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13: R3 Condensed Consolidated Statements of Comprehensive HTML 55K
Income (Loss)
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Income (Loss) (Parenthetical)
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Equity
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Accounting Policies
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ACCOUNTING POLICIES - Additional Information
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of Revenues Disaggregated by Service, Primary
Geographical Regions and Timing of Revenue
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Narrative (Details)
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Schedule of Impairments (Details)
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Carrying Amount of Goodwill (Detail)
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Assets (Detail)
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Carrying Amount of Intangible Assets (Detail)
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Basic and Diluted Loss Per Share (Detail)
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Antidilutive Securities Excluded from EPS
Calculation (Detail)
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Concerning Company's Reportable Segments (Detail)
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Primary Measure of Segment Profitability Adjusted
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Environmental Liabilities (Detail)
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(State
or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
i2355 Waukegan Road
iBannockburn, iIllinoisi60015
(Address of principal executive offices, including zip code)
(i847) i367-5910
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.01 per share
iSRCL
iNasdaq
Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,”"smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer ☒
Smaller reporting company i☐
Accelerated
filer ☐
Emerging growth company i☐
Non-accelerated filer ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
Unless the context requires otherwise, the “Company,”“Stericycle,”"we,""us" or "our" refers to Stericycle, Inc. on a consolidated basis. The Company also uses several other terms in this Quarterly Report on Form 10-Q, most of which are
explained or defined below:
Income from Operations adjusted for certain items discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Harsco Corporation and CEI Holding LLC, a Delaware limited liability company and subsidiary of Harsco Corporation
CARES Act
U.S. Coronavirus Aid, Relief, and Economic Security Act enacted into law on March 27, 2020
Clean Air Act
The Clean Air Act of 1970
Consolidated Leverage Ratio
Consolidated Leverage Ratio means, as of any date of determination, the ratio of (a) (i) Consolidated Funded Indebtedness as of such date minus (ii) Unrestricted Cash
as of such date to (b) Consolidated EBITDA for the period of four fiscal quarters most recently ended on or prior to such date, as defined in the Fifth Amendment.
COR
Cost of revenues
COSO Framework
Internal Control Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
COVID-19
The global novel coronavirus disease 2019 outbreak, which the World Health Organization declared as to be a pandemic
Credit Agreement
Credit Agreement dated November
17, 2017 by and among the Company and certain of its subsidiaries named therein, Bank of America, N.A., as administrative agent, and the other financial institutions party thereto
CRS
Communication and Related Services
DAQ
Division of Air Quality
DEA
U.S. Drug Enforcement Agency
Disposal Group
The divestiture of Domestic Environmental Solutions
DOJ
U.S.
Department of Justice
Domestic Environmental Solutions
Hazardous Waste Solutions and Manufacturing and Industrial Services
DSO
Days Sales Outstanding, defined as the average number of days that it takes a company to collect payment after a sale has been made computed as the last twelve months of Revenues for the quarter and period ended DSO, respectively, divided by the Accounts Receivable balance.
DTSC
Department of Toxic Substances Control
EBITDA
Earnings before interest, tax, depreciation and amortization
EPA
U.S.
Environmental Protection Agency
ERP
Enterprise Resource Planning
Exchange Act
U.S. Securities Exchange Act of 1934
Expert Solutions
Recall and Return Services
FASB
Financial Accounting Standards Board
FCPA
U.S. Foreign Corrupt Practices Act
Fourth Amendment
Fourth Amendment to the Credit Agreement,
dated as of June 14, 2019
Fifth Amendment
Fifth Amendment to the Credit Agreement, dated as of February 25, 2020
HSA
Healthcare Service Agreement with Buyer
International
Operating segment including Europe, Middle East, Asia Pacific and Latin America Business operations outside of North America
IRS
U.S. Internal Revenue Service
North America
Operating
segment in North America, including Puerto Rico
NOV
Notice of Violation
Other
Represents corporate enabling and shared services functions
PFA
Pre-filing agreement
Purchase Agreement
Stock Purchase Agreement, dated as of February 6, 2020, by and between Stericycle, Inc., and the Buyer
PSU
Performance-based restricted stock unit
ROU
Right-of-use
RSU
Restricted
stock unit
RWCS
Regulated Waste and Compliance Services
SEC
U.S. Securities and Exchanges Commission
Senior Credit Facility
The Company's $1.2 billion senior credit facility due in 2022 granted under the terms of the Credit Agreement
Senior Notes
5.375% Senior Notes due July 2024
SG&A
Selling, general and administrative
expenses
SID
Secure Information Destruction Services
SOP
Sorted office paper
SQ Settlement
Small quantity medical waste customers class action settlement of $295.0 million
Term Facility
Aggregate amount of commitments made by any lender under the terms of the Credit Agreement
Term Loans
Advances made by any lender under the Term Facility
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In millions, except per share data and unless otherwise indicated)
i
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of Significant Accounting Policies
i
Basis of Presentation: The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Stericycle, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The
Company's Condensed Consolidated Financial Statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenues and expenses of all wholly owned subsidiaries and majority-owned subsidiaries over which the Company exercises control. Outside shareholders' interests in subsidiaries are shown on the Condensed Consolidated Financial Statements as “Noncontrolling interests."
The accompanying unaudited Condensed Consolidated Financial Statements as of September 30, 2020 and for the three and
nine months ended September 30, 2020 and 2019 have been prepared pursuant to the rules and regulations of the SEC for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements prepared in conformity with U.S. GAAP. In the opinion of management, however, all adjustments, consisting of normal recurring adjustments necessary to present fairly the results of operations, financial position and cash flows have been made. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2019 Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year or any other period.
iUse
of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Some areas where the Company makes estimates include its allowance for doubtful accounts, credit memo reserve, accrued employee health and welfare benefits, environmental liabilities, stock-based compensation expense, income tax liabilities, accrued auto and workers’ compensation insurance claims, operating lease ROU assets and lease liabilities, intangible asset valuations, and long-lived asset and goodwill impairment assessments. Actual results could differ from the Company's
estimates.
i
Allowance for Doubtful Accounts: The Company reports accounts receivable at their net realizable value, which is management’s best estimate of the cash that will ultimately be received. The Company maintains an allowance for doubtful accounts to reflect the expected uncollectability of accounts
receivable based on historical collection data and specific risks identified among uncollected accounts, as well as management’s expectation of future economic conditions. If current or expected future economic trends, events, or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. The adequacy of allowances for uncollectible accounts is reviewed at least quarterly and adjusted as necessary based on such reviews. Management’s judgment is required to assess the collectability of an account, based on detailed analysis of the aging of the receivables, the creditworthiness ofthe Company’scustomers, historical collection trends,andcurrentand future expectedeconomic trends.
Accounts receivable written off in subsequent periods can differ from the allowance for doubtful accounts provided, but historically the Company’s provision has been adequate.
The allowance for doubtful accounts has decreased to $i55.4
million as of September 30, 2020 from $i67.9 million as of December 31, 2019. This decline is principally due to write offs of uncollectible receivables in Brazil and due to the divestiture of the Domestic Environmental Solutions business on April 6, 2020. See Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairmentsfor
further information.
i
Adoption of New Accounting Standards
Financial Instrument Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) associated with the measurement of
credit losses on financial instruments. ASU 2016-13 replaces the prior incurred loss impairment methodology of recognizing credit losses when a loss was probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. The amended guidance was effective for the Company on January 1, 2020.
The Company recognized a net decrease to Retained earnings in the Condensed Consolidated Financial Statements of $ii2.5/
million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.
Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issued ASU 2018-15, “Intangibles -Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs for internal-use software. The accounting for any hosting contract is unchanged. ASU 2018-15 was effective on January 1, 2020 and was adopted prospectively for implementation costs incurred after the date of adoption. The adoption of ASU 2018-15 did not have a material impact on the Condensed Consolidated Financial Statements.
Accounting Standards Issued But Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU
2019-12”). ASU 2019-12 attempts to simplify aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption is permitted for all entities. The Company plans to adopt ASU 2019-12 effective January 1, 2021. The ASU is currently not expected to have a material impact on our Condensed Consolidated Financial Statements.
During the three month period ended June 30, 2020, we updated our service lines to include Hazardous Waste Solutions Services and Manufacturing and Industrial Services in RWCS. This reclassification was driven by the divestiture of the Domestic Environmental Solutions business. See Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments. In addition, during the three month period ended June 30, 2020, we updated segment reporting to reflect U.S. CRS as part of the North America segment. See Part I, Item I. Financial Statements; Note 8 Segment Reporting in the Condensed Consolidated
Financial Statements for further information. For 2019 periods, amounts have been recast to reflect these changes.
The Company’s incremental direct costs of obtaining a contract, which consist primarily of sales incentives, are deferred and amortized to SG&A over a weighted average estimated period of benefit of i6.4
years.
During the three months ended September 30, 2020 and 2019, the Company amortized $i2.7 million and $i2.2
million, respectively, of deferred sales incentives to SG&A.
During the nine months ended September 30, 2020 and 2019, the Company amortized $i7.8 million and $i6.5
million, respectively, of deferred sales incentives to SG&A.
i
Total contract acquisition costs, net of accumulated amortization, were classified as follows:
NOTE
3 – RESTRUCTURING, DIVESTITURES, AND IMPAIRMENTS
Restructuring - Business Transformation
Stericycle is focused on driving long-term growth, profitability and delivering enhanced shareholder value.
