Stericycle Beats Consensus

Stericycle Inc. (SRCL - Analyst Report) delivered earnings per share (EPS) of 68 cents in its first quarter ended March 31, 2011, beating the Zacks Consensus Estimate of 65 cents, and surpassing the year-ago result of 57 cents by 19%.

The reported and year-ago quarters’ EPS excluded expenses related to acquisitions and restructuring costs. Including these items, EPS stood at 64 cents and 56 cents in the reported and year-earlier periods, respectively.

Revenues

Revenues climbed 19% to $398.1 million, outpacing the Zacks Consensus Estimate of $381 million. Acquisitions less than 12 months old contributed approximately $30.6 million to top-line growth. Foreign exchange had a favorable impact of $2.3 million in the quarter.

Domestic revenues were $290.6 million and international revenues were $107.5 million in the quarter. Domestic regulated waste and compliance services revenues were $254.8 million and the returns and recall revenues were $35.8 million. Domestic internal growth, excluding returns management, was up approximately 7%, and international internal growth adjusted for exchange was up 8%.

Cost & Margin Performance

Cost of sales increased 20% to $215.6 million in the quarter and, as a percentage of revenue, increased 70 basis points to 54.2%. Even though adjusted gross profit went up 17% to $182.5 million, gross margin dipped 70 basis points to 45.8%. This, however, excluded the impact of restructuring costs of $62,000. Accounting for these costs, gross profit was $182.4 million at a gross margin of 45.8%.

Selling, general, administrative and engineering expenses climbed 12% to $71.9 million in the quarter but, as a percentage of revenue, dipped 100 basis points to 18.1%. Stericycle’s adjusted operating income was $107.2 million, up 19% year over year. However, operating margin contracted 10 basis points to 26.9%. Including restructuring costs, acquisitions costs and integration expenses, operating income was $102.4 million at an operating margin of 25.7%.

Financial Position

As of March 31, 2011, Stericycle had cash and cash equivalents of $24.6 million, down from $77 million as of December 31, 2010. As of March 31, 2011, the debt-to-capitalization ratio improved to 47% from 51% as of December 31, 2010.

During the quarter, Stericycle completed 9 acquisitions – 3 domestic and 6 international. The incremental revenue impact in the first quarter was $1.8 million. On April 18, 2011, Stericycle announced the completion of the Healthcare Waste Solutions, Inc. ("HWS") acquisition, and the annualized revenues of all of these acquisitions are approximately $57 million.

Fiscal 2011 Outlook

Stericycle expects fiscal 2011 EPS to range between $2.79 and $2.82 on revenues in a band of $1.61 billion to $1.64 billion.

Free cash flow is expected between $284 million and $288 million. Capital expenditure is anticipated 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. Stericycle’s merger and acquisition pipeline both in the United States and abroad remains quite robust, representing approximately $100 million in additional revenue.

Furthermore, the recent completion of the HWS acquisition and steady rollout of new products like Steri-Safe and Bio Systems add to the company’s growth potential. However, the increase in overhead costs and integration-related expenses could have an adverse impact on its operating margins. The shares of Stericycle currently retain a Zacks #3 Rank (short-term Hold recommendation).

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)).