Stericycle (NASDAQ:SRCL) is in the midst of a comprehensive business transformation. Its latest initiatives weren't able to stop revenue from sinking during the fourth quarter, but they did get the company's earnings heading in the right direction -- at least temporarily -- as its adjusted profit came in above expectations. However, Stericycle still has more work to do, which is why it's transitioning to a new leadership team to drive the next phase of its turnaround strategy.

Stericycle results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$852.7 million

$887.8 million

(4%)

Adjusted net income

$93.2 million

$90.9 million

2.5%

Adjusted EPS

$1.03

$1.00

3%

Data source: Stericycle.

What happened with Stericycle this quarter?

Several factors impacted results:

  • While revenue slipped versus the year-ago period, it was in line with the company's expectations. Driving the decline was a 1.1% organic sales decrease, a $21.4 million negative impact from foreign exchange fluctuations, and the loss of $10.4 million in revenue from asset sales, which the company only partially offset by picking up an incremental $6.8 million in sales from recent acquisitions.
  • Stericycle's secure information destruction services business continued expanding during the fourth quarter with revenue of $233.5 million, up 13.8% organically, and rising 15.4% after factoring in mergers and acquisitions (M&A) and foreign exchange fluctuations.
  • The biggest weak spot, meanwhile, continues to be the communications and related services segment, where revenue plunged 29% year over year. The company is exploring strategic alternatives for this segment and recently sold its U.K.-based texting business.
  • Meanwhile, Stericycle's other two businesses, regulated waste and compliance services and manufacturing and industrial services, both experienced a mid-single-digit decline in organic revenue, which widened significantly after adding the impact of M&A and foreign exchange fluctuations.
  • Adjusted earnings per share improved thanks to higher margins, due in large part to the growth in its secure information destruction business, as well as the impact of tax reform.
  • For the full year, revenue was $3.486 billion, down 2.6% year over year but near the midpoint of its revised guidance range. Adjusted earnings per share, meanwhile, came in at $4.45, which was 2.5% higher than 2017's level and above the top end of its forecast for $4.31 to $4.41 per share.
  • Cash flow from operations plunged 67.7% last year to $165.7 million, primarily because the company paid out $295 million to settle a customer class-action lawsuit. Stericycle used its remaining cash flow plus the $25.2 million it generated from asset sales to repay $9.7 million in debt, fund $130.8 million in capital expenses, finance $44.7 million of acquisitions, and repurchase $17.2 million of preferred stock.
Shredded paper closeup.

Image source: Getty Images.

What management had to say

CEO Charlie Alutto commented on the quarter: "Our performance in the quarter was in line with our expectations, with strength in our core Secure Information Destruction business and positive momentum in the regulated medical waste business." As noted above, revenue from secure document destruction rose by double digits during the quarter and was up 10.6% for the full year. That solid result enabled the company to achieve its revised guidance and it helped partially offset weakness elsewhere.

Click here for the latest earnings call transcript for Stericycle.

Looking forward

Stericycle announced that Alutto, who has been CEO since 2013, will retire in early May. The company named current COO Cindy Miller to replace him and lead the next phase of its turnaround. Stericycle also said that its CFO would head its international division upon finding a successor.

In commenting on what lies ahead, Miller stated that "our Business Transformation, including portfolio rationalization, continues to be a priority for 2019," with the company pursuing strategic alternatives for its communications business, as well as other noncore assets and geographies. At the same time, Stericycle will continue investing in its transformation initiatives, including implementing an enterprise resource planning software solution to help optimize its operations. As such, the company remains in transition.

Stericycle forecast its 2019 revenue will be between $3.41 billion and $3.53 billion, down less than 1% from last year at the midpoint, while adjusted earnings will be in the range of $3.32-3.72 per share, implying a 21% decline at the midpoint.