During the nine months ended September 30, 2019, the Company recognized $i5.3
million in charges related to executive and employee termination costs, primarily within Other as part of SG&A in the Condensed Consolidated
Statements of Loss. As of September 30, 2020, approximately $i1.2 million in future payments remained accrued as part of Accrued Liabilities on the Condensed Consolidated Balance Sheets.
Divestitures
On August 3, 2020, Stericycle entered into an agreement and completed the sale
of its operations in Argentina for proceeds of approximately $i3.9 million. Revenue of Argentina operations were approximately i1% of our consolidated
annual revenues for 2019. The transaction resulted in a third quarter divestiture pre-tax loss of $i112.4 million, of which $i87.2 million
related to the balance of cumulative currency translation adjustment.
On April 6, 2020, the Company completed the sale of all of the outstanding equity interests of its Domestic Environmental Solutions business (the “Transaction”) to Buyer for approximately $i462.5 million (subject to customary adjustments for working capital and other adjustments), pursuant to the
Purchase Agreement, dated February 6, 2020. As previously announced, the Purchase Agreement provided for the divestiture of the Company’s Domestic Environmental Solutions business, reported in the North America segment, exclusive of the Company’s healthcare hazardous waste services and unused consumer pharmaceutical take-back services, to Buyer. In connection with the Purchase Agreement, the Company entered into an HSA and TSA with the Buyer for a period of i7
years and i6 months, respectively. The Company allocated and deferred a portion of the Transaction proceeds, $i17.7 million
related to the HSA and $i1.5 million related to the TSA, which will be recognized over the applicable duration of the HSA and TSA periods, subject to specific agreement provisions, thereby offsetting the expenses incurred to deliver the respective services. The allocated proceeds are reflected as an operating cash flow on the Condensed Consolidated Statement of Cash Flows, as they are advances received for services to be provided prospectively.
In the
first quarter of 2020, the Company recognized an impairment charge of $i58.3 million, inclusive of $i10.8
million of related deal costs for the Transaction. In the second and third quarters of 2020, the Company recognized an incremental pre-tax loss (gain) of $i3.8 million and $(i8.3) million,
respectively, primarily driven by working capital adjustments based upon the terms of the Purchase Agreement that have now concluded with an associated payment of $i9.7 million to the Buyer in September 2020. These charges, net are reported as Divestiture losses (gains), net in the Company’s Condensed Consolidated Statements of Loss. Further, the Company released a $i1.7 million
benefit associated with contingent consideration related to a prior acquisition agreement connected with the divested business (Fair value - Level 3) that is reported in SG&A in the Company’s Condensed Consolidated Statements of Loss.
During the nine months ended September 30, 2019, the Company completed the sale of the its U.K. based texting business, a component of the International segment for proceeds of $i14.9 million,
including a $i1.3 million note receivable that was due in six months from the closing of the transaction, resulting in a pre-tax gain of approximately $i5.1 million,
which is recognized in Divestiture losses (gains), net in the Condensed Consolidated Statements of Loss.
During September 2019, the Company approved plans to sell its TAS business in North America and its retail pharmaceutical returns business in the U.S. and Puerto Rico. Accordingly, the assets and liabilities for these businesses were classified as held for sale resulting in a $ii42.3/ million
impairment charge in the three and nine months ended September 30, 2019. These businesses are part of CRS, which is presented in the North America reportable segment. In October 2019, the Company entered into definitive agreements and completed the sales of these businesses for cash consideration of $i36.4 million.
During September
2019, the Company also approved a plan to sell substantially all of its operations in Mexico. Accordingly, the assets and liabilities for these operations were classified as held for sale resulting in a $ii40.2/
million impairment charge in the three and nine months ended September 30, 2019. In October 2019, the Company entered into a definitive agreement and completed the sale of the Mexico operations for nominal consideration. These operations are presented in the International RWCS reportable segment. The cumulative currency translation adjustment of $i18.0 million
was included as part of the carrying value of the disposal group when measuring the impairment charge.
Operational
optimization impairments are associated with our actions to reduce operating costs and optimize operations. In the three and nine months ended September 30, 2020 our International reportable segment includes charges primarily related to the discontinuation of a service line in the U.K. In the three and nine months ended September 30, 2019 our International reportable segment includes charges related to impairments of permits and other long-lived assets in Europe and Latin America and our North America reportable segment for charges associated with a site movement.
Asset impairments in the three and nine months ended September 30, 2020 our North
America reportable segment includes charges associated with rationalization of software application assets and intangible assets as a result of a discontinuation of a certain service line, and our International reportable segment includes charges associated with certain property, plant and equipment assets and permits primarily in the U.K.
i
NOTE
4 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill:
i
Changes in the carrying amount of goodwill by reportable segment were as follows:
During
the first quarter of 2019, there were business, market, and strategic developments which negatively impacted the estimated cash flows of our Latin America reporting unit and triggered an interim assessment as of March 31, 2019. The Company determined that the Latin America reporting unit’s carrying value was in excess of its estimated fair value and recognized $i20.9 million of non-cash goodwill impairment, resulting
in ino remaining goodwill in the Latin America reporting unit.
The
estimated amortization expense for each of the next five years (based upon exchange rates at September 30, 2020) is as follows for the years ending December 31:
In millions
2020 (remainder)
$
i29.7
2021
i114.6
2022
i113.2
2023
i112.4
2024
i110.9
/
i
NOTE
5 – LONG-TERM DEBT
i
The Company’s long-term debt consisted of the following:
The estimated fair value of our debt approximated $i2.03 billion and $i2.73
billion as of September 30, 2020 and December 31, 2019, respectively. These fair value amounts were estimated using an income approach by applying market interest rates for comparable instruments and developed based on inputs classified as Level 2 within the fair value hierarchy.
On February 25, 2020, the Company executed a Fifth Amendment, which amended the Credit Agreement to, among other things:
•increase the maximum allowable Consolidated Leverage Ratio to i5.00
to 1.00 until December 31, 2021 and i4.50 to 1.00 thereafter.
•upon the consummation of the divestiture of the Domestic Environmental Solutions business Disposal Group, each of the foregoing maximum permitted Consolidated Leverage Ratio levels were reduced to i4.75
to 1.00 until December 31, 2021 and i4.25 to 1.00 thereafter.
•allow for continuation of the $i200.0 million
of cash add backs to EBITDA through December 31, 2020, and addbacks of $i100.0 million until December 31, 2021, with no further addbacks thereafter.
•increase the
leverage ratio pricing tier of greater than i4.50 to 1.00 by i0.125%.
•grant a first-priority
security interest to the administrative agent for the benefit of the lenders in substantially all of the personal property of the Company and certain of its material domestic subsidiaries, including certain equity interests held by those entities.
In the nine months ended September 30, 2020 and in connection with the Fifth Amendment, the Company incurred issuance costs of $i1.7
million, of which $i0.4 million has been charged to Interest expense, net. The remainder was capitalized as unamortized debt issuance costs and is being amortized to Interest expense, net over the remaining term of the Credit Agreement.
The Company may make prepayments against the amended Senior Credit Facility, in whole or in part, without premium or penalty. The Company
would be required to prepay certain outstanding amounts in the event of certain circumstances or transactions. In April 2020, with the net proceeds generated from the divestiture of the Domestic Environmental Solutions business, the Company made principal repayments of approximately $i430.0 million, which excluded certain transaction costs, final working capital adjustments, or other adjustments associated with the divestiture.
As
of September 30, 2020, the Company was in compliance with its Consolidated Leverage Ratio covenant, with an actual ratio of i3.75 to 1.00, which was below the allowed maximum ratio of i4.75
to 1.00 as set forth in the Fifth Amendment. On April 6, 2020, the Company completed the divestiture of the Domestic Environmental Solutions business. Therefore, effective April 6, 2020, the Consolidated Leverage Ratio decreased by i0.25 to i4.75
to 1.00 for fiscal quarters ending on or before December 31, 2021 and i4.25 to 1.00 for fiscal quarters ending on or after March 31, 2022.
Given our current leverage position, we believe that we should be able to operate within our covenant thresholds, but due to the unpredictability of the COVID-19 pandemic and situations outside our control, it is reasonably likely we could exceed this Consolidated Leverage Ratio threshold
at some point in the next 12 months. This risk can be mitigated and potentially managed through appropriate spending controls, divestitures, restructuring the Company’s existing indebtedness, amending the Credit Agreement, or seeking temporary relief from the Consolidated Leverage Ratio covenant from the Company’s lenders.
A failure to comply with these covenant provisions could result in an event of default. Upon an event of default, unless waived, the lenders could elect to terminate their commitments, cease making further loans, and/or cause their loans to become due and payable in full, foreclose against the assets securing the debt under our Credit Agreement and force us and our subsidiaries
into bankruptcy or liquidation.
