STERICYCLE, INC. Safe Harbor Statement
This document may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. When we use words such as "believes," "expects," "anticipates," "estimates" "may," "plan," "will," "goal" or similar expressions, we are making forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are therefore subject to risks and uncertainties, which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. Factors that could cause such differences include, among others, developments in the COVID-19 pandemic and the resulting impact on the results of operations, precautions we have taken to safeguard the health and safety of our employees which may make certain of our business processes less efficient, measures taken by governmental authorities to prevent the spread of the COVID-19 virus which could disrupt our supply chain, result in disruptions in transportation services and restrictions on the ability of our employees to travel, result in temporary closure of our facilities or the facilities of our customers and suppliers, affect the volume of paper processed by our secure information destruction business and the revenue generated from the sale of SOP, disruptions in our relationships with our employees as a result of certain cost-saving measures, an economic slowdown in theU.S. and other countries resulting from the outbreak of the COVID-19 virus, SOP pricing volatility, foreign exchange rate volatility in the jurisdictions in which we operate, the volume and size of any recall events, changes in governmental regulation of the collection, transportation, treatment and disposal of regulated waste or the proper handling and protection of personal and confidential information, the level of government enforcement of regulations governing regulated waste collection and treatment or the proper handling and protection of personal and confidential information, decreases in the volume of regulated wastes or personal and confidential information collected from customers, the ability to implement our ERP system, charges related to portfolio rationalization or the failure of divestitures to achieve the desired results, failure to consummate transactions with respect to non-core businesses, the obligations to service substantial indebtedness and comply with the covenants and restrictions contained in our credit agreements and notes, a downgrade in our credit rating resulting in an increase in interest expense, political, economic, inflationary and other risks related to our foreign operations, the outcome of pending or future litigation or investigations including with respect to theU.S. Foreign Corrupt Practices Act, changing market conditions in the healthcare industry, competition and demand for services in the regulated waste and secure information destruction industries, failure to maintain an effective system of internal control over financial reporting, delays or failures in implementing remediation efforts with respect to existing or future material weaknesses, disruptions in or attacks on information technology systems, as well as other factors described in our filings with theU.S. Securities and Exchange Commission , including our Annual Report on Form 10-K and subsequent Quarterly Reports on Forms 10-Q. As a result, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking or other statements contained herein other than in accordance with legal and regulatory obligations.
2020 Q2 10-
-------------------------------------------------------------------------------- The following discussion of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes in Part I, Item 1. Financial Statements (Unaudited) of this Quarterly Report and our Consolidated Financial Statements and related notes thereto and Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K.
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Overview
We are a U.S. based business-to-business services company and leading provider
of compliance-based solutions that protect people and brands, promote health and
safeguard the environment. We serve customers worldwide with solutions for
regulated waste management, secure information destruction, compliance, customer
contact, and brand protection. For further information on our business,
reportable segments, and services, see Part I, Item 1. Business, in our 2019
Form 10-K.
Key business highlights for the three months ended
• Improved cash flow from operations to
2020 compared to
• Reduced net debt by approximately
divestiture proceeds and cash flow from operations, which lowered the
adjusted debt to EBITDA leverage ratio to 3.89 as defined by our Credit
Agreement
• RWCS revenues remained stable with prior year as the COVID-19 pandemic
continued
COVID-19 Pandemic
In March 2020 , the World Health Organization declared the COVID-19 virus
outbreak a pandemic. The COVID-19 pandemic has had a global economic impact,
including temporary closure of non-essential businesses worldwide and
postponement of elective surgeries and preventative care. The closure of
non-essential businesses has a direct impact on our customers, primarily in SID.
The Company continues to maintain operations within all business service
offerings. We are monitoring future implications of the COVID-19 pandemic
related to potential supply chain shortages and are taking actions to manage
spending to align to operational requirements.
The Company's COVID-19 pandemic response has included efforts to protect the
health and well-being of our workforce and our customers. We worked proactively
with the Centers for Disease, Control and Prevention , the Occupational Safety
and Health Administration , the Department of Transportation and regulatory
agencies around the world to ensure readiness for proper medical waste
management. We have updated and implemented numerous protocols specifically to
reduce risk among our front-line staff, and our strategic sourcing team has
worked diligently to take measures to provide our field operations employees
with appropriate personal protective equipment. We've staggered shift times and
dedicated trucks to specific drivers to reduce exposure. We've implemented more
rigorous cleaning protocols for all our facilities. During the second quarter
2020, we had more than 7,000 team members around the globe sheltering in place,
all to protect our staff and communities we serve. We will continue to monitor
the safety of our team members as a result of the COVID-19 pandemic, but the
long-term impact is not known at this point as the scale and severity of the
outbreak is still unknown.
The Company has taken a leadership position related to the COVID-19 pandemic to
support our customers and provide industry expertise regarding the effective
management of COVID-19 waste.
The impact of the COVID-19 pandemic across our revenue service categories is as follows:
2020 Q2 10-
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Revenue COVID-19 Pandemic Economic
Service Services Offered Impact Considerations
Category
RWCS's transportation and
treatment facilities have
remained open to provide safe
and compliant disposal of
medical waste.
Organic revenues were down
slightly in the quarter due to
•Medical waste management services the postponement of elective
(including reusable sharps disposal surgeries and preventative
management services) care.
Regulated •Pharmaceutical waste services
Waste and •Compliance programs under the The COVID-19 pandemic has also
Compliance Steri-Safe®, and First Practice created new needs for
Services Management brand names healthcare. Testing
centers
•Healthcare hazardous waste for the COVID-19 virus are
management services for hospitals expanding acrossAmerica. Top
and industrial hazardous waste in retailers in the United States
global markets have announced plans to add
and expand the footprint of
testing facilities as we
continue to face this
pandemic. Today, we are
providing service to testing
sites, and that number
continues to grow.
SID saw a sharp decline due to
the COVID-19 pandemic toward
the end of the first quarter
of 2020 and was impacted by
the temporary closure of
customers' sites as a result
of shelter-in-place orders.
