Stericycle(SRCL) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The company's Q1 2024 financials show decreased revenue, increased net income, and a significant negative shift in operating cash flow Condensed Consolidated Statements of Income Q1 2024 saw a 2.8% revenue decrease to $664.9 million but a 17.0% increase in net income to $13.1 million Q1 2024 vs Q1 2023 Income Statement Highlights | Metric | Q1 2024 (in millions) | Q1 2023 (in millions) | Change | | :--- | :--- | :--- | :--- | | Revenues | $664.9 | $684.3 | -2.8% | | Gross Profit | $254.9 | $261.0 | -2.3% | | Income from Operations | $38.9 | $40.0 | -2.8% | | Net Income | $13.1 | $11.2 | +17.0% | | Diluted EPS | $0.14 | $0.12 | +16.7% | Condensed Consolidated Balance Sheets Total assets grew to $5.44 billion, with a notable increase in accounts receivable and total debt Balance Sheet Summary | Metric (in millions) | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $31.0 | $35.3 | | Accounts receivable, net | $616.4 | $553.9 | | Goodwill | $2,758.0 | $2,755.6 | | Total Assets | $5,435.7 | $5,352.6 | | Total Debt (Current + Long-term) | $1,422.4 | $1,305.2 | | Total Liabilities | $2,912.6 | $2,829.7 | | Total Equity | $2,523.1 | $2,522.9 | Condensed Consolidated Statements of Cash Flows Operating cash flow turned negative to $(54.5) million, a significant decrease from the prior year's inflow Q1 2024 vs Q1 2023 Cash Flow Summary | Activity (in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash from operating activities | $(54.5) | $49.5 | | Net cash from investing activities | $(56.8) | $(34.5) | | Net cash from financing activities | $109.3 | $(11.6) | | Net change in cash | $(4.3) | $4.0 | - The significant decrease in operating cash flow was mainly due to a $64.4 million increase in accounts receivable and a $41.1 million decrease in accrued liabilities[18] - Financing activities included redeeming $600.0 million of senior notes, offset by $951.0 million in proceeds from the credit facility[18] Notes to Condensed Consolidated Financial Statements Notes detail revenue disaggregation, acquisition activity, restructuring charges, debt refinancing, and ongoing legal investigations Q1 Revenue Disaggregation by Service and Segment (in millions) | Category | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | By Service | | | | Regulated Waste and Compliance Services (RWCS) | $447.8 | $451.3 | | Secure Information Destruction Services (SID) | $217.1 | $233.0 | | By Segment | | | | Total North America | $569.2 | $573.4 | | Total International | $95.7 | $110.9 | - In January 2024, the company acquired a southeastern U.S. regulated waste business for a total purchase price of $15.8 million, including $14.0 million in cash[38][39] - In February 2024, the company recognized $5.6 million in severance charges for a workforce reduction as part of an Operational Optimization plan[41] - The company redeemed all $600 million of its 5.375% Senior Notes due in 2024 using borrowings from its revolving credit facility, converting the debt from fixed to variable rate[43][45] - As of March 31, 2024, the company's Credit Agreement Defined Debt Leverage Ratio was 3.51 to 1.00, below the maximum allowed ratio of 4.00 to 1.00[44] - The company is subject to ongoing government investigations, including FCPA compliance monitoring, an SDNY investigation into its former environmental solutions business, and a DEA investigation into its former controlled substances business[54][56][61] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the revenue decline, key business priorities, and operational challenges from a new ERP system implementation Key Business Priorities The company's 2024 key priorities focus on driving margin expansion and strategic capital allocation - The company's 2024 key priorities are focused on driving margin expansion and include: Commercial and Service Excellence, Operational Excellence, Digital Implementation, and Strategic Capital Allocation[72] - A workforce reduction in Q1 2024 resulted in $5.6 million in severance charges and is expected to generate annual savings of $21.0 to $24.0 million[76] - The company's strategic capital allocation now allows for consideration of tuck-in acquisitions and potential share repurchases, while targeting a debt leverage ratio between 2.5x-3.0x[72] Results of Operations A 2.8% total revenue decline was driven by divestitures and lower SID commodity-indexed revenues Q1 2024 Revenue Change Components vs. Q1 2023 | Service | Total Change | Organic Growth | Acquisition | Divestitures | Foreign Exchange | | :--- | :--- | :--- | :--- | :--- | :--- | | RWCS | (0.8)% | 2.1% | 0.2% | (3.5)% | 0.5% | | SID | (6.8)% | (6.3)% | 0.1% | (1.1)% | 0.3% | | Total | (2.8)% | (0.8)% | 0.1% | (2.7)% | 0.4% | - The decline in SID organic revenue was mainly due to lower commodity-indexed revenues of $19.8 million, partially offset by higher service revenues[88] - North America Adjusted Income from Operations decreased 7.0% to $149.1 million, primarily due to lower SID commodity-indexed revenues and higher bad debt expense[95][96] - International Adjusted Income from Operations increased 20.4% to $12.4 million, driven by favorable RWCS pricing and the impact of divestitures[95][97] - SG&A expenses were flat at $216.0 million but increased as a percentage of revenue to 32.5% from 31.6%, due to higher costs for operational optimization and litigation, and higher bad debt expense[92] Liquidity and Capital Resources Operating cash flow declined significantly due to ERP-related billing delays, increasing Days Sales Outstanding (DSO) - As of March 31, 2024, the company had approximately $0.4 billion of available capacity in its $1.2 billion Credit Facility[103] - Operating cash flow decreased by $104.0 million YoY to an outflow of $54.5 million, mainly due to a $63.1 million increase in accounts receivable caused by billing and collection delays from the U.S. RWCS ERP launch[106] - Days Sales Outstanding (DSO), net of deferred revenues, increased to 76 days at March 31, 2024, compared to 55 days at March 31, 2023, driven by ERP implementation-related issues[107] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates, commodity prices, and foreign currency rates - The company's primary market risks are changes in interest rates, commodity prices (SOP, diesel fuel), and foreign currency rates[113] - A sensitivity analysis shows that a 100 basis point increase in interest rates on variable rate debt would increase annual pre-tax interest expense by about $8.8 million[114] Controls and Procedures Disclosure controls and procedures were deemed effective with no material changes to internal controls during the quarter - The company's disclosure controls and procedures were deemed effective as of March 31, 2024[117] - No changes occurred in the first quarter of 2024 that have materially affected or are reasonably likely to materially affect internal control over financial reporting[118] PART II. OTHER INFORMATION Legal Proceedings This section references Note 9 for details on ongoing legal matters, including government investigations - Information regarding legal proceedings is detailed in Note 9 of the Condensed Consolidated Financial Statements[121] Risk Factors No material changes to the risk factors disclosed in the company's 2023 Form 10-K are reported - There have been no material changes to the risk factors disclosed in the 2023 Form 10-K[122] Unregistered Sales of Equity Securities and Use of Proceeds The company confirms no sales of unregistered equity securities occurred during the first quarter of 2024 - No sales of unregistered equity securities occurred during Q1 2024[123] Other Information No directors or officers adopted or terminated Rule 10b5-1 trading plans during the first quarter - No directors or officers adopted or terminated any Rule 10b5-1 trading plans in Q1 2024[124] Exhibits This section lists all exhibits filed with the report, including required CEO and CFO certifications - The report includes exhibits such as the CEO and CFO certifications (Exhibits 31.1, 31.2, 32) and an amended Executive Severance and Change in Control Plan (Exhibit 10.3)[126]