Item 1. Financial Statements (Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In millions, except per share data and unless otherwise indicated)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of Significant Accounting Policies
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, 2019 and for the three and nine months ended September 30, 2019 and 2018 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. However, in the opinion of management, 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 2018 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.
Use 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, intangible asset valuations, measurement of assets and liabilities held-for-sale, and long-lived asset and goodwill impairment assessments. Such estimates are based on historical trends and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from the Company’s estimates.
Leases (Accounted for as of January 1, 2019 and thereafter under ASC 842): Operating leases are included in Operating lease ROU assets, Operating lease liabilities and Long-term operating lease liabilities on the Company’s Condensed Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment, Current portion of long-term debt, and Long-term debt on the Condensed Consolidated Balance Sheets.
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2019 Q3 10-Q Report
|
Stericycle, Inc. • 10
|
Operating lease ROU assets, Operating lease liabilities and Long-term operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Nearly all of the Company’s lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company uses an estimated incremental borrowing rate, which is based on information available at the lease commencement. The Company used estimated incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company’s leases generally do not require material variable lease payments and generally do not contain options to purchase the leased property, any material residual value guarantees, or material restrictive covenants. At commencement, the Operating lease ROU asset is equal to the lease liability and is adjusted for lease incentives and initial direct costs incurred. The Company reviews all options to extend, terminate, or purchase its ROU assets at the commencement of the lease and on an ongoing basis and accounts for these options when they are reasonably certain of being exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, including payments for common area maintenance and vehicle maintenance costs, which are accounted for separately for each class of underlying assets.
In addition, the Company applies the short-term lease recognition exemption for leases with terms at commencement of not greater than 12 months.
Adoption of New Accounting Standards
Leases
In February 2016, the FASB issued ASC 842. The amended guidance, which was effective for the Company on January 1, 2019, requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and previously classified as operating leases. The Company elected the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented.
The Company elected to apply a package of practical expedients which allowed it to not reassess at transition: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance.
The standard had a material impact on the Company’s Condensed Consolidated Balance Sheets, but did not have an impact on the Company’s Condensed Consolidated Statements of (Loss) Income. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged (see Note 5 – Leases).
Derivatives and Hedging
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 amends the hedge accounting recognition and presentation requirements with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and enhance the transparency and understandability of hedge transactions. In addition, ASU 2017-12 makes improvements to simplify the application of the hedge accounting guidance. ASU 2017-12 was effective for the Company on January 1, 2019, and the adoption did not have a material impact on the Condensed Consolidated Financial Statements.
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2019 Q3 10-Q Report
|
Stericycle, Inc. • 11
|
Stranded Tax Effects
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the Tax Act to be reclassified to retained earnings. ASU 2018-02 was effective for the Company on January 1, 2019. The adoption of ASU 2018-02 did not have a material impact on the Condensed Consolidated Financial Statements.
Stock Compensation
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 extends the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 was effective for the Company on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Condensed Consolidated Financial Statements.
Changes in Stockholders Equity and Noncontrolling Interest
In August 2018, the SEC issued the final rule amending Rule 3-04 of Regulation S-X (“Rule 3-04”), which requires entities to disclose changes in stockholders’ equity in the form of a reconciliation for the current and comparative year-to-date interim periods, with subtotals for each interim period. The Company adopted Rule 3-04 in the first quarter of fiscal 2019.
Accounting Standards Issued But Not Yet Adopted
Financial Instrument Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” (“ASU 2016-13”) associated with the measurement of credit losses on financial instruments. ASU 2016-13 replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is 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 is effective for us on January 1, 2020. The Company is evaluating the impact of adopting ASU 2016-13 on the Condensed Consolidated Financial Statements.
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 250-40): 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 is effective on January 1, 2020 with early adoption permitted, including adoption in any interim period. The Company is evaluating the impact of adopting ASU 2018-15 on the Condensed Consolidated Financial Statements.
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2019 Q3 10-Q Report
|
Stericycle, Inc. • 12
|
NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenues
The following table presents revenues disaggregated by service and primary geographical regions, and includes a reconciliation of disaggregated revenue to revenue reported by reportable segments, Domestic and Canada RWCS and International RWCS:
|
In millions
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Reportable Segment
|
Domestic and Canada RWCS
|
|
|
International RWCS
|
|
|
All Other
|
|
|
|
|
|
|
Revenues by Service:
|
United States
|
|
Canada
|
|
|
Europe
|
|
Others
|
|
|
United States
|
|
|
Total
|
|
|
Medical Waste and Compliance Solutions
|
$
|
281.4
|
|
$
|
10.3
|
|
|
$
|
58.6
|
|
$
|
40.6
|
|
|
$
|
-
|
|
|
$
|
390.9
|
|
|
Hazardous Waste Solutions
|
|
84.0
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
84.0
|
|
|
Total RWCS revenues
|
|
365.4
|
|
|
10.3
|
|
|
|
58.6
|
|
|
40.6
|
|
|
|
-
|
|
|
|
474.9
|
|
|
Secure Information Destruction Services
|
|
173.4
|
|
|
16.3
|
|
|
|
29.9
|
|
|
3.0
|
|
|
|
-
|
|
|
|
222.6
|
|
|
Manufacturing and Industrial Services
|
|
61.6
|
|
|
6.0
|
|
|
|
0.8
|
|
|
8.3
|
|
|
|
-
|
|
|
|
76.7
|
|
|
Communication Services
|
|
-
|
|
|
4.0
|
|
|
|
0.4
|
|
|
-
|
|
|
|
34.3
|
|
|
|
38.7
|
|
|
Expert Solutions
|
|
-
|
|
|
2.3
|
|
|
|
1.9
|
|
|
-
|
|
|
|
16.0
|
|
|
|
20.2
|
|
|
Total CRS revenues
|
|
-
|
|
|
6.3
|
|
|
|
2.3
|
|
|
-
|
|
|
|
50.3
|
|
|
|
58.9
|
|
|
Total
|
$
|
600.4
|
|
$
|
38.9
|
|
|
$
|
91.6
|
|
$
|
51.9
|
|
|
$
|
50.3
|
|
|
$
|
833.1
|
|
|
Reportable Segment Total
|
|
|
|
$
|
639.3
|
|
|
|
|
|
$
|
143.5
|
|
|
$
|
50.3
|
|
|
$
|
833.1
|
|
|
In millions
|
|
|
|
Three months ended September 30, 2018
|
|
|
Reportable Segment
|
Domestic and Canada RWCS
|
|
|
International RWCS
|
|
|
All Other
|
|
|
|
|
|
|
Revenues by Service:
|
United States
|
|
Canada
|
|
|
Europe
|
|
Others
|
|
|
United States
|
|
|
Total
|
|
|
Medical Waste and Compliance Solutions
|
$
|
283.4
|
|
$
|
9.7
|
|
|
$
|
58.9
|
|
$
|
42.6
|
|
|
$
|
-
|
|
|
$
|
394.6
|