Secure •Secure information destruction During the second quarter ofInformation (including document and hard drive 2020, as countries and states
Destruction destruction services) began to relax
Services shelter-in-place orders,
customers began reactivating
their service.
Within the North America
segment, SID stops were down
as much as 40% in April 2020
and improved to an 18% decline
in June 2020 .
At the end of the first
quarter 2020 and into the
second quarter 2020, we
•Appointment reminders, secure observed lower demand for
messaging, event registration, and hospital scheduling services
other communications specifically due to the focus on COVID-19Communication for hospitals and integrated patients. As we exited the
and delivery networks. second quarter, demand has
Related •Regulated recall and returns shown steady improvements but
Services management communication, logistics, is not back to pre-COVID-19
and data management services for pandemic levels.
expired, withdrawn or recalled
products Expert Solutions was impacted
by lower volumes in recall
events. Lower recall volumes
have continued through the
second quarter 2020.
Key Business Priorities
1. Portfolio rationalization - On April 6, 2020 , amid the challenging
economic environment, we successfully completed the divestiture of the
Domestic Environmental Solutions business to Harsco Corporation for
million in cash. We also divested of all our operations in
evaluate our portfolio of services and service lines to assess long-term
potential and identify potential business candidates that are not
vertically integrated, are not essential to our RWCS and SID services,
and/or present the opportunity to reduce debt; however, the impact of the
COVID-19 pandemic on the economy may limit our ability to close future
transactions.
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2. Quality of revenue - See discussion above regarding the COVID-19 pandemic
impacts on our revenue service categories. Our commercial teams around the
world are working proactively to reactivate SID customers as businesses
continue to return to the place of work from shelter-in-place orders.
Additionally, within SID, we have introduced an Express service with a
two-day pick-up guarantee, and a Priority service with a five-day
guarantee, allowing our customers to determine their priority and specific
day for one-time pick-up services. Alternatively, the COVID-19 pandemic
may impact our customers' ability to operate and make timely payments and
certain customers may be challenged to continue after all non-essential
businesses are re-opened globally. We will continue to monitor customer
specific risks and cash collection efforts.
3. Operational cost efficiencies - The Company's efforts over the last twelve
months to build performance dashboards, centralize decision-making and
standardize operations proved effective to help quickly implement
necessary changes to ensure continuity of service to customers whiletightly managing costs. We instituted central oversight and controls to
quickly drive down costs. As our business normalizes and the COVID-19
pandemic restrictions ease, we plan to resume investment in the business
in alignment with revenue. For example, we brought back about half of our
furloughed employees over the quarter as business demands warranted and
have recommenced certain necessary travel. The Company is committed tobalance immediate cost savings needs with requirements for the long-term
health of the business.
4. Debt reduction and leverage improvement - We have reduced debt by
approximately
approximately
Domestic Environmental Solutions business to the repayment of debt during
managing cash, we reduced our adjusted debt to EBITDA leverage ratio as
defined by our Credit Agreement to 3.89 times in the second quarter 2020.
We have approximately $500 million currently available under our Senior
Credit Facility, which matures in November 2022 .
5. ERP implementation - We entered 2020 with a schedule to begin the staged
deployment of the commercial, operational and financial systems in the
U.S. and Canada . However, guided by our commitment to protect what
matters, we concluded that the health and travel risks associated with afield deployment in the COVID-19 pandemic environment were substantial,
and given our priorities to serve our customers and keep our team members
safe, we made the decision to defer the ERP deployment. We have updated
our planned timing of our ERP deployment to start in the first half of
2021.
Key Strategies and Other Significant Matters
The following table identifies key strategies and other significant matters impacting our business and how they are classified in the Condensed Consolidated Statements of Loss:
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In millions
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Pre-tax items:
Included in COR
Operational Optimization $ - $ 2.2 $ - $ 4.2
Asset Impairments 6.8 - 6.8 1.6
Total included in COR 6.8 2.2 6.8 5.8
Included in SG&A
Business Transformation 9.2 14.0 27.2 34.5
Intangible Amortization 31.2 36.9 63.1 74.7
Acquisition and Integration - - - 1.9
Operational Optimization - 1.4 - 3.0
Divestitures 2.4 4.6 5.4 7.2
Litigation, Settlements and
Regulatory Compliance 4.2 9.1 8.6 18.9
Asset Impairments 1.5 2.1 5.5 2.1
Other 1.3 9.7 5.9 25.6
Total included in SG&A 49.8 77.8 115.7 167.9
Divestiture losses (gains), net 3.8 0.3 62.1 (5.1 )
Goodwill impairment - - - 20.9
Total included in Loss from
operations 60.4 80.3 184.6 189.5
Included in Interest expense,
net
Capital Allocation (debt
related) - 3.6 - 3.6
Loss on early extinguishment of
debt - 23.1 - 23.1
Included in Other expense, net
Other (including highly
inflationary exchange loss) 0.6 0.2 1.0 1.3
Total pre-tax $ 61.0 $ 107.2 $ 185.6 $ 217.5
After tax items:
U.S. CARES Act $ - $ - $ (39.4 ) $ -
Total after-tax $ - $ - $ (39.4 ) $ -
2020 Q2 10-
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Business Transformation
For the periods presented and for the cumulative period since the inception of
Business Transformation, we have recognized the following, principally reported
in Other:
In millions
Three Months Ended Six Months Ended
June 30, June 30,
Cumulative
2020 2019 2020 2019 Since Inception
ERP development and
implementation (Project
Monarch)
Consulting and professional
fees $ 1.8 $ 6.2 $ 12.2 $ 12.7 $ 55.4
Internal labor 3.4 2.3 7.0 4.2 25.1
Software usage/maintenance
fees 3.1 3.4 5.7 7.7 28.4
Other related expenses 0.9 0.7 2.3 1.2 8.2
Operating expenditures 9.2 12.6 27.2 25.8 117.1
Capital expenditures 19.7 34.8 44.1 65.8 153.6
Total ERP (Project Monarch)
related 28.9 47.4 71.3 91.6 270.7
Investment in cost savings
and business capability
Consulting and professional
fees - - - 0.4 43.3
Internal costs - 0.3 - 0.6 8.1
Exit costs - employee
termination - - - - 6.7
Other related expenses - 1.1 - 2.4 4.7
Total cost savings and
business capability related - 1.4 - 3.4 62.8
Other related matters
Executive severance - - - 5.3 13.3
Consulting and professional
fees - - - - 4.2
Non-cash charges - - - - 11.4
Total - - - 5.3 28.9
Total operating and capital
expenditures $ 28.9 $ 48.8 $ 71.3 $ 100.3 $ 362.4
Non-cash charges $ 0.5 $ 0.8 $ 1.1 $ 0.8 $ 14.7
Cash charges (including
stock based compensation) 8.7 13.2 26.1 33.7 194.1
Total operating expenditures
$ 34.5 $ 208.8 As ofDecember 31, 2019 , we had completed activities originally contemplated as part of Business Transformation in the areas of investment in costs savings and business capability and other related matters. Prospectively, Business Transformation activities will be focused on ERP development and implementation with additional operating expenditures and capital expenditures anticipated in 2020 and 2021 to complete design, testing and deployment inNorth America . We have updated our planned timing of our ERP deployment to start in the first half of 2021. Once theNorth America deployment occurs, additional costs will be added to ongoing operations to reflect the cost of the ERP post go-live. For 2020, and beyond, we will continue to incur costs to maintain the legacy suite of applications supporting our global businesses until those applications are replaced by the new ERP.
