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Stericycle Inc. Can’t Clean Up After Currencies Impact Results

By Matthew DiLallo - Apr 23, 2015 at 6:59PM

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Stericycle Inc. misses on both the top and the bottom line; however, growth was much stronger if we strip out the impact of foreign exchange.

Stericycle Inc (SRCL 