STERICYCLE, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes in Part II, Item 8. Financial Statements and Supplementary Data of this 2019 Form 10-K. Overview Incorporated in 1989,Stericycle protects people, safeguards communities, and reduces risk through highly specialized medical and hazardous waste management and secure information services. Our team of more than 19,500 employees serves customers in theU.S. and 18 other countries with a concentration on the growing healthcare industry. We are a world-leading services company with the scale, expertise, and experience to handle complicated and behind-the-scenes essential services for waste management, regulatory compliance and destruction of secure information. To our customers, team members and the communities we serve,Stericycle is a company that protects what matters. Our offering of services appeals to a wide range of small and large business customers. The majority of our customers are healthcare businesses (hospitals, physician, and dental practices, outpatient clinics, long-term care facilities, etc.). We also provide services to retailers, manufacturers, financial services providers, professional services providers, governmental entities, and other businesses. While we manage large volumes of waste and other materials, the volume per customer site on average is small.
Highlights for the year ended
• Revenues for the year ended
to
impact of divestitures and macroeconomic factors of foreign exchange rates
and SOP pricing which reduced revenues by
• Organic revenue in RWCS and SID, excluding the impact of SOP pricing,
remained strong with increases of 0.7% and 3.6% compared to 2018,
respectively. These were more than offset by continued lowered sales in
Domestic CRS primarily due to smaller sized recall events and fewer
mandated recalls and lower M&I revenues.
• Loss from operations for the year was
loss from operations of
charges associated with key priorities and other significant matters of
respectively. Excluding these matters, loss from operations decreased by
million including SOP Pricing and foreign exchange, the impact of
divestitures, and operational matters of
RWCS and corporate operating costs and declines in CRS operations.
• Net loss was
with
due to the changes in significant charges associated with key priorities
and other significant matters and operational items previously
highlighted.
• Cash flow from operations for the full year was
to
by the Small Quantity customer class action settlement payment of
million. Excluding the settlement payment, cash flow from operations
decreased
2019, as
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PART II
previously highlighted, and payments in 2019 for certain litigation
matters, 2018 incentive compensation and ERP-related prepaid software.
• Capital expenditures for the year were
million for the ERP implementation, compared to
including
During 2019, we completed the following debt related transactions:
a) Issued
2024, which are unsecured and bear interest at 5.375% per annum, payable
on
b) Executed the Fourth Amendment which amended the Credit Agreement to, among
other things, (i) provide an incremental Term Loan of
modify the definition of "Consolidated EBITDA", (iii) revise the financial
covenant requirement for our Consolidated Leverage Ratio and (iv) make
certain other modifications to negative covenants related to restricted
payments and investments that we may make.
c) Repaid in full $1.075 billion of the outstanding private placement notesusing the net proceeds from the Senior Notes and the incremental Term Loan
together with additional borrowings under the Senior Credit Facility.
On
• increase the maximum allowable Consolidated Leverage Ratio to 5.00 to 1.00
until the end of the first quarter of 2022 and 4.50 to 1.00 thereafter.
• upon the consummation of the divesture of the
the foregoing maximum permitted Consolidated Leverage Ratio levels will
step down to 4.75 to 1.00 and 4.25 to 1.00, respectively.
• allow for continuation of the
through
2021, with no further addbacks thereafter.
• increase the leverage ratio pricing tier of greater than 4.50 to 1.00 by
0.125%.
• grant a first-priority security interest to the administrative agent for
the benefit of the lenders in substantially all of the personal property
of the Company and certain of its material domestic subsidiaries,
including certain equity interests held by those entities.
For additional information, see Part II, Item 8, Financial Statements and Supplementary Data; Note 9 - Debt in the Consolidated Financial Statements.
Over the course of 2019, we divested a texting business based in theUK , a telephone answering services business and pharmaceutical returns business inNorth America , and substantially all of our operations inMexico andChile . The five transactions combined generated$83.7 million in gross proceeds during 2019. As a result of these divestitures we recorded total non-cash divestiture losses, net of gains, of$103.0 million . (For additional information, see Part II, Item 8, Financial Statements and Supplementary Data; Note 4 - Restructuring and Divestitures in the Consolidated Financial Statements).
On
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Subject to the terms and conditions of the Purchase Agreement, the Buyer has agreed to purchase all of the outstanding equity interests of our Domestic Environmental Solutions subsidiary. Both we and Buyer have agreed to indemnify the other party for losses arising from certain breaches of the Purchase Agreement and other liabilities, subject to certain limitations. The purchase price for the Transaction is approximately$462.5 million , and subject to adjustment based on theESOL Disposal Group's net working capital at closing and other adjustments as defined in the Purchase Agreement. The Transaction is anticipated to result in a loss which is currently not estimable. The expected charge is based on our current estimate of the proceeds that will be allocated to the disposal transaction as we evaluate the terms of the HSA agreement negotiated with the Buyer concurrently with the Transaction, the net assets that will be disposed of and an allocation of goodwill based on the relative fair value of theESOL Disposal Group to the Domestic Environmental Solutions reporting unit. The remaining goodwill will be allocated to the Retained Business which we anticipate will become part of the Domestic Healthcare Compliance Services reporting unit once the transaction closes. The Purchase Agreement contains customary representations, warranties and covenants related to the Business and the Transaction. Between the date of the Purchase Agreement and the completion of the Transaction, we have agreed to conduct the ordinary course of theESOL Disposal Group business consistent with past practices in all material respects and have agreed to certain other operating covenants with respect to theESOL Disposal Group business as set forth more fully in the Purchase Agreement. The Purchase Agreement includes customary termination provisions, including if the closing of the Transaction has not occurred on or beforeNovember 6, 2020 (which may be extended untilFebruary 6, 2021 , if needed, to obtain applicable regulatory approvals). Both we and the Buyer have agreed to indemnify the other party for losses arising from certain breaches of the Purchase Agreement and other liabilities, subject to certain limitations. In connection with the closing of the Transaction, we and Buyer will enter into certain additional ancillary agreements, including a transition services agreement. We and Buyer will also enter into a long-term subcontracted HSA with respect to our Retained Business. We currently provide integrated waste compliance services to healthcare customers, including medical and hazardous waste disposal services. We will continue to be the integrated waste services provider to these customers and have subcontracted with the Buyer to performed hazardous waste services, including collection, transportation and disposal as necessary.
The Domestic Environmental Solutions business generated revenue of
Key Business Priorities
Following its founding in 1989,Stericycle grew rapidly as the medical waste industry developed and largely through inorganic acquisitions. Growth from medical waste acquisitions helped us achieve scale of infrastructure, route density, and a leadership position in theU.S. We also leveraged acquisitions to enter new geographies or add additional services to our portfolio. As we grew and evolved, we operated without centralization and the efficiencies that come from an integrated, modern corporate structure and associated information systems.
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The following table identifies key priorities and other significant matters impacting our business (amounts are stated pre-tax except when noted):
In millions
Year Ended December 31,
2019 2018 2017
Pre-tax items:
Included in COR
Business Transformation $ 0.4 $ 8.1 $ 0.7
Operational Optimization 9.8 - 0.4
Asset Impairments 5.2 17.6 -
Total included in COR 15.4 25.7 1.1
Included in SG&A
Business Transformation 67.3 74.5 30.6
Intangible Amortization 145.2 130.3 118.4
Acquisition and Integration 3.5 9.8 40.7
Operational Optimization 4.7 29.4 70.7
Divestitures 11.7 7.7 -Litigation, Settlements and Regulatory Compliance 28.2 93.2
327.7 Asset Impairments 16.9 8.9 - Other 39.7 29.1 24.8 Total included in SG&A 317.2 382.9 612.9 Divestiture losses, net of gains 103.0 12.8 9.5 Goodwill impairment 228.3 358.7 65.0 Total included in Loss from operations 663.9 780.1
688.5
Included in Interest expense, net Capital Allocation (debt related) 3.6 2.7
-
Loss on early extinguishment of debt 23.1 -
-
Included in Other expense, net Other (including highly inflationary exchange loss) 3.3 3.8 - Total pre-tax$ 693.9 $ 786.6 $ 688.5 After tax items: Capital Allocation (preferred dividends) $ -$ 25.5 $ 36.3 U.S. Tax Reform - 8.8 (129.8 ) Total after-tax $ -$ 34.3 $ (93.5 )
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The above priorities and other significant matters include the following types
of activities:
Cash Charges
Consulting
Closure and and
Exit Professional Non-Cash
Costs(1) Internal (2) Fees Other (3) Charges (4)
Business ? ? ? ? ?
Transformation
Acquisition and ? ? ? ? ?
Integration
Operational ? ? ? ? ?
Optimization
Divestitures ? ? ?