2020 Q2 10-
-------------------------------------------------------------------------------- As part of our Business Transformation, we have undertaken legal entity organizational restructuring actions to assist with streamlining and simplifying business operations and to help lower general and administrative costs. Such actions could result in additional charges associated with consulting and professional fees and increases in potential exposure toU.S. and foreign taxes and foreign exchange charges. Intangible Amortization See table above of key strategies and other significant matters for intangible amortization expense from acquisitions for the periods presented and how they are classified in the Condensed Consolidated Statements of Loss. The decrease in amortization expense is a result of the reduction of Intangible assets related to the divestiture of the Domestic Environmental Solutions business. See Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments in the Condensed Consolidated Financial Statements for further information. Operational Optimization We aim to achieve a culture of continuous improvement that will enhance our efficiency, effectiveness and competitiveness to improve our cost base and cash flow, and we have taken a number of actions to reduce operating costs and optimize operations. For example, we believe plant throughput and route density are competitive strengths ofStericycle . We maintain such strengths by making adjustments to our network of transportation and treatment facilities, standardizing containers and fleet levels in an effort to optimize overall logistics and processing capabilities within a service category while reducing operational costs. As part of these efforts, we seek to reduce network redundancies by consolidating facilities, closing the redundant facility, optimizing containers and fleet levels and restructuring the local organization and operation for efficiency.
There were no Operational Optimization expenses incurred in the three and six
month periods ended
Three Months Ended June 30, 2019
North America International Other Total
Exit costs - employee
termination $ - $ 0.2 $ - $ 0.2
Closure and exit costs
- other - 0.3 - 0.3
Non-cash charges - 2.3 - 2.3
Other expenses - 0.8 - 0.8
Total $ - $ 3.6 $ - $ 3.6
For the three month period ended June 30, 2019 , International closure and exit
costs - other related to site closure costs in Europe , non-cash charges related
to impairment charges for long-lived assets in Europe and Latin America , and
other expenses represent additional charges incurred as a result of diverting
processing during conversion of one of our plants in Asia-Pacific .
2020 Q2 10-
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Six Months Ended June 30, 2019
North America International Other Total
Exit costs -
employee
termination $ - $ 0.2 $ - $ 0.2
Closure and exit
costs - other - 1.8 - 1.8
Non-cash charges 2.0 2.3 - 4.3
Other expenses 0.1 0.8 - 0.9
Total $ 2.1 $ 5.1 $ - $ 7.2
For the six month period ended June 30, 2019 , North America non-cash charges
related to impairment charges for long-lived assets. International closure and
exit costs - other mostly related to site clean-up costs incurred in Latin
America and site closure costs in Europe , non-cash charges related to impairment
charges for long-lived assets in Europe and Latin America , and other expenses
represent additional charges incurred as a result of diverting processing during
conversion at one of our plants in Asia-Pacific .
As we continue to consider each Operational Optimization activity, the amount,
timing and recognition of charges will be affected by the occurrence of
commitments and triggering events as defined under U.S. GAAP, among other
factors. We may incur more charges and cash expenditures than estimated and may
not realize the expected improvement or cost savings on the planned time frame
or at all.
Divestitures (including Divestiture losses (gains), net)We evaluate our portfolio of services on an ongoing basis with a country-by-country and service line-by-service line approach to assess long-term potential and identify potential business candidates for divestiture. Our decisions regarding divestitures are based upon the following criteria:
• outlook for long-term market conditions; • potential impact to complementary services or customer relationships; • ability to leverage infrastructure and customer base for growth; • potential for margin improvement; • current divestiture value versus future divestiture value; • ongoing capital requirements of the business; • return on invested capital;
• impact on overall leverage, including impact on our debt leverage ratio;
• implications for our internal control remediation efforts; and • implications for our ERP system implementation.
We recognized the following Divestitures (including Divestiture losses (gains), net) in the Condensed Consolidated Statements of Loss:
2020 Q2 10-
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In millions
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Domestic Environmental
Solutions business $ 3.8 $ - $ 62.1 $ -
U.K. TextAnywhere business - - - (5.8 )
U.K. hazardous waste business - 0.3 - 0.7
Divestiture losses (gains),
net 3.8 0.3 62.1 (5.1 )
Consulting and professional
fees (in SG&A) 2.4 4.6 5.4 7.2
Total Divestitures (including
Divestiture losses (gains),
net) $ 6.2 $ 4.9 $ 67.5 $ 2.1 For additional information regarding Divestiture losses (gains), net, see Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments in the Condensed Consolidated Financial Statements.
