Stericycle Beats by a Whisker

Stericycle Inc. (SRCL - Analyst Report) has reported fiscal 2011 third quarter results delivering an adjusted EPS of 71 cents versus 65 cents in the year-earlier quarter and beating the Zacks Consensus Estimate by a penny.

The quarter noted some special items including a 5 cent charge pertaining to acquisition expenses and a 1 cent credit related to net release of prior year’s tax reserves. The prior-year quarter included a 2 cent charge pertaining to acquisition expenses and a 1 cent credit related to net release of prior year’s tax reserves. Including these items, EPS amounted to 68 cents compared with 65 cents in the year-ago quarter.

Total revenue increased 16% year over year to $420.9 million, beating the Zacks Consensus Estimate of $406 million. There was a favorable foreign exchange impact to the extent of $4.1 million in the quarter and acquisitions less than 12 months old contributed approximately $43.9 million to the top-line growth.

Domestic revenue was $303.9 million; return, recall revenues contributed $25.1 million; and international revenues totaled $117.1 million, in the reported quarter. The domestic internal growth rate was up 7.0%, small quantity climbing up 8% and large quantity 6%.

Costs and Margins

Cost of sales soared to $231 million in the quarter versus $195 million in the year-ago quarter. Gross profit increased to $190 million from $168 million in the year-earlier quarter. However, gross margins contracted 120 basis points year over year to 45.2%.

Selling, general and administrative expenses increased to $74.9 million in the quarter from $66.8 million in the year-ago quarter. Income from operations improved to $111 million from $99 million in the prior-year quarter. However, operating margins declined 90 basis points year over year to 26.4%.

Financial Position

As of September 30, 2011, Stericycle reported cash and cash equivalents of $23.4 million, declining from $38.2 million as of June 30, 2011.

As of September 30, 2011, the debt-to-capitalization ratio increased to 54% from 48.2% as of June 30, 2011.

Cash from operations for the first nine months was $215.2 million compared with $205.4 million in the comparable year-ago period.

Stericycle repurchased 962,000 shares of common stock for $76.9 million in the quarter, under its authorization program. The company has authorization to purchase an additional 4.9 million shares.

During the quarter, the company completed 17 acquisitions, of which 6 were domestic and 11 international.

Outlook

Management provided full year 2011 EPS guidance in the range of $2.81 to $2.82 per share and projected revenue in the range of $1.65 billion to $1.68 billion.

Free cash flow is estimated in the range of $285 million to $290 million and capital expenditure is expected in the range of $50 million to $55 million.

For 2012, Stericycle estimates EPS in the range of $3.19 to $3.25 and revenues in a band of $1.8 billion to $1.9 billion. Free cash flow is expected to range between $320 million and $325 million, with capital expenditure anticipated between $60 million and $65 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. 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 #1 Rank (short-term Strong Buy 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).

Read the full analyst report on WM

Read the full analyst report on SRCL

Read the full analyst report on ECOL