Litigation,
Settlements and ? ?
Regulatory
Compliance
Other ?
(1) Includes employee and contract termination, facility closure, and clean-up
costs.
(2) Includes dedicated resources, including project related incentive
compensation and stock-based compensation.
(3) Includes other costs related to each priority e.g. software maintenance
fees, changes in contingent consideration and environmental provisions.
(4) Includes impairments, accelerated depreciation, and/or amortization,
gain/loss on disposal, and changes in deferred consideration.
At the end of 2017, we began implementation of a business transformation, including the development of an ERP system, focused on driving long-term growth, improving profitability, and enhancing shareholder value. During 2019, we refocused our transformation efforts and aligned around five key business priorities.
1. Portfolio rationalization - As we look to the future, we continue to
pursue the divestiture of service lines or geographies that are not
profitable, have limited growth potential, are not vertically integrated,
are not essential to our regulated waste and compliance services and
secure information destruction service categories, and/or present the
opportunity to reduce debt.
2. Quality of revenue - The services we offer help our customers meet complex
regulations. Our expertise, infrastructure and service levels provide a
differentiated and premium brand value to the customers we serve. As such,
we are focused on improving the quality of revenue we deliver. During
2019, we added a Chief Commercial Officer and began implementing changes
in our commercial operations. We realigned our sales organization around
customer channels; implemented best practices for sales management and
training; reorganized our marketing teams to focus functional area of
expertise across services; and improved our contracting processes with
customers.
3. Operational cost efficiencies - Our day-to-day operations are shifting
toward a standardized operating model to optimize processes, drive
efficiencies and improve both safety and service. During 2019, we added a
Chief Engineer and have begun centralizing operational decision making
under a corporate engineering group. Additionally, we are focused on
driving cost efficiencies through work measurement, asset optimization,
use of technology, and expanded strategic sourcing.
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4. Debt reduction and leverage improvement - As a result of the debt
accumulated from our historic acquisition strategy, debt structure and
debt improvement were a key focus in 2019. In June 2019 , we raised $600
million from the issuance of our Senior Notes and $365 million from anincremental Term Loan. Combined with an additional draw from our Senior
Credit Facility,
billion-dollar private placement notes. Additionally, in 2019, we applied
cash flow from operations and proceeds from divestitures to enable a net
debt reduction of approximately
5. ERP implementation - Over our 30-year history,
more than 500 companies without fully integrating certain acquisitions
onto centralized information technology platforms. The disparate operating
and information systems have resulted in significant operational
inefficiencies. With the implementation of an ERP, we expect to improve
daily decision making via real-time information insights, simplify and
enhance forecast accuracy, provide transparency for greater
accountability, aid in the development of strategic planning, and make it
easier for our customers to do business with us. The "go-live" of the ERP
system began in
human-resources performance management module. During 2020, the additional
ERP capabilities, including commercial, operational and financial, will be
implemented in a staged approach across our North America RWCS reportable
segment, excluding the ESOL Disposal Group .
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Business Transformation
Since the program's inception, we have recognized the following charges and capital expenditures related to the Business Transformation:
In millions
Year Ended December 31,
Cumulative Since
2019 2018 2017 Inception
Investment in Costs Savings
and Business Capability
Exit costs - employee
termination $ - $ - $ 6.7 $ 6.7
Consulting and professional
fees 0.4 27.1 15.8 43.3
Internal costs 2.4 4.4 1.3 8.1
Other related expenses 3.3 1.4 - 4.7
Total 6.1 32.9 23.8 62.8
ERP Development and
Implementation
Consulting and professional
fees 27.2 16.0 - 43.2
Internal costs 9.3 8.7 0.1 18.1
Software usage/maintenance
fees 15.3 7.4 - 22.7
Other related expenses 4.3 0.6 1.0 5.9
56.1 32.7 1.1 89.9
Capital expenditures 80.6 18.0 10.9 109.5
Total 136.7 50.7 12.0 199.4
Other Related Matters
Exit costs - employee
termination 5.5 3.7 4.1 13.3
Consulting and professional
fees - 4.2 - 4.2
Non-cash charges - 9.1 2.3 11.4
Total 5.5 17.0 6.4 28.9
Total charges and capital
expenditures $ 148.3 $ 100.6 $ 42.2 $ 291.1
Non-cash related charges $ 1.8 $ 9.4 $ 2.4 $ 13.6
Cash related charges
(including stock based
compensation) 65.9 73.2 28.9 168.0
Total operating expenditures
ThroughDecember 31, 2019 , we have 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 to complete design, testing and deployment inNorth America . 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.
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Business Transformation operating expenditures by reportable segment were as
follows:
In millions
Year Ended December 31,
2019 2018 2017
North America RWCS $ 2.6 $ 10.8 $ 5.5
International RWCS 1.3 0.7 4.0
All Other 63.8 71.1 21.8
Total $ 67.7 $ 82.6 $ 31.3
As part of our Business Transformation, we are undertaking 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 to U.S. and foreign taxes
and foreign exchange charges.
Intangible Amortization
For the years ended December 31, 2019 , 2018, and 2017, we recognized $145.2
million , $130.3 million , and $118.4 million , respectively, of intangible
amortization expense. The increase is partially due to the adjustment of the
estimated useful lives of certain of our customer relationship intangibles (see
Part II, Item 8. Financial Statements and Supplementary Data; Note 7 - Goodwill
and Other Intangible Assets in the Consolidated Financial Statements) at the end
of 2018 with the remaining changes, net arising from acquisitions and
divestitures.
Acquisition and Integration
Details of the acquisitions completed in the years ended
Acquisition and integration expenses were as follows:
In millions
Year Ended December 31,
2019 2018 2017
Acquisition expenses $ 3.5 $ 7.4 $ 10.6
Integration expenses - 2.2 30.5
Unfavorable (favorable) change in
contingent consideration - 0.2 (0.4 )
Total $ 3.5 $ 9.8 $ 40.7
Acquisition expenses in all years principally comprise internal costs and
changes in deferred consideration. Integration expenses incurred in the years
ended December 31, 2018 and 2017 were primarily related to acquisitions
completed in the U.S. and, in particular, the Shred-it®
acquisition. Prospectively, baring new acquisitions, we anticipate acquisition
and integration expenses to be limited to deferred consideration changes, if
any.
Operational Optimization
We aim to achieve a culture of continuous improvement that will enhance its
efficiency, effectiveness and competitiveness to improve its 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 of Stericycle . We maintain such strengths by making
adjustments to our network of
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transportation and treatment facilities 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, and restructuring the local organization and operation for efficiency. Operational Optimization expenses, of which$9.8 million was recognized in COR and$4.7 million was recognized in SG&A, for the year endedDecember 31, 2019 , were as follows: In millions North America RWCS International RWCS All Other Total Exit costs - employee termination $ 0.4 $ 0.9 $ 1.0$ 2.3 Closure and exit costs - other - 2.4 - 2.4 Impairment and accelerated depreciation of property, plant and equipment 2.0 4.0 - 6.0 Impairment of intangibles - 0.9 0.4 1.3 Total non-cash charges 2.0 4.9 0.4 7.3 Other expenses - 2.5 - 2.5 Total $ 2.4 $ 10.7 $ 1.4$ 14.5
Of the more significant charges:
• North America RWCS: Exit costs - employee termination related to employee
severance payments and non-cash charges related to impairment of long-lived
assets arising from a site relocation in the
• International RWCS: Exit costs - employee termination and non-cash charges
relate to site closures and facility exits in EMEA and
expenses primarily related to additional charges incurred as a result of
diverting waste processing during conversion at one of our plants in APAC; and
• All Other: Exit costs - employee termination relate to severance payments in
our Domestic CRS business to better align cost structure with associated
revenues and non-cash charges relate to an impairment of customer list
intangibles.
Operational Optimization expenses, which were all recognized in SG&A, for the
year ended
In millions
North America RWCS International RWCS All Other Total
Exit costs - employee termination $ - $ 0.2 $ 1.1 $ 1.3
Closure and exit costs - other 4.2 5.9 3.7 13.8
Impairment and accelerated
depreciation of property, plant
and equipment 1.0 4.7 - 5.7
Impairment of intangibles - 6.6 - 6.6
Total non-cash charges 1.0 11.3 - 12.3
Other expenses - 2.0 - 2.0
Total $ 5.2 $ 19.4 $ 4.8 $ 29.4 Of the more significant charges:
• North America RWCS: Closure and exit costs - other related to optimizing
overall logistics and sales functions, primarily related to our secure
information destruction locations and lease exit costs for the consolidation
of call centers in our Canadian CRS locations. Non-cash charges related to
accelerated depreciation associated with software;
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• International RWCS: Closure and exit costs - other related to closure,
contract exit and other clean-up costs, primarily in
APAC. Non-cash impairment charges related to long-lived assets, customer
relationships, and operating permits, primarily in
and rationalization of a tradename in
in APAC; and
• All Other: Closure and exit costs - other related to lease exit costs for
the consolidation of call centers in Domestic CRS locations.