In the second quarter 2019, the Company completed the following transactions:
a)Issued $i600.0 million at par of aggregate principal Senior Notes, due July 2024, In connection with the issuance of the Senior Notes the Company incurred $i7.1 million
of direct issuance costs, which have been capitalized in unamortized debt issuance costs and are being amortized to Interest expense, net over the term of the Senior Notes.
b)Executed the Fourth Amendment which amended the Credit Agreement. In connection with the Fourth Amendment, the Company incurred issuance costs of $i2.0 million, of which $i0.2 million
had been charged to Interest expense, net and the remainder capitalized as
unamortized debt issuance costs and are being amortized to Interest expense, net over the remaining term of the Credit Agreement.
c)Repaid
in full $i1.075 billion of the outstanding private placement notes using the net proceeds from the Senior Notes and the incremental Term Loan together with additional borrowings under the Senior Credit Facility. In connection with the repayment of the private placement notes, the Company incurred a loss on early extinguishment of debt of $i23.1 million
comprising make whole premiums, payable under the terms of certain of the private placement notes, of $i20.4 million and the write-off of $i2.7 million
of unamortized debt issuance costs associated with the private placement notes.
i
Amounts committed to outstanding letters of credit and the unused portion of the Company’s Senior Credit Facility were as follows:
Outstanding letters of credit under Senior Credit Facility
$
i80.7
$
i33.0
Unused
portion of the Senior Credit Facility
i591.7
i408.3
/
i
NOTE
6 – INCOME TAXES
The Company reported income tax expense of $i6.5 million for the three months ended September 30, 2020 compared to a benefit of $i8.6
million for the three months ended September 30, 2019. The effective tax rates for the three months ended September 30, 2020 and 2019 was an expense of i8.7% and a benefit of i12.7%,
respectively. The results for the three months ended September 30, 2020 reflect the impact associated with non-deductible divestiture charges. The effective tax rate for the three months ended September 30, 2019 is principally due to the impact of certain non-deductible impairments of assets held-for-sale and the impact of valuation allowances recognized against current losses in several countries offset by the impact of certain tax reserves adjustments.
The Company reported an income tax benefit of $i23.2
million for the nine months ended September 30, 2020 compared to a tax benefit of $i8.0 million for the nine months ended September 30, 2019. The effective tax rates for the nine months ended September 30, 2020 and 2019, were i18.1%
and i5.9%, respectively. The results for the nine months ended September 30, 2020, reflected a $i39.4
million tax benefit related to the U.S. CARES Act (see further description below), the tax impact from divestiture charges which are primarily non-deductible, and discrete tax expense associated with stock-based compensation. The effective tax rate for the nine months ended September 30, 2019, is principally due to the impact of certain non-deductible impairments of assets held-for-sale and goodwill, valuation allowances recognized against current period losses in several countries, partially offset by the impact of certain tax reserves adjustments.
On March 27, 2020, President Donald Trump signed into law the U.S. CARES Act, which is a substantial tax-and-spending package intended to provide additional economic
stimulus to address the impact of the COVID-19 pandemic. The U.S. CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. As a result of the U.S. CARES Act tax law changes, in the nine months ended September 30, 2020, we recognized a $i39.4
million tax benefit related to our ability to carryback net operating losses to prior years that had higher tax rates. In conjunction with previously recognized net operating losses, the total refunds we anticipate from the U.S. CARES Act in 2020 are approximately $i100 million. In July 2020, the Company received approximately half
of the expected refund amounts. The impact of the CARES Act in prospective periods may differ from our estimate as of September 30, 2020 due to changes in interpretations and assumptions, guidance that may be issued and actions the Company may take in response to the CARES Act. The CARES Act is highly detailed, and the Company will continue to assess the impact that various provisions will have on its business.
Similar tax provisions and other stimulus measures have been granted either before or after September 30, 2020 by certain foreign and U.S. state jurisdictions, which the Company
continues to evaluate and apply, if applicable.
The
Company filed a PFA with the IRS related to a claim under Internal Revenue Code Section 1341 concerning the tax rate to be applied to the SQ Settlement on the Company’s 2018 tax return. The IRS has agreed to review the position and discussions are ongoing. As a result of the enactment of the U.S. CARES Act, the Company was able to realize a benefit at the higher tax rate on a portion of the SQ Settlement. In 2020, in consideration of the U.S. CARES Act, we revised the PFA, a portion of the long-term receivable previously established for the Section 1341 claim has been reclassified to a current income tax receivable and the related uncertain tax position has been released as part of the tax benefit for the nine months ended September 30,
2020. Any additional income tax benefit resulting from the claim in a future period may be recognized as appropriate in accordance with the guidance in ASC 740 on the accounting for uncertain tax positions. There can be no assurance that this amount or any amount will be recovered as a result of this claim.
The Company files income tax returns in the U.S., in various states and in certain foreign jurisdictions. The Company has recorded liabilities to cover certain uncertain tax positions. Such uncertain tax positions relate to additional taxes that the Company may be required to pay in various tax jurisdictions. During the course of examinations by various taxing authorities,
proposed adjustments may be asserted. The Company evaluates such items on a case-by-case basis and adjusts the accrual for uncertain tax positions as deemed necessary.
i
NOTE 7 – (LOSS) EARNINGS PER COMMON SHARE
i
The
following table sets forth the computation of basic and diluted loss per share:
Options excluded from computation of diluted loss per share.
i2,691
i4,469
i3,190
i4,663
RSUs
excluded from computation of diluted loss per share.
i278
i335
i281
i239
/
PSUs
are offered to key employees and are subject to achievement of specified performance conditions. Contingently issuable shares are excluded from the computation of diluted earnings per share if, based on current period results, the shares would not be issuable if the end of the reporting period were the end of the contingency period. If such goals are not met, no compensation expense is recognized, and any previously recognized compensation expense is reversed.
/i
NOTE
8 – SEGMENT REPORTING
Beginning in the first quarter of 2020, we have changed our measure of segment profitability to Adjusted Income from Operations. Adjusted Income from Operations is Income (Loss) from Operations excluding certain specified items, including Intangible Amortization. Beginning in the first quarter of 2020, we presented our operations in
Puerto Rico, which historically had been reported in our International reportable segment, in our North America reportable segment. During the second quarter of 2020, we presented CRS, which historically had been reported in Other, in our North America reportable segment.
The segments were updated to reflect how the chief operating decision maker evaluates performance, determines resource allocation and develops and executes strategies to drive growth and profitability. See Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments. As a result of these changes in segment reporting, all applicable historical segment information has been recast to conform to the new presentation.
Our reportable segments are:
•North
America
•International
•Other (which includes costs related to corporate enabling shared services functions and stock-based compensation)
i
The following tables show financial information for the Company's reportable segments:
Domestic
CRS assets of $i78.4 million as of September 30, 2020 are now included in the North America reportable segment.
Other than the reorganization of our segments described above and the impact of the divestiture discussed in Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments, there were no significant changes by reportable segment from the information provided in the
Company’s 2019 Form 10-K.
The
reduction in environmental liabilities relates primarily to the Domestic Environmental Solutions business, which was sold on April 6, 2020 and included $i27.5 million of environmental remediation liabilities. See Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments in the Condensed Consolidated Financial Statements for further information.
Legal Proceedings
The
Company operates in highly regulated industries and responds to regulatory inquiries or investigations from time to time that may be initiated for a variety of reasons. At any given time, the Company has matters at various stages of resolution with the applicable government authorities. The Company is also routinely involved in actual or threatened legal actions, including those involving alleged personal injuries and commercial, employment, environmental, tax, and other issues. The outcomes of these matters are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, claimants seek damages, as well as other relief, including injunctive relief, that could require
significant expenditures or result in lost revenue.
In accordance with applicable accounting standards, the Company establishes an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and reasonably estimable. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is not probable or a probable loss is not reasonably estimable, no liability is recorded. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. These accruals represent management’s best estimate of probable losses and, in such cases, there may be an exposure to loss
in excess of the amounts accrued. Estimates of probable losses resulting from litigation and regulatory proceedings are difficult to predict. Legal and regulatory matters inherently involve significant uncertainties based on, among other factors, the jurisdiction and stage of the proceedings, developments in the applicable facts or law, and the unpredictability of the ultimate determination of the merits of any claim, any defenses the Company may assert against that claim and the amount of any damages that may be awarded. The Company’s accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes in the law or regulatory environment, adverse or favorable
rulings, newly discovered facts relevant to the matter, or changes in the strategy for the matter. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Contract Class Action and Opt Out Lawsuits. Beginning on March 12, 2013, the Company was served with several class action complaints filed in federal and state courts in several jurisdictions. These complaints asserted, among other things, that the
Company had imposed unauthorized or excessive price increases and other charges on its customers in breach of its contracts and in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The complaints sought certification of the lawsuit as a class action and the award to class members of appropriate damages and injunctive relief. These related actions were ultimately transferred to the United States District Court for the Northern District of Illinois for centralized pretrial proceedings.
The parties engaged in discussions through and overseen by a mediator regarding a potential resolution of the matter and reached a settlement agreement, as previously disclosed, which settlement agreement obtained court approval on March 8, 2018
(the “SQ Settlement”). Under the terms of the SQ Settlement, the Company admitted no fault or wrongdoing whatsoever, and it entered into the SQ Settlement to avoid the cost and uncertainty of litigation.
Certain class members who have opted out of the Final SQ Settlement have filed lawsuits against the Company, and the Company will defend and resolve those actions. The Company has made an accrual in respect of these collective matters consistent with its accrual policies described above, which is not material.
