Stericycle Beats Estimates

Zacks Investment Research
updated | Zacks.com

Stericycle Inc. (NASDAQ:SRCL) delivered adjusted earnings per share (EPS) of 78 cents in the first quarter of fiscal 2012, up 13% from 69 cents in the prior-year quarter. Adjusted EPS surpassed the Zacks Consensus Estimate of 76 cents.

The quarter noted some special items including acquisition expenses of 2 cents per share and adjustments of contingent consideration to fair value, and other items of 1 cent per share. The prior-year quarter noted acquisition costs of 7 cents per share and a benefit from adjustments of contingent consideration to fair value, and other items of 2 cents per share.

Including these items, EPS amounted to 75 cents in the reported quarter compared with 64 cents in the year-ago quarter.

Total revenue increased 16% year over year to $460 million in the first quarter, exceeding the Zacks Consensus Estimate of $453 million. Acquisitions contributed $41 million to revenues while foreign exchange had a negative impact of $3.3 million.

Domestic revenues were $329 million; return and recall revenues amounted to $35.8 million; and international revenues totaled $130.9 million. The domestic internal growth rate was up 9%, with small quantity climbing up 10% and large quantity 8%.

Cost and Margins

Cost of sales increased to $244 million in the quarter from $206 million in the year-ago quarter. Gross profit increased to $205 million from $182 million in the year-earlier quarter. However, gross margin contracted 120 basis points year over year to 44.6%.

Selling, general and administrative expenses increased 11% to $77.8 million in the quarter from $70 million in the year-ago quarter. Income from operations improved to $85 million from $76 million in the prior-year quarter. However, operating margin declined 60 basis points year over year to 18.5%.

Financial Position

As of December 31, 2011, cash and cash equivalents of Stericycle amounted to $30.3 million compared with $22.5 million as of December 31, 2011. The debt-to-capitalization ratio improved to 51% as of March 31, 2012 from 54% as of December 31, 2011. Cash from operations was $99.6 million in the quarter versus $65.6 million in the year-ago quarter.

Stericycle repurchased over 38,000 shares of common stock for $2.9 million in the quarter, under its authorization program. The company has authorization to purchase an additional 4.3 million shares.

During the quarter, the company completed 11 acquisitions, out of which 6 were based in domestic locations and the rest in international locations.

Outlook

Management provided EPS guidance in the range of $3.24 to $3.28 for full year 2012 and expects revenues in the range of $1.85 billion to $1.9 billion for the year.

Free cash flow is expected to range between $320 million and $325 million in 2012, with capital expenditure anticipated between $60 million and $65 million.

Our Take

The company witnessed strong growth worldwide, driven by new account acquisition and expansion of its portfolio of service offerings. Stericycle offers multiple service offerings to its customers, which add to the value of each account. For its small quantity customers, the services include Steri-Safe and clinical compliance offerings and for large quantity customers – Sharps Management, pharma waste and Integrated Waste Services.

With currently 80% of the large quantity and 70% of the small quantity customers using one of Stericycle’s current service offerings, the adoption of its multiple services could more than double or triple its revenues.

However, the recent spate of acquisitions is leading to higher overheads and integration-related costs, which could have an adverse impact on operating margins. Moreover, the business of medical waste disposal and regulations can change often, with new regulations being frequently adopted. Frequent change in regulations would impose new compliance requirements on Stericycle, alter its current method of conducting business, and ultimately increase costs and compress margins. Currently, shares of Stericycle retain a Zacks #4 Rank (short-term “Sell” rating).

Based in Lake Forest, Illinois, Stericycle Inc. is a leading provider of regulated medical waste management and product recall and return services in the U.S. It operates a national medical waste management network that caters to medical schools, hospitals, and other healthcare providers. It competes with US Ecology Inc. (NASDAQ:ECOL) and Waste Management (NYSE:WM).

 
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