Operational Optimization charges, which, except for$0.4 million which was recognized in COR, were recognized in SG&A, for the year endedDecember 31, 2017 , were as follows: In millions North America RWCS International RWCS All Other Total Exit costs - employee termination $ 1.1 $ 3.7$ 0.5 $ 5.3 Closure and exit costs - other 16.1 8.8 5.8 30.7 Impairment and accelerated depreciation of property, plant and equipment - 5.1 - 5.1 Impairment of intangibles 3.1 11.9 5.8 20.8 Total non-cash charges 3.1 17.0 5.8 25.9 Consulting and professional fees 8.9 - 0.3 9.2 Total $ 29.2 $ 29.5$ 12.4 $ 71.1
Of the more significant charges:
• North America RWCS: Closure and exit costs - other related to optimizing
overall logistics and sales functions, primarily related to our secure
information destruction locations. Non-cash impairment charges related to long
lived assets. Consulting and professional fees related to costs to identify
opportunities and reduce operational redundancies;
• International RWCS: Closure and exit costs - employee termination and closure
and exit costs - other included amounts incurred in
rationalizing our operations and in the
contract exit costs. Non-cash impairment charges related to long-lived assets,
operating permits, and customer relationships in
• All Other: Closure and exit costs - other related to consolidating of call
centers in Domestic CRS locations. Non-cash charges relate to the impairment
of a tradename. Consulting and professional fees represented expenses incurred
to eliminate operational redundancies.
As we continue to consider each Operational Optimization activity, the amount, the timing and recognition of charges will be affected by the occurrence of commitments and triggering events as defined underU.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 its planned time frame or at all. Divestitures 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. Any decision to divest of a business is based upon several criteria, including the following: • outlook for long-term market conditions; • potential impact to complementary services or customer relationships; • ability to leverage infrastructure and customer base for growth;
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• potential for margin improvement, inclusive of vertical integration of
collection and treatment;
• current divestiture value versus future divestiture value;
• return on invested capital;
• impact on overall leverage, including impact on debt leverage ratio;
• implications for ongoing internal control compliance efforts; and
• implications for our ERP system implementation.
We recognized the following divestiture losses, net of (gains) associated with
divestitures of the following businesses (see Part II, Item 8. Financial
Statements and Supplementary Data; Note 4 - Restructuring and Divestitures in
the Consolidated Financial Statements.
In millions
Year Ended December 31,
2019 2018 2017
North America RWCS Segment
CRS businesses $ 6.5 $ - $ -
U.S. clean room business - 6.9 -
Total North America RWCS charges 6.5 6.9 -
International RWCS Segment
Mexico operations 43.2 - -
Chile operations 19.0 - -
U.K. TextAnywhere business (5.1 ) - -
U.K. hazardous waste business 0.7 5.9 6.8
U.K. patient transport business (0.3 ) - 5.7
South Africa operations - - (3.0 )
Total International RWCS charges, net 57.5 5.9 9.5
All Other
CRS businesses 39.0 - -
Total $ 103.0 $ 12.8 $ 9.5
Included in the losses on divestiture of the Mexico and Chile operations were
charges of $18.9 million and $16.8 million , respectively, relating to the
recognition of losses accumulated on the associated cumulative currency
translation adjustments which were reclassified to earnings as of the date of
disposal.
In addition to these charges, in 2019 and 2018 we incurred $11.7 million and
$7.7 million , respectively, of consulting and professional fees associated with
our Portfolio Rationalization efforts. We did not incur any such fees in the
year ended December 31, 2017 .
As part of our long-term strategy for improving profitability and return on
invested capital, we continue to evaluate the performance of our entire
portfolio of assets and businesses. Divestitures resulting from this ongoing
evaluation may cause us to record significant charges, including those related
to goodwill, other intangible assets, long-lived assets, and cumulative currency
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
any divestiture we may complete as a result of our ongoing reviews could have a
material adverse effect on our business, financial condition or results of
operations.
We will continue monitoring businesses for achievement of the criteria that may
require classification as assets held-for-sale or for impairment as otherwise
required by applicable accounting standards. Our impairment evaluation is based
on the assumption that these assets or businesses will continue to be operated
by us as held-for-use until they are divested or classified as held-for-sale.
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Litigation, Settlements and Regulatory Compliance
We 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 from time to time including the items detailed in Part II, Item 8. Financial Statements and Supplementary Data; Note 20 - Legal Proceedings, in the Consolidated Financial Statements. Our financial results may also include considerations of non-recurring matters including settlements, environmental remediation, and legal related consulting and professional fees.
For the year ended
For the year endedDecember 31, 2018 , we recognized$93.2 million of legal, settlement and regulatory compliance expenses, consulting and professional fees, primarily related to certain litigation matters, including the provision, net of insurance recoveries, for the Securities Class Action Settlement announced onDecember 19, 2018 and approved inJuly 2019 . For the year endedDecember 31, 2017 , we recognized$327.7 million of legal, settlement and regulatory compliance expenses, consulting and professional fees, primarily related to certain litigation matters, of which$295.0 million was for the SQ Settlement.
See also Item 1A. Risk Factor "We are subject to a number of pending lawsuits."
Asset and Goodwill Impairments
Asset impairment charges comprise the following:
In millions
Year Ended December 31,
2019 2018 2017
Software $ 1.6 $ 17.6 $ -
Other property plant and equipment 3.6 - -
Impairments included in COR$ 5.2 $ 17.6 $
-
Other property plant and equipment$ 0.5 $ - $
-
Customer lists, permits and tradenames 16.4 8.9 - Impairments included in SG&A$ 16.9 $ 8.9 $ - Asset impairments$ 22.1 $ 26.5 $ -Goodwill impairments: Canada reporting unit$ 126.6 $ - $ - Domestic Environmental Solutions reporting unit 80.8 - - Domestic CRS reporting unit - 286.3 - Latin America reporting unit 20.9 72.4 65.0 Goodwill impairments$ 228.3 $ 358.7 $ 65.0 For the year endedDecember 31, 2019 , impairment charges primarily consisted of$1.6 million related to software as a result of rationalization of system applications primarily in All Other,$1.0 million related to permits inMexico due to site closures prior to theMexico operations divestiture,$0.7 million related to customer list intangibles inthe Netherlands , and$18.3 million associated with property and equipment and customer relationship, permits and other intangibles in ourBrazil operations, both, which are part of our International RWCS reportable segment and$0.5 million associated with a site closure in our North
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America RWCS reportable segment. For the year endedDecember 31, 2018 , the impairment charges were primarily associated to software in connection with our evolving future information systems strategy including rationalization of applications used within each reportable segment. The impairment charges included in SG&A and COR for the year endedDecember 31, 2019 and 2018, respectively are further described in Part II, Item 8. Financial Statements and Supplementary Data; Note 5 - Property, Plant and Equipment and Note 7 -Goodwill and Other Intangible Assets in the Consolidated Financial Statements. As a result of our annual goodwill impairment assessments onOctober 1 and interim assessments, as applicable, we recognized goodwill impairment charges which are discussed below in the Impairment section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Goodwill Impairment. (For additional information, see Part II, Item 8. Financial Statements and Supplementary Data; Note 7 -Goodwill and Other Intangible Assets in the Consolidated Financial Statements). Impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur, including deterioration in the macroeconomic environment or in the equity markets, including the market value of our common shares, deterioration in our performance or our future projections, or changes in our plans for one or more reporting units or specified long-lived assets, among other factors. Other During the years endedDecember 31, 2019 , 2018, and 2017, we recognized$39.7 million ,$29.1 million , and$24.8 million , respectively, of consulting and professional fees related to internal control remediation activities as well as the implementation of new accounting standards.