Securities Class Action and Opt Out Lawsuits. On July 11, 2016, two purported stockholders filed a putative class action complaint in the U.S. District Court for the Northern District of
Illinois, which was subsequently amended. As amended, the complaint purported to assert claims on behalf of all purchasers of the Company’s publicly traded securities between February 7, 2013 and February 21, 2018, inclusive, and all those who purchased securities in the Company’s public offering of depository shares on or around September 15, 2015. The complaint named as defendants the Company, its directors and certain of its current and former officers, and certain of the underwriters in the public offering. The complaint purported to assert claims under Sections 11,
12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as SEC Rule 10b-5, promulgated thereunder. The complaint alleged, among other things, that the Company imposed unauthorized or excessive price increases and other charges on its customers in breach of its contracts, and that defendants failed to disclose those alleged practices in public filings and other statements issued during the proposed class period.
Defendants filed a motion to dismiss. Before the court had ruled on the pending motion to dismiss, the parties engaged in discussions through and overseen by a mediator regarding a potential resolution of the matter and reached a settlement agreement
as previously disclosed (the “Securities Class Action Settlement”). The court held a final fairness hearing on July 22, 2019, at which it granted final approval of the Securities Class Action Settlement and took under advisement the amount of attorneys’ fees to be awarded to plaintiffs’ counsel from the settlement fund. Under the terms of the Securities Class Action Settlement, the Company admitted no fault or wrongdoing whatsoever, and it entered into the Securities Class Action Settlement to avoid the cost and uncertainty of litigation.
Certain class members who have opted out of the Final Securities Class Action Settlement have filed lawsuits against the Company. On
March 6, 2020, the Company filed motions to dismiss these actions, which motions remain pending. The Company intends to defend these actions vigorously and resolve them as appropriate. The Company has made an accrual in respect of these lawsuits consistent with its accrual policies described above, which is not material.
U.S. Government Investigations. On June 12, 2017, the SEC issued a subpoena to the Company, requesting documents
and information relating to the Company’s compliance with the FCPA or other foreign or domestic anti-corruption laws with respect to certain of the Company’s operations in Latin America. In addition, the DOJ notified the Company that it was investigating this matter in parallel with the SEC. The Company is cooperating with these agencies and certain foreign authorities. The Company is also conducting an internal investigation of these and other matters, including outside of Latin America, under the oversight of the Audit Committee of the Board of Directors
and with the assistance of outside counsel, and this investigation has found evidence of improper conduct.
As part of the FCPA investigation discussed above, the SEC has requested certain additional information from the Company. On July 29, 2019, the SEC issued a subpoena to the Company requesting documents relating to the Company’s pricing practices concerning small quantity customers, as alleged in the Contract Class Actions and in the Securities Class Action. The
Company is cooperating with the SEC’s request.
The Company has been informed that the office of the United States Attorney for the Southern District of New York is conducting a False Claims Act investigation related to Stericycle’s collection, transportation and disposal of hazardous waste. The Company has separately been informed that the State of California Department of Justice has opened a similar investigation with respect to government customers in California. The Company is cooperating with both investigations.
The
Company has not accrued any amounts in respect of the foregoing matters, as it cannot estimate any reasonably possible loss or any range of reasonably possible losses that the Company may incur. The Company is unable to make such an estimate because, based on what the Company knows now, in the Company’s judgment, the factual and legal issues presented in this matter are sufficiently unique that the Company is unable to identify other circumstances sufficiently comparable to provide guidance in making estimates.
Environmental
and Regulatory Matters.The Company is regulated by federal, state and local laws enacted to regulate the discharge of materials into the environment, the generation, transportation and disposal of waste, and the cleanup of contaminated soil and groundwater and protection of the environment. Because of the highly regulated nature of its business, the Company frequently becomes a party to legal or administrative proceedings involving various governmental authorities and other interested parties. The issues involved in these proceedings generally relate to alleged violations of existing permits and licenses or alleged responsibility under federal or state
Superfund laws to remediate contamination at properties owned either by the Company or by other parties to which either the Company or the prior owners of certain of its facilities shipped waste. From time to time, the Company may be subject to fines or penalties in regulatory proceedings
relating primarily to waste treatment, storage or disposal facilities. Effective April 6, 2020, the Company completed the divestiture of its Domestic Environmental Solutions business, including the facility in Rancho Cordova, California, to Harsco Corporation. Pursuant to the Purchase Agreement, the Company may be subject to certain indemnification claims for matters relating to those Domestic Environmental Solutions facilities.
North Salt Lake, Utah.The Company has continued to toll the statute of limitations with the USAO for the District of Utah relating to an investigation
by the EPA into past Clean Air Act emissions and permit requirements, as previously alleged in the NOV issued by the State of Utah DAQ. The NOV resulted in the Company’s December 2014 settlement with the DAQ, as previously disclosed.
The parties have reached agreement in principle, to be documented in the form of a civil consent decree, under which the Company will undertake a Supplemental Environmental Project and pay a civil penalty under the Clean Air Act. The Company has accrued the total amount of the agreement in principle, which is not material.
Tabasco, Mexico.
In late 2016, the ASEA in Mexico conducted a permit compliance inspection at a hazardous waste treatment facility acquired by one of the Company’s subsidiaries in Dos Bocas, Tabasco, Mexico. The ASEA subsequently claimed that the soil treatment process described in the facility’s treatment permit had not been followed properly and issued an order imposing a fine and directing that the facility be closed and that alleged contamination on a certain portion of the facility be remediated. The Company’s subsidiary has engaged a firm of environmental technicians to assess the contamination described in the ASEA order and to conduct a broader environmental assessment of the facility. The
Company’s review and assessment of the overall facility is ongoing. In November 2017, the ASEA rescinded the prior order imposing the fine. After reassessing the evidence and arguments presented, the ASEA issued a new resolution on March 9, 2018, containing a lower, revised fine and including remedial obligations.
In March 2018, the Company submitted a proposal for remedial measures. On April 26, 2018, the Company appealed the fines in the most recent order.
In December 2018, the ASEA approved the
Company’s remedial plan for the facility, which will involve an amendment to the facility’s permit to allow for on-site, in-situ remediation of the one treatment cell subject to ASEA’s original order.
In June 2018, the Company instituted both civil and criminal legal proceedings in Mexico against the company from which it acquired the relevant facility, seeking to hold the seller liable for any remediation as well as lost profits and damages. The defendants named in the civil complaint filed their answers in September 2018 and evidence is being heard in this matter.
The
Company has accrued its estimate of the probable loss and costs necessary to comply with the ASEA order and remediate the treatment cell, which are not material.
Rancho Cordova, California. On June 25 and 26, 2018, the California DTSC conducted a Compliance Enforcement Inspection of the Company’s Domestic Environmental Solutions facility in Rancho Cordova, California. On February 14, 2020, DTSC filed an action in the Superior Court for the State of California, Sacramento Division, alleging violations of California’s Hazardous Waste Control Law and the facility’s hazardous waste permit arising from the inspection. That action is ongoing.
Separately, on August
15, 2019, the Company received from DTSC a written Intent to Deny Hazardous Waste Facility Permit application for the Rancho Cordova facility. A public hearing was held on September 22, 2019, and the public comment period closed on October 25, 2019. The Company entered a written submission as part of that process. On August 27, 2020, DTSC issued a Notice of Denial of Hazardous Waste Facility Permit Application and on September 25, 2020, the Company filed a Petition for Review, which instituted an administrative appeal
of DTSC’s action.
The Company has not accrued any amounts in respect of these alleged violations and cannot estimate the reasonably possible loss or the range of reasonably possible losses that it may incur. The Company is unable to make such an estimate because (i) litigation is by its nature uncertain and unpredictable and (ii) in the Company’s judgment, the factual and legal allegations asserted by plaintiffs are sufficiently unique that it is unable to identify other proceedings with circumstances sufficiently comparable to provide guidance in making estimates.
DEA Investigation – Rancho Cordova, California and Indianapolis, Indiana. On February 11, 2020, the Company received an administrative subpoena from the DEA, which executed a search warrant at the Company’s Domestic Environmental Solutions facility at Rancho Cordova, California
and an administrative inspection warrant at the Company’s facility in Indianapolis, Indiana for materials related to the Domestic Environmental Solutions business of shipping and destroying controlled substances. On that same day, agents from the DTSC executed a separate search warrant at the Rancho Cordova facility. The Company is cooperating with the DEA and DTSC in response to their investigations, including with the government’s activity at the Rancho Cordova and Indianapolis facilities.
The Company has not accrued any amounts in respect of these investigations and cannot estimate the reasonably possible loss or the range of reasonably possible
losses that it may incur. The Company is unable to make such an estimate because (i) litigation is by its nature uncertain and unpredictable and (ii) in the Company’s judgment, the factual and legal allegations asserted by plaintiffs are sufficiently unique that it is unable to identify other proceedings with circumstances sufficiently comparable to provide guidance in making estimates.
The Company intends to vigorously defend itself against these allegations and actions.
European Retrovirus Investigations. In conjunction with Europol, governmental
authorities of Spain and Romania have conducted coordinated inspections of a large number of medical waste management facilities, including Stericycle facilities, relating to the transportation, management and disposal of waste that may be infected with the COVID-19 virus, and related matters. The Company is cooperating with these investigations.