We continue to evaluate the performance of our entire portfolio of assets and
businesses. Divestitures resulting from this evaluation may cause us to record
significant charges, including those related to goodwill, other intangible
assets, long-lived assets, and cumulative translation adjustments. In addition,
divestitures we complete may not yield the targeted improvements in our
business. Any charges that we are required to record or the failure to achieve
the intended financial results associated with the portfolio rationalization
evaluation could have a material adverse effect on our business, financial
condition or results of operations.
Litigation, Settlements and Regulatory ComplianceWe operate in highly regulated industries and must address regulatory inquiries or respond to investigations from time to time. We are also involved in a variety of civil litigation matters from time to time including the items detailed in Part I, Item I. Financial Statements; Note 9 - Commitments and Contingencies. Our financial results may also include considerations of non-recurring matters including settlements, environmental remediation, and legal related consulting and professional fees.
See table above for litigation, settlement and regulatory compliance charges,
primarily consulting and professional fees, contingent liability provisions and
settlements impacting our business for the periods presented and how they are
classified in the Condensed Consolidated Statements of Loss.
Asset and Goodwill Impairments
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We recognized the following non-cash impairment charges:
In millions
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Property, plant and equipment $ 6.8 $ - $ 6.8 $ 1.6
Impairments included in COR $ 6.8 $ - $ 6.8 $ 1.6 Property, plant and equipment $ -
1.7 5.5 1.7
Impairments included in SG&A $ 1.5 $ 2.1 $ 5.5 $ 2.1
Goodwill impairments:
Latin America reporting unit $ - $ - $ - $ 20.9
Goodwill impairments $ - $ - $ - $ 20.9
For additional information, see Part I, Item I. Financial Statements; Note 3 -
Restructuring, Divestiture and Impairments in the Condensed Consolidated
Financial Statements and Part I, Item I. Financial Statements; Note 4 - Goodwill
and Other Intangible Assets in the Condensed Consolidated Financial Statements.
Other
See table above of key strategies and other significant matters for other
charges, primarily consulting and professional fees related to internal control
remediation activities as well as the implementation of new accounting
standards, impacting our business for the periods presented and how they are
classified in the Condensed Consolidated Statements of Loss.
See table above of key strategies and other significant matters for the impact
of foreign exchange re-measurement of net monetary assets held in Argentina as a
result of its designation as a highly inflationary economy for the periods
presented and how they are classified in the Condensed Consolidated Statements
of Loss.
U.S. CARES Act
For additional information, see Part I, Item I. Financial Statements; Note 6 - Income Taxes in the Condensed Consolidated Financial Statements.
Results of Operations
Three and Six Months Ended
As ofJune 30, 2020 , SOP pricing is slightly higher as compared to the prior year period; SOP pricing declined significantly during 2019 and has rebounded in 2020 reaching slightly higher than prior year pricing during the second quarter. Continued macroeconomic impacts related to the COVID-19 pandemic, see section above regarding COVID-19 pandemic impacts, and in SOP pricing could have an impact on our Revenues, Gross profit and results of operations.
2020 Q2 10-
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Revenues:
In analyzing our Company's performance, it is necessary to understand that our various regulated services share a common infrastructure and customer base. We market our regulated waste and compliance services by offering various pricing options to meet our customers' preferences, and customers move between these different billing paradigms. For example, our customers may contract with us for Medical Waste Disposal services that are billed based on the weight of waste collected, processed and disposed during a particular period, and in a subsequent period, the same customer could move to our standard service, which packages the same regulated medical waste services with training and education services for a contracted subscription fee. Another example is a customer that purchases our Medical Waste Disposal and Sharps Disposal Management services which provides the customer with the same regulated services under a different pricing and billing arrangement. We do not track the movement of customers between the various types of regulated services we offer. Although we can identify directional trends in our services, because the regulated services are similar in nature and there are inherent inaccuracies in disaggregation, we analyze revenues by revenue service category and operating segment. We analyze our revenue growth by identifying changes related to organic growth, acquisitions, divestitures and changes due to currency exchange fluctuations. Organic growth excludes the effect of foreign exchange and acquisitions and divestitures to revenues in the comparative period. In 2020, we updated the presentation of the Company's segment reporting see Part I, Item I. Financial Statements; Note 8 Segment Reporting in the Condensed Consolidated Financial Statements for further information. As a result of these changes in segment reporting, all applicable historical segment information has been recast to conform to the new presentation.
In addition, we updated service lines to reflect Hazardous Waste Solutions Services and Manufacturing and Industrial Services into RWCS. This reclassification is driven by the divestiture of the Domestic Environmental Solutions business, discussed in Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments, and have recast for historical periods presented.