|
|
Hazardous Waste Solutions
|
|
82.0
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
82.0
|
|
|
Total RWCS revenues
|
|
365.4
|
|
|
9.7
|
|
|
|
58.9
|
|
|
42.6
|
|
|
|
-
|
|
|
|
476.6
|
|
|
Secure Information Destruction Services
|
|
178.4
|
|
|
16.3
|
|
|
|
29.9
|
|
|
3.0
|
|
|
|
-
|
|
|
|
227.6
|
|
|
Manufacturing and Industrial Services
|
|
62.9
|
|
|
5.4
|
|
|
|
1.0
|
|
|
9.8
|
|
|
|
-
|
|
|
|
79.1
|
|
|
Communication Services
|
|
-
|
|
|
3.5
|
|
|
|
4.0
|
|
|
-
|
|
|
|
37.2
|
|
|
|
44.7
|
|
|
Expert Solutions
|
|
-
|
|
|
2.7
|
|
|
|
1.9
|
|
|
-
|
|
|
|
22.3
|
|
|
|
26.9
|
|
|
Total CRS revenues
|
|
-
|
|
|
6.2
|
|
|
|
5.9
|
|
|
-
|
|
|
|
59.5
|
|
|
|
71.6
|
|
|
Total
|
$
|
606.7
|
|
$
|
37.6
|
|
|
$
|
95.7
|
|
$
|
55.4
|
|
|
$
|
59.5
|
|
|
$
|
854.9
|
|
|
Reportable Segment Total
|
|
|
|
$
|
644.3
|
|
|
|
|
|
$
|
151.1
|
|
|
$
|
59.5
|
|
|
$
|
854.9
|
|
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 13
|
|
In millions
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Reportable Segment
|
Domestic and Canada RWCS
|
|
|
International RWCS
|
|
|
All Other
|
|
|
|
|
|
|
Revenues by Service:
|
United States
|
|
Canada
|
|
|
Europe
|
|
Others
|
|
|
United States
|
|
|
Total
|
|
|
Medical Waste and Compliance Solutions
|
$
|
842.6
|
|
$
|
31.0
|
|
|
$
|
181.9
|
|
$
|
123.2
|
|
|
$
|
-
|
|
|
$
|
1,178.7
|
|
|
Hazardous Waste Solutions
|
|
240.4
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
240.4
|
|
|
Total RWCS revenues
|
|
1,083.0
|
|
|
31.0
|
|
|
|
181.9
|
|
|
123.2
|
|
|
|
-
|
|
|
|
1,419.1
|
|
|
Secure Information Destruction Services
|
|
535.5
|
|
|
48.9
|
|
|
|
90.3
|
|
|
9.3
|
|
|
|
-
|
|
|
|
684.0
|
|
|
Manufacturing and Industrial Services
|
|
178.8
|
|
|
17.5
|
|
|
|
2.7
|
|
|
23.6
|
|
|
|
-
|
|
|
|
222.6
|
|
|
Communication Services
|
|
-
|
|
|
11.9
|
|
|
|
3.9
|
|
|
-
|
|
|
|
103.7
|
|
|
|
119.5
|
|
|
Expert Solutions
|
|
-
|
|
|
7.3
|
|
|
|
5.3
|
|
|
-
|
|
|
|
51.2
|
|
|
|
63.8
|
|
|
Total CRS revenues
|
|
-
|
|
|
19.2
|
|
|
|
9.2
|
|
|
-
|
|
|
|
154.9
|
|
|
|
183.3
|
|
|
Total
|
$
|
1,797.3
|
|
$
|
116.6
|
|
|
$
|
284.1
|
|
$
|
156.1
|
|
|
$
|
154.9
|
|
|
$
|
2,509.0
|
|
|
Reportable Segment Total
|
|
|
|
$
|
1,913.9
|
|
|
|
|
|
$
|
440.2
|
|
|
$
|
154.9
|
|
|
$
|
2,509.0
|
|
|
In millions
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Reportable Segment
|
Domestic and Canada RWCS
|
|
|
International RWCS
|
|
|
|
|
All Other
|
|
|
|
|
|
|
Revenues by Service:
|
United States
|
|
Canada
|
|
|
Europe
|
|
Others
|
|
|
|
|
United States
|
|
|
Total
|
|
|
Medical Waste and Compliance Solutions
|
$
|
860.5
|
|
$
|
29.4
|
|
|
$
|
189.2
|
|
$
|
143.7
|
|
|
|
|
$
|
-
|
|
|
$
|
1,222.8
|
|
|
Hazardous Waste Solutions
|
|
235.0
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
235.0
|
|
|
Total RWCS revenues
|
|
1,095.5
|
|
|
29.4
|
|
|
|
189.2
|
|
|
143.7
|
|
|
|
|
|
-
|
|
|
|
1,457.8
|
|
|
Secure Information Destruction Services
|
|
528.3
|
|
|
49.1
|
|
|
|
91.0
|
|
|
9.1
|
|
|
|
|
|
-
|
|
|
|
677.5
|
|
|
Manufacturing and Industrial Services
|
|
186.8
|
|
|
16.6
|
|
|
|
15.9
|
|
|
33.8
|
|
|
|
|
|
-
|
|
|
|
253.1
|
|
|
Communication Services
|
|
-
|
|
|
12.7
|
|
|
|
13.3
|
|
|
-
|
|
|
|
|
|
112.9
|
|
|
|
138.9
|
|
|
Expert Solutions
|
|
-
|
|
|
8.9
|
|
|
|
7.0
|
|
|
-
|
|
|
|
|
|
90.0
|
|
|
|
105.9
|
|
|
Total CRS revenues
|
|
-
|
|
|
21.6
|
|
|
|
20.3
|
|
|
-
|
|
|
|
|
|
202.9
|
|
|
|
244.8
|
|
|
Total
|
$
|
1,810.6
|
|
$
|
116.7
|
|
|
$
|
316.4
|
|
$
|
186.6
|
|
|
|
|
$
|
202.9
|
|
|
$
|
2,633.2
|
|
|
Reportable Segment Total
|
|
|
|
$
|
1,927.3
|
|
|
|
|
|
$
|
503.0
|
|
|
|
|
$
|
202.9
|
|
|
$
|
2,633.2
|
|
Contract Liabilities
Contract liabilities at September 30, 2019 and December 31, 2018 were $13.4 million and $15.0 million, respectively. Contract liabilities as of September 30, 2019 are expected to be recognized in Revenues, as the amounts are earned, which will be over the next twelve months.
Contract Acquisition Costs
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 6.3 years.
During the three months ended September 30, 2019 and 2018, the Company amortized $2.2 million and $1.8 million, respectively, of deferred sales incentives to SG&A.
During the nine months ended September 30, 2019 and 2018, the Company amortized $6.5 million and $5.0 million, respectively, of deferred sales incentives to SG&A.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 14
|
Total contract acquisition costs, net of accumulated amortization, were classified as follows:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Other current assets
|
$
|
8.3
|
|
|
$
|
8.5
|
|
|
Other assets
|
|
25.5
|
|
|
|
23.3
|
|
|
Total contract acquisition costs
|
$
|
33.8
|
|
|
$
|
31.8
|
|
NOTE 3 – RESTRUCTURING, DIVESTITURES, AND DISPOSAL GROUPS HELD-FOR-SALE
Restructuring - Business Transformation
Stericycle is focused on driving long-term growth, profitability and delivering enhanced shareholder value.
As part of overall business strategy, in the third quarter of 2017, the Company initiated a comprehensive multi-year Business Transformation, which it expects to complete by 2022, with the objective to improve long-term operational and financial performance. Through September 30, 2019, the Company has incurred nearly all the originally anticipated employee termination charges, including incremental charges related principally to executive management, in connection with its initial restructuring estimate. As the Company continues to consider each key initiative of the Business Transformation additional charges may be recorded. The amount, timing and recognition of any such charges will be affected by the occurrence of triggering events, as defined under U.S. GAAP, among other factors.
We did not recognize any executive and employee termination costs during the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Company recognized $5.3 million in charges related to executive and employee termination costs, of which $4.6 million was recognized within All Other, $0.6 million was recognized within the International RWCS reportable segment, and $0.1 million was recognized within the Domestic and Canada RWCS reportable segment. These amounts are reflected as part of SG&A and will be paid out over approximately two years. As of September 30, 2019, approximately $3.9 million in future payments remained accrued.
During the three and nine months ended September 30, 2018, in connection with its evolving future information systems strategy, the Company recognized a $6.8 million non-cash impairment charge for software, which is reflected as part of COR. The assets were held by the Domestic and Canada RWCS reportable segment.
During the three and nine months ended September 30, 2018, the Company recognized $1.0 million in charges related to site closures/consolidation within the Domestic and Canada RCS reporting segment, which are reflected as part of COR. The charges comprised $0.5 million related to lease termination fees and $0.5 million related to non-cash impairment charges for leasehold improvements.
During the three and nine months ended September 30, 2018, the Company incurred $0.1 million and $2.2 million, respectively, of severance payments related to Business Transformation. The Domestic and Canada RWCS and International RWCS reportable segments incurred $1.7 million and $0.3 million, respectively, with the remaining $0.2 million impacting All Other. These amounts were recognized in SG&A and were fully paid as of September 30, 2018.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 15
|
Restructuring – Other
During the three months and nine ended September 30, 2019 the Company recognized, in COR, total charges of $1.8 million relating to a facility exit in Romania, which is included in the International RWCS reportable segment. The charges comprised $1.4 million related to non-cash impairment charges for permits and long-lived assets, $0.2 million related to employee severance and $0.2 million related to closure and exit costs. The amounts related to employee severance remain unpaid as of September 30, 2019.
