Stericycle(SRCL) - 2023 Q4 - Annual Report

Part I Business Stericycle provides regulated waste and information destruction services through North America and International segments, prioritizing portfolio optimization, efficiency, and debt reduction - Stericycle operates through two segments, North America and International, providing Regulated Waste and Compliance Services (RWCS) and Secure Information Destruction (SID) services[21][22] Revenues by Service Category (2023 vs 2022) | Service Category | Segment | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | :--- | | Regulated Waste and Compliance Services | North America | $1,474.4 | $1,468.8 | | Secure Information Destruction Services | North America | $781.4 | $794.3 | | Total North America | | $2,255.8 | $2,263.1 | | Regulated Waste and Compliance Services | International | $301.4 | $329.4 | | Secure Information Destruction Services | International | $102.1 | $112.2 | | Total International | | $403.5 | $441.6 | | Total Revenues | | $2,659.3 | $2,704.7 | - In 2023, the company divested eight businesses for aggregate net proceeds of approximately $85 million as part of its portfolio optimization strategy, and in January 2024, it acquired a U.S. regulated waste business for approximately $16 million[25][26] - Key business priorities include quality of revenue, operational efficiency, ERP implementation (deployed in U.S. RWCS in Q3 2023), portfolio optimization, and debt reduction (debt leverage ratio reduced to 2.85 times)[37] - In 2023, the Secure Information Destruction business collected approximately 462,000 tons of Sorted Office Paper (SOP), an 11.7% decrease from 2022, with the average SOP price at $174 per ton, a 26.0% decrease from 2022[44] - The company maintains a strong customer base with a revenue retention rate of approximately 90% and long-term contracts typically ranging from three to five years[29][47] - As of December 31, 2023, the company's workforce comprised over 13,500 team members, and the voluntary turnover rate improved to approximately 22% in 2023 from 28% in 2022[53][54] Risk Factors The company faces significant market, operational, regulatory, and financial risks, including commodity price volatility, ERP implementation challenges, extensive governmental oversight, and substantial debt obligations - The business is affected by the volatile demand and price for recycled paper (SOP), a commodity, with a decline in paper tonnage collected observed due to increased use of digital technology and remote work[94] - Complications with the ongoing ERP system modernization could negatively impact business operations, financial reporting, and internal controls, as the 2023 RWCS deployment impacted the timing of billing and collections[102] - The company is subject to extensive governmental regulation, and failure to comply or obtain necessary permits could result in significant liabilities, adverse publicity, and harm to the business[106][107][108] - As of December 31, 2023, the company had goodwill of $2.76 billion, and changes in market conditions or business performance could lead to significant non-cash impairment charges[133] - The company has substantial indebtedness ($1.31 billion as of Dec 31, 2023), and covenants in its Credit Agreement and Senior Notes could restrict operations and the ability to pursue business opportunities, with a failure to comply potentially leading to default and acceleration of debt[138][140][143] - The company is subject to pending legal proceedings and government investigations, including matters related to the FCPA, environmental statutes, and the Controlled Substances Act, which may result in material liability[118][120][121] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[160] Cybersecurity Stericycle has an integrated cybersecurity risk management program overseen by the Audit Committee of the Board of Directors, with no material incidents reported - Cybersecurity risk management is integrated into the company's broader risk management framework and involves external experts for evaluation and testing[162][163] - The Audit Committee of the Board of Directors leads oversight of cybersecurity risks, receiving regular updates from management, including the CIO[167][169] - The company reports that it has not encountered cybersecurity challenges that have materially impaired its operations or financial standing[165] Properties The company maintains approximately 396 global facilities and a vehicle fleet, which are deemed adequate and subject to ongoing capital investments for modernization - The company operates a worldwide network of approximately 396 facilities, including treatment plants, processing centers, and transfer stations[34] - Management believes current properties are sufficient for operations and continues to modernize facilities and fleet through capital investments[171] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 19 of the Consolidated Financial Statements - Information regarding legal proceedings is incorporated by reference from Note 19 of the Financial Statements[172] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[173] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stericycle's common stock trades on Nasdaq, with no cash dividends or share repurchases made from 2021-2023, and its stock performance has lagged key indices - The company's common stock is listed on the Nasdaq Global Select Market (SRCL)[176] - No cash dividends were paid on common stock during 2023, 2022, or 2021[176] - The company did not purchase any of its common stock during 2023, 2022, or 