For the years ended
Capital Allocation
Our capital allocation items include the following types of activities:
• Stock issuance costs, • Dividends on Preferred Stock,
• Debt modification costs in connection with related non-recurring matters,
• Losses on early extinguishment of debt, and • Other related expenses. For the year endedDecember 31, 2019 , we incurred a pre-tax loss on early extinguishment of debt of$23.1 million , comprising a "make-whole" premium of$20.4 million , due under the terms of certain of the private placement notes, and$2.7 million related to unamortized debt issuance costs, associated with repayments of our private placement notes. We also incurred$0.2 million of debt modification charges associated with the execution of the Fourth Amendment, which are recorded in Interest expense, net and charges of$3.4 million related to the write-
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off of the unamortized portion of premiums associated with interest rate locks executed in connection with the issuance of certain of the private placement notes, which are recorded in Interest expense, net. During the year endedDecember 31, 2018 , we recognized$2.7 million of debt modification charges related to amending our credit agreements. These charges have been recognized as Interest expense, net in the Consolidated Statements of (Loss) Income. We declared and paid dividends of$25.5 million and$36.3 million , to the Series A Preferred Stock shareholders during the years endedDecember 31, 2018 and 2017, respectively. OnSeptember 14, 2018 , in accordance with their terms of issuance, all of the Series A Preferred Stock was converted into common stock and all then outstanding shares of preferred stock and the associated depositary shares were cancelled. Tax Reform We analyzed the provisional impact of the Tax Act on our year end 2017 income tax benefit/provision and as a result recognized$129.8 million as an income tax benefit in 2017. Consistent with the requirements of Staff Accounting Bulletin No. 118 ("SAB 118"), the analysis and determination of provisional impact was finalized during 2018, resulting in a charge of$8.8 million . For further discussion, see Part II, Item 8. Financial Statements and Supplementary Data; Note 10 - Income Taxes in the Consolidated Financial Statements.
Results of Operations
Revenues (including Segment Revenue):
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 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 with less than a full year of revenues in the comparative period. Revenues and Gross profit associated with SID Services are impacted by changes in SOP pricing, which has declined in recent quarters. Continued declines in SOP pricing could have a material impact on our Revenues, Gross profit and results of operations.
Regulated Waste and Compliance Services consist of Medical Waste and Compliance Solutions and Hazardous Waste Solutions. Communication and Related Services Revenues consist of Communications Services and Expert Solutions.
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2019 compared to 2018
Year over year movements in Revenues by Service Category and were as follows:
In millions Percentage Change %
Year Ended December 31,
Foreign
2019 2018 Change Change Organic Acquisitions Divestitures Exchange
Revenues by Service
Regulated Waste and
Compliance Services $ 1,892.8 $ 1,932.6 $ (39.8 ) (2.1 %) 0.7 % 0.1 % (0.5 %) (2.4 %)
Secure Information (1)
Destruction Services 901.9 911.0 (9.1 ) (1.0 %) (1.0 %) 0.9 % - (0.9 %)
Communication and Related
Services 219.2 313.1 (93.9 ) (30.0 %) (16.6 %) - (13.0 %) (0.4 %)
Manufacturing and Industrial
Services 295.0 329.2 (34.2 ) (10.4 %) (2.2 %) - (4.1 %) (4.1 %)
Total Revenues $ 3,308.9 $ 3,485.9 $ (177.0 ) (5.1 %) (1.6 %) 0.3 % (1.8 %) (2.0 %)
Revenues by Segment
North America RWCS $ 2,544.2 $ 2,574.1 $ (29.9 ) (1.2 %) (1.2 %) (2) 0.4 % (0.2 %) (0.2 %)
International RWCS 579.3 655.1 (75.8 ) (11.6 %) 3.1 % (3) - (4.9 %) (9.8 %)
All Other 185.4 256.7 (71.3 ) (27.8 %) (17.5 %) - (10.3 %) -
Total Revenues $ 3,308.9 $ 3,485.9 $ (177.0 ) (5.1 %) (1.6 %) 0.3 % (1.8 %) (2.0 %)
(1) Excluding SOP price impact, SID organic percentage change is 3.6% for the
year ended
(2) Excluding SOP price impact, North America RWCS organic percentage change
is 0.2% for the year ended
(3) Excluding SOP price impact, International RWCS organic percentage change
is 4.1% for the year ended
On a consolidated basis revenues decreased$177.0 million , or 5.1%, in 2019 to$3.31 billion from$3.49 billion in 2018. The decrease was largely driven by the impact of divestiture activity, foreign exchange, SOP pricing and reductions in CRS, partially offset by organic growth in RWCS and SID due, among other things, to the implementation of a recycling revenue surcharge. North America RWCS revenues decreased$29.9 million , or 1.2%, in 2019 to$2.54 billion from$2.57 billion in 2018. Organic revenue declined$30.0 million , or 1.2%, as a result of approximately$35.0 million related to the impact of SOP pricing partially offset by growth in SID. Acquisitions contributed$9.5 million , or 0.4%, to revenues and divestitures reduced revenues by$5.7 million or 0.2%. The decline of the Canadian dollar had an unfavorable impact on 2019 revenues of$3.7 million , or 0.2%. International RWCS revenue decreased$75.8 million , or 11.6%, in 2019 to$579.3 million from$655.1 million in 2018. Organic revenue increased in the International RWCS segment in 2019 by$20.4 million , or 3.1%, primarily due to higher volumes in RWCS revenues as a result of the implementation of new sales strategies and higher SID revenues, due to higher volumes, and increases in recycling surcharge revenue, offset by the impact of decreases in SOP pricing. Divestitures of businesses, primarily theU.K hazardous waste business in 2018, reduced revenues by$32.1 million , or 4.9%. The effect of foreign exchange rates unfavorably impacted international revenues in 2019 by$64.1 million , or 9.8%, as foreign currencies declined against theU.S. dollar.
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All Other revenues, related to Domestic CRS, decreased$71.3 million , or 27.8%, in 2019 to$185.4 million from$256.7 million in 2018. Organic revenue decreased$45.0 million , or 17.5%, primarily due to reductions in CRS volumes due to smaller sized recall events and fewer mandated recalls as a result of theU.S. Federal government shutdown in early 2019. Divestitures, primarily related to the North America TAS and retail pharmaceutical returns businesses divested in 2019 reduced revenues by$26.3 million , or 10.3%. 2018 compared to 2017 In millions Percentage Change % Year Ended December 31, Foreign 2018 2017 Change Change Organic Acquisitions Divestitures Exchange Revenues by Service Regulated Waste and Compliance Services$ 1,932.6 $ 2,023.6 $ (91.0 ) (4.5 %) (2.8 %) 0.3 % (1.1 %) (0.9 %) Secure Information Destruction Services 911.0 823.4 87.6 10.6 % 7.8 % 2.7 % (0.4 %) 0.5 % Communication and Related Services 313.1 382.6 (69.5 ) (18.2 %) (18.2 %) 0.1 % - (0.1 %) Manufacturing and Industrial Services 329.2 351.1 (21.9 ) (6.2 %) 2.8 % 0.2 % (5.4 %) (3.8 %) Total Revenues$ 3,485.9 $ 3,580.7 $ (94.8 ) (2.7 %) (1.5 %) 0.8 % (1.3 %) (0.7 %) Revenues by Segment North America RWCS$ 2,574.1 $ 2,551.9 $ 22.2 0.9 % (0.1 %) 1.1 % (0.1 %) - International RWCS 655.1 707.6 (52.5 ) (7.4 %) 1.9 % 0.4 % (5.9 %) (3.8 %) All Other 256.7 321.2 (64.5 ) (20.1 %) (20.1 %) - - - Total Revenues$ 3,485.9 $ 3,580.7 $ (94.8 ) (2.7 %) (1.5 %) 0.8 % (1.3 %) (0.7 %) On a consolidated basis revenues decreased$94.8 million , or 2.7%, in 2018 to$3.49 billion from$3.58 billion in 2017. The decrease was largely driven by the expected declines in the SQ medical waste business and CRS, foreign exchange, and divestitures, partially offset by strong organic growth in SID. North America RWCS revenues increased$22.2 million , or 0.9%, in 2018 to$2.57 billion from$2.55 billion in 2017. Organic revenues decreased$1.5 million , as we saw declines due to the impact of SQ pricing. This was partially offset by increases in SID revenues as a result of increased pricing and related demand for and SOP pricing increases related to recycled paper as well as organic growth from new customers and growth in Regulated Waste and Compliance revenues from retail and our larger customers. Acquisitions contributed$27.0 million , or 1.1%, to revenues. Divestitures, primarily related to theU.S. clean room business, reduced revenues by$3.3 million , or 0.1%. International RWCS revenue decreased$52.5 million , or 7.4%, in 2018 to$655.1 million from$707.6 million in 2017. The increase in International RWCS segment organic revenues was$13.3 million , or 1.9%. SID revenues increased as a result of increased pricing and related demand and SOP pricing for recycled paper as well as organic growth from new customers, and the impact of the new General Data Protection Regulation laws inEurope . We also saw increases in Medical Waste and Compliance Revenues as a result of growth inEurope . These increases were offset by declines due to the exit from our patient transport business in theU.K. and overall economic declines in severalLatin America markets. Acquisitions in the International RWCS segment contributed$2.7 million , or 0.4%, to revenues. Divestitures related to the hazardous waste business in theU.K. and SID business inSouth Africa reduced revenues by$41.7 million , or 5.9%. The effect of foreign exchange rates, primarily inLatin America , unfavorably impacted
