes................................. 15,052 13,987 29,148 27,561
--------- --------- --------- ---------
Net income................................... $ 20,358 $ 21,311 $ 40,637 $ 42,650
========= ========= ========= =========
Depreciation and amortization................ $ 4,837 $ 4,019 $ 9,406 $ 7,778
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(in thousands) (in thousands)
Medical waste management services............ $ 44,676 $ 25,299 $ 77,418 $ 48,180
Proprietary equipment and technology
license sales............................ 131 44 279 166
--------- --------- --------- ---------
Total revenue................................ 44,807 25,343 77,697 48,346
--------- --------- --------- ---------
Net interest expense......................... 867 347 1,545 741
Income before income taxes................... 5,849 2,458 10,040 3,466
Income taxes................................. 1,039 787 1,984 1,319
--------- --------- --------- ---------
Net income................................... $ 4,810 $ 1,671 $ 8,056 $ 2,147
========= ========= ========= =========
Depreciation and amortization................ $ 1,876 $ 1,123 $ 3,602 $ 2,592
Three Months Ended June 30,
---------------------------------------
2006 2005
------------------ ------------------
$ % $ %
-------- -------- -------- --------
Revenues............................................... $198,424 100.0 $149,148 100.0
Cost of revenues....................................... 105,883 53.4 79,863 53.5
Depreciation........................................... 4,980 2.5 4,006 2.7
-------- -------- -------- --------
Total cost of revenues................................. 110,863 55.9 83,869 56.2
Gross profit........................................... 87,561 44.1 65,279 43.8
Selling, general and
administrative expenses.............................. 34,903 17.6 21,980 14.7
Depreciation........................................... 949 0.5 760 0.5
Amortization........................................... 784 0.4 376 0.3
Acquisition related expenses........................... 664 0.3 180 0.1
-------- -------- -------- --------
Total selling, general and administrative expenses..... 37,300 18.8 23,296 15.6
-------- -------- -------- --------
Write-down of fixed assets............................. 300 0.2 -- --
-------- -------- -------- --------
Income from operations................................. 49,961 25.2 41,983 28.1
Write-down of security investment...................... 1,000 0.5 -- --
Net income............................................. 25,168 12.7 22,982 15.4
Earnings per share-diluted............................. $ 0.56 $ 0.51
Six Months Ended June 30,
--------------------------------------
2006 2005
------------------ ------------------
$ % $ %
-------- -------- -------- --------
Revenues............................................... $377,673 100.0 $289,726 100.0
Cost of revenues....................................... 201,726 53.4 155,343 53.6
Depreciation........................................... 9,633 2.6 8,171 2.8
-------- -------- -------- --------
Total cost of revenues................................. 211,359 56.0 163,514 56.4
-------- -------- -------- --------
Gross profit........................................... 166,314 44.0 126,212 43.6
Selling, general and
administrative expenses.............................. 66,637 17.6 42,665 14.7
Depreciation........................................... 2,080 0.6 1,527 0.5
Amortization........................................... 1,295 0.3 672 0.2
Acquisition related costs.............................. 1,295 0.3 270 0.1
-------- -------- -------- --------
Total selling, general and administrative expenses..... 71,307 18.9 45,134 15.6
-------- -------- -------- --------
Write-down of fixed assets............................. 300 0.1 -- --
-------- -------- -------- --------
Income from operations................................. 94,707 25.1 81,078 28.0
Write-down of security investment...................... 1,000 0.3 -- --
Net income............................................. 48,693 12.9 44,797 15.5
Earnings per share-diluted............................. $ 1.08 $ 0.99
OTHER INFORMATION
Maximum
Number (or
Approximate
Dollar
Value) of
Total Shares (or
Number of Shares Units) that
Average (or Units) May Yet Be
Total Price Purchased as Part Purchased
Number of Shares Paid per of Publicly Under the
(or Units) Share Announced Plans Plans or
Period Purchased (or Unit) or Programs Programs
- ------------------------------------------------------------------------------------------------------------
January 1 - January 31, 2006 181,800 57.99 181,800 1,914,700
February 1 - February 28, 2006 11,300 58.01 11,300 1,903,400
March 1 - March 31, 2006 0 0.00 0 1,903,400
April 1- April 30, 2006 0 0.00 0 1,903,400
May 1- May 31, 2006 2,000 59.45 2,000 1,901,400
June 1- June 30, 2006 60,600 62.71 60,600 1,840,800
In addition, the stockholders also voted to ratify the appointment of Ernst & Young LLP as our independent public accountants for 2006 by the following vote:
For |
Against |
Abstain |
Broker Non-Vote |
33,852,535 |
807,600 |
17,147 |
5,651,938 |
The stockholders also voted on a stockholder proposal regarding a plan for the elimination of incineration. This proposal was defeated by the following vote:
For |
Against |
Abstain |
Broker Non-Vote |
2,067,254 |
29,587,866 |
3,022,161 |
5,651,939 |
ITEM 6. 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
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 4, 2006.
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STERICYCLE, INC. |
|
|
(Registrant) |
|
|
By: |
/s/ Frank J.M. ten Brink |
|
Frank J.M. ten Brink |
|
|
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification
Mark C. Miller
President and Chief Executive Officer
I, Mark C. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stericycle, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have:
(a) designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 4, 2006.
/s/ Mark C. Miller
Mark C. Miller
President and Chief Executive Officer
Stericycle, Inc.
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification
Frank J.M. ten Brink
Executive Vice President and Chief Financial Officer
I, Frank J.M. ten Brink, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stericycle, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have:
(a) designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 4, 2006.
/s/ Frank J.M. ten Brink
Frank J.M. ten Brink
Executive Vice President and
Chief Financial Officer
Stericycle, Inc.
Exhibit 32
SECTION 1350 CERTIFICATION
In reference to this quarterly report on Form 10-Q of Stericycle, Inc. we, Mark C. Miller, President and Chief Executive Officer of the registrant, and Frank J.M. ten Brink, an Executive Vice President and the Chief Financial Officer of the registrant, certify as follows, pursuant to 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002):
(a) the report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(b) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
Date: August 4, 2006.
/s/ Mark C. Miller
Mark C. Miller
President and Chief Executive Officer
Stericycle, Inc.
/s/ Frank J.M. ten Brink
Frank J.M. ten Brink
Executive Vice President
and Chief Financial Officer
Stericycle, Inc.