Revenues by service and reportable segment were as follows:
Three Months Ended
In millions Components of Change (%)
Organic
Foreign
2020 2019 Change ($) Change (%) Growth(1) SOP Pricing Divestitures Exchange
Revenue by Service
Regulated Waste and Compliance
Services $ 418.1 $ 553.2 $ (135.1 ) (24.4 %) (0.3 %) - (22.6 %) (1.6 %)
Secure Information Destruction
Services 152.5 229.4 (76.9 ) (33.5 %) (33.6 %) 0.6 % - (0.5 %)
Communication and Related
Services 27.6 63.2 (35.6 ) (56.3 %) (17.1 %) - (39.1 %) (0.2 %)
Total Revenues $ 598.2 $ 845.8 $ (247.6 ) (29.3 %) (10.6 %) 0.2 % (17.7 %) (1.2 %)
North America
Regulated Waste and Compliance
Services $ 328.5 $ 445.2 $ (116.7 ) (26.2 %) (0.5 %) - (25.6 %) (0.1 %)
Secure Information Destruction
Services 137.4 196.6 $ (59.2 ) (30.1 %) (30.4 %) 0.6 % - (0.3 %)
Communication and Related
Services 25.4 61.0 $ (35.6 ) (58.4 %) (17.9 %) - (40.5 %) -
Total North America Segment $ 491.3 $ 702.8 $ (211.5 ) (30.1 %) (10.4 %) 0.2 % (19.7 %) (0.1 %)
International
Regulated Waste and Compliance
Services $ 89.6 $ 108.0 $ (18.4 ) (17.0 %) 0.6 % - (10.0 %) (7.7 %)
Secure Information Destruction
Services 15.1 32.8 (17.7 ) (54.0 %) (53.0 %) 0.6 % - (1.5 %)
Communication and Related
Services 2.2 2.2 - - 4.5 % - - (4.5 %)
Total International Segment $ 106.9 $ 143.0 $ (36.1 ) (25.2 %) (11.6 %) 0.1 % (7.6 %) (6.2 %)
2020 Q2 10-
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Six Months Ended June 30,
In millions Components of Change (%)
Organic
Foreign
2020 2019 Change ($) Change (%) Growth(1) SOP Pricing Divestitures Exchange
Revenue by Service
Regulated Waste and Compliance
Services $ 951.4 $ 1,090.1 $ (138.7 ) (12.7 %) 1.4 % - (12.5 %) (1.7 %)
Secure Information Destruction
Services 370.6 461.4 (90.8 ) (19.7 %) (16.0 %) (3.3 %) - (0.4 %)
Communication and Related
Services 61.2 124.4 (63.2 ) (50.8 %) (8.9 %) - (41.7 %) (0.2 %)
Total Revenues $ 1,383.2 $ 1,675.9 $ (292.7 ) (17.5 %) (4.1 %) (0.9 %) (11.2 %) (1.2 %)
North America
Regulated Waste and Compliance
Services $ 767.1 $ 872.2 $ (105.1 ) (12.0 %) 1.1 % - (13.1 %) (0.1 %)
Secure Information Destruction
Services 323.4 394.7 (71.3 ) (18.1 %) (14.7 %) (3.2 %) - (0.1 %)
Communication and Related
Services 55.4 117.4 (62.0 ) (52.8 %) (10.8 %) - (41.9 %) (0.1 %)
Total North America Segment $ 1,145.9 $ 1,384.3 $ (238.4 ) (17.2 %) (4.4 %) (0.9 %) (11.8 %) (0.1 %)
International
Regulated Waste and Compliance
Services $ 184.3 $ 217.9 $ (33.6 ) (15.4 %) 2.8 % - (10.1 %) (8.1 %)
Secure Information Destruction
Services 47.2 66.7 (19.5 ) (29.2 %) (23.4 %) (3.7 %) - (2.1 %)
Communication and Related
Services 5.8 7.0 (1.2 ) (17.1 %) 22.9 % - (38.6 %) (1.4 %)
Total International Segment $ 237.3 $ 291.6 $ (54.3 ) (18.6 %) (2.7 %) (0.9 %) (8.5 %) (6.6 %)
(1) Growth is change in revenues excluding the impact of SOP pricing,
divestitures and foreign exchange.
For the three and six month periods ended June 30, 2020 as compared to the prior
year periods, organic SID revenue was lower primarily driven by COVID-19-related
shelter-in-place orders which resulted in a reduction in the number of service
stops. Organic CRS revenue also saw a decline as a result of lower demand for
hospital scheduling services due to the deferral of elective surgeries and
preventative care and lower recall volume compared to last year. Organic RWCS
revenue was relatively stable despite the postponement of elective surgeries and
preventative care.
North America revenues decreased $211.5 million , or 30.1%, in the second quarter
of 2020 to $491.3 million from $702.8 million in the second quarter of 2019.
Divestiture of the Domestic Environmental Solutions business in the second
quarter 2020 and divestiture of components of the CRS business sold in 2019
reduced revenues by $138.8 million , or 19.7%. Organic revenue excluding SOP
pricing decreased $72.8 million or 10.4% and was slightly offset by an increase
in revenue due to the increase in SOP pricing of $1.1 million .
International revenues decreased $36.1 million , or 25.2%, in the second quarter
of 2020 to $106.9 million from $143.0 million in the second quarter of 2019. The
decrease in International segment organic revenue excluding SOP pricing was
$16.6 million , or 11.6% largely attributable to the COVID-19 pandemic. The
impact of SOP pricing was relatively flat at an increase of $0.2 million for the
quarter ended June 30, 2020 as compared to the prior year quarter. Divestiture
of the U.K. TextAnywhere, Chile , and Mexico businesses reduced revenues by $10.8
million , or 7.6%. The effect of foreign exchange rates unfavorably impacted
International revenues in 2020 by $8.9 million , or 6.2%, as foreign currencies,
notably those in Latin America , declined against the U.S. dollar.
North America revenues decreased $238.4 million , or 17.2%, in the six month
period ended June 30, 2020 to $1,145.9 million from $1,384.3 million in the
period ended June 30, 2019 . Divestiture of the Domestic Environmental Solutions
business in the second quarter 2020 and divestiture of components of the CRS
business sold in 2019 reduced revenues by $163.3 million , or 11.8%. Organic
revenue excluding SOP pricing decreased $61.3 million or 4.4%. Additionally,
there was a decrease in revenue due to the impact of SOP pricing of $12.6
million , or 0.9% as compared to the prior year period.