The Company has not accrued any amounts in respect of this matter, as it cannot estimate any reasonably possible loss or any range of reasonably possible losses that the Company may incur. The Company is unable to make
such an estimate because, based on what the Company knows now, in the Company’s judgment, the factual and legal issues presented in this matter are sufficiently unique that the Company is unable to identify other circumstances sufficiently comparable to provide guidance in making estimates.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe
Harbor Statement
This document may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. When we use words such as “believes,”“expects,”“anticipates,”“estimates”“may,”“plan,”“will,”“goal” or similar expressions, we are making forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are therefore subject to risks and uncertainties, which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. Factors that could cause such differences include, among others, developments in the COVID-19 pandemic and the resulting impact on the results of operations, precautions we have taken to safeguard the health
and safety of our employees which may make certain of our business processes less efficient, measures taken by governmental authorities to prevent the spread of the COVID-19 virus which could disrupt our supply chain, result in disruptions in transportation services and restrictions on the ability of our employees to travel, result in temporary closure of our facilities or the facilities of our customers and suppliers, affect the volume of paper processed by our secure information destruction business and the revenue generated from the sale of SOP, disruptions in our relationships with our employees as a result of certain cost-saving measures, an economic slowdown in the U.S. and other countries resulting from the outbreak of the COVID-19 virus, SOP pricing volatility, foreign exchange rate volatility in the jurisdictions in which we operate, the volume and size of any recall events, changes in governmental regulation of the collection, transportation, treatment and
disposal of regulated waste or the proper handling and protection of personal and confidential information, the level of government enforcement of regulations governing regulated waste collection and treatment or the proper handling and protection of personal and confidential information, decreases in the volume of regulated wastes or personal and confidential information collected from customers, the ability to implement our ERP system, charges related to portfolio rationalization or the failure of divestitures to achieve the desired results, failure to consummate transactions with respect to non-core businesses, the obligations to service substantial indebtedness and comply with the covenants and restrictions contained in our credit agreements and notes, a downgrade in our credit rating resulting in an increase in interest expense, political, economic, inflationary and other risks related to our foreign operations, the outcome of pending or future litigation or investigations
including with respect to the U.S. Foreign Corrupt Practices Act, changing market conditions in the healthcare industry, competition and demand for
services in the regulated waste and secure information destruction industries, failure
to maintain an effective system of internal control over financial reporting, delays or failures in implementing remediation efforts with respect to existing or future material weaknesses, disruptions in or attacks on information technology systems, as well as other factors described in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequent Quarterly Reports on Forms 10-Q. As a result, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking or other statements contained herein other than in accordance with legal and regulatory obligations.
The following discussion of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated
Financial Statements and related notes in Part I, Item 1. Financial Statements (Unaudited) of this Quarterly Report and our Consolidated Financial Statements and related notes thereto and Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K.
Overview
We are a U.S. based business-to-business services company and leading provider of compliance-based solutions that protect people and brands, promote health and safeguard the environment. We serve customers in the U.S. and 17 countries worldwide with solutions for regulated waste management, secure information destruction, compliance, customer contact, and brand protection. For further information on our
business, reportable segments, and services, see Part I, Item 1. Business, in our 2019 Form 10-K.
Key business highlights for the nine months ended September 30, 2020 include:
•Cash flow from operations improved to $365.2 million for the first nine months of 2020 compared to $201.2 million in 2019.
•Net debt was reduced by approximately $135.5 million in the third quarter, decreasing total net debt to below $2.0 billion, the lowest net debt in the last five years.
•Income from operations, normalized for divestitures and foreign exchange rates, improved in the third quarter, driven by operational efficiencies and cost reductions.
•RWCS
organic revenues grew 0.6%.
•The divestiture of the Argentina business was completed in the quarter.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 virus outbreak a pandemic. The COVID-19 pandemic has had a global economic impact, including temporary closure of non-essential businesses worldwide and postponement of elective surgeries and preventative care. The Company continues to maintain operations within all business service offerings. We are monitoring future implications of the COVID-19 pandemic and continue to take actions to manage
spending to align to operational requirements.
The Company’s COVID-19 pandemic response has included efforts to protect the health and well-being of our workforce and our customers. We worked proactively with the Centers for Disease, Control and Prevention, the Occupational Safety and Health Administration, the Department of Transportation and regulatory agencies around the world to ensure readiness for proper medical waste management. We have updated and implemented numerous protocols specifically to reduce risk among our front-line team members, and our strategic sourcing team has worked diligently to take measures to provide our field operations employees with appropriate personal protective equipment. We’ve staggered shift times and dedicated trucks to specific drivers to reduce exposure. We’ve implemented more rigorous cleaning protocols
for all our facilities. Since March of 2020, we had more than 7,000 team members around the globe sheltering in place, all to protect our staff and communities we serve. We will continue to monitor the safety of our team members as a result of the COVID-19 pandemic, but the long-term impact is not known at this point as the scale and severity of the outbreak is still uncertain.
The Company has taken a leadership position related to the COVID-19 pandemic to support our customers and provide industry expertise regarding the effective management of COVID-19 waste.
The impact of the COVID-19 pandemic across our revenue service categories is as follows:
•Compliance programs under the Steri-Safe®, and First Practice Management brand names
•Healthcare hazardous waste management services for hospitals and industrial hazardous waste in global markets
RWCS’s transportation and treatment facilities have remained open to provide safe and compliant disposal of medical waste.
Revenues for RWCS showed growth over third quarter last year despite the impact on maritime waste services
from the pandemic.
The COVID-19 pandemic has also created new needs for healthcare testing centers for the COVID-19 virus across America as well as the disposal of non-healthcare waste. We continue to provide services to testing centers and our expanding non-healthcare waste customer base.
Secure Information
Destruction Services
•Secure information destruction (including document and hard drive destruction services)
Continuing with the progress built towards the end of the second quarter, in the third quarter continued recovery of our stops serviced as the economy continued to reopen.
In
North America, SID organic revenues were down 14.3% percent compared to third quarter 2019, which reflects a decrease in service stops of approximately the same percentage. While still below pre-pandemic levels, SID revenues recorded an improved quarter-over-quarter sequential performance.
Communication and
Related Services
•Appointment reminders, secure messaging, event registration, and other communications specifically for hospitals and integrated delivery networks.
•Regulated recall and returns management communication, logistics, and data management services for expired, withdrawn or recalled products
At the end of the first quarter and through the third
quarter 2020, we observed lower demand for services due to the pandemic. When excluding the impact of divestitures and foreign exchange, revenues declined $1.7 million.
Key Business Priorities
1.Quality of revenue –Over the past 18 months, we have been executing against our foundational initiatives we launched to drive revenue quality. These included a formal cross-functional deal review committee, realignment of sales incentive plans, and the re-organization of our commercial leadership team around our service lines and key customers channels.
We are now adding our next quality of revenue initiative, the implementation of a global customer pipeline management process and tool for both Regulated Waste and Compliance Services and Secure Information Destruction. We experienced favorable revenue trends from the new services that we introduced during the second quarter. Our non-healthcare PPE waste disposal service is expanding our customer base to new channels while our Priority and Express document destruction services are being well received by customers wanting time sensitive pick-up.
2.Operational cost efficiencies – As we manage through volatile times, we remain focused on controlling variable and discretionary costs and improving performance and efficiencies in our field operations. Our Engineering and Operations teams have and will continue to implement operational process and performance improvements, which have
significantly contributed to our gross profit margin expansion during the third quarter. We are gaining traction on sizing and balancing our fleet and equipment; driving efficiencies in route and long-haul planning; and optimizing our network and assets. Additionally, we have normalized our workforce following the furloughs experienced earlier this year.
3.Portfolio rationalization –On August 3, 2020, Stericycle divested all of our operations in Argentina for approximately $3.9 million in cash. On April 6, 2020, we also divested the Domestic Environmental Solutions business to Harsco Corporation for $462.5 million in cash. We expect to continue to evaluate our portfolio of services and service lines to assess long-term potential for growth and profitability, strategic to our core services, and/or present the opportunity to reduce debt; however, the impact of the COVID-19 pandemic on the economy may limit our ability to close future transactions.
4.Debt
reduction and leverage improvement –We have reduced net debt by approximately $693 million during the nine months ended September 30, 2020. We applied approximately $430 million in net proceeds from the divestiture of the Domestic Environmental Solutions business to the repayment of debt during April 2020. With the divestiture proceeds and our continued focus on operating margin expansion, we reduced our adjusted debt to EBITDA leverage ratio as defined by our Credit Agreement to 3.75 times in the third quarter 2020. We have $591.7 million as of September 30, 2020 available under our Senior Credit Facility, which matures in November 2022.
5.ERP implementation – We entered 2020 with a
schedule to begin the staged deployment of the commercial, operational and financial systems in North America. Our first stage included the implementation of a human capital management system which was completed in January 2020. However, guided by our commitment to protect what matters, we concluded that the health and travel risks associated with a field deployment in the COVID-19 pandemic environment were substantial, and given our priorities to serve our customers and keep our team members safe, we made the decision to defer the ERP deployment to 2021. In the interim, we are making progress mining data from our legacy systems and tools to gain business insights, build scorecards and improve performance. Additionally, over the past several months, we accelerated the deployment of certain technologies associated with our North American ERP system, including our new employee travel and expense system and a global tax management system.