2021[176] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Stericycle's revenues decreased to $2.66 billion due to divestitures, but organic revenue grew, while a net loss was reported primarily from divestiture losses, despite improved operating cash flow and reduced debt leverage Results of Operations In 2023, total revenues decreased to $2.66 billion due to divestitures, despite organic growth, leading to a net loss of $21.3 million primarily from a significant divestiture loss Revenue Components of Change (2023 vs 2022) | Service Category | Organic Growth % | Divestitures % | Foreign Exchange % | Total Change % | | :--- | :--- | :--- | :--- | :--- | | Regulated Waste and Compliance Services | 4.2% | (5.3%) | 0.1% | (1.2%) | | Secure Information Destruction Services | (1.7%) | (0.6%) | (0.2%) | (2.5%) | | Total Revenues | 2.2% | (3.8%) | 0.0% | (1.7%) | - Gross profit decreased by $11.0 million to $1,014.6 million in 2023, but as a percentage of revenues, gross profit margin improved to 38.2% from 37.9% in 2022, driven by productivity initiatives and pricing actions, partially offset by lower SID commodity revenues and higher fleet costs[217] - SG&A expenses decreased by $13.6 million to $873.9 million in 2023, primarily due to the impact of divestitures and lower bad debt expense, partially offset by increased incentive compensation[218] - The company recorded a net loss on divestitures of $63.4 million in 2023, a significant shift from the $15.6 million net gain recorded in 2022[219] Segment Adjusted Income from Operations (2023 vs 2022) | Segment | 2023 (in millions) | 2022 (in millions) | Change % | | :--- | :--- | :--- | :--- | | North America | $619.0 | $607.1 | 2.0% | | International | $38.2 | $34.1 | 12.0% | | Other Costs | $(341.7) | $(317.5) | 7.6% | Liquidity and Capital Resources The company's liquidity is supported by improved operating cash flow of $243.3 million and a $1.2 billion credit facility, with plans to refinance $600 million Senior Notes Cash Flow Summary (2023 vs 2022) | Cash Flow Activity | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Net cash from operating activities | $243.3 | $200.2 | | Net cash from investing activities | $(43.8) | $(84.6) | | Net cash from financing activities | $(220.4) | $(111.0) | - The increase in operating cash flow was primarily driven by lower FCPA settlement payments ($72.8 million lower YoY) and reduced annual incentive payments, partially offset by an increase in accounts receivable[232] - Days Sales Outstanding (DSO), net of deferred revenues, rose to 66 days at year-end 2023 from 55 days at year-end 2022, mainly due to the timing of U.S. RWCS customer billing and collections associated with the ERP implementation[233] - The company had $1.11 billion of available capacity under its $1.2 billion Credit Facility as of December 31, 2023[227] - On February 1, 2024, the company issued a redemption notice for all $600.0 million of its outstanding Senior Notes due in 2024, with a redemption date of March 14, 2024, intending to use its Revolving Credit Facility[227][391] Critical Accounting Policies and Estimates Management identifies critical accounting policies including goodwill impairment and income taxes, with no goodwill impairment recognized in 2023 and a reduced valuation allowance for deferred tax assets - The allowance for doubtful accounts was $44.7 million as of December 31, 2023, down from $53.3 million in 2022[250] - The annual goodwill impairment test was performed as of October 1, 2023, using a qualitative assessment for the RWCS U.S. unit and a quantitative assessment for the Domestic SID and Europe units, with no impairment recognized[256][257][258] - As of the October 1, 2023 assessment, the estimated fair value of each reporting unit exceeded its carrying value by at least 40%, indicating a significant cushion against impairment[261] - The company records a valuation allowance against deferred tax assets that are not more likely than not to be realized, with the valuation allowance at year-end 2023 at $36.8 million, a decrease from $67.2 million in 2022, primarily due to divestitures[267] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from interest rate fluctuations, commodity price volatility (SOP, diesel), and foreign currency exposure, impacting its financial performance - A hypothetical 100 basis point increase in interest rates on variable rate debt would increase annual pre-tax interest expense by approximately $3.5 million[273] - The company is subject to market risks from commodity price changes, including SOP, diesel fuel, and utilities, which can impact revenues and margins[274] - As of December 31, 2023, the company had cumulative currency translation adjustment losses of approximately $184.5 million related to its foreign operations[276] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023, 2022, and 2021, including a net loss of $21.4 million in 2023, with an unqualified auditor opinion Consolidated Financial Statements The consolidated financial statements show a $21.4 million net loss in 2023, stable total assets of $5.35 billion, and strong operating cash flow of $243.3 million Consolidated Statement of (Loss) Income Highlights | Metric (in millions, except EPS) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $2,659.3 | $2,704.7 | $2,646.9 | | Gross Profit | $1,014.6 | $1,025.6 | $1,017.2 | | Income from Operations | $77.3 | $153.7 | $72.3 | | Net (Loss) Income Attributable to Stericycle | $(21.4) | $56.0 | $(27.8) | | Diluted (Loss) Earnings Per Share | $(0.23) | $0.61 | $(0.30) | Consolidated Balance