During the three months ended September 30, 2019 recognized, in COR, total charges of $0.9 million relating to a site closure in Brazil, which is included in the International RWCS reportable segment. The charges comprised $0.4 million related to non-cash impairment charges for long-lived assets, $0.4 million related to lease exit costs and $0.1 million related to employee severance.
During the nine months ended September 30, 2019 recognized, in COR, $2.0 million related to impairment charges for long-lived assets arising from a site movement in the U.S., which is included in the Domestic and Canada RWCS reportable segment.
During the nine months ended September 30, 2019 recognized, in COR, total charges of $2.2 million related primarily to impairment charges for long-lived assets due to a site closure in the U.K., which is included in the International RWCS reportable segment.
During the nine months ended September 30, 2019 recognized, in SG&A, total charges of $1.9 million related to two site closures in Brazil, which is included in the International RWCS reportable segment. The charges comprised $1.0 million related to site clean-costs, $0.4 million related to non-cash impairment charges for long-lived assets, $0.4 million related to lease exit costs and $0.1 million related to employee severance.
During the three and nine months ended September 30, 2018, the Company recognized, in SG&A, severance costs of approximately $1.1 million, associated with a reduction in headcount undertaken as part of Operational Optimization. The charges were incurred within All Other and the payments made in the fourth quarter of 2018.
Divestitures
During the nine months ended September 30, 2019, the Company completed, as part of its portfolio rationalization, the sale of the non-core U.K. based texting business, a component of the International RWCS reportable segment for proceeds of $14.9 million. During the three months and nine months ended September 30, 2019, the Company recognized a pre-tax loss of approximately $0.7 million and a pre-tax gain of approximately $5.1 million, respectively recognized in SG&A.
During the nine months ended September 30, 2018, the Company entered into an agreement to sell a component of the Domestic and Canada RWCS reportable segment, which closed on August 1, 2018. The Company recognized non-cash impairment charges of $6.9 million in SG&A in connection with reclassifying the assets and liabilities associated with this business as held-for-sale.
During the nine months ended September 30, 2018, the Company completed the sale of a business in the U.K., a component of the International RWCS reportable segment, for consideration of approximately $11.5 million, of which $8.2 million was received in cash at closing and $3.3 million which was held in escrow until it was received in August 2019. Prior to sale, the Company had recognized total non-cash
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 16
|
impairment charges of $14.8 million in connection with reclassifying the assets and liabilities as held-for-sale and subsequent changes in the fair value of these assets, including $4.2 million during the nine months ended September 30, 2018. These charges were included in SG&A.
Assets and Liabilities Held-for-Sale
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 are classified as held for sale in the accompanying Condensed Consolidated Balance Sheets. These businesses are part of CRS, which is principally presented in All Other. In October 2019, the Company entered into definitive agreements and completed the sales of these businesses for cash consideration of $36.4 million. In connection with the sale agreement for the TAS business, the Company entered into a TSA with the buyer for a period of up to 15 months. The Company will allocate and deferred a portion of the proceeds, which will be recognized over the duration of the TSA period offsetting the expenses incurred to deliver the TSA services that are not reimbursed by the buyer.
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 are classified as held for sale in the accompanying Condensed Consolidated Balance Sheets. 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 translation adjustment of $18.0 million was included as part of the carrying value of the disposal group when measuring the impairment charge.
During the three months ended September 30, 2019 the Company recognized the following non-cash impairment charges associated with classifying certain assets and liabilities as held-for-sale as the carrying value of the net assets held for sale exceeded their fair value less estimated costs to sell:
|
In millions
|
|
|
Three Months Ended September 30,
|
|
|
2019
|
|
|
|
CRS businesses
|
$
|
42.3
|
|
|
|
Mexico operations
|
|
40.1
|
|
|
|
Total charges
|
$
|
82.4
|
|
|
As of September 30, 2019, the Company had the following assets and liabilities classified as held-for-sale:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
Total current assets (primarily receivables)
|
$
|
31.5
|
|
|
Fixed assets
|
|
13.8
|
|
|
Operating lease right-of-use assets
|
|
3.3
|
|
|
Intangibles
|
|
47.5
|
|
|
Held-for-sale valuation allowance
|
|
(65.9
|
)
|
|
Assets held-for-sale
|
$
|
30.2
|
|
|
|
|
|
|
|
Total current liabilities
|
$
|
15.2
|
|
|
Long-term operating lease liabilities
|
|
2.2
|
|
|
Liabilities held-for-sale
|
$
|
17.4
|
|
There were no assets held-for-sale as of December 31, 2018.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 17
|
The Company anticipates additional impacts for the individual transactions related to estimated transaction costs, foreign exchange volatility, and adjustments to working capital, prior to close and subsequently based upon the terms of the applicable agreement. Operating results for these businesses will be excluded from the financial statements subsequent to the close date of the applicable transaction.
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill:
Changes in the carrying amount of goodwill by reportable segment were as follows:
|
In millions
|
|
|
|
Domestic and
Canada RWCS
|
|
|
International RWCS
|
|
|
All Other
|
|
|
Total
|
|
|
Balance as of December 31, 2018
|
$
|
2,848.4
|
|
|
$
|
373.8
|
|
|
$
|
-
|
|
|
$
|
3,222.2
|
|
|
Valuation adjustments from prior year acquisitions
|
|
(3.6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3.6
|
)
|
|
Impairment during the period
|
|
-
|
|
|
|
(20.9
|
)
|
|
|
-
|
|
|
|
(20.9
|
)
|
|
Divestiture and held-for-sale adjustments (Note 3)
|
|
(2.4
|
)
|
|
|
(6.2
|
)
|
|
|
-
|
|
|
|
(8.6
|
)
|
|
Changes due to foreign currency fluctuations
|
|
3.7
|
|
|
|
(14.4
|
)
|
|
|
-
|
|
|
|
(10.7
|
)
|
|
Balance as of September 30, 2019
|
$
|
2,846.1
|
|
|
$
|
332.3
|
|
|
$
|
-
|
|
|
$
|
3,178.4
|
|
During the first quarter of 2019, there were business, market, and strategic developments which negatively impacted the estimated cash flows of the Company’s 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 $20.9 million of non-cash goodwill impairment charges related to the Latin America reporting unit. Following the impairment, the Latin America reporting unit has no remaining goodwill.
Accumulated non-cash goodwill impairment charges by reportable segment were as follows:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
International RWCS
|
$
|
158.3
|
|
|
$
|
137.4
|
|
|
All Other
|
|
286.3
|
|
|
|
286.3
|
|
|
Total
|
$
|
444.6
|
|
|
$
|
423.7
|
|
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 18
|
Intangible Assets:
Intangible assets were as follows:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Value
|
|
|
Amortizable intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
1,499.9
|
|
|
$
|
562.1
|
|
|
$
|
937.8
|
|
|
$
|
1,591.5
|
|
|
$
|
492.0
|
|
|
$
|
1,099.5
|
|
|
Covenants not-to-compete
|
|
5.1
|
|
|
|
3.8
|
|
|
|
1.3
|
|
|
|
5.1
|
|
|
|
3.2
|
|
|
|
1.9
|
|
|
Tradenames
|
|
3.8
|
|
|
|
1.0
|
|
|
|
2.8
|
|
|
|
3.9
|
|
|
|
1.2
|
|
|
|
2.7
|
|
|
Operating permits
|
|
4.1
|
|
|
|
0.4
|
|
|
|
3.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
11.8
|
|
|
|
4.0
|
|
|
|
7.8
|
|
|
|
12.3
|
|
|
|
3.5
|
|
|
|
8.8
|
|
|
Indefinite lived intangibles:
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating permits
|
|
202.6
|
|
|
|
-
|
|
|
|
202.6
|
|
|
|
212.5
|
|
|
|
-
|
|
|
|
212.5
|
|
|
Tradenames
|
|
310.8
|
|
|
|
-
|
|
|
|
310.8
|
|
|
|
312.3
|
|
|
|
-
|
|
|
|
312.3
|
|
|
Total
|
$
|
2,038.1
|
|
|
$
|
571.3
|
|
|
$
|
1,466.8
|
|
|
$
|
2,137.6
|
|
|
$
|
499.9
|
|
|
$
|
1,637.7
|
|
Changes in the carrying amount of intangible assets were as follows:
|
In millions
|
|
|
|
Total
|
|
|
Balance as of December 31, 2018
|
$
|
1,637.7
|
|
|
Intangible assets acquired during the period
|
|
0.5
|
|
|
Valuation adjustments for prior year acquisitions
|
|
3.5
|
|
|
Impairments during the period
|
|
(2.6
|
)
|
|
Divestitures and assets held-for-sale adjustments (Note 3)
|
|
(53.2
|
)
|
|
Amortization during the period
|
|
(110.5
|
)
|
|
Changes due to foreign currency fluctuations
|
|
(8.6
|
)
|
|
Balance as of September 30, 2019
|
$
|
1,466.8
|
|
The estimated amortization expense for each of the next five years (based upon exchange rates at September 30, 2019) is as follows for the years ending December 31:
|
In millions
|
|
|
2019 (remainder)
|
$
|
34.8
|
|
|
2020
|
$
|
135.5
|
|
|
2021
|
$
|
129.0
|
|
|
2022
|
$
|
127.5
|
|
|
2023
|
$
|
124.9
|
|
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 19
|
NOTE 5 – LEASES
The Company has operating leases for transfer sites, processing facilities, communication centers, corporate and regional offices, vehicles, and certain equipment.