2020 Q2 10-
-------------------------------------------------------------------------------- International revenues decreased$54.3 million , or 18.6%, in the six month period endedJune 30, 2020 to$237.3 million from$291.6 million in the period endedJune 30, 2019 . The decrease in International segment organic revenue excluding SOP pricing was$7.9 million , or 2.7%. Additionally, there was a decrease in revenue due to the impact of SOP pricing of$2.5 million , or 0.9% as compared to the prior year period. Divestiture of theU.K. TextAnywhere,Chile , andMexico businesses reduced revenues by$24.7 million , or 8.5%. The effect of foreign exchange rates unfavorably impacted International revenues in 2020 by$19.2 million , or 6.6%, as foreign currencies, notably those inLatin America , declined against theU.S. dollar. Gross profit: In millions Three Months Ended June 30, 2020 2019 Change $ % Revenue $ % Revenue $ % Gross profit 229.7 38.4 % 302.6 35.8 % (72.9 ) (24.1 %) In millions Six Months Ended June 30, 2020 2019 Change $ % Revenue $ % Revenue $ % Gross profit 516.3 37.3 % 599.7 35.8 % (83.4 ) (13.9 %) The decrease in Gross profit dollars for the three and six months endedJune 30, 2020 , as compared to the prior year periods, was primarily due to decreased gross profit due to the divestiture of the Domestic Environmental Solutions business in 2020 and divestitures that occurred during 2019, as well as the margin flow-through impacts associated with COVID-19-related decreased revenue discussed above specific to SID and CRS. These were partially offset by reductions in variable and discretionary costs, driven by operational efficiency improvements including in compensation and transportation. Gross profit as a percentage of Revenues has improved as divested businesses historically produced lower margins as compared to core businesses and operational efficiencies noted above. In addition, we continue to see lower charges associated with our key strategies and other significant matters discussed above. International Gross profit is lower than domestic Gross profit because our international operations have fewer small account customers, which tend to generate higher Gross profit. Our international operations generate most of their revenues from large account customers, such as hospitals, publicly funded healthcare organizations and government bodies. If our international revenues increase, consolidated Gross profit percentages may experience downward pressure due to this "business mix" shift, which may be offset by additional international small account market penetration, operational optimization and domestic business expansion. SG&A: In millions Three Months Ended June 30, 2020 2019 Change $ % Revenue $ % Revenue $ % SG&A 201.1 33.6 % 277.0 32.8 % (75.9 ) (27.4 %)
2020 Q2 10-
--------------------------------------------------------------------------------
In millions
Six Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
SG&A 459.7 33.2 % 562.8 33.6 % (103.1 ) (18.3 %)
The decrease in SG&A for the three and six months ended June 30, 2020 , as
compared to the prior year periods, was primarily due to disciplined reduced
spending in light of the impact of the COVID-19 pandemic on operations and the
divestiture of the Domestic Environmental Solutions business in 2020 and
divestitures that occurred during 2019. Additionally, the Company had lower
employee costs due to the impact of furloughed team members, lower commissions,
and reduced consulting and professional fees for business transformation,
divestitures, litigation, compliance and material weakness remediation costs,
partially offset by higher incentive compensation. Further, there was a decrease
in intangible asset amortization as assets became fully amortized.
Divestiture losses (gains), net:
In millions
Three Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Divestiture losses (gains), net 3.8 0.6 % 0.3 - 3.5 nm
In millions
Six Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Divestiture losses (gains), net 62.1 4.5 % (5.1 ) (0.3 %) 67.2 nm
For additional information, see Part I, Item I. Financial Statements Note 3 Restructuring, Divestitures and Impairments in the Condensed Consolidated Financial Statements and our Key Strategies and Other Significant Matters discussed above.Goodwill impairment: In millions Six Months Ended June 30, 2020 2019 Change $ % Revenue $ % Revenue $ % Goodwill impairment - - 20.9 1.2 % (20.9 ) (100.0 %)
No goodwill impairments were recorded during the three months ended
For additional information, see Part I, Item I. Financial Statements; Note 4 -Goodwill and Other Intangible Assets in the Condensed Consolidated Financial Statements and our Key Strategies and Other Significant Matters discussed above. Segment Profitability:
See Part I, Item I. Financial Statements Note 8 - Segment Reporting.
2020 Q2 10-
--------------------------------------------------------------------------------
Segment profitability was as follows:
In millions
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 compared to 2019 2020
2019 2020 compared to 2019
% of Segment % of Segment % of Segment % of Segment
$ Revenues $ Revenues $ % $ Revenues $ Revenues $ %
Adjusted Income from Operations
North America 140.5 28.6 % 149.4 21.3 % (8.9 ) (6.0 %) 290.0 25.3 % 289.2 20.9 % 0.8 0.3 %
International 1.8 1.7 % 16.0 11.2 % (14.2 ) (88.8 %) 16.9 7.1 % 33.1 11.4 % (16.2 ) (48.9 %)
Other (57.0 ) - (59.8 ) - 2.8 (4.7 %) (127.8 ) - (111.7 ) - (16.1 ) 14.4 %
Total 85.3 14.3 % 105.6 12.5 % (20.3 ) (19.2 %) 179.1 12.9 % 210.6 12.6 % (31.5 ) (15.0 %)
Reconciliation to Income (Loss)
from Operations:
Total Adjusted Income from
Operations 85.3 105.6 179.1 210.6
Business Transformation (9.2 ) (14.0 ) (27.2 ) (34.5 )
Intangible Amortization (31.2 ) (36.9 ) (63.1 ) (74.7 )
Acquisition and Integration - - - (1.9 )
Operational Optimization - (3.6 ) - (7.2 )
Divestitures (including
Divestitures (losses) gains,
net) (6.2 ) (4.9 ) (67.5 ) (2.1 )
Litigation, Settlements and
Regulatory Compliance (4.2 ) (9.1 ) (8.6 ) (18.9 )
Asset Impairments (8.3 ) (2.1 ) (12.3 ) (3.7 )
Goodwill Impairment - - - (20.9 )
Other (1.3 ) (9.7 ) (5.9 ) (25.6 )
Income (Loss) from Operations 24.9 25.3 (5.5 ) 21.1
Adjusted Income from Operations for our North America segment decreased $8.9
million , or 6.0%, in the second quarter of 2020 to $140.5 million from $149.4
million in the second quarter of 2019. As a percentage of North America
revenues, Adjusted Income from Operations was 28.6% and 21.3%, for the second
quarter of 2020 and 2019, respectively. Adjusted Income from Operations dollars
decreased due to the impact of divestitures and was partially offset due to
reductions in variable and discretionary costs, driven by operational efficiency
improvements including compensation, transportation, and SG&A expense
management. Operating margin improved as divested businesses historically
produced lower margins as compared to core businesses and operational
efficiencies noted above.