Sheet Highlights | Metric (in millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $671.5 | $558.7 | | Goodwill | $2,755.6 | $2,784.9 | | Total Assets | $5,352.6 | $5,334.1 | | Total Current Liabilities | $718.0 | $621.9 | | Long-term debt, net | $1,277.8 | $1,484.0 | | Total Liabilities | $2,829.7 | $2,909.6 | | Total Equity | $2,522.9 | $2,424.5 | Consolidated Statement of Cash Flows Highlights | Metric (in millions) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $243.3 | $200.2 | $303.1 | | Net cash from investing activities | $(43.8) | $(84.6) | $(90.1) | | Net cash from financing activities | $(220.4) | $(111.0) | $(207.9) | | Cash and cash equivalents at end of year | $35.3 | $56.0 | $55.6 | Note 4 – Restructuring, Divestitures, and Asset Impairments In 2023, the company divested multiple international operations, resulting in a total pre-tax net loss of $63.4 million, including significant currency translation losses - In 2023, the company divested operations in multiple international locations, including Brazil, Republic of Korea, Australia, and Singapore[361][362] 2023 Divestiture Losses (Gains), Net | Divestiture | Total Loss (Gain) (in millions) | | :--- | :--- | | Romania Operations | $4.2 | | UAE Joint Venture | $0.5 | | Netherlands Dental Operations | $1.0 | | Republic of Korea Operations | $(50.8) | | Australia and Singapore Operations | $7.3 | | Brazil Operations | $96.2 | | International Container Manufacturing | $5.0 | | Total Divestiture losses, net | $63.4 | - The company recognized $4.1 million in Operational Optimization charges in 2023, primarily for severance and facility closure costs[357] Note 9 – Debt As of December 31, 2023, total debt was $1.31 billion, with the company in compliance with covenants and planning to refinance $600 million Senior Notes Debt Composition | Debt Instrument | Dec 31, 2023 (in millions) | Dec 31, 2022 (in millions) | | :--- | :--- | :--- | | $1.2B Credit Facility | $31.0 | $154.1 | | $125M Term Loan | $125.0 | $200.0 | | $600M Senior Notes (due 2024) | $600.0 | $600.0 | | $500M Senior Notes (due 2029) | $500.0 | $500.0 | | Other Debt | $49.2 | $63.3 | | Total Debt | $1,305.2 | $1,517.4 | - The company was in compliance with its financial covenants as of December 31, 2023, with a leverage ratio of 2.85 to 1.00[384] - The company intends to refinance its $600 million Senior Notes due in July 2024 using its revolving credit facility and issued a redemption notice on February 1, 2024[391] Note 19 – Legal Proceedings Stericycle is involved in various legal and regulatory matters, including ongoing FCPA compliance monitoring and investigations by the U.S. Attorney and DEA - The company has substantially completed its payment obligations related to the 2022 FCPA settlement and is under a two-year independent compliance monitorship followed by one year of self-reporting[452] - An investigation by the U.S. Attorney for the Southern District of New York and the EPA into the company's former Domestic Environmental Solutions business is ongoing, with an accrual made that is not material[453] - The company is cooperating with an ongoing criminal and civil investigation by the DEA and U.S. Attorney's Office for the Eastern District of California related to its former ESOL Retail Controlled Substances Business, for which the company cannot estimate a reasonably possible loss[459][460] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[464] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[465] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[468] - The company's independent auditor, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of internal control over financial reporting[472] Other Information No directors or officers adopted or terminated Rule 10b5-1 trading plans during the fourth quarter of 2023 - No directors or officers adopted or terminated any Rule 10b5-1 trading plans during the fourth quarter of 2023[479] Disclosures Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[480] Part III Part III incorporates information on directors, executive officers, corporate governance, compensation, security ownership, and accountant fees by reference from the 2024 proxy statement, with 5.6 million securities available for future issuance under equity plans Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 proxy statement - Required information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[483][484][486] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2024 proxy statement - Required information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[487] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2024 proxy statement, with 5.6 million securities available for future issuance under equity compensation plans - Required information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[488] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise (in millions) | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance (in millions) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1.8 | $64.88 | 5.6 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's 2024 proxy statement - Required information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[492][493] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2024 proxy statement - Required information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[494] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - Lists all financial statements, schedules, and exhibits filed with the Form 10-K[497][498] Form 10-K Summary This item is not applicable and contains no information - None[502]