The components of net lease cost were as follows:
|
In millions
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Operating lease cost
|
$
|
27.7
|
|
|
$
|
85.6
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
|
0.8
|
|
|
|
2.4
|
|
|
Interest on lease liabilities
|
|
0.2
|
|
|
|
0.6
|
|
|
Net lease cost
|
$
|
28.7
|
|
|
$
|
88.6
|
|
Short-term lease cost, variable lease cost and sublease income were not significant during the period.
Supplemental cash flow information related to leases was as follows:
|
In millions
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
78.0
|
|
|
Operating cash flows from finance leases
|
|
0.4
|
|
|
Financing cash flows from finance leases
|
|
2.4
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
122.2
|
|
|
Finance leases
|
|
2.1
|
|
Finance lease assets, net of accumulated amortization, were $20.8 million as of September 30, 2019 and are included in Property, Plant and Equipment, net on the Condensed Consolidated Balance Sheet.
Information regarding lease terms and discount rates is as follows:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
Weighted average remaining lease term (years):
|
|
|
|
|
Operating leases
|
|
6.3
|
|
|
Finance leases
|
|
6.2
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
4.1
|
%
|
|
Finance leases
|
|
5.0
|
%
|
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 20
|
Maturities of lease liabilities as of September 30, 2019, were as follows:
|
In millions
|
|
|
|
Operating leases
|
|
|
Finance leases
|
|
|
2019
|
$
|
27.5
|
|
|
$
|
0.8
|
|
|
2020
|
|
99.8
|
|
|
|
3.3
|
|
|
2021
|
|
82.9
|
|
|
|
2.4
|
|
|
2022
|
|
65.1
|
|
|
|
2.5
|
|
|
2023 and thereafter
|
|
189.6
|
|
|
|
12.1
|
|
|
Total lease payments
|
|
464.9
|
|
|
|
21.1
|
|
|
Less: Interest
|
|
55.8
|
|
|
|
2.2
|
|
|
Present value of lease liabilities
|
$
|
409.1
|
|
|
$
|
18.9
|
|
As of September 30, 2019, the Company had approximately $13.0 million of additional operating leases and $11.0 million of additional finance leases, primarily related to buildings, for which the underlying operating lease had not yet commenced. Operating leases are expected to commence in fiscal years 2019 and 2020 with lease terms of 1 to 25 years. Finance leases are expected to commence in fiscal year 2019 with lease terms extending to 25 years.
NOTE 6 – DEBT
The Company’s Debt consisted of the following:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
$1.2 billion Senior Credit Facility, due in 2022
|
$
|
731.5
|
|
|
$
|
583.3
|
|
|
$1.3 billion Term Loan, due in 2022
|
|
1,227.3
|
|
|
|
902.5
|
|
|
$600 million Senior Notes, due 2024
|
|
600.0
|
|
|
|
-
|
|
|
$125 million private placement notes, due in 2019
|
|
-
|
|
|
|
125.0
|
|
|
$225 million private placement notes, due in 2020
|
|
-
|
|
|
|
225.0
|
|
|
$150 million private placement notes, due in 2021
|
|
-
|
|
|
|
150.0
|
|
|
$125 million private placement notes, due in 2022
|
|
-
|
|
|
|
125.0
|
|
|
$200 million private placement notes, due in 2022
|
|
-
|
|
|
|
200.0
|
|
|
$100 million private placement notes, due in 2023
|
|
-
|
|
|
|
100.0
|
|
|
$150 million private placement notes, due in 2023
|
|
-
|
|
|
|
150.0
|
|
|
Promissory notes and deferred consideration weighted average maturity 2.5 years at 2019 and 2.7 years at 2018
|
|
86.6
|
|
|
|
120.9
|
|
|
Foreign bank debt weighted average maturity 1.5 years at 2019 and 1.9 years at 2018
|
|
79.8
|
|
|
|
76.7
|
|
|
Obligations under finance leases
|
|
18.9
|
|
|
|
20.3
|
|
|
Total debt
|
|
2,744.1
|
|
|
|
2,778.7
|
|
|
Less: current portion of total debt
|
|
111.9
|
|
|
|
104.3
|
|
|
Less: unamortized debt issuance costs
|
|
15.2
|
|
|
|
10.5
|
|
|
Long-term portion of total debt
|
$
|
2,617.0
|
|
|
$
|
2,663.9
|
|
On June 14, 2019, the Company completed the following transactions:
|
|
a)
|
Issued $600.0 million at par of aggregate principal Senior Notes, due July 2024, which are unsecured and bear interest at 5.375% per annum, payable on January 15 and July 15 of each year. The Senior Notes are fully and unconditionally guaranteed by each of the Company’s current domestic subsidiaries that guarantee the Company’s Senior Credit Facility. The Indenture limits the ability of the Company and its subsidiaries to incur certain liens, enter into certain sale
|
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 21
|
|
|
|
and leaseback transactions, and consolidate, merge or sell all or substantially all of their assets.
|
The Senior Notes will be redeemable, at the option of the Company, in whole or in part, at any time on or after July 15, 2021, at the redemption prices specified in the Indenture along with accrued interest. At any time prior to July 15, 2021, the Senior Notes may be redeemed, at the option of the Company, in whole or in part, at a redemption price of 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest. In addition, the Company may redeem up to 40% of the Senior Notes at any time before July 15, 2021, with the net cash proceeds from certain equity offerings at a redemption price equal to 105.375%, plus accrued and unpaid interest.
In the event of both a change of control of the Company and a rating downgrade by the rating agencies, the Company will be required to offer to repurchase all outstanding Senior Notes at 101% of their principal amount, plus accrued and unpaid interest.
The Indenture contains customary events of default, which include (subject in certain cases to customary grace and cure periods), nonpayment of principal or interest; breach of other agreements in the Indenture; failure to pay certain other indebtedness; certain events of bankruptcy or insolvency; failure to pay certain final judgments; and failure of certain guarantees to be enforceable.
|
|
b)
|
Executed the Fourth Amendment which amends the Credit Agreement to (i) provide an incremental Term Loan of $365.0 million, (ii) modify the definition of “Consolidated EBITDA” to allow for the continuation of cash addbacks to EBITDA, up to a maximum of $200.0 million, (iii) revise the financial covenant requiring that the Company’s Consolidated Leverage Ratio cannot exceed: (a) 4.50 to 1.00, in the case of any fiscal quarter ending on or before March 31, 2020, (b) 4.25 to 1.00, in the case of any fiscal quarter ending during the period from April 1, 2020 through September 30, 2020, (c) 4.00 to 1.00, in the case of the fiscal quarter ending December 31, 2020, and (d) 3.75 to 1.00, in the case of any fiscal quarter ending thereafter and (iv) make certain other modifications to negative covenants related to restricted payments and investments that the Company may make.
|
|
|
c)
|
Repaid in full $1.075 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 issuance of the Senior Notes the Company incurred $7.1 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.