2020 Q2 10-
-------------------------------------------------------------------------------- Adjusted Income from Operations for ourNorth America segment increased$0.8 million , or 0.3%, in the six months endedJune 30, 2020 to$290.0 million from$289.2 million in the six months endedJune 30, 2019 . As a percentage ofNorth America revenues, Adjusted Income from Operations was 25.3% and 20.9%, for the six months endedJune 30, 2020 and 2019, respectively. Adjusted Income from Operations improved due to reductions in variable and discretionary costs, driven by operational efficiency improvements including compensation, transportation, and SG&A expense management. This was partially offset by the impact of divestitures. Operating margin improved as divested businesses historically produced lower margins as compared to core businesses and operational efficiencies noted above. Adjusted Income from Operations for our International segment decreased$14.2 million , or 88.8%, in the second quarter of 2020 to$1.8 million from$16.0 million in the second quarter of 2019. The decline was primarily driven by the margin flow-through impacts of COVID-19-related revenue decreases discussed above. As a percentage of International revenues, Adjusted Income from Operations was 1.7% and 11.2% for the second quarter of 2020 and 2019, respectively. Adjusted Income from Operations for our International segment decreased$16.2 million , or 48.9%, in the six month period endedJune 30, 2020 to$16.9 million from$33.1 million in the six months endedJune 30, 2019 . The decline was primarily driven by the margin flow-through impacts of COVID-19-related revenue decreases discussed above. As a percentage of International revenues, Adjusted Income from Operations was 7.1% and 11.4% for the six month periods endedJune 30, 2020 and 2019, respectively. Adjusted Loss from Operations for Other decreased in the three months endedJune 30, 2020 compared to the prior year comparable period as a result of operational efficiencies and SG&A expense management as discussed above.
Adjusted Loss from Operations for Other increased in the six months ended
Interest expense, net:
In millions
Three Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Interest expense, net 19.3 3.2 % 33.6 4.0 % (14.3 ) (42.6 %)
In millions
Six Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Interest expense, net 44.3 3.2 % 61.2 3.7 % (16.9 ) (27.6 %)
The decrease in the three and six months ended June 30, 2020 as compared to the
prior year periods is a result of a lower weighted-average debt balance as well
as lower interest rates compared to the prior year. For further information see
Part I, Item I. Financial Statements; Note 5 - Long-Term Debt.
2020 Q2 10-
--------------------------------------------------------------------------------
Loss on early extinguishment of debt:
In millions
Three Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Loss on early
extinguishment of debt - 0.0 % (23.1 ) (2.7 %) 23.1 (100.0 %)
In millions
Six Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Loss on early
extinguishment of debt - 0.0 % (23.1 )
(1.4 %) 23.1 (100.0 %)
For further information see Part I, Item I. Financial Statements; Note 5 -
Long-Term Debt.
Other expense, net:
In millions
Three Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Other expense, net 1.0 0.2 % 1.8 0.2 % (0.8 ) (44.4 %)
In millions
Six Months Ended June 30,
2020 2019 Change
$ % Revenue $ % Revenue $ %
Other expense, net 3.9 0.3 % 4.0 0.2 % (0.1 ) (2.5 %)
Other expense, net is primarily comprised of foreign exchange losses including
the re-measurement of net monetary assets held in Argentina as a result of its
designation as a highly inflationary economy.
Income tax (expense) benefit:
In millions
Three Months Ended June 30,
2020 2019 Change
$ Effective Rate $ Effective Rate $ %
Income tax (expense)
benefit (8.7 ) 189.1 % 3.0 9.0 % (11.7 ) nm
In millions
Six Months Ended June 30,
2020 2019 Change
$ Effective rate $ Effective rate $ %
Income tax (expense)
benefit 29.7 55.3 % (0.6 ) (0.9 %) 30.3 nm
For further information, see Part I, Item I. Financial Statements; Note 6 - Income Taxes in the Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
2020 Q2 10-
-------------------------------------------------------------------------------- The Company believes that it has sufficient liquidity to support its ongoing operations, including Business Transformation, and to invest in future growth to create value for its shareholders. Operating cash flows and the Company's$1.2 billion Senior Credit Facility are the Company's primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on the Company's long-term debt obligations, capital expenditures necessary to support growth and productivity improvements, including those associated with Business Transformation and shareholder distributions approved by the Board of Directors. To the extent the Company's liquidity needs prove to be greater than expected or cash generated from operations is less than anticipated, and cash on hand or credit availability is insufficient or the Company is in breach under its existing Credit Agreement, the Company would need to seek additional financing from alternative sources, including approaching the capital markets, in order to provide additional liquidity. The Company additionally expects positive impacts to cash flow from operations in 2020 as a result of theU.S. CARES Act. The Company anticipates cash refunds under certain provisions of theU.S. CARES Act to be approximately$100 million in 2020 from cash tax refunds for 2018 and 2019 net operating loss carrybacks. In July, the Company received approximately half of the expected refund amount. We expect to receive the remaining refund by the end of the year, although there is some timing risk given currentIRS volume and government shelter-in-place requirements. Additionally, starting in the second quarter of 2020 and continuing through the rest of the year, the Company has and expects to continue to defer payments associated with employer related payroll taxes of approximately$20 million under theU.S. CARES Act with expected payments in late 2021 and 2022. Through the second quarter endedJune 30, 2020 , the company deferred approximately$8 million . Similar tax provisions and other stimulus measures have been granted either before or afterJune 30, 2020 by certain foreign andU.S. state jurisdictions which the Company continues to evaluate and apply, if applicable. The Company has benefited in the second quarter endedJune 30, 2020 from indirect tax payment deferrals of approximately$8 million , which will be due in 2021. The Credit Agreement and Fifth Amendment contain a number of covenants, including financial covenants. As ofJune 30, 2020 , the Company was in compliance with the Consolidated Leverage Ratio covenant, with an actual ratio of 3.89 to 1.00, which was below the allowed maximum ratio of 4.75 to 1.00 as contained in the Fifth Amendment. OnApril 6, 2020 , the Company completed the divestiture of its Domestic Environmental Solutions business. Therefore, effectiveApril 6, 2020 , the Consolidated Leverage Ratio decreased by 0.25 to 4.75 to 1.00 for fiscal quarters ending on or beforeDecember 31, 2021 and 4.25 to 1.00 for fiscal quarters ending on or afterMarch 31, 2022 . Given our current leverage position, we believe we should be able to operate within our covenant thresholds, but due to the unpredictability of the COVID-19 pandemic and situations outside our control it is reasonably likely that the Company could exceed this Consolidated Leverage Ratio threshold at some point in the next 12 months. This risk can be mitigated and potentially managed through appropriate spending controls, divestitures, restructuring the Company's existing indebtedness, amending the Credit Agreement, or seeking temporary relief from the Consolidated Leverage Ratio covenant from the Company's lenders. A failure to comply with these provisions could result in an event of default. Upon an event of default, unless waived, the lenders could elect to terminate their commitments, cease making further loans, and/or cause their loans to become due and payable in full, foreclose against the assets securing the debt under our Credit Agreement and force us and our subsidiaries into bankruptcy or liquidation.
