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Overview
Stericycle, Inc. is a U.S. based business-to-business services company that provides compliance-based solutions to protect people, brands, health, well-being, and the environment. The company serves customers in North America and Europe through its family of brands. Key business highlights include receiving regulatory approvals for a proposed merger, progress on a Nevada incinerator project, and an agreement to divest operations in Spain and Portugal.
The company continues to face revenue challenges with some national account customers, including changes in service frequency and site consolidations. Hurricanes also impacted some customers and communities in the southeastern U.S.
Proposed Plan of Merger
Stericycle spent significant time and resources in the second and third quarters of 2024 on matters related to a proposed merger agreement. The company expects to close the merger as soon as the remaining customary closing conditions are met.
Key Business Priorities
In 2024, Stericycle focused on four key priorities to drive margin expansion and deliver value:
Commercial and Service Excellence - Delivering a differentiated value proposition and seamless customer experience as a trusted compliance partner.
Operational Excellence - Improving margins by streamlining the workforce, leveraging modern technologies, updating facilities, and refreshing the vehicle fleet.
Digital Implementation - Leveraging digital, data, and AI capabilities to enhance commercial, service, and operational efficiencies.
Strategic Capital Allocation - Investing in core businesses while targeting lower debt levels.
Certain Key Priorities and Other Significant Matters
The following table outlines certain key priorities and other significant matters impacting Stericycle’s business:
| Item | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Operational Optimization | $(0.1) | $- | $1.9 | $- |
| Asset Impairments | $- | $- | $- | $3.4 |
| ERP and System Modernization | $4.1 | $4.8 | $12.7 | $12.9 |
| Intangible Amortization | $27.6 | $27.9 | $83.1 | $84.2 |
| Operational Optimization | $(0.3) | $- | $3.1 | $- |
| Portfolio Optimization | $1.3 | $0.8 | $3.1 | $1.4 |
| Litigation Settlements and Regulatory Compliance | $15.9 | $5.3 | $39.0 | $22.4 |
| Asset Impairments | $- | $3.1 | $- | $3.1 |
| WM Transaction-Related Charges | $3.4 | $- | $11.6 | $- |
| Divestiture Losses and Impairments | $10.5 | $4.2 | $10.5 | $63.4 |
The company continues to invest in its ERP and system modernization efforts, with $7.9 million and $24.9 million spent in Q3 2024 and YTD 2024, respectively. Intangible amortization expenses have decreased due to divestitures and assets reaching the end of their useful lives.
Stericycle recognized operational optimization charges related to workforce reductions, which are expected to provide annual savings. The company also incurred portfolio optimization costs, including divestiture losses and impairments.
Litigation, settlements, and regulatory compliance costs were higher, reflecting consulting fees, provisions, and settlements. The company also incurred charges related to the proposed merger with WM.
Results of Operations
Revenues for Q3 2024 were $648.4 million, a decrease of 0.8% compared to Q3 2023. The decrease was primarily due to divestitures and lower organic revenues, partially offset by an acquisition and favorable foreign exchange rates.
Revenues for the first nine months of 2024 were $1,974.9 million, a decrease of 1.6% compared to the same period in 2023. The decrease was mainly due to divestitures and lower organic revenues, partially offset by an acquisition and favorable foreign exchange.
North America revenues decreased 0.5% in Q3 2024 and 0.3% in the first nine months of 2024, primarily due to lower organic revenues from national account customers.
International revenues decreased 2.5% in Q3 2024 and 9.0% in the first nine months of 2024, mainly due to the impact of divestitures, partially offset by favorable foreign exchange rates.
Gross profit was $244.1 million (37.6% of revenues) in Q3 2024, compared to $245.7 million (37.6% of revenues) in Q3 2023. For the first nine months of 2024, gross profit was $757.0 million (38.3% of revenues), compared to $757.8 million (37.8% of revenues) in the same period of 2023. The decreases were partially due to lower SID commodity-indexed revenues and corresponding margin impact, partially offset by cost savings.
SG&A expenses were $224.6 million (34.6% of revenues) in Q3 2024, compared to $217.3 million (33.3% of revenues) in Q3 2023. For the first nine months of 2024, SG&A was $668.1 million (33.8% of revenues), compared to $654.2 million (32.6% of revenues) in the same period of 2023. The increases were primarily due to higher costs associated with certain key priorities and other significant matters, partially offset by cost savings.
Divestiture losses, net and impairments were $10.5 million (1.6% of revenues) in Q3 2024, compared to $4.2 million (0.6% of revenues) in Q3 2023. For the first nine months of 2024, these costs were $10.5 million (0.5% of revenues), compared to $63.4 million (3.2% of revenues) in the same period of 2023.
Segment Profitability
Adjusted Income from Operations for the North America segment decreased in both the three and nine month periods, primarily due to lower SID commodity-indexed revenues and the corresponding margin impact, partially offset by cost savings.
Adjusted Income from Operations for the International segment decreased in Q3 2024 but increased in the first nine months of 2024. The Q3 decrease was mainly due to lower SID commodity-indexed revenues, partially offset by the impact of divestitures, RWCS pricing, and foreign exchange. The YTD increase was driven by the impact of divestitures, RWCS pricing, and foreign exchange, partially offset by lower SID commodity-indexed revenues.
Adjusted Loss from Operations for Other Costs decreased in both the three and nine month periods, primarily due to cost savings, including operational optimization initiatives, and lower incentive and stock-based compensation.
Liquidity and Capital Resources
Stericycle believes it has sufficient liquidity to support ongoing operations and future growth, with operating cash flows and a $1.2 billion credit facility as its primary sources of liquidity.
As of September 30, 2024, the company had $432.7 million of available capacity in the credit facility. Stericycle was in compliance with its financial covenants, with a credit agreement defined debt leverage ratio of 3.48 to 1.00, below the maximum allowed ratio of 4.00 to 1.00.
In February 2024, Stericycle redeemed all $600 million of its outstanding 2019 Senior Notes, refinancing the debt using the credit facility. This converted the long-term debt from a fixed to a variable interest rate.
Operating cash flows decreased $136.9 million in the first nine months of 2024 compared to the same period in 2023, mainly due to higher accounts receivable, increased payments for litigation and other matters, higher incentive plan payments, and higher tax and interest payments.
Investing cash flows decreased $105.1 million in the first nine months of 2024 compared to the same period in 2023, primarily due to lower cash received from divestitures and higher capital expenditures.
Financing cash flows increased $267.6 million in the first nine months of 2024 compared to the same period in 2023, driven by higher net borrowings on the credit facility to fund the 2019 Senior Notes redemption.
Outlook and Analysis
Stericycle continues to face revenue challenges with certain national account customers, as well as the impact of recent hurricanes on some customers and communities. However, the company’s key business priorities focused on commercial excellence, operational improvements, digital transformation, and strategic capital allocation are aimed at driving margin expansion and delivering value.
The proposed merger with WM has required significant time and resources, and the successful completion of the transaction remains subject to the satisfaction of various closing conditions. If completed, the merger could provide opportunities for synergies and growth, but also carries integration risks that the company will need to manage.
Stericycle’s financial performance has been mixed, with decreases in revenues, gross profit, and segment profitability in some areas, offset by cost savings and other initiatives. The company’s liquidity position remains strong, though operating cash flows have declined due to various one-time items.
Overall, Stericycle appears to be navigating a period of transition, with the proposed merger, operational optimization efforts, and other strategic initiatives intended to position the company for improved profitability and growth in the future. However, the company continues to face headwinds from customer and market challenges that will require careful execution of its key priorities to overcome.