In connection with the Fourth Amendment, the Company incurred issuance costs of $2.0 million, of which $0.2 million has 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.
In connection with the repayment of the private placement notes, the Company incurred a loss on early extinguishment of debt of $23.1 million comprising make whole premiums, payable under the terms of certain of the private placement notes, of $20.4 million and the write-off of $2.7 million of unamortized debt issuance costs associated with the private placement notes.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 22
|
In addition, $3.4 million, representing the unamortized portion of premiums associated with interest rate locks executed in connection with the issuance of certain of the private placement notes, was recorded in Interest expense, net. These amounts were previously included in Accumulated other comprehensive loss.
As of September 30, 2019, the Company was in compliance with its Consolidated Leverage Ratio covenant, with an actual ratio of 4.41 to 1.00, which was below the allowed maximum ratio of 4.50 to 1.00 as set forth in the Fourth Amendment.
Based upon the Company’s current financial projections, it is reasonably likely that the Company could exceed this Consolidated Leverage Ratio threshold at some point in the next twelve 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 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, require cash collateralization of letters of credit, and/or cause their loans to become due and payable in full which could cause the Company and the Company’s subsidiaries to enter into bankruptcy or liquidation.
The Company has the ability and intends to use some of the availability under the revolving credit facility to refinance approximately $13.9 million of foreign debt due in 2020 and accordingly has presented the balance of these notes within the long-term portion of total debt as of September 30, 2019.
Amounts committed to outstanding letters of credit, the unused portion of the Company’s Senior Credit Facility and other letters of credit outstanding as of September 30, 2019 and December 31, 2018, were as follows:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Outstanding letters of credit under Senior Credit Facility
|
$
|
36.2
|
|
|
$
|
63.1
|
|
|
Unused portion of the Senior Credit Facility
|
|
432.3
|
|
|
|
553.6
|
|
|
Other letters of credit outstanding
|
|
52.3
|
|
|
|
52.2
|
|
NOTE 7 – INCOME TAXES
Income tax benefit was $8.6 million for the three months ended September 30, 2019 compared to expense of $10.9 million for the three months ended September 30, 2018. The effective tax rates for the three months ended September 30, 2019 and 2018 were 12.7% and 31.7%, respectively. The effective tax rate for the three months ended September 30, 2019 is principally due to the impact of valuation allowances recognized against current losses in several countries and the impact of certain impairments of assets held-for-sale partially offset by the impact of certain tax reserves adjustments. The effective tax rate for the three months ended September 30, 3018, was impacted by certain tax reserve and deferred tax adjustments.
Income tax benefit was $8.0 million for the nine months ended September 30, 2019 compared to an expense of $27.1 million for nine months ended September 30, 2018. The effective tax rates in the first nine months of 2019 and 2018 were 5.9% and 26.9%, respectively. The effective tax rate for the nine months ended September 30, 2019, is principally due to the impact of certain impairments of assets held-for-sale and non-deductible goodwill impairments, valuation allowances recognized against current
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 23
|
period losses in several countries, partially offset by the impact of certain tax reserves adjustments. The effective tax rate for the nine months ended September 30, 3018, was impacted by certain tax reserve and deferred tax adjustments.
During the three and nine months ended September 30, 2018, the Company recorded $0.4 million in measurement-period adjustments to its estimates associated with the impacts of the Tax Act.
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.
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 reviewed and has subsequently agreed to hold discussions regarding the PFA. As of September 30, 2019, prior to the filing of the 2018 tax return the Company had established a long term receivable and an amount within the uncertain tax positions to reflect its estimate of the potential refund should its claim be successful. Any positive income tax benefit resulting from the claim in a future period will 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.
NOTE 8 – FAIR VALUE MEASUREMENTS
For its derivative financial instruments, the Company uses a market approach valuation technique based on observable market transactions of spot and forward rates.
As of December 31, 2018, the Company recognized an asset of $0.3 million, established using Level 2 inputs, related to the fair value of the U.S. dollar-Canadian dollar foreign currency swap which was classified within Other assets. As of September 30, 2019, this balance was fully amortized. The objective of the swap was to offset the foreign exchange risk to certain U.S. dollar equivalent cash outflows for the Company’s Canadian subsidiary.
The Company’s contingent consideration liabilities, recorded using Level 3 inputs, as of September 30, 2019 and December 31, 2018 were classified as follows:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
December 31,
2018
|
|
|
Other current liabilities
|
$
|
0.6
|
|
|
$
|
2.8
|
|
|
Other liabilities
|
|
7.5
|
|
|
|
7.5
|
|
|
Total contingent consideration
|
$
|
8.1
|
|
|
$
|
10.3
|
|
Contingent consideration represents amounts expected to be paid as part of acquisition consideration only if certain future events occur. These events are usually the achievement of targets for revenues, earnings, or other milestones related to the business acquired. The Company arrives at the fair value of contingent consideration by applying a weighted probability of potential payment outcomes. The calculation of these potential outcomes is dependent on both past financial performance and management assumptions about future performance. If the financial performance measures were all fully
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 24
|
met, the Company’s maximum liability would be $10.6 million as of September 30, 2019. Contingent consideration liabilities are reassessed each reporting period.
Changes to contingent consideration were as follows:
|
In millions
|
|
|
Contingent consideration as of December 31, 2018
|
|
10.3
|
|
|
Decrease due to payments
|
|
(2.2
|
)
|
|
Contingent consideration as of September 30, 2019
|
$
|
8.1
|
|
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions, the classification of a disposal group as held-for-sale, or the remeasurement of assets resulting in impairment charges. See Note 3 – Restructuring, Divestitures, and Disposal Groups Held-for-Sale and Note 4 – Goodwill and Other Intangible Assets for further discussion of impairment charges recognized during the periods presented. These values are generated using Level 3 inputs.
Fair Value of Debt: The estimated fair value of the Company’s debt obligations, using Level 2 inputs, as compared to its carrying value was as follows:
|
In billions
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Fair value of debt obligations
|
$
|
2.77
|
|
|
$
|
2.75
|
|
|
Carrying value of debt obligations
|
|
2.74
|
|
|
|
2.78
|
|
Fair value was estimated using an income approach by applying market interest rates for comparable instruments.
Accounts receivable, accounts payable and accrued liabilities are financial assets and liabilities, respectively, with carrying values that approximate fair value using Level 3 inputs.
NOTE 9 – STOCK-BASED COMPENSATION
Stock-Based Compensation Expense:
The following table presents the total stock-based compensation expense resulting from stock option awards, RSUs, PSUs, and the ESPP included in SG&A in the Condensed Consolidated Statements of (Loss) Income:
|
In millions
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Stock option plan
|
$
|
0.9
|
|
|
$
|
2.5
|
|
|
$
|
6.8
|
|
|
$
|
8.4
|
|
|
RSUs
|
|
2.0
|
|
|
|
2.0
|
|
|
|
6.0
|
|
|
|
5.8
|
|
|
PSUs
|
|
0.5
|
|
|
|
1.9
|
|
|
|
0.2
|
|
|
|
4.5
|
|
|
ESPP
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
Total expense
|
$
|
3.7
|
|
|
$
|
6.7
|
|
|
$
|
13.7
|
|
|
$
|
19.5
|
|
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 25
|
The decrease in expense during the three and nine months ended September 30, 2019, as compared to the three and nine months ended September 30, 2018, was primarily the result of a lower estimated PSU achievement of 2019 performance goals and higher award forfeitures.
Stock Options:
Stock option activity for the nine months ended September 30, 2019 is summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Total Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in millions)
|
|
|
Outstanding at January 1, 2019
|
|
4,896,386
|
|
|
$
|
95.85
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
340,652
|
|
|
|
49.01
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(267,566
|
)
|
|
|
51.50
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(387,082
|
)
|
|
|
89.17
|
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
(373,137
|
)
|
|
|
97.89
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2019
|
|
4,209,253
|
|
|
$
|
95.37
|
|
|
|
3.2
|
|
|
$
|
0.8
|
|
|
Exercisable as of September 30, 2019
|
|
3,351,023
|
|
|
$
|
100.83
|
|
|
|
2.5
|
|
|
$
|
-
|
|
At September 30, 2019, the Company had $11.2 million of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 2.5 years. Current period grants vest over a period of three years.