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international revenues in 2018 by
All Other revenues, related to Domestic CRS, decreased$64.5 million , or 20.1%, in 2018 to$256.7 million from$321.2 million in 2017. Revenues were impacted by reductions in CRS volumes due to smaller-sized recall events as compared to multiple large-sized recall events managed during 2017 and lower call volumes. Gross Profit In millions Year Ended December 31, 2019 2018 2017 Change 2019 versus 2018 Change 2018 versus 2017 $ % of Revenue $ % of Revenue
$ % of Revenue $ % $ % Gross profit 1,174.5 35.5 % 1,376.0 39.5 % 1,462.5 40.8 % (201.5 ) (14.6 %) (86.5 ) (5.9 %) Consolidated Gross profit decreased$201.5 million , or 14.6%, in 2019 to$1.17 billion from$1.38 billion in 2018. As a percentage of revenues, consolidated Gross profit decreased to 35.5% in 2019 compared to 39.5% in 2018. The decline in gross profit was primarily due to the impact of higher operational costs, including third-party disposal in hazardous waste operations, equipment maintenance and rental costs as well as the impact of SOP pricing declines. Consolidated Gross profit decreased$86.5 million , or 5.9%, in 2018 to$1.38 billion from$1.46 billion in 2017. As a percentage of revenues, consolidated Gross profit decreased to 39.5% in 2018 compared to 40.8% in 2017. The decline in gross profit was primarily attributable to the expected impact of SQ mix and pricing, approximately$25.7 million of impairment charges incurred in the North America RWCS and All Other reportable segments and the impact of lower volumes in CRS. Decreases were also due to a prolonged declining market trend and cost pressures inLatin America . 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. Historically, our international operations generate most of their revenues from large account customers, such as hospitals, publicly funded healthcare organizations and government bodies. As our international revenues increase, consolidated gross profit percentages experience downward pressure due to this "business mix" shift, which may be offset by additional international small account market penetration, integration savings, and domestic business expansions. SG&A In millions Year Ended December 31, 2019 2018 2017 Change 2019 versus 2018 Change 2018 versus 2017 $ % of Revenue $ % of Revenue
$ % of Revenue $ % $ %
SG&A 1,055.1 31.9 % 1,165.6 33.4 % 1,395.6 39.0 % (110.5 ) (9.5 %) (230.0 ) (16.5 %)
SG&A expenses decreased$110.5 million , or 9.5%, in 2019 to$1.06 billion from$1.17 billion in 2018. As a percentage of revenues, SG&A decreased to 31.9% of revenues in 2019 compared to 33.4% in 2018. The decrease was primarily the result of lower charges associated with key priorities and other significant matters, discussed above, which were$317.4 million in 2019 compared to$382.9 million in 2018 and
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lower incentive compensation.
SG&A expenses decreased$230.0 million , or 16.5%, in 2018 to$1.17 billion from$1.40 billion in 2017. As a percentage of revenues, SG&A decreased to 33.4% in 2018 compared to 39.0% in 2017. The decrease was primarily attributable to lower charges associated with key priorities and significant matters, which were$382.9 million in 2018 compared to$612.9 million in 2017. These matters are discussed above. Additionally, there were also decreases in consulting and professional fees and bad debt expense partially offset by an increase in incentive compensation as achievement was at higher overall levels during 2018. Goodwill Impairment In millions Year Ended December 31, 2019 2018 2017 Change 2019 versus 2018 Change 2018 versus 2017 $ % of Revenue $ % of Revenue $ % of Revenue Goodwill impairment 228.3 6.9 % 358.7 10.3 % 65.0 1.8 % (130.4 ) (36.4 %) 293.7 451.8 %
We performed our annual goodwill assessment as of
The following factors contributed to changes in our long-range plan approved in the fourth quarter, which negatively impacted the estimated fair value of these reporting units:
• Domestic Environmental Solutions: During 2019, we experienced higher
operating costs, particularly related to hazardous waste disposal costs. In
addition, we anticipate that the timelines for achieving the betterment
plans for both revenue quality and cost improvements have been extended. We
also gathered insights from the process of evaluating Domestic
Environmental Solutions as part of our portfolio rationalization
considerations.
•
Regulated Medical Waste Services, lower SOP pricing, and higher medical and
hazardous waste costs including
reliance on third-party disposal, and
expect these challenges to have a prolonged impact and have adjusted for
them in our current year long-range plan.
These challenges were factored into updates to our long-range plan and
forecasted cash-flow assumptions to reflect our current outlook. We also made
certain adjustments to the discount rates used to present value these forecasted
cash-flows. As a result, we recognized $126.6 million to fully impair the
goodwill associated with our Canada reporting unit and $80.8 million of non-cash
impairment charges related our Domestic Environmental Solutions reporting unit.
During the first quarter of 2019, there were business, market, and strategic
developments which negatively impacted the estimated cash flows of our Latin
America reporting unit and triggered an interim assessment as of March 31,
2019 . We 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
During 2018, as a result of our annual impairment assessment of goodwill, we
recognized a non-cash goodwill impairment charge for our Domestic CRS and Latin
America reporting units of $286.3 million and $72.4 million , respectively.
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During 2017, as a result of our annual impairment assessment of goodwill we
recognized a non-cash goodwill impairment charge for our
Segment Profitability
We use Adjusted EBITDA as the primary measure of profitability for each of our
Reportable Segments - see Part II, Item 8. Financial Statements and
Supplementary Data; Note 18 - Segment Reporting in the Consolidated Financial
Statements for an explanation of this measure. Segment profitability and a
reconciliation of the total for segment profitability to (loss) income from
operations was as follows:
In millions
Year Ended December 31,
2019 2018 2017 Change 2019 versus 2018 Change 2018 versus 2017
% of Segment % of Segment % of Segment
$ Revenues $ Revenues $ Revenues $ % $ %
Adjusted EBITDA
North America RWCS 643.2 25.3 % 782.4 30.4 % 809.5 31.7 % (139.2 ) (17.8 %) (27.1 ) (3.3 %)
International RWCS 99.0 17.1 % 95.6 14.6 % 93.7 13.2 % 3.4 3.6 % 1.9 2.0 %
All Other (164.4 ) (88.7 %) (133.4 ) (52.0 %) (91.2 ) (28.4 %) (31.0 ) 23.2 % (42.2 ) 46.3 %
Total 577.8 17.5 % 744.6 21.4 % 812.0 22.7 % (166.8 ) (22.4 %) (67.4 ) (8.3 %)
Reconciliation to Loss from operations: Total Adjusted EBITDA above 577.8 744.6 812.0 Depreciation (125.8 ) (125.6 ) (131.1 ) Intangible Amortization (145.2 ) (130.3 ) (118.4 ) Business Transformation (67.7 ) (82.6 ) (31.3 ) Acquisition and Integration (3.5 ) (9.8 ) (40.7 ) Operational Optimization (14.5 ) (29.4 ) (71.1 ) Divestitures (including Divestiture Losses, net of Gains) (114.7 ) (20.5 ) (9.5 ) Litigation, Settlements and Regulatory Compliance (28.2 ) (93.2 ) (327.7 ) Asset Impairments (22.1 ) (26.5 ) - Goodwill Impairment (228.3 ) (358.7 ) (65.0 ) Other (39.7 ) (29.1 ) (24.8 ) Loss from operations (211.9 ) (161.1 ) (7.6 ) 2019 compared to 2018 Adjusted EBITDA for our North America RWCS reportable segment decreased$139.2 million , or 17.8%, in 2019 to$643.2 million from$782.4 million in 2018. As a percentage of North America RWCS revenues, Adjusted EBITDA was 25.3% and 30.4% for 2019 and 2018, respectively. This decrease was primarily a result of lower gross margins due to the impact of higher operational costs, including third-party disposal in hazardous waste operations, equipment maintenance and rental costs as well as the impact of SOP pricing declines.
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Adjusted EBITDA for our International RWCS reportable segment increased$3.4 million , or 3.6%, in 2019 to$99.0 million from$95.6 million in 2018. As a percentage of International RWCS revenues, Adjusted EBITDA was 17.1% and 14.6% for 2019 and 2018, respectively. The increase as a percentage of revenues was primarily the result of a higher gross profit percentage inEurope as a result of the divestitures of lower margin businesses in 2018 and lower SG&A expenses, offset by lower operating margins inLatin America due to the impact of lower volumes and decreases in SOP pricing inEurope . Adjusted EBITDA for All Other decreased$31.0 million , or 23.2%, in 2019 to$(164.4) million from$(133.4) million in 2018. The decrease is a result of lower revenues in our Domestic CRS business due to smaller sized recall events and fewer mandated recalls as a result of theU.S. Federal government shutdown in early 2019, combined with disproportionally lower gross profits due to the higher fixed cost nature of this business and higher corporate enabling functional expenses.
