Stericycle's (NASDAQ:SRCL) turnaround took a step back in the third quarter as sales and earnings both declined versus the year-ago period. That's after the company battled several headwinds during the quarter, including literal ones in the form of multiple hurricanes. Those storms aside, Stericycle has struggled to grow earnings in recent years despite a major acquisition, which led it to announce a comprehensive business transformation during the quarter to get back on track.

Stericycle results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$882.8 million

$890.1 million

(0.8%)

Adjusted net income

$99.5 million

$112.8 million

(11.8%)

Adjusted EPS

$1.10

$1.24

(11.3%)

Data source: Stericycle. EPS = earnings per share.

Scraps of shredded paper.

Image source: Getty Images.

What happened with Stericycle this quarter?

Several headwinds impacted results:

  • Stericycle's revenue fell versus the year-ago period due to several factors. First, the company sold some assets, which cut sales by $9.9 million, though recent acquisitions offset $6.8 million of that amount. Meanwhile, revenue from manufacturing and industrial services dropped 7.6% on an organic basis to $88.6 million, which came in lower than expected. If not for that weakness, sales would have increased 0.1% after adjusting for asset sales and foreign currency exchange fluctuations.
  • Aside from the lackluster results in the manufacturing and industrial services segment, revenue from regulated waste and compliance services stumbled 1.9% organically versus the year-ago period to $502.4 million. Furthermore, communication and related services revenue slipped 0.1% to $89.0 million, though that was consistent with the company's expectations.
  • The lone positive was the company's secure information destruction services segment where sales rose 6.4% organically to $204.7 million.
  • The dip in sales, along with cost pressure in Latin America and the impact from several hurricanes, caused earnings to slip by double digits versus the year-ago period.

What management had to say

CEO Charlie said this about the third quarter:

We saw strong performance across our Secure Information Destruction, hospital regulated waste, and retail and healthcare hazardous waste services in the quarter. The small quantity healthcare and Communication and Related Services results were consistent with our expectations. Also in the quarter, Manufacturing and Industrial came in lower than anticipated, we experienced cost pressure in Latin America, and we were impacted by several hurricanes.

As Alutto points out, several of Stericycle's businesses performed well, led by its secure information destruction segment, which it formed when it bought Shed-it. Overall, that business delivered a 6.4% organic sales increase as the company continued to sign more customers up for these services. Stericycle also continues to make small tuck-in acquisitions to expand this business, which when combined with organic growth, helped boost sales 9.4% after adjusting for foreign exchange fluctuations.

However, that wasn't enough to overcome the continued weakness in the company's manufacturing and industrial services segment, which when combined with issues in Latin America and the hurricane headwinds, pushed down its financial results.

Looking forward

Because of the company's recent poor performance, Alutto noted in the earnings release that Stericycle has "initiated a comprehensive multi-year business transformation initiative to improve our long-term operational and financial performance." One of the steps the company plans to take is investing in an enterprise resource planning technology platform, a suite of business applications that should help the company become more efficient. In addition, Stericycle plans to restructure the organization and implement several other initiatives to drive down costs. While these actions will likely weigh on earnings in the near term, they should improve profitability in the future.

Matthew DiLallo owns shares of Stericycle. The Motley Fool recommends Stericycle. The Motley Fool has a disclosure policy.