There were no options exercised in the three months ended September 30, 2019. For the three months ended September 30, 2018, the intrinsic value of options exercised was $3.3 million. For the nine months ended September 30, 2019 and 2018, the intrinsic value of options exercised was $1.5 million and $4.8 million, respectively. The exercise intrinsic value represents the total pre-tax intrinsic value (the difference between the fair value on the trading day the option was exercised and the exercise price associated with the respective option).
The Company uses historical data to estimate expected life and volatility.
The estimated fair value of stock options at the time of the grant using the Black-Scholes option pricing model was as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Stock options granted (shares)
|
|
30,666
|
|
|
|
1,712
|
|
|
|
340,652
|
|
|
|
362,382
|
|
|
Weighted average fair value at grant date
|
$
|
13.74
|
|
|
$
|
18.09
|
|
|
$
|
14.41
|
|
|
$
|
16.87
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
4.34
|
|
|
|
4.89
|
|
|
|
4.40
|
|
|
|
4.89
|
|
|
Expected volatility
|
|
32.63
|
%
|
|
|
25.68
|
%
|
|
|
30.99
|
%
|
|
|
25.34
|
%
|
|
Expected dividend yield
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Risk free interest rate
|
|
1.76
|
%
|
|
|
2.74
|
%
|
|
|
2.35
|
%
|
|
|
2.58
|
%
|
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 26
|
Restricted Stock Units:
RSU activity for the nine months ended September 30, 2019 is summarized as follows:
|
|
Number of Units
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Total Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in millions)
|
|
|
Non-vested at January 1, 2019
|
|
429,810
|
|
|
$
|
72.02
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
262,864
|
|
|
|
48.57
|
|
|
|
|
|
|
|
|
|
|
Vested and released
|
|
(105,677
|
)
|
|
|
73.47
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(115,001
|
)
|
|
|
69.30
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of September 30, 2019
|
|
471,996
|
|
|
$
|
59.12
|
|
|
|
1.6
|
|
|
$
|
24.0
|
|
At September 30, 2019, the Company had approximately $21.8 million of total unrecognized compensation expense related to RSUs, which is expected to be recognized over a weighted average period of 2.7 years. The fair value of RSUs that vested during the three and nine months ended September 30, 2019 was $0.3 million and $5.1 million, respectively. Current period grants vest over a period of three years.
Performance-Based Restricted Stock Units:
PSU activity for the nine months ended September 30, 2019, is summarized as follows:
|
|
Number of Units
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Non-vested at January 1, 2019
|
|
115,508
|
|
|
$
|
63.77
|
|
|
Granted
|
|
157,451
|
|
|
|
48.59
|
|
|
Vested and released
|
|
(65,095
|
)
|
|
|
63.38
|
|
|
Forfeited
|
|
(84,936
|
)
|
|
|
58.11
|
|
|
Non-vested as of September 30, 2019
|
|
122,928
|
|
|
$
|
48.45
|
|
At September 30, 2019, the Company had approximately $0.6 million of total unrecognized compensation expense related to the 2019 installments of PSUs. At September 30, 2019, approximately 227,000 of additional installments of PSUs exist which will vest, or not, based on achievement of performance goals to be established for fiscal years 2020 through 2021.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 27
|
NOTE 10 – (LOSS) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per share:
|
In millions, except per share data
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Stericycle, Inc.
|
$
|
(59.2
|
)
|
|
$
|
23.5
|
|
|
$
|
(127.5
|
)
|
|
$
|
73.7
|
|
|
Mandatory convertible preferred stock dividend
|
|
-
|
|
|
|
(8.4
|
)
|
|
|
-
|
|
|
|
(25.5
|
)
|
|
Gain on repurchases of preferred stock
|
|
-
|
|
|
|
2.4
|
|
|
|
-
|
|
|
|
16.9
|
|
|
Numerator for basic (loss) earnings per share attributable to Stericycle, Inc. common shareholders
|
$
|
(59.2
|
)
|
|
$
|
17.5
|
|
|
$
|
(127.5
|
)
|
|
$
|
65.1
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic (loss) earnings per share - weighted average shares
|
|
91.1
|
|
|
|
86.7
|
|
|
|
91.0
|
|
|
|
85.9
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation awards
|
|
-
|
|
|
|
0.2
|
|
|
|
-
|
|
|
|
0.2
|
|
|
Denominator for diluted (loss) earnings per share - adjusted weighted average shares and after assumed exercises
|
|
91.1
|
|
|
|
86.8
|
|
|
|
91.0
|
|
|
|
86.1
|
|
|
(Loss) earnings per share – Basic
|
$
|
(0.65
|
)
|
|
$
|
0.20
|
|
|
$
|
(1.40
|
)
|
|
$
|
0.76
|
|
|
(Loss) earnings per share – Diluted
|
$
|
(0.65
|
)
|
|
$
|
0.20
|
|
|
$
|
(1.40
|
)
|
|
$
|
0.76
|
|
For the three and nine months ended September 30, 2019, options to purchase shares (in thousands) of 4,469 and 4,663, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
For the three and nine months ended September 30, 2018, options to purchase shares (in thousands) of 4,631 and 4,697, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
For the three and nine months ended September 30, 2019, RSUs (in thousands) of 335 and 239, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
For the three and nine months ended September 30, 2018, RSUs (in thousands) of 151 and 47, respectively, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
During the three and nine months ended September 30, 2019 and 2018, all of the Company’s outstanding PSUs were subject to the 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. These outstanding PSUs were excluded from the (loss) earnings per share calculation for the three and nine months ended September 30, 2019 and 2018 as the performance conditions were not satisfied as of the end of the respective periods.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 28
|
NOTE 11 – SEGMENT REPORTING
The following tables show financial information for the Company's reportable segments:
|
In millions
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic and Canada RWCS
|
$
|
639.3
|
|
|
$
|
644.3
|
|
|
$
|
1,913.9
|
|
|
$
|
1,927.3
|
|
|
International RWCS
|
|
143.5
|
|
|
|
151.1
|
|
|
|
440.2
|
|
|
|
503.0
|
|
|
All Other
|
|
50.3
|
|
|
|
59.5
|
|
|
|
154.9
|
|
|
|
202.9
|
|
|
Total
|
$
|
833.1
|
|
|
$
|
854.9
|
|
|
$
|
2,509.0
|
|
|
$
|
2,633.2
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic and Canada RWCS
|
$
|
167.7
|
|
|
$
|
196.6
|
|
|
$
|
482.9
|
|
|
$
|
583.4
|
|
|
International RWCS
|
|
26.7
|
|
|
|
20.9
|
|
|
|
73.8
|
|
|
|
80.8
|
|
|
All Other
|
|
(44.0
|
)
|
|
|
(33.6
|
)
|
|
|
(131.8
|
)
|
|
|
(100.1
|
)
|
|
Total
|
$
|
150.5
|
|
|
$
|
183.9
|
|
|
$
|
425.0
|
|
|
$
|
564.1
|
|
The following table reconciles the Company's primary measure of segment profitability (Adjusted EBITDA) to (loss) income from operations:
|
In millions
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Total Reportable Segment Adjusted EBITDA
|
$
|
150.5
|
|
|
$
|
183.9
|
|
|
$
|
425.0
|
|
|
$
|
564.1
|
|
|
Depreciation(1)
|
|
(31.7
|
)
|
|
|
(32.1
|
)
|
|
|
(95.6
|
)
|
|
|
(95.6
|
)
|
|
Business Transformation
|
|
(17.1
|
)
|
|
|
(21.0
|
)
|
|
|
(51.6
|
)
|
|
|
(64.9
|
)
|
|
Intangible Amortization
|
|
(35.8
|
)
|
|
|
(31.8
|
)
|
|
|
(110.5
|
)
|
|
|
(96.6
|
)
|
|
Acquisition and Integration
|
|
(1.6
|
)
|
|
|
(1.6
|
)
|
|
|
(3.5
|
)
|
|
|
(7.5
|
)
|
|
Operational Optimization
|
|
(3.9
|
)
|
|
|
(3.6
|
)
|
|
|
(11.1
|
)
|
|
|
(19.5
|
)
|
|
Divestitures and Held-for-Sale Impairments
|
|
(85.3
|
)
|
|
|
(2.0
|
)
|
|
|
(87.4
|
)
|
|
|
(19.1
|
)
|
|
Litigation, Settlements and Regulatory Compliance
|
|
(2.4
|
)
|
|
|
(17.3
|
)
|
|
|
(21.3
|
)
|
|
|
(61.2
|
)
|
|
Impairments(2)
|
|
-
|
|
|
|
-
|
|
|
|
(24.6
|
)
|
|
|
-
|
|
|
Other
|
|
(7.2
|
)
|
|
|
(6.2
|
)
|
|
|
(32.8
|
)
|
|
|
(14.9
|
)
|
|
(Loss) income from operations
|
$
|
(34.5
|
)
|
|
$
|
68.3
|
|
|
$
|
(13.4
|
)
|
|
$
|
184.8
|
|
|
|
(1)
|
Excludes depreciation charges of $0.2 million and $1.0 million for the three and nine months ended September 30, 2019, respectively that are included as part of Business Transformation.