2020 Q2 10-
--------------------------------------------------------------------------------
For further details concerning these matters see Part I, Item I. Financial Statements; Note 5 - Long-Term Debt in the Condensed Consolidated Financial Statements for further information.
Working Capital: At
Current assets decreased$114.0 million atJune 30, 2020 to$592.6 million from$706.6 million atDecember 31, 2019 , primarily driven by divestiture of the Domestic Environmental Solutions business partially offset by higher prepaid expenses including income tax receivables associated with the impact of theU.S. CARES Act for net operating loss carryback refunds. Our second quarter DSO as reported was 46 days, compared to the DSO of 47 days in the first quarter of 2020. When excluding the divestiture revenues from the trailing 12-month DSO calculation, DSO was 52 days for the second quarter, compared to 61 days for the first quarter of 2020. We estimate the sequential quarter improvement of nine days is based on five days from the Domestic Environmental Solutions divestiture, three days from collections exceeding revenues due to the COVID-19 pandemic, and an additional day from collection process improvements. Current liabilities decreased$96.6 million atJune 30, 2020 to$660.3 million from$756.9 million atDecember 31, 2019 , primarily driven by the divestiture of the Domestic Environmental Solutions business. In millions Six Months Ended June 30, 2020 2019 Net cash from operating activities $ 207.3 $
71.0
Net cash from investing activities 352.3 (93.1 ) Net cash from financing activities (551.0 )
23.3
Effect of exchange rate changes on cash and cash equivalents (1.3 ) (1.0 ) Net change in cash and cash equivalents $ 7.3 $ 0.2 Operating Cash Flows: Net cash from operating activities increased$136.3 million in the first six months of 2020 to$207.3 million from$71.0 million in the first six months of 2019. The current period primarily reflects (i.) lower payments for legal and professional fees, annual incentive compensation, prepaid software, and interest totaling$54.8 million , (ii.) lower accounts receivable of$56.5 million driven by collections exceeding revenues due to the COVID-19 pandemic and collection process improvements (iii.) lower accounts payable of$25.0 million primarily driven by reduced costs (iv.) government relief tax-related payment deferrals of$15.7 million , roughly split betweenU.S. and international, and (v.) advances received on recently executed service agreements of$19.2 million related to the Domestic Environmental Solutions divestiture. Investing Cash Flows: Net cash from investing activities increased$445.4 million in the first six months of 2020 to net cash provided of$352.3 million from net cash used of$93.1 million in the first six months of 2019. Our capital expenditures decreased by$33.6 million to$74.6 million from$108.2 million in the first half of 2019, primarily driven by the timing of 2019 investments in the ERP and 2020 disciplined capital management. In the second quarter of 2020, we received$427.7 million from the divestiture of the Domestic Environmental Solutions business. In the first quarter of 2019, we received$13.6 million from the divestiture of aU.K. businesses.
2020 Q2 10-
-------------------------------------------------------------------------------- Financing Cash Flows: Net cash used by financing activities increased$574.3 million in the first six months of 2020. Our net repayments on our Senior Credit Facility and term loan were$525.6 million in the six month period endedJune 30, 2020 principally due to the proceeds received from the divestiture of the Domestic Environmental Solutions business and higher net cash from operating activities generated in the period. During the first six months of 2019, net borrowings of$68.6 million included repayment of private placement notes and new debt issuance of Senior Notes and additional borrowings on the Senior Credit Facility and Term Loan. As a result of the 2019 repayment of private placement notes, the Company paid$20.4 million for a make whole premium. Critical Accounting Policies and Estimates As discussed in our 2019 Form 10-K, the preparation of the Consolidated Financial Statements in conformity withU.S. GAAP requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and revenues and expenses during the periods reported. Some areas where the Company makes estimates include its allowance for doubtful accounts, credit memo reserve, accrued employee health and welfare benefits, environmental liabilities, stock-based compensation expense, income tax liabilities, accrued auto and workers' compensation insurance claims, operating lease ROU assets and lease liabilities, intangible asset valuations, and long-lived asset and goodwill impairment. Actual results may differ from those estimates. EffectiveJanuary 1, 2020 , the Company adopted ASU 2016-13. See Part I, Item I. Financial Statements; Note 1 - Basis of Presentation and Summary of Significant Accounting Policies in the Condensed Consolidated Financial Statements for further information on the adoption of ASU 2016-13.
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