2018 compared to 2017
Adjusted EBITDA for our North America RWCS reportable segment decreased$27.1 million , or 3.3%, in 2018 to$782.4 million from$809.5 million in 2017. As a percentage of North America RWCS revenues, Adjusted EBITDA was 30.4% and 31.7%, for 2018 and 2017, respectively. This decrease was primarily a result of the impact of lower margins caused by the expected impact of pricing on our SQ medical waste customers as well as the pricing pressures we have experienced from our SQ regulated waste and compliance customers resulting from hospital consolidation of physician practices and increased competitive activities, partially offset by the impact of Business Transformation cost savings and efficiencies. Additionally, the overall decrease was partially offset by the benefits of increased volume and higher SOP pricing. Adjusted EBITDA for our International RWCS reportable segment increased$1.9 million , or 2.0%, in 2018 to$95.6 million from$93.7 million in 2017. As a percentage of International RWCS revenues, Adjusted EBITDA was 14.6% and 13.2% for 2018 and 2017, respectively. We experienced improvements in overall margins inEurope as a result of our exit from some lower margin businesses. These improvements were partially offset by lower margins inLatin America due to a prolonged declining market trend and costs pressures.
Adjusted EBITDA for All Other decreased
Interest Expense, Net
In millions
Year Ended December 31,
2019 2018 2017 Change 2019 versus 2018 Change 2018 versus 2017
$ % Revenue $ % Revenue $ % of Revenue $ % $ %
Interest
expense, net 118.3 3.6 % 106.0 3.0 % 93.7 2.6 % 12.3 11.6 % 12.3 13.1 %
Interest expense, net increased in 2019 to$118.3 million from$106.0 million in 2018 due to an overall increase in interest rates charged on our borrowings caused by an increase in the LIBOR rate and interest rate adjustments. The interest rate adjustments were calculated under the terms of the relevant agreements, related to both our private placement notes, prior to their early extinguishment, and the Senior Credit Facility combined with an overall increase in our average outstanding debt balance. Further,
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for 2019, Interest expense, net includes a non-cash charge of
Interest expense, net increased in 2018 to$106.0 million from$93.7 million in 2017 due to an increase in the overall interest rates on our borrowings caused by an increase in the LIBOR rate and interest rate adjustments. The higher interest rates were a result of higher rates as calculated under the terms of the relevant agreements, related to both our private placement notes and Senior Credit Facility combined with an overall increase in our average outstanding debt balance primarily due to funding the SQ settlement payment of$295.0 million using amounts available on our Senior Credit Facility. We capitalized interest of$5.4 million ,$2.9 million and$1.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Interest capitalization is based upon the balance of construction in progress within property plant and equipment and is primarily comprised of amounts associated with our ERP implementation. As the ERP becomes operational amounts will be reclassified from construction in progress, thereby reducing the amount of interest which is capitalized, increasing the amount recognized as interest expense. In addition, based on the terms of the amendment to the Credit Agreement signed onFebruary 25, 2020 we expect that our annual interest expense will increase by approximately$2.0 million .
Loss on Early Extinguishment of Debt
During 2019, we incurred a pre-tax loss on early extinguishment of debt of$23.1 million , relating to the repayment of our private placement notes, discussed in Capital Allocation above. Other Expense, Net Other expense, net increased in 2019 to$9.5 million from$8.3 million in 2018. Other expense includes$3.3 million and$3.8 million in 2019 and 2018, respectively, relating to the foreign exchange loss resulting from the re-measurement of our Argentina Peso denominated net monetary assets as a result of the designation, as ofJuly 1, 2018 , ofArgentina as a highly inflationary economy.,
Other expense, net increased in 2018 to
Income Tax Benefit
In millions
Year Ended December 31,
2019 2018 2017 Change 2019 versus 2018 Change 2018 versus 2017
$ Effective rate $ Effective rate $ Effective rate $ % $ %
Income tax benefit 16.8 4.6 % 29.8 10.8 % 150.9 139.9 % (13.0 ) (43.6 %) (121.1 ) (80.3 %)
Income tax benefit was $16.8 million in 2019 compared to income tax benefit of
$29.8 million in 2018. The effective tax rates for the years 2019 and 2018 were
4.6% and 10.8%, respectively. In 2019 and 2018, our effective rate was impacted
by the non-deductibility of a portion of the goodwill impairments in certain
jurisdictions, and valuation allowances recognized against net operating losses
in several countries.
Income tax benefit was $29.8 million in 2018 compared to $150.9 million in
2017. The effective tax rates for the years 2018 and 2017 were 10.8% and 139.9%,
respectively. During 2017, as a result of the introduction of the Tax Act, we
recognized an income tax benefit of $129.8 million arising from the
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revaluation of ourU.S. net deferred tax liabilities from 35% to the newly enactedU.S. corporate income tax rate of 21%, partially offset by a one-time transition tax on our unremitted foreign earnings and profits which we elected to pay over an eight-year period, and expected foreign withholding taxes. During 2018, in accordance withSAB 118, we recognized a charge of$8.8 million as we completed our analysis associated with the impact of the Tax Act. In addition, in 2018 and 2017 our effective rate was also impacted by the non-deductibility of the goodwill impairments in certain jurisdictions, and valuation allowances recognized against net operating losses in several countries. We file income tax returns inthe United States , in various states and in certain foreign jurisdictions. We are no longer subject toU.S. federal, state, local, or non-US income tax examinations by tax authorities for years prior to 2015. The Company filed a PFA with theIRS 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. TheIRS has reviewed and has subsequently agreed to hold discussions regarding the PFA in 2020. During the year endedDecember 31, 2018 , 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. The long-term receivable is included in Other Assets, while the uncertain tax position liability is included in Other Liabilities in the Consolidated Balance Sheets as ofDecember 31, 2019 and 2018. 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. The long-term receivable is in addition to the net operating loss assets, included in Other assets in the Consolidated Balance Sheets. There can be no assurance that this amount or any amount will be recovered as a result of this claim.
Liquidity and Capital Resources
Details of our outstanding debt obligations can be found in Part II, Item 8. Financial Statements and Supplementary Data; Note 9 - Debt in the Consolidated Financial Statements. We believe that we have sufficient liquidity to support our ongoing operations, including the ERP implementation, and to invest in future growth to create value for our shareholders. Operating cash flows and the$1.2 billion Senior Credit Facility are our primary sources of liquidity and are expected to be used for, among other things, payment of interest and principal on our long-term debt obligations and capital expenditures necessary to support growth and productivity improvements, including those associated with our ERP implementation. To the extent our 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 we are in breach under the existing Credit Agreement, we would need to seek additional financing from alternative sources, including approaching the capital markets, in order to provide additional liquidity.
On
• increase the maximum allowable Consolidated Leverage Ratio to 5.00 to 1.00
until the end of the first quarter of 2022 and 4.50 to 1.00 thereafter.
• upon the consummation of the divesture of the
the foregoing maximum permitted Consolidated Leverage Ratio levels will
step down to 4.75 to 1.00 and 4.25 to 1.00, respectively.
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• allow for continuation of the $200 million of cash add backs to EBITDA
through
2021, with no further addbacks thereafter.
• increase the leverage ratio pricing tier of greater than 4.50 to 1.00 by
0.125%,
• grant a first-priority security interest to the administrative agent for
the benefit of the lenders in substantially all of the personal property
of the Company and certain of its material domestic subsidiaries,
including certain equity interests held by those entities.
