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Stericycle (SRCL) Misses on Both Q3 Earnings & Revenues

Waste management firm Stericycle, IncSRCL reported relatively sedate third-quarter 2015 results with adjusted earnings of $1.08 per share, flat year over year and woefully short of the Zacks Consensus Estimate by 10 cents.

Stericycle Inc. - Earnings Surprise | FindTheBest

GAAP net income for the reported quarter was $41.8 million or 47 cents per share compared with $82.8 million or 96 cents per share in the year-earlier quarter. The significant year-over-year decline in earnings despite a healthy top-line improvement during the reported quarter was primarily due to high operating, acquisition and integration expenses.

Revenues & Margins

Revenues for the reported quarter increased 7.6% year over year to $718.6 million, but missed the Zacks Consensus Estimate of $735 million. The year-over-year increase in revenues was primarily attributable to accretive acquisitions, which contributed approximately $33.3 million of the $50.7 million increase. When adjusted for unfavorable foreign exchange impact, revenues recorded a 12.5% hike over the prior-year period to $751.6 million.

Domestic revenues in the reported quarter aggregated $523.5 million (up 11.7% year over year), to which domestic regulated waste and compliance services contributed $493.2 million and $30.3 million was attributable to recalls and returns. Domestic internal growth, excluding recalls and returns revenues, was 6.0%. International revenues stood at $195.1 million, down 4.1% year over year.

Gross profit (GAAP) for the reported quarter aggregated $299.7 million, up 7.5% from the year-ago quarter. Gross margin, however, remained flat at 41.7% driven by increased costs. Non-GAAP gross profit for the quarter was $300.2 million, up 7.4% from $279.5 million in the second quarter of 2014. Non-GAAP gross margin was 41.8% compared with 41.9% in the year-ago quarter. Operating income reduced to $83.2 million from $139.5 million in the year-ago quarter due to high selling, general and administrative expenses including acquisition and integration costs.

Financial Position

As of Sep 30, 2015, cash and cash equivalents aggregated $32.9 million versus $22.2 million as of Dec 31, 2014. Net cash provided by operating activities for the first nine months of 2015 was $293.3 million versus $345.0 million in the year-ago period.

At quarter end, long-term debt (net of current portion) stood at $1,409.7 million compared with $1,527.2 million at year-end 2014. Debt-to-EBITDA ratio was 1.17x at the quarter end. Stericycle had an unused borrowing capacity of $875 million under its revolving credit facility.

Stericycle reported capital expenditure of $25.8 million for the quarter. During third-quarter 2015, the company repurchased 88,376 shares for $11.9 million. At the end of the quarter, the company had an authorization to repurchase an additional 4 million shares.

Acquisitions

During third-quarter 2015, the company closed 10 acquisitions of which 3 were domestic and 7 international (3 in South Korea, 2 in Spain and 2 in Romania). These acquisitions contributed $2.2 million in revenues during the quarter at an annualized rate of approximately $14.3 million. Stericycle is continuously on the lookout for strategic acquisitions that will enhance market share and expand its geographic base. The acquisition pool of the company remains robust in multiple geographies and lines of business.

Subsequent to the end of the second quarter, Stericycle closed the acquisition of information destruction services provider Shred-it International for $2.3 billion in cash. With Shred-it on board, Stericycle is expected to enhance its core compliance solutions portfolio and offer specialized services, thereby augmenting its value proposition to clients.

The transaction is anticipated to result in cost synergies to the tune of $20-$30 million by 2018, leading to accretive earnings. Earnings per share is expected to increase by at least 10% in 2016 and by the high-teens in 2018, generating robust cash flow and over $1 billion in EBITDA in 2016 through improved margins and debt repayment.

Guidance

For 2015, Stericycle expects its earnings to be in the range of $4.38 - $4.41 per share, with revenues in the range of $3 billion. Capital expenditure in 2015 is expected to be between $104 million and $110 million. Free cash flow is expected between $417 million to $426 million.

Stericycle also provided a preliminary guidance for 2016, wherein it expects its cash earnings per share to be in the range of $5.28 - $5.35, with revenues in the range of $3.65 billion to $3.72 billion. Capital expenditure in 2016 is expected to be between $125 million and $140 million. Free cash flow is expected between $470 million to $485 million.

Stericycle currently has a Zacks Rank #4 (Sell). Better-ranked stocks include Waste Management, Inc. WM , FTI Consulting, Inc. FCN and Bureau Veritas SA BVRDF , each carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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