Key
Strategies and Other Significant Matters
The following table identifies key strategies and other significant matters impacting our business and how they are classified in the Condensed Consolidated Statements of Loss:
For the periods presented and for the cumulative period since the inception of Business Transformation, we have recognized the following, principally reported in Other:
ERP development and implementation (Project Monarch)
Consulting
and professional fees
$
3.1
$
7.1
$
15.3
$
19.8
$
58.5
Internal labor
3.4
2.9
10.4
7.1
28.5
Software
usage/maintenance fees
3.1
4.4
8.8
12.1
31.5
Other related expenses
1.1
1.3
3.4
2.5
9.3
Operating
expenditures
10.7
15.7
37.9
41.5
127.8
Capital expenditures
2.9
30.0
47.0
95.8
156.5
Total
ERP (Project Monarch) related
13.6
45.7
84.9
137.3
284.3
Investment in cost savings and other related matters
—
1.4
—
10.1
91.7
Total
operating and capital expenditures
$
13.6
$
47.1
$
84.9
$
147.4
$
376.0
`
`
Non-cash
charges
$
0.6
$
0.2
$
1.7
$
1.0
$
15.3
Cash charges (including stock based compensation)
10.1
16.9
36.2
50.6
204.2
Total
operating expenditures
$
10.7
$
17.1
$
37.9
$
51.6
$
219.5
As of December 31, 2019, we had completed activities originally contemplated as part of Business Transformation in the areas
of investment in costs savings and business capability and other related matters. We have shifted the planned deployment of the rest of our North American ERP system until 2021. In the interim, we accelerated the deployment of certain technologies associated with our North American ERP system, including our new employee travel and expense system and a new global tax management system.
Until the ERP system is implemented, we will continue to incur costs to maintain the development system. The 2021 ERP deployment results in us incurring a prorated portion of the incremental annual IT ongoing costs for running the new system. Additionally, we will continue to incur costs to maintain the legacy suite of applications that are also used by our international businesses until their system portfolio is replaced.
We
have undertaken legal entity organizational restructuring actions to assist with streamlining and simplifying business operations and to help lower general and administrative costs. Such actions could result in additional charges associated with consulting and professional fees and increases in potential exposure to U.S. and foreign taxes and foreign exchange charges.
Intangible Amortization
See table above of key strategies and other significant matters for intangible amortization expense from acquisitions for the periods presented and how they are classified in the Condensed Consolidated Statements of Loss.
The
decrease in amortization expense is a result of the reduction of Intangible assets related to divestitures. SeePart I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairmentsin the Condensed Consolidated Financial Statementsfor further information.
Operational Optimization
We aim to achieve a culture of continuous improvement that will enhance our efficiency, effectiveness and competitiveness to improve our cost base and cash flow, and we have taken a number of actions to reduce
operating costs and optimize operations. For example, we believe plant throughput and route density are competitive strengths of Stericycle. We maintain such strengths by making adjustments to our network of transportation and treatment facilities, standardizing containers and fleet levels in an effort to optimize overall logistics and processing capabilities within a service category while reducing operational costs. As part of these efforts, we seek to reduce network redundancies by consolidating facilities, closing redundant facilities,
optimizing containers and fleet levels and restructuring the local organization and operations for efficiency.
We recognized the following Operational Optimization expenses:
See Part I, Item I. Financial Statements; Note 3 Restructuring, Divestitures, and Impairments for further information.
As we continue to consider each Operational Optimization activity, the amount, timing and recognition of charges will be affected by the occurrence of commitments and triggering events as defined under U.S. GAAP, among other factors. We may incur more charges and cash expenditures than estimated and may not realize the expected improvement or cost savings on the planned time frame or at all.
We evaluate our portfolio of services on an ongoing basis with a country-by-country
and service line-by-service line approach to assess long-term potential and identify potential business candidates for divestiture. Our decisions regarding divestitures are based upon the following criteria:
•outlook for long-term market conditions;
•potential impact to complementary services or customer relationships;
•ability to leverage infrastructure and customer base for growth;
•potential for margin improvement;
•current divestiture value versus future divestiture value;
•ongoing capital requirements of the business;
•return
on invested capital;
•impact on overall leverage, including impact on our debt leverage ratio;
Consulting,
professional, and other fees (in SG&A)
1.3
2.1
6.7
9.3
Total Divestitures (including Divestiture losses (gains), net)
$
105.4
$
85.3
$
172.9
$
87.4
For
additional information regarding Divestiture losses (gains), net, see Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments in the Condensed Consolidated Financial Statements.
We continue to evaluate the performance of our entire portfolio of assets and businesses. Divestitures resulting from this evaluation may cause us to record significant charges, including those related to goodwill, other intangible assets, long-lived assets, and cumulative translation adjustments. In addition, divestitures we complete may not yield the targeted improvements in our business. Any charges that we are required to record or the failure to achieve the intended financial results associated with the portfolio rationalization evaluation could have a material adverse effect on our business, financial condition or results of operations.
Litigation,
Settlements and Regulatory Compliance
We operate in highly regulated industries and must address regulatory inquiries or respond to investigations from time to time. We are also involved in a variety of civil litigation matters from time to time including the items detailed in Part I, Item I. Financial Statements; Note 9 – Commitments and Contingencies. Our financial results may also include considerations of non-recurring matters including settlements, environmental remediation, and legal related consulting and professional fees.
See table above for litigation, settlement and regulatory compliance charges, primarily consulting and professional fees, contingent liability provisions and settlements, net of insurance recoveries, impacting our business for the periods presented and how they are classified in the Condensed Consolidated Statements
of Loss.
For
additional information, see Part I, Item I. Financial Statements; Note 3 – Restructuring, Divestiture and Impairments in the Condensed Consolidated Financial Statements and Part I, Item I. Financial Statements; Note 4 – Goodwill and Other Intangible Assets in the Condensed Consolidated Financial Statements.
Other
See table above of key strategies and other significant matters for other charges, primarily consulting and professional fees related to internal control remediation activities as well as the implementation of new accounting standards, impacting our business for the periods presented and how they are classified in the Condensed
Consolidated Statements of Loss.
See table above of key strategies and other significant matters for the impact of foreign exchange re-measurement of net monetary assets held in Argentina, divested on August 3, 2020, as a result of its designation as a highly inflationary economy for the periods presented and how they are classified in the Condensed Consolidated Statements of Loss.
U.S. CARES Act
For additional information, see Part I, Item I. Financial Statements; Note 6 – Income Taxes in the Condensed Consolidated Financial Statements.
In analyzing our Company’s performance, it is necessary to understand that our various regulated services share a common infrastructure and customer base. We market our regulated waste and compliance services by offering various pricing options to meet our customers’ preferences, and customers move between these different billing paradigms. For example, our customers may contract with us for Medical Waste Disposal services that are billed
based on the weight of waste collected, processed and disposed during a particular period, and in a subsequent period, the same customer could move to our standard service, which packages the same regulated medical waste services with training and education services for a contracted subscription fee. Another example is a customer that
purchases our Medical Waste Disposal and Sharps Disposal Management services which provides the customer with the same regulated services under a different pricing and billing arrangement.
We do not track the movement of customers between the various types of regulated services we offer. Although we can identify directional trends in our services, because the regulated services are similar in nature and there are inherent inaccuracies in disaggregation, we analyze revenues by revenue service category and operating segment. We analyze our revenue growth by identifying changes related to organic growth, acquisitions, divestitures and changes due to currency exchange fluctuations. Organic growth excludes the effect of foreign exchange and acquisitions and divestitures to revenues in the comparative period.
In 2020, we
updated the presentation of the Company’s segment reporting see Part I, Item I. Financial Statements; Note 8 Segment Reporting in the Condensed Consolidated Financial Statements for further information. As a result of these changes in segment reporting, all applicable historical segment information has been recast to conform to the new presentation.
In addition, we updated service lines to reflect Hazardous Waste Solutions Services and Manufacturing and Industrial Services in RWCS. This reclassification is driven by the divestiture of the Domestic Environmental Solutions business, discussed in Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments, and service line information has been recast to conform to the new presentation.
Revenues
by service and reportable segment were as follows:
(1)Growth
is change in revenues excluding the impact of SOP pricing, divestitures and foreign exchange.
For the three and nine month periods ended September 30, 2020 as compared to the prior year periods, organic SID and CRS revenue were lower, primarily reflecting COVID-19 pandemic business disruption. Organic RWCS revenue was slightly favorable in the current year three and nine month periods in comparison to the prior year respective periods.
North America revenues decreased $174.8 million, or 25.3%, in the third quarter of 2020 to $517.1 million from $691.9 million in the third quarter of 2019. Divestiture of the Domestic Environmental Solutions business in the second quarter 2020 and divestiture of components of the CRS business sold in 2019 reduced revenues by $143.3 million, or 20.7%. Organic revenue, excluding
SOP pricing, decreased $32.3 million or 4.7% due to the COVID-19 pandemic, and slightly offset by an increase in revenue due to the increase in SOP pricing of $1.1 million.
