Stericycle (NASDAQ:SRCL) continued working on its business transformation initiatives in the second quarter. While that strategy aims to grow revenue and earnings in the long term, it's having a negative impact on the company's results in the near term as it sells noncore businesses and makes investments that will improve operations. Because of that, the company posted mixed second-quarter results.

Stericycle results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$883.3 million

$917.7 million

(3.7%)

Adjusted net income

$106.1 million

$103.6 million

2.4%

Adjusted earnings per share

$1.17

$1.15

1.7%

Data source: Stericycle.

A person putting medical waste in a hazardous waste container.

Image source: Getty Images.

What happened with Stericycle this quarter?

Several issues impacted results:

  • Revenue from Stericycle's regulated waste and compliance services segment declined 5.5% versus last year's second quarter to $483.8 million due to an expected decrease from lower pricing in its small quantity medical waste business and an asset sale.
  • The company's communications and related services (CRS) segment was also weaker as revenue plunged 21% versus the year-ago period to $81.3 million due to softness in that business segment.
  • The manufacturing and industrial services segment also delivered lower revenue, which declined 2.2% to $88.2 million as asset sales and unfavorable foreign exchange fluctuations more than offset a 3.8% organic sales increase.
  • Partially offsetting those weaker segments was the continued solid performance of the secure information destruction services segment where revenue jumped 8.3% to $230 million thanks to strong organic growth, incremental revenue from acquisitions, and a positive impact from foreign exchange rates.
  • Stericycle was able to overcome its sluggish sales by generating higher earnings, due to the early benefits from its business transformation and a lower tax rate as a result of U.S. corporate tax reform.
  • The company has generated $231 million in cash flow from operations through the first half of the year, which is down 3.3% from 2017 due to increased costs from its business transformation initiatives.

What management had to say

CEO Charlie Alutto commented on the quarter and the progress of its business transformation by stating that:

Our second quarter results demonstrate the underlying strength of our core businesses and reflect the early benefits of our Business Transformation and its overall value to the Company. Our core businesses performed well with Regulated Waste and Compliance Services meeting expectations and higher paper prices contributing to the performance of Secure Information Destruction. We delivered Adjusted EBITDA and Adjusted EPS within guidance by effectively controlling our expenses, offsetting weaker CRS results. Our team remains focused on the Business Transformation, and we are on track to achieve our goals for the year.

Overall, the quarter came in about where Stericycle anticipated as lower pricing in its small quantity medical waste business and softness in its CRS segment weighed on revenue while its business transformation strategy helped boost the bottom line. Stericycle noted that it realized an additional $7.9 million of adjusted EBITDA during the quarter as a direct result of these efforts and has now achieved $23.9 million of the $50 million benefit it expects to capture for the year.

As part of its transformation process, the company has undergone a thorough review of its portfolio. That led it to sell its hazardous waste business in the U.K. during the quarter, and it recently signed an agreement to sell its noncore clean room services in the U.S. In addition to that, the company said it would pursue strategic alternatives for its noncore CRS business, which could include a sale of that unit.

Looking forward

Even though the second quarter came right where Stericycle anticipated, and its business transformation remains on track, the company reduced its full-year guidance. It now sees revenue in the range of $3.45 billion to $3.54 billion (down from $3.5 billion to $3.64 billion) and adjusted earnings of between $4.35 to $4.55 per share, which while 2.5% higher than 2017's adjusted earnings at the midpoint, is a reduction from its initial range of $4.45 to $4.85 per share this year. However, the company continues to stay on pace with the long-term goals of its business transformation, which would see it grow adjusted earnings per share at a 6% to 10% compound annual rate through 2022. 

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