We expect to incur facility and other fees of approximately
The Credit Agreement and Fifth Amendment contain a number of covenants, including financial covenants. As ofDecember 31, 2019 we were in compliance with the Consolidated Leverage Ratio covenant, with an actual ratio of 4.45 to 1.00, which was below the allowed maximum ratio of 5.00 to 1.00 as contained in the Fifth Amendment. Working Capital AtDecember 31, 2019 , our working capital decreased$64.4 million to a deficit of$50.3 million compared to$14.1 million atDecember 31, 2018 . This change is primarily related to the recognition of Operating lease liabilities associated with the adoption of ASC 842, and the impact of divestitures and increased collections, partially offset by an increase in Prepaid expenses, and decreases in Accrued liabilities and Bank overdrafts. Current assets decreased$40.7 million in 2019 to$706.6 million from$747.3 million in 2018. Increases in Prepaid expenses as a result of increases in prepaid software-as-a-service fees were partially offset by declines in accounts receivable as a result of divestitures and increased collections. Days sales outstanding ("DSO") was 60 days and 63 days as ofDecember 31, 2019 and 2018, respectively. Current liabilities increased$23.7 million in 2019 to$756.9 million from$733.2 million in 2018, primarily as a result of the adoption of ASC 842, which now requires recognition of Operating lease liabilities on the Consolidated Balance Sheet. This increase was partially offset by decreases in Accrued liabilities, due to timing of payments related to 2018 annual incentive plans, and a decrease in Bank overdrafts, as we used a portion of the proceeds from the divestiture of a business to reduce overdraft balances in theU.K. In millions Year Ended December 31, 2019 2018 2017
Net cash from operating activities
(104.0 ) (147.5 ) (193.0 )
Net cash from financing activities (141.6 ) (25.7 ) (321.2 )
Effect of exchange rate changes on
cash and cash equivalents (2.0 ) (0.4 ) 3.6
Net change in cash and cash
equivalents $ 0.4 $ (7.9 ) $ (2.0 )
Operating Cash Flows: Net cash from operating activities increased $82.3
million , or 49.7%, in 2019 to $248.0 million from $165.7 million in 2018. Cash
flow from operations in 2018 is lower, primarily as a result of the payment of
the $295.0 million SQ settlement. Excluding the settlement payment, cash flow
from operations decreased $212.7 million , primarily due to lower operating
performance in 2019, as previously highlighted, and payments in 2019 for certain
litigation matters, 2018 incentive compensation and ERP-related prepaid
software.
Investing Cash Flows: Net cash used in investing activities decreased
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million from$130.8 million in 2018, primarily as a result of capital expenditure payments associated with our ERP implementation. We also received$86.6 million from the divestiture of businesses during 2019 and the receipt of a note receivable issued in connection with the divestiture of ourU.K. hazardous waste business in 2018. Payments for acquisitions, net of cash acquired, decreased by$44.5 million as we completed only one acquisition in 2019 versus 21 in 2018. Financing Cash Flows: Net cash used in financing activities increased$115.9 million , or 451.0%, in 2019, to a net outflow of$141.6 million from a net outflow of$25.7 million in 2018. InJune 2019 , we raised proceeds of$600.0 million from our issuance of the Senior Notes and used the proceeds, net of issuance costs, together with additional borrowings on our Senior Credit Facility and Term Loan, to repay in full approximately$1.075 billion of the then outstanding balance on private placement notes. As a result of this repayment, we also incurred a "make-whole" premium of$20.4 million , payable under the terms of certain of the private placement notes. Our net borrowings on our Senior Credit Facility and Term Loan were$446.3 million , including the additional Term Loan of$365.0 million , in 2019 compared to net borrowings of$68.7 million in 2018, primarily as a result of additional borrowings to finance the repayment of the private placement notes. We made repayments of$12.5 million in 2019, including using a portion of the proceeds from the divestiture of a business to reduce our bank overdraft in theU.K. We made Series A repurchases of$17.2 million and paid dividends of$25.5 million to the holders of Series A during 2018. The Series A was converted, in accordance with its terms of issuance, to common stock inSeptember 2018 and as a result no dividends were due or payable during 2019.
Contractual Obligations
The following table summarizes our significant contractual obligations and cash
commitments at
Payments due by period (in millions)
Total 2020 2021-2022 2023-2024 2025 and After
Long term debt (1) $ 2,646.2 $ 98.0 $ 1,936.6 $ 610.3 $ 1.3
Finance lease liabilities 34.5 6.5 10.5 5.5 12.0
Operating lease liabilities 508.2 112.6 172.9
113.7 109.0
Estimated unconditional
purchase obligations 229.3 159.1 52.6 17.6 -
Total contractual cash
obligations $ 3,418.2 $ 376.2 $ 2,172.6 $ 747.1 $ 122.3
(1) These amounts represent the scheduled principal payments related to our
long-term debt, excluding interest (see Part II, Item 8. Financial
Statements and Supplementary Data; Note 9 - Debt in the Consolidated
Financial Statements).
Payments for unrecognized tax benefits are excluded from contractual obligations. Based on the uncertain nature of our liability for unrecognized tax benefits, we are unable to make an estimate of the period of potential settlement, if any, with the applicable taxing authorities.
We had elected to pay our
Environmental liabilities are not presented above but are accrued on an undiscounted basis and are associated with identified sites where an assessment has indicated that cleanup costs are probable and can be reasonably estimated but the timing of such payments is not fixed and determinable (see Part II, Item 8. Financial Statements and Supplementary Data; Note 12 - Commitments and Contingencies in the Consolidated Financial Statements).
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As ofDecember 31, 2019 , we had$33.0 million of stand-by letters of credit outstanding against our senior credit facility and a further$52.3 million of stand-by letters of credit outstanding against another facility,$72.3 million of surety bonds, and$19.3 million of bank guarantees. The bank guarantees are issued mostly by our international subsidiaries for various purposes, including leases, seller notes, contracts and permits. The surety bonds are used for performance guarantees. Neither the bank guarantees nor the surety bonds affect our ability to use our various lines of credit. We anticipate that our operating cash flows, together with additional borrowings available under our Senior Credit Facility, as amended onFebruary 25, 2020 , will be sufficient to meet our anticipated future operating expenses, key priorities such as our ERP implementation, capital expenditures and debt service obligations as they become due during the next 12 months and the foreseeable future.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions. Our most critical accounting policies are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and those policies that have a material impact on the financial condition or operating performance of the Company. Part II, Item 8. Financial Statements and Supplementary Data; Note 1 - Basis of Presentation and Summary of Significant Accounting Polices in the Consolidated Financial Statements provides a detailed description of all of our material accounting policies however, we have identified the following as our most critical accounting policies and estimates.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these good or services. Revenue is recognized net of revenue-based taxes assessed by governmental authorities.
We provide regulated waste and compliance services, which include the collection and processing of regulated and specialized waste for disposal, the collection of personal and confidential information for secure destruction, and Expert Solutions, and communication services. The associated activities for each of these are a series of distinct services that are substantially the same and have the same pattern of transfer over time; therefore, the respective services are treated as a single performance obligation. We recognize revenue by applying the right to invoice practical expedient as our right to consideration corresponds directly to the value provided to the customer for performance to date. Revenues for our Regulated Medical Waste Solutions and Secure Information Destruction Services are recognized upon waste collection. OurCompliance Solution revenues are recognized over the contractual service period. Revenues from Hazardous Waste Solutions and Manufacturing and Industrial Services are recognized at the time the waste is received by a facility with an appropriate permit, either our processing facility or a third party. Revenues from Communication Services and Expert Solutions are recorded as the services are performed.
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Allowance for Doubtful Accounts
We report accounts receivable at their net realizable value, which is management's best estimate of the cash that will ultimately be received. We maintain an allowance for doubtful accounts to reflect the expected uncollectability of accounts receivable based on historical collection data and specific risks identified among uncollected accounts. If current economic trends, events, or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. The adequacy of allowances for uncollectible accounts is reviewed at least quarterly, and adjusted as necessary based on such reviews. Management's judgment is required to assess the collectability of an account, based on detailed analysis of the aging of the receivables, the creditworthiness of our customers, historical collection trends and current economic trends.
Accounts receivable written off in subsequent periods can differ from the
allowance for doubtful accounts provided, but historically our provision has
been adequate. Allowance for doubtful accounts was
Impairment of Long-Lived and Other Assets
Property, Plant and Equipment and Intangible Assets (definite-lives), Net: Long-lived assets, such as property, plant and equipment and amortizing intangible assets are reviewed whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment of assets with definite-lives is generally determined by comparing projected undiscounted cash flows to be generated by the asset, or appropriate grouping of assets, to its carrying value. If impairment is identified, a loss is recognized equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted. Determining the extent of impairment, if any, typically requires various estimates and assumptions including using management's judgment, cash flows directly attributable to the asset, the useful life of the asset and residual value, if any. When necessary, the Company uses internal cash flow estimates, quoted market prices and appraisals as appropriate to determine fair value. Actual results could vary from these estimates. In addition, the remaining useful life of the impaired asset is revised, if necessary.
(For additional information, see Part II, Item 8. Financial Statements and
Supplementary Data; Note 5 - Property, Plant and Equipment and Note 7 -
Intangible Assets (indefinite-lived): Indefinite-lived intangibles consist primarily of permits and tradenames. Indefinite-lived intangibles are assessed for impairment annually, as ofOctober 1 , or more frequently if an event occurs or circumstances change and are not subject to amortization but are assessed for impairment in the same manner as goodwill. Indefinite lived intangibles may be assessed using either a qualitative or quantitative approach. The qualitative approach first determines if it is more-likely-than-not that the fair value of the asset is less than the carrying value. If no such determination is made, then the impairment test is complete. If, however, it is determined that there is a likely impairment, a quantitative assessment is performed. In the fourth quarter of 2019, we performed our annual impairment test on indefinite-lived intangibles, other than goodwill, using the qualitative approach for certain assets and the quantitative approach for the remaining assets. The calculated fair value of our indefinite-lived intangibles is based upon, among other things, certain assumptions about expected future operating performance, internal and external processing costs, and an appropriate discount rate determined by management.
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Future changes in our assumptions or the interrelationship of the assumptions described above may negatively impact future valuations that would require non-cash charges and may have a material effect on our financial condition and operating results.Goodwill :Goodwill is assessed for impairment annually as ofOctober 1 of each year, or more frequently if an event occurs or circumstances change that could reduce the value of a reporting until below its carrying value. We used a quantitative approach to assess goodwill for impairment. The fair value of each reporting unit is calculated using the income approach (including DCF) and validated using a market approach with the involvement of a third-party valuation specialist. Our reporting units are: Domestic Healthcare Compliance Services, Domestic Shred-it, Domestic CRS, Domestic Environmental Solutions,Canada ,Europe ,Asia Pacific andLatin America . The income approach uses expected future cash flows of each reporting unit and discounts those cash flows to present value. Expected future cash flows are calculated using management assumptions of growth rates, including long-term growth rates, capital expenditures, and cost efficiencies. Future acquisitions are not included in the expected future cash flows. We use a discount rate based on a calculated weighted average cost of capital which is adjusted for each of our reporting units based on size, country and company specific risk premiums. The market approach compares the valuation multiples of similar companies to that of the associated reporting unit. In addition, we analyze differences between the sum of the fair value of the reporting units and our total market capitalization for reasonableness, taking into account certain factors including control premiums. The fair value is then compared to its carrying value including goodwill. If the fair value is in excess of its carrying value, the related goodwill is not impaired. If the fair value is less than its carrying value, we recognize an impairment charge in the amount that the carrying value exceeds the fair value but not to exceed the carrying value of any goodwill. We performed an interim review of goodwill assessment for ourLatin America reporting unit in the first quarter of 2019 and our annual goodwill assessment as ofOctober 1, 2019 . As a result of these assessments we recorded non-cash goodwill impairment charges of$126.6 million relating to ourCanada reporting unit,$80.8 million relating to our Domestic Environmental Solutions reporting unit and$20.9 million relating to ourLatin America reporting unit. The factors considered in these goodwill impairment assessments are discussed further above in the Goodwill Impairment section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Goodwill Impairment. (For additional information, see Part II, Item 8. Financial Statements and Supplementary Data; Note 7 -Goodwill and Other Intangible Assets in the Consolidated Financial Statements). A measure of sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit's fair value exceeds their respective carrying value. Subsequent to the impairment charges incurred throughDecember 31, 2019 , the fair value exceeds the carrying value for all reporting units, except Domestic Environmental Solutions, by no less than forty percent. We performed sensitivity analysis on our estimated fair values, noting that a 50 basis point increase in the discount rate or a 50 basis point reduction in the long-term growth rate would not result in impairments for any of the reporting units, except Domestic Environmental Solutions, which, would result in incremental impairment charges of$39.0 million or$26.0 million , respectively. Following the impairment charges recorded throughDecember 31, 2019 , the Domestic CRS,Canada , andLatin America reporting units have no goodwill remaining. Intangible Assets Lives
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We have determined that certain of our operating permits and certain tradenames have indefinite lives due to our ability to renew them with minimal additional cost, and therefore they are not amortized. Our finite-lived intangible assets are amortized over their useful lives using the straight-line method. Our customer relationships have useful lives from 10 to 25 years based upon the type of customer. We have non-compete covenant intangibles with useful lives from 5 to 14 years. We also have tradename intangibles with useful lives from 15 to 40 years. We evaluate the useful life of our intangible assets annually to determine whether events and circumstances warrant a revision to their remaining useful life and changes are reflected prospectively as the intangible asset is amortized over the revised remaining useful life. In the fourth quarter of 2019, we performed the annual assessment of the useful life of our finite-lived intangibles and made no changes to useful lives.
Assets and Liabilities Held-for-Sale
We classify Long-lived assets or disposal groups as held-for-sale when management having the appropriate authority, generally our Board of Directors or certain of our Executive Officers, commits to a plan of sale, the disposal group is ready for immediate sale, an active program to locate a buyer has been initiated and the sale is probable and expected to be completed within one year. Once classified as held-for-sale disposal groups are valued at the lower of their carrying amount or fair value less estimated selling costs. Where the disposal group constitutes substantially all, generally more than 90% of the assets and liabilities, of our operations in a foreign country the balance in the cumulative currency translation adjustment, associated with that country is included in the carrying value of the disposal group. If the carrying value, including any amount associated with the cumulative currency translation adjustment exceeds the fair value less estimated selling costs a held-for-sale impairment charge is recorded to reduce the carrying value. The estimate for fair value is reviewed at the end of every reporting period that the disposal group is classified as held-for-sale and the carrying value adjusted whenever the estimated fair value less costs to sell is less than the carrying value.
Environmental Remediation Liabilities
Our environmental remediation liabilities primarily include costs associated
with remediating air, groundwater, surface water, soil contamination, and
applicable legal costs. To estimate our ultimate liability at these sites, we
evaluate several factors, including the nature and extent of contamination at
each identified site, the required remediation methods, timing of expenditures,
and the apportionment of responsibility among the potentially responsible
parties ("PRPs") and the financial viability of those PRP's. We routinely review
and evaluate sites that require remediation, considering whether we were an
owner, operator, transporter, or generator at the site, the amount and type of
waste hauled to the site and the number of years we contracted with or owned the
site. Next, we review the same information with respect to other named and
unnamed PRPs. Estimates of the cost for the likely remediation are then either
developed using our internal resources or by third party environmental engineers
or other service providers. (For additional information, see Part II, Item 8.
Financial Statements and Supplementary Data; Note 12 - Commitments and
Contingencies in the Consolidated Financial Statements).
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement
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carrying amounts of existing assets and liabilities and their respective tax basis as well as net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our Consolidated Financial Statements. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, and our forecast of future earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Actual operating results in future years could differ from our current assumptions, judgments and estimates. However, we believe that it is more likely than not that most of the deferred tax assets recognized on our Consolidated Balance Sheets will ultimately be realized. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. AtDecember 31, 2019 , our estimated gross unrecognized tax benefits were$62.7 million , of which$61.3 million , if recognized, would favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. The Company filed a PFA with theIRS 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. TheIRS has reviewed and has subsequently agreed to hold discussions in 2020 regarding the PFA. 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. The Tax Act established global intangible low-taxed income ("GILTI") provisions that impose a tax on foreign income in excess of a deemed return on intangible assets of foreign corporations. We recognize the taxes on GILTI as a period expense rather than to recognize deferred taxes for basis differences that are expected to affect the amount of GILTI inclusion upon reversal.
For further information see Part II, Item 8. Financial Statements and Supplementary Data; Note 10 - Income Taxes in the Consolidated Financial Statements.
Insured and Self-Insured Claims
The Company's insurance for workers' compensation, auto/fleet, general liability, property and employee-related health care benefits is obtained using high deductible insurance policies, if any, meaning that the Company has retained a significant portion of the risks related to the claims associated with these programs. The estimated exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on a calculation performed by a third party actuarial specialist using the
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Company's historical claims experience. The accruals for these liabilities could be revised if future occurrences or loss developments significantly differ from the assumptions used. Estimated recoveries associated with insured claims are recognized as assets when the receipt of such amounts is probable.
Stock-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period, usually the vesting period. Performance based awards are recognized consistent with performance metrics and Accounting Standards Codification Section 718 Compensation - Stock Compensation. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of ISOs and similar instruments are estimated using option-pricing models, (Black Scholes). The option pricing model includes assumptions that are evaluated by a third-party valuation specialist and evaluated and approved by the Vice President and Treasurer based on historical experience, current company trends and comparative analysis to industry trends. If an equity award is modified after the grant date, we assess the impact of the modification and where necessary record compensation cost calculated as any incremental fair value of the modified award over the fair value of the original award immediately before the modification. RSU's awarded to an employee and PSU's awarded are measured at fair value, once the related performance criteria have been established. A non-vested equity share unit awarded to an employee is measured at its fair value as if it were vested and issued on the grant date.
For further detail, see Part II, Item 8. Financial Statements and Supplementary Data; Note 14 - Stock Based Compensation in the Consolidated Financial Statements.
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