International revenues decreased $21.9 million, or 15.5%, in the third quarter of 2020 to $119.3 million from $141.2 million in the third quarter of 2019. The decrease in International segment organic revenue, excluding SOP pricing, was $3.5 million, or 2.5%, largely attributable to the COVID-19 pandemic. The impact of SOP pricing was relatively flat at an increase of $0.2 million for the quarter ended September 30, 2020 as compared to the prior year quarter. Divestiture of the Argentina, Chile, and Mexico businesses reduced revenues by $18.7 million, or 13.3%. The effect of foreign exchange rates was slightly unfavorable by $0.1 million, or 0.1%. Due to the divestiture of Argentina operations during the third
quarter of 2020, we have eliminated the Argentina peso from our consolidated results which has experienced significant volatility in recent periods.
North America revenues decreased $413.2 million, or 19.9%, for the nine month period ended September 30, 2020 to $1,663.0 million from $2,076.2 million for the nine month period ended September 30, 2019. Divestiture of the Domestic Environmental Solutions business in the second quarter 2020 and divestiture of components of the CRS business sold in 2019 reduced revenues by $306.5 million, or 14.8%. Organic revenue, excluding SOP pricing, decreased $93.7 million or 4.5%. Additionally, there was a decrease in revenue due to the impact of SOP pricing of $11.5 million, or 0.6% as compared to the prior year period.
International revenues decreased
$76.2 million, or 17.6%, for the nine month period ended September 30, 2020 to $356.6 million from $432.8 million for the nine month period ended September 30, 2019. The decrease in International segment organic revenue, excluding SOP pricing, was $11.4 million, or 2.6%. Additionally, there was a decrease in revenue due to the impact of SOP pricing of $2.3 million, or 0.5% as compared to the prior year period. Divestiture of the Argentina, U.K. TextAnywhere, Chile, and Mexico businesses reduced revenues by $43.5 million,
or 10.0%. The effect of foreign exchange rates unfavorably impacted International revenues in 2020 by $19.0 million, or 4.4%, as foreign currencies, notably those in Latin America, declined against the U.S. dollar
The decrease in Gross profit for the three and nine months ended September 30, 2020, as compared to the prior year periods, was primarily due to the divestiture
of the Domestic Environmental Solutions business and Argentina business in 2020 and divestitures that occurred during 2019. In addition, income from operations was lower associated with the COVID-19 pandemic resulting in decreased revenue discussed above specific to SID and CRS. These were partially offset by reductions in variable and discretionary costs, driven by operational efficiency improvements including in transportation and productivity gains. Gross profit as a percentage of Revenues has improved as divested businesses historically produced lower margins as compared to core businesses and operational efficiencies noted above. In addition, we continue to see lower charges associated with our key strategies and other significant matters discussed above.
International Gross profit is lower than domestic Gross profit because our international operations have fewer small account customers, which tend to generate higher Gross
profit. Our international operations generate most of their revenues from large account customers, such as hospitals, publicly funded healthcare organizations and government bodies. If our international revenues increase, consolidated Gross profit percentages may experience downward pressure due to this "business mix" shift, which may be offset by additional international small account market penetration, operational optimization and domestic business expansion.
The
decrease in SG&A for the three and nine months ended September 30, 2020, as compared to the prior year periods, was primarily due to disciplined spending on operations and the 2020 divestitures of the Domestic Environmental Solutions business and Argentina business, and other divestitures in 2019. Additionally, the Company had lower employee costs due to the impact of furloughed team members, lower commissions, and reduced consulting and professional fees, divestitures, litigation, compliance and material weakness remediation costs, partially offset by higher incentive compensation. Further, there was a decrease in intangible asset amortization as assets became fully amortized.
For additional information, see Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments in the Condensed Consolidated Financial
Statements and our Key Strategies and Other Significant Matters discussed above.
No
goodwill impairments were recorded during the three months ended September 30, 2020 and 2019.
For additional information, see Part I, Item I. Financial Statements; Note 4 – Goodwill and Other Intangible Assets in the Condensed Consolidated Financial Statements and our Key Strategies and Other Significant Matters discussed above.
Segment Profitability:
See Part I, Item I. Financial Statements Note 8 – Segment Reporting and our Key Strategies and Other Significant Matters discussed above for adjusting items detail.
Adjusted
Income from Operations for our North America segment increased $1.5 million, or 1.0%, in the third quarter of 2020 to $157.0 million from $155.5 million in the third quarter of 2019. As a percentage of North America
revenues, Adjusted
Income from Operations was 30.4% and 22.5%, for the third quarter of 2020 and 2019, respectively. Adjusted Income from Operations increased due to reductions in variable and discretionary costs, driven by operational efficiency improvements including compensation, transportation, and SG&A expense management. Operating margin improved as divested businesses historically produced lower margins as compared to core businesses and operational efficiencies noted above.
Adjusted Income from Operations for our North America segment increased $2.3 million, or 0.5%, for the nine months ended September 30, 2020 to $447.0 million from $444.7 million for the nine months ended September 30, 2019. As a percentage of North America revenues, Adjusted Income from Operations was 26.9% and 21.4%, for the nine months ended September 30,
2020 and 2019, respectively. Adjusted Income from Operations improved due to reductions in variable and discretionary costs, driven by operational efficiency improvements including compensation, transportation, and disciplined spending in operations. The increase was partially offset by the divestiture of the Domestic Environmental Solutions business and divestitures that occurred during 2019. Operating margin improved as divested businesses historically produced lower margins as compared to core businesses and operational efficiencies noted above.
Adjusted Income from Operations for our International segment decreased $4.6 million, or 23.0%, for the third quarter of 2020 to $15.4 million from $20.0 million for the third quarter of 2019. The decline was primarily driven by a reduction in income from operations due to the COVID-19
pandemic and the related revenue decreases discussed above. As a percentage of International revenues, Adjusted Income from Operations was 12.9% and 14.2% for the third quarter of 2020 and 2019, respectively.
Adjusted Income from Operations for our International segment decreased $20.8 million, or 39.2%, for the nine month period ended September 30, 2020 to $32.3 million from $53.1 million for the nine months ended September 30, 2019. The decline was primarily a reduction in income from operations due to the COVID-19 pandemic and the related revenue decreases discussed above. As a percentage of International revenues, Adjusted Income from Operations was 9.1% and 12.3% for the nine month periods ended September 30, 2020 and 2019,
respectively.
Adjusted Loss from Operations for Other increased in the three months ended September 30, 2020 compared to the prior year comparable period as a result of higher incentive and stock based compensation and professional fees associated with higher legal expenses and information technology expenses.
Adjusted Loss from Operations for Other increased in the nine months ended September 30, 2020 compared to the prior year comparable period as a result of higher incentive and stock based compensation, professional fees associated with higher legal expense and information technology, and corporate insurance, partially offset by lower worker’s compensation expense.
The decrease in the three and nine months ended September 30, 2020 as compared to the prior year periods is a result of a lower weighted-average debt balance
as well as lower interest rates. For further information see Part I, Item I. Financial Statements; Note 5 – Long-Term Debt.
No loss on early extinguishment of debt was recorded during the three months ended September 30, 2020 and 2019.
During the nine months ended September 30, 2019, the Company incurred a pre-tax loss on early extinguishment of debt of $23.1 million, relating to the repayment of its private placement notes.
For further information see Part I, Item I. Financial Statements; Note 5 – Long-Term Debt.
Other expense, net is primarily comprised of foreign exchange losses including the re-measurement of net monetary assets held in Argentina as a result of its designation as a highly inflationary economy.
For further information, see Part I, Item I. Financial Statements; Note 6 – Income Taxes in the Condensed Consolidated Financial Statements.
Liquidity
and Capital Resources
The Company believes that it has sufficient liquidity to support its ongoing operations and to invest in future growth to create value for its shareholders. Operating cash flows and the Company’s $1.2 billion Senior Credit Facility are the Company’s primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company’s long-term debt obligations, capital expenditures necessary to support growth and productivity improvements, including those associated with shareholder distributions approved by the Board of Directors.
To the extent the Company needs to add additional funding options to meet additional liquidity
requirements or diversify its funding portfolio, the
Company could seek additional financing from alternative sources, including approaching the capital markets.
The Company additionally expects positive impacts to cash flow from operations in 2020 as a result of the U.S. CARES Act. The Company anticipates cash refunds under certain provisions of the U.S. CARES Act to be approximately $100 million in 2020 from cash tax refunds for 2018 and 2019 net operating loss carrybacks. In July, the Company received approximately half of the expected refund amount. We anticipate receiving the remaining refund by the end of the year, although there is some timing risk given COVID-19 mail processing delays
affecting the processing of refund claims at the IRS. Additionally, starting in the second quarter of 2020 and continuing through the rest of the year, the Company has and expects to continue to defer payments associated with employer related payroll taxes of approximately $20.0 million under the U.S. CARES Act with expected payments in late 2021 and 2022. Through the third quarter ended September 30, 2020, the Company deferred approximately $15.0 million of total expected employer related payroll taxes.
Similar tax provisions and other stimulus measures have been granted either before or after September 30, 2020 by certain foreign and U.S. state jurisdictions
which the Company continues to evaluate and apply, if applicable. The Company has benefited in the nine month period ended September 30, 2020 from indirect tax payment deferrals of approximately $10.0 million, which will be due in 2021.