|
|
|
(2)
|
Impairment primarily comprises goodwill impairment (see Note 4 – Goodwill and Other Intangibles).
|
Other than the impact of the held-for-sale impairments discussed in Note 3 – Restructuring, Divestitures and Disposal Groups Held-For-Sale, there were no significant changes in total assets by reportable segment from the information provided in the Company’s 2018 Form 10-K.
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2019 Q3 10-Q Report
|
Stericycle, Inc. • 29
|
NOTE 12 – ENVIRONMENTAL REMEDIATION LIABILITIES
Total environmental liabilities at September 30, 2019 and December 31, 2018, were classified as follows:
|
In millions
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Accrued liabilities
|
$
|
3.4
|
|
|
$
|
5.3
|
|
|
Other liabilities
|
|
28.1
|
|
|
|
28.2
|
|
|
Total environmental liabilities
|
$
|
31.5
|
|
|
$
|
33.5
|
|
The Company projects payments for these Environmental liabilities over approximately 30 years.
NOTE 13 – 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 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
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 30
|
ultimately transferred to the United States District Court for the Northern District of Illinois for centralized pretrial proceedings (the “MDL Action”).
On February 16, 2017, the Court entered an order granting plaintiffs’ motion for class certification. The Court certified a class of “[a]ll persons and entities that, between March 8, 2003 through the date of trial resided in the United States (except Washington and Alaska), were identified by Stericycle as ‘Small Quantity’ or ‘SQ’ customer, and were charged and paid more than their contractually-agreed price for Stericycle’s medical waste disposal goods and services pursuant to Stericycle’s automated price increase policy. Governmental entities whose claims were asserted in United States ex rel. Perez v. Stericycle Inc. shall be excluded from the class.”
The parties engaged in discussions through and overseen by a mediator regarding a potential resolution of the matter and reached an agreement in principle for settlement in July 2017, which was subsequently documented in a definitive settlement agreement (the “Settlement”) on October 17, 2017. The Settlement provided a global resolution of all cases and claims against the Company in the MDL Action. It also provided that the Company would establish a common fund of $295.0 million from which would be paid all compensation to members of the settlement class, attorneys’ fees to class counsel, incentive awards to the named class representatives and all costs of notice and administration. It also provided that the Company’s existing contracts with customers would remain in force, while it would also establish as part of the Settlement guidelines for future price increases and provide customers additional transparency regarding such increases. Under the terms of the Settlement, the Company admitted no fault or wrongdoing whatsoever, and it entered into the Settlement to avoid the cost and uncertainty of litigation. The Settlement provided that, upon final approval by the Court following a fairness hearing, it would fully and finally resolve all claims against the Company alleged in the MDL Action.
The court held a fairness hearing on March 8, 2018 and granted approval of the Proposed MDL Settlement that same day. The Proposed MDL Settlement became finally effective on June 7, 2018 (the “Final Settlement”), and the Company funded the Final Settlement on July 6, 2018.
Certain class members who have opted out of the Final Settlement have filed lawsuits against the Company, and the Company will defend and resolve those actions. The Company has accrued its estimate of the probable loss for these collective matters, which is not material.
Securities Class Action Lawsuit. 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. The plaintiffs purported to sue for themselves and on behalf of all purchasers of the Company’s publicly traded securities between February 7, 2013 and April 28, 2016, inclusive, and all those who purchased securities in the Company’s public offering of depositary shares, each representing a 1/10th interest in a share of the Company’s mandatory convertible preferred stock, 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 purports 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 alleges, 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 beginning February 7, 2013 and ending April 28, 2016. Plaintiffs filed an Amended Complaint on August 4, 2016 and a Corrected Amended Complaint on October 21, 2016.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 31
|
On November 1, 2016, the Court appointed the Public Employees’ Retirement System of Mississippi and the Arkansas Teacher Retirement System as Lead Plaintiffs and their counsel as Lead Counsel. On February 1, 2017, Lead Plaintiff filed a Consolidated Amended Complaint with additional purported factual material supporting the same legal claims from the prior complaints for a class period from February 7, 2013 through September 18, 2016. Defendants filed a motion to dismiss the Consolidated Amended Complaint on April 1, 2017. On May 19, 2017, plaintiffs filed a response in opposition to the motion to dismiss and on June 19, 2017, Defendants filed a reply brief in support of their motion.
On March 31, 2018, plaintiffs filed a further Amended Complaint, alleging additional corrective disclosures and extending the purported class period through February 21, 2018. Defendants filed a motion to dismiss the Consolidated Amended Complaint on May 25, 2018. The Motion was fully briefed on July 13, 2018, and awaited a ruling by the Court.
The parties engaged in discussions through and overseen by a mediator regarding a potential resolution of the matter and reached an agreement in principle for settlement in December 2018 (the “Proposed Securities Class Action Settlement”).
As the Company disclosed on December 20, 2018, the terms of the Proposed Securities Class Action Settlement provided that the Company would establish a common fund of $45.0 million, from which would be paid all compensation to members of the settlement class, attorneys’ fees to class counsel, incentive awards to the named class representatives and all costs of notice and administration. In the Proposed Securities Class Action Settlement, the Company admitted no fault or wrongdoing whatsoever. The Company entered into the Proposed Securities Class Action Settlement in order to avoid the cost and uncertainty of litigation.
On February 14, 2019, the Company executed a definitive written settlement agreement (the “Settlement”), which incorporated the terms of the agreement in principle announced in December 2018. The Settlement incorporated the terms of the Proposed Securities Class Action Settlement, described above. Under the terms of the Settlement, the Company admitted no fault or wrongdoing whatsoever, and it entered into the Settlement to avoid the cost and uncertainty of litigation. The Settlement provided that, upon final approval by the Court following a fairness hearing, it would fully and finally resolve all claims against the Company alleged in the Securities Class Action.
On February 25, 2019, plaintiffs in the Securities Class Action filed Plaintiffs’ Unopposed Motion for an Order Preliminarily Approving Class Settlement and Authorizing Dissemination of Notice of Settlement (the “Preliminary Approval Motion”). The Preliminary Approval Motion asked the Court to preliminarily approve the Settlement, to approve the manner and content of the notice to be given to potential class members, and to set a schedule for, among other things, deadlines for potential class members to file claims, object to the Settlement, or seek exclusion from the Settlement class. The Court approved the Preliminary Approval Motion on March 12, 2019, and the Company funded the settlement on March 25, 2019. The large majority of the $45.0 million common fund has been funded by the Company’s insurers. The Court held a fairness hearing on July 22, 2019, at which it granted final approval of the Settlement. At the hearing, the Court took under advisement the amount of attorneys’ fees to be awarded to plaintiffs’ counsel from the $45.0 million settlement.
Shareholder Derivative Lawsuits. On September 1, 2016, a purported stockholder filed a putative derivative action complaint in the Circuit Court of Cook County, Illinois against certain officers and directors of the Company, naming the Company as nominal defendant. The complaint alleges that defendants breached their fiduciary duties to the Company and its stockholders by causing the Company
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 32
|
to allegedly overcharge certain customers in breach of those customers’ contracts, otherwise provide unsatisfactory customer service and injure customer relationships, and make materially false and misleading statements and omissions regarding the Company’s business, operational and compliance policies between February 7, 2013 and the present.
