Sound Fiscal 2010 at Stericycle

Stericycle Inc. ( SRCL - Analyst Report ) delivered earnings per share (EPS) of 69 cents in its fourth quarter ended December 31, 2010, beating the Zacks Consensus Estimate of 64 cents, and surpassing the year-ago result of 55 cents by 25%.

The reported and year-ago quarters’ EPS excluded expenses related to acquisitions and restructuring costs. Including these items, EPS stood at 57 cents in the reported quarter and at 52 cents in the year-earlier quarter.

Revenues

Revenues climbed 25% to $393.5 million, outpacing the Zacks Consensus Estimate of $363 million. Acquisitions less than 12 months old contributed approximately $32.5 million to top-line growth. Foreign exchange had an unfavorable impact of $1 million in the quarter.

Domestic revenues were $292.6 million and international revenues were $100.9 million in the quarter. Domestic regulated waste and compliance services revenues were $250 million and the returns and recall revenues were $42.6 million.

Domestic internal growth, excluding returns management, was up approximately 8%, and international internal growth adjusted for exchange was also up a rough 8%.

Cost & Margin Performance

Cost of sales increased 27% to $210.8 million in the quarter and, as a percentage of revenue, increased 80 basis points to 53.6%. Even though adjusted gross profit went up 24% to $182.7 million, gross margin dipped 80 basis points to 46.4%. This, however, excluded the impact of restructuring costs of $181,000. Accounting for these costs, gross profit was $182.5 million with a gross margin of 46.4%.

Selling, general, administrative and engineering expenses climbed 20% to $72.4 million in the quarter but, as a percentage of revenue, dipped 80 basis points to 18.4%. Stericycle’s adjusted operating income was $107 million, up 24% year over year. However, operating margin contracted 30 basis points to 27.2%. Including restructuring costs, transactional expenses related to acquisitions and acquisition integration expenses, operating income was $93.9 million with an operating margin of 23.9%.

Fiscal 2010 Performance

Stericycle’s fiscal 2010 adjusted EPS was $2.52, up 21% from $2.09 in fiscal 2009. The bottom line was comfortably ahead of the Zacks Consensus Estimate of $2.40. Figures of both these years excluded expenses related to acquisitions, restructuring cost and benefits related to release of prior-year tax reserves. Netting these items, fiscal 2010 EPS stood at $2.39 compared with $2.03 in fiscal 2009.

Revenues clocked $1,439 million, ahead of the Zacks Consensus Estimate of $1,409 million and up 22% from the previous year.

Financial Position

As of December 31, 2010, Stericycle had cash and cash equivalents of $77 million, up from $20.6 million as of September 30, 2010 and $15.7 million as of December 31, 2009. During the year, the company generated operating cash flow of $325.7 million, up from $277.2 million in the previous year.

Stericycle purchased 709,867 shares of common stock in the open market in the fourth quarter for $50.7 million. During the fourth quarter, Stericycle completed 17 acquisitions – six domestic and 11 international.

As of December 31, 2010, the debt-to-capitalization ratio was 51% compared with 49% as of September 30, 2010.

Fiscal 2011 Outlook

Stericycle expects fiscal 2011 EPS to range between $2.76 and $2.80 and revenue in the range of $1.55 billion to $1.58 billion.

Free cash flow is expected to be between $278 million and $283 million. Capital expenditure is anticipated to be between $45 million and $55 million.

Our Take

A significant portion of Stericycle’s historical growth came from the successful integration of acquisitions in both domestic and international markets. The company is continuously looking for strategic acquisitions that will further bolster its existing market position and expand its geographic base.

The company’s Steri-Safe program remains a key driver of long-term cash flow growth, given its significant market potential and high incremental margins.

Further, only 20% of Stericycle’s large quantity customers use its multiple services, leaving more than 80% of its extensive customer base available for adding services such as Sharps Management and RX Waste. By selling these multiple service offerings, the company can potentially triple the value of each account. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Lake Forest, Illinois-based Stericycle is a leading provider of regulated medical waste management as well as product recall and return services in the U.S.

The company’s customers fall into two categories – small-accounts (outpatient clinics, medical and dental offices, long-term and sub-acute care facilities, and retail pharmacies) and large-accounts (hospitals, blood banks, and pharmaceutical manufacturers).

The company caters to a wide clientele spanning domestic and international markets. Stericycle competes with US Ecology Inc. ( ECOL - Snapshot Report ) and Waste Management Inc. ( WM - Analyst Report ) .