The Credit Agreement and Fifth Amendment contain a number of covenants, including financial covenants. As of September 30, 2020, the Company was in compliance with the Consolidated Leverage Ratio covenant, with an actual ratio of 3.75 to 1.00, which was below the allowed maximum ratio of 4.75 to 1.00 as contained in the Fifth Amendment. On April
6, 2020, the Company completed the divestiture of its Domestic Environmental Solutions business. Therefore, effective April 6, 2020, the Consolidated Leverage Ratio decreased by 0.25 to 4.75 to 1.00 for fiscal quarters ending on or before December 31, 2021 and 4.25 to 1.00 for fiscal quarters ending on or after March 31, 2022.
Given our current leverage position, we believe we should be able to operate within our covenant thresholds, but due to the unpredictability of the COVID-19 pandemic and situations outside our control, it is reasonably likely that we could exceed this Consolidated Leverage Ratio threshold at some point in the next 12 months. This risk can be mitigated and potentially
managed through appropriate spending controls, divestitures, restructuring the Company’s existing indebtedness, amending the Credit Agreement, or seeking temporary relief from the Consolidated Leverage Ratio covenant from the Company’s lenders.
A failure to comply with these covenant provisions could result in an event of default. Upon an event of default, unless waived, the lenders could elect to terminate their commitments, cease making further loans, and/or cause their loans to become due and payable in full, foreclose against the assets securing the debt under our Credit Agreement and force us and our subsidiaries into bankruptcy or liquidation.
For
further details concerning these matters see Part I, Item I. Financial Statements;Note5–Long-TermDebt in the Condensed Consolidated Financial Statements for further information.
Cash Flow Summary:
The following table shows cash flow information for the Company by activity:
Effect of exchange rate changes on cash and cash equivalents
(0.4)
(3.4)
Net change in cash and cash equivalents
$
24.7
$
(3.5)
Operating Cash Flows: Net
cash from operating activities increased $164.0 million in the first nine months of 2020 to $365.2 million from $201.2 million in the first nine months of 2019. The current period primarily reflects (i.) lower payments for legal and professional fees, annual incentive compensation, and prepaid software totaling $50.5 million, (ii.) lower accounts receivable of $26.6 million driven by collections exceeding revenues and collection
process improvements (iii.) lower accounts payable of $17.4 million primarily driven by reduced costs (iv.) government relief tax-related payment deferrals of $22.4 million, roughly split between U.S. and international, (v.) U.S. CARES Act net operating loss carryback refund of $48.0 million, received in the third quarter, and (vi.) advances received on executed service agreements of $19.2 million related to the Domestic Environmental Solutions divestiture.
Our third quarter DSO as reported was 50 days, compared to the DSO of 61 days in the third quarter of 2019. When excluding the divestiture revenues from the trailing 12-month DSO calculation, DSO was flat at 55 days for the third quarter 2020 and 2019.
Investing Cash Flows: Net cash from investing activities increased $469.5 million
in the first nine months of 2020 to net cash provided of $328.2 million from net cash used of $141.3 million in the first nine months of 2019. Our capital expenditures decreased by $66.5 million to $94.7 million from $161.2 million in the first nine months ended 2019,primarily driven by the timing of 2019 investments in the ERP and 2020 disciplined capital management. In the second quarter of 2020, we received $427.7 million from the divestiture of the Domestic Environmental Solutions business partially offset in the third quarter of 2020 by a final working capital payment of $9.7 million. In the first quarter of 2019, we received $13.6 million from the divestiture of a U.K. businesses.
Financing Cash Flows: Net cash from financing activities increased $608.3 million in the first nine
months of2020 to $668.3 million from $60.0 million in the firstnine months of 2019. The changerelated to our net repayments on ourSeniorCreditFacility and term loan for $637.3 million principally due to the proceeds received fromthe divestiture of the Domestic Environmental Solutions business and highernet cash from operating activitiesgenerated in the first nine months of 2020.Additionally, the Company made payments
of other long-term debt and foreign debt of $26.9 million in the first nine months of 2020. During the first nine months of 2019, net borrowings of $68.6 million included repayment of private placement notes and new debt issuance ofSeniorNotes and additional borrowings on theSeniorCreditFacility andTermLoan. As a result of the 2019 repayment of private placement notes, the Companypaid$20.4 million for a make whole
premium.
Critical Accounting Policies and Estimates
As discussed in our 2019 Form 10-K, the preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and revenues and expenses during the periods reported. Some areas where the Company makes estimates include its allowance for doubtful accounts, credit memo reserve, accrued employee health and welfare benefits, environmental liabilities, stock-based compensation expense, income
tax liabilities, accrued auto and workers’ compensation insurance claims, operating lease ROU assets and lease liabilities, intangible asset valuations, and long-lived asset and goodwill impairment. Actual results may differ from those estimates.
Effective January 1, 2020, the Company adopted ASU 2016-13. SeePart I, Item I. Financial Statements;Note 1 – Basis of Presentation and Summary of Significant Accounting Policies in the Condensed Consolidated Financial Statements for further information on the adoption ofASU 2016-13.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about the various risks to which we have exposure are included in Part I, Item 7A "Quantitative and Qualitative Disclosures about Market Risk" of our 2019 Form 10-K. There were no material changes from the information provided therein.
The U.K.’s Financial Conduct Authority, which regulates LIBOR, announced in 2017 that it intends to phase out LIBOR by the end of 2021. The Company’s contracts with respect to its borrowings already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR.
Item 4.
Controls and Procedures
Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rule 13a-15(e) of the Exchange Act as "controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in
the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms." Our disclosure controls and procedures are designed to ensure that material information relating to us and our consolidated subsidiaries is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosures.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30,
2020 (the end of the period covered by this Quarterly Report on Form 10-Q). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2020, because of material weaknesses in internal control over financial reporting, as described below.
Internal Control Over Financial Reporting
Management of Stericycle is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d (f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Stericycle conducted an assessment of the effectiveness of its internal
control over financial reporting as of December 31, 2019 based on the criteria established by the COSO Framework.
As of December 31, 2019, material weaknesses continued to exist in our Control Environment and Control Activity components of the COSO Framework. Management identified material weaknesses in controls related to:
(a)
not fully implementing and monitoring general information technology controls
(“GITCs”) in the areas of user access and program change management for systems supporting all of the Company’s internal control processes. Our business process controls (automated and manual) are dependent on the affected GITCs and therefore are also deemed ineffective because they could have been adversely impacted by the ineffective GITCs; and
(b)
our Domestic Environmental Solutions business of the North America Regulated Waste and Compliance Services segment (further
referred to within this Item as “Environmental Solutions”) related to not fully designing, implementing and monitoring controls relevant to our revenue (including the GITCs for systems supporting this process) and cost of disposal processes.
As a result of the material weaknesses described above, management concluded that, as of December 31, 2019, our internal control over financial reporting was ineffective.
Changes in internal controls
As described below, we have undertaken and continue to undertake significant remediation actions to address the material weaknesses in our internal controls over financial reporting. In addition to the remediation actions that continued throughout the quarter ended
September 30, 2020, the disposal of Environmental Solutions has materially affected our internal control over financial reporting as mentioned below.
Planned Remediation of Remaining Material Weaknesses
Remediation actions undertaken during the three months ended September 30, 2020 include:
The Information Technology Governance Risk Compliance team (IT GRC) has focused remediation efforts on the maturation of our user entitlement review process, our logical access controls, program change management controls, and IT performance metrics monitoring processes
impacting our controls environment, training, and awareness. While the above efforts have improved our GITCs, many of the control activities impacted by these improvements have not operated for a sufficient period of time to be able to conclude on effectiveness through September 30, 2020. Operating effectiveness testing of GITCs is currently in progress.
We remain committed to continue investing significant time and resources
and taking actions to remediate the material weaknesses in our GITCs. We believe the controls we have designed will remediate the control deficiencies that have led to the material weaknesses and strengthen our GITCs.
Divestiture of Environmental Solutions
Remediation actions completed during the nine months ended September 30, 2020 include (see above for description of the control area in remediation):
As disclosed in Form 8-K dated April 6, 2020, the Company has completed the divestiture of the Domestic Environmental Solutions business, excluding the healthcare
customer and unused consumer pharmaceutical take-back services. As a result of this divestiture, the material weaknesses impacting the Company as of December 31, 2019 associated with the Domestic Environmental Solutions business no longer impacted the Company subsequent to April 6, 2020.
Notwithstanding the existence of the material weaknesses as described above, we believe that the Condensed Consolidated Financial Statements in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.
Further information pertaining to legal proceedings can be found in Part I, Item I. Financial Statements; Note 9 – Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements and is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information included in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk
Factors” in the Annual Report on Form 10-K for the year ended December 31, 2019, and Form 10-Q for the period ended June 30, 2020, the factors identified under “Safe Harbor” at the end of Part I, Item 2 of this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition, cash flows, or results of operations. The risks described in the Annual Report and Form 10-Q for the period ended June 30, 2020, are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company
currently considers immaterial also may materially adversely affect its business, financial condition, and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the three months ended September 30, 2020.
The following information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Loss; (ii) Condensed Consolidated Statements of Comprehensive (Loss) Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Changes in Equity and (vi) Notes to Condensed Consolidated Financial Statements
104
Cover Page Interactive Data File (formatted
as Inline XBRL and contained in Exhibit 101)
* The Company agrees to furnish supplementally a copy of any omitted exhibit or appendix to the Securities and Exchange Commission upon request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