On March 1, 2017, another purported stockholder filed a putative derivative action complaint containing substantially similar allegations in the Circuit Court of Cook County, Illinois against certain officers and directors of the Company, naming the Company as nominal defendant. The Company notes, among other things, that, in addition to failing to make the required demand on the board of directors, both of these filings were in violation of the Company’s Bylaws, which require any such actions to be brought in a court in Delaware.
On June 29, 2017, the Court entered an agreed order consolidating the two putative derivative actions for all purposes under the caption Kaushal Shah v. Charles A. Alutto, et al. On July 11, 2017, the Court entered a further agreed order appointing lead counsel for plaintiffs and staying the action pending resolution of the motion to dismiss the securities class action discussed above. Pursuant to the agreed order, defendants reserved all potential defenses to both actions, should the stay be lifted. On February 14, 2019, the Court entered an Agreed Order to Lift Stay and Set Briefing Schedule, under which the Court lifted the stay of litigation, granted plaintiffs leave to file an amended complaint on or before April 15, 2019, and set a briefing schedule for a motion to dismiss by the Company. On April 18, 2019, by stipulation of the parties, the Court entered an order extending these deadlines until after the fairness hearing in Rick Siu v. Mark C. Miller, described below. After the settlement in Rick Siu v. Mark C. Miller became final, plaintiffs in Kaushal Shah v. Charles A. Alutto filed a motion to voluntarily dismiss their claims with prejudice, which was granted by the Court on September 6, 2019.
On March 26, 2018, Alvin Janklow v. Charles A. Alutto, et al., was filed in the Federal District Court for the District of Delaware. On April 16, 2018, John Brennan v. Charles A. Alutto, et al., was filed in the same court. On May 16, 2018, the Court entered an order consolidating Brennan and Janklow. On April 18, 2018, the company filed a motion to stay the combined Janklow and Brennan cases, and the Court granted the Company’s motion. On January 11, 2019, the parties stipulated to, and the Court entered an order, lifting the stay to allow the Company to file a motion to dismiss and setting a briefing schedule on that motion. On January 25, 2019, Stericycle filed its motion to dismiss; on February 25, 2019, Plaintiffs filed an opposition to the motion; the Company filed its reply on March 12, 2019. On March 19, 2019, Plaintiffs filed a motion for leave to file a sur-reply, which the Company opposed. After the settlement in Rick Siu v. Mark C. Miller became final, plaintiffs in Alvin Janklow v. Charles A. Alutto, et al., filed a motion to voluntarily dismiss their claims with prejudice, which was granted by the Court on October 8, 2019.
On April 12, 2018, Rick Siu v. Mark C. Miller, et al., was filed in Delaware Chancery Court. By agreement of the parties, the Siu case was stayed by order of the Court on May 24, 2018, pending resolution of the motion to dismiss the securities class action discussed above. The parties subsequently engaged in discussions through and overseen by a mediator regarding a potential resolution of the matter. On February 25, 2019, the parties executed and filed with the Court a written Stipulation and Agreement of Settlement, Compromise, and Release (the “Siu Settlement”). Under the Siu Settlement, the Defendants will implement and/or maintain certain corporate governance changes for a period of four years following approval of the settlement. In addition, under the Siu Settlement, the Company was awarded payment from applicable insurance in the amount of $7.5 million, less any amounts ordered by the Court to be paid for Plaintiff’s attorneys’ fees and expenses or as a service award to Plaintiff.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 33
|
Neither the Company nor the Defendants have admitted any fault or wrongdoing whatsoever in connection with the Siu Settlement, but have entered into the Siu Settlement in order to avoid the cost and uncertainty of litigation. The Court held a hearing on the Siu Settlement on July 30, 2019, at which it granted approval of the settlement and awarded $1.25 million in attorney’s fees from the total settlement. The remaining $6.25 million was paid to the Company under the terms of the agreement.
On October 18, 2016, the Company received a letter from an attorney purporting to represent a current stockholder of the Company demanding, pursuant to Del. Ct. Ch. R. 23.1, that the Company’s Board of Directors take action to remedy alleged breaches of fiduciary duties by certain officers and directors of the Company. The factual allegations set forth in the letter were similar to those asserted in the Securities Class Action Lawsuit and the Shareholder Derivative Lawsuits.
The Company’s Board of Directors constituted a Special Demand Review Committee to investigate the claims made in the demand letter and the Committee retained independent counsel to assist with the investigation. At the conclusion of its investigation, the Committee’s counsel advised the stockholder that the Board had completed its investigation and determined not to pursue legal action.
On July 30, 2018, the purported stockholder on whose behalf the demand letter was sent filed a stockholder derivative action, Damon Turney v. Mark C. Miller, et al., in the Federal District Court of the Northern District of Illinois, alleging that the demand was wrongfully refused. The Company moved to dismiss the action on December 5, 2018. The Court granted the Company’s motion and dismissed the case with prejudice on August 13, 2019.
On January 22, 2019, the Company received a letter from an attorney purporting to represent another current stockholder of the Company setting forth allegations and demands substantially similar to those previously presented in the October 18, 2016 demand letter, the Securities Class Action Lawsuit and the Shareholder Derivative Lawsuits. The Company’s Board of Directors referred this letter to the Special Demand Review Committee and its independent counsel for consideration. After the Committee had considered the January 22, 2019 letter in light of its prior investigation, the Committee’s counsel advised the stockholder that the Board had determined not to pursue legal action.
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 has notified the Company that it is 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 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
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 34
|
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 Matters. The Company’s Environmental Solutions business 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 this 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 wastes. 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.
North Salt Lake, Utah. The Company has continued to toll the statute of limitations with the United States Attorney’s Office for the District of Utah (the “USAO”) relating to an investigation by the U.S. Environmental Protection Agency (the “EPA”) into past Clean Air Act emissions and permit requirements, as previously alleged in the notice of violation (the “NOV”) issued by the State of Utah Division of Air Quality (the “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.
Tabasco, Mexico. In late 2016, the National Agency for Industrial Security and the Protection of the Environment for the Hydrocarbon Sector in Mexico (“ASEA”) conducted a permit compliance inspection at a hazardous waste treatment facility acquired by one of the Company’s subsidiaries in Dos Bocas, Tabasco, Mexico. 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, ASEA rescinded the prior order imposing the fine. After reassessing the evidence and arguments presented, 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, 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.
|
2019 Q3 10-Q Report
|
Stericycle, Inc. • 35
|
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.
Tacoma, Washington. On October 7, 2019, the State of Washington Department of Ecology (“Washington Ecology”) issued an Administrative Order alleging violations of Washington regulations and the facility operating permit for our hazardous waste facility in Tacoma, Washington during 2018 and ordering compliance with Chapter 70.105 Revised Code of Washington, Hazardous Waste Management Act, Chapter 173-303 Washington Administrative code, Dangerous Waste Regulations, and Dangerous Waste Management Facility Permit WAD020257945 effective March 22, 2012. The Administrative Order identified certain alleged violations and associated corrective actions for the Tacoma Facility to take upon receipt of the Order. Washington Ecology also issued an associated Notice of Penalty, assessing a fine of $1.9 million.
The Company has 30 days to appeal the fine to the state Pollution Control Hearings Board and intends to vigorously defend itself against these allegations.
The Company has accrued its estimate of the probable loss for these collective matters, which is not material.
Rancho Cordova, California. On June 25 and 26, 2018, the California Department of Toxic Substances Control (“DTSC”) conducted a Compliance Enforcement Inspection of the Company’s facility in Rancho Cordova, California. On October 7, 2019, the Company learned that DTSC has referred alleged violations of California’s Hazardous Waste Control Law and the facility’s hazardous waste permit arising from the inspection to the Environmental Section of the California Attorney General’s Office for enforcement.
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. Next, DTSC will issue a final permit decision. If DTSC were to deny the permit renewal, the Company has the right to file an administrative appeal.
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 intends to vigorously defend itself against these allegations and actions.