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After several tough quarters, Stericycle's (SRCL +0.00%) financial performance improved during the third quarter. However, that was mainly due to the positive impact from share repurchases rather than a meaningful improvement in its underlying business. Because of that, the company's expectations for 2017 are rather muted.
Stericycle results: The raw numbers
|
Metric |
Q3 2016 Actuals |
Q3 2015 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$890.1 million |
$718.6 million |
23.9% |
|
Non-GAAP gross profit |
$381.0 million |
$300.2 million |
26.9% |
|
Non-GAAP EPS |
$1.24 |
$1.15 |
7.8% |
Data source: Stericycle. YOY = year over year.
What happened with Stericycle this quarter?
Repurchase activity was the key to the quarter.
- Stericycle's revenue jumped 24% due to acquisitions completed over the past year, namely its recent purchase of Shred-it. In fact, acquisitions contributed $184.7 million to company's top line, which was more than the year-over-year increase in revenue. However, that was primarily due to the negative impact from unfavorable foreign exchange rates, which sliced $18.3 million off the top. Stripping out that impact, organic revenue grew by 0.7%.
- Pricing pressure, declining hazardous waste volumes, and lower fuel surcharges also held back revenue growth.
- On a more positive note, the company delivered record cash flow in the quarter, which it used to repay $100 million in debt, repurchase 265,000 shares of mandatory convertible preferred stock, and close five small acquisitions.
- The repurchase of those preferred shares added $0.07 per share to the company's bottom line during the quarter.
What management had to say
CEO Charlie Alutto stated, "We were able to maintain consistent margin performance in the quarter despite revenue headwinds from previously discussed pricing pressure and softness in the manufacturing and industrial market."
As Alutto notes, Stericycle continued to face many headwinds during the quarter. Foreign exchange rates and weak hazardous waste volumes from industrial customers are dragging down its growth rate. During the quarter, these two issues kept organic growth down to 0.7%. However, after stripping out their impact, organic growth would have been 1.6%.
The weakness in the industrial waste sector is not just an issue for Stericycle. Leading environmental and industrial services provider Clean Harbors (CLH +0.41%) lamented in the second quarter that "softness across several of our key industrial markets limited growth opportunities, constrained customer spending on projects, and reduced near-term waste volumes from several key verticals." Furthermore, Clean Harbors foresaw "near-term challenges" from the ongoing industrial spending levels. This weakness caused Clean Harbors to narrow its full-year guidance last quarter toward the lower end of its range.
That said, despite these industry headwinds, Stericycle is generating a tremendous amount of cash flow, which it is putting to use by continuing to repurchase the mandatory convertible preferred stock it issued to close the Shred-it transaction.
Looking forward
Stericycle believes that its continued efforts to repurchase those shares will have a meaningful impact on earnings going forward. That is evident by its preliminary guidance, which Alutto provided on the conference call. He said:
For 2017, we believe EPS estimates will be in the range of $4.57 to $4.77 using a share count of approximately 91.1 million. This includes the unfavorable impact of approximately $0.19 from the normalization of performance compensation and additional SG&A investments to drive future growth and profitability. This is partially offset by approximately $0.17 of benefit from ongoing strategy to repurchase the mandatory preferred convertible shares. We believe revenues for 2017 will be in the range of $3.54 billion to $3.67 billion, depending on assumptions of foreign exchange and internal rates of flat to 3%. ... We have estimates for free cash flow in 2017 between $450 million to $470 million.
For perspective, at the midpoint that outlook represents a 1.7% decline in earnings per share from its full-year guidance for 2016. However, that decline would be 3.5% if it was not for the $0.17-per-share benefit from the preferred stock repurchase. Meanwhile, Stericycle sees revenue edging up 1% while free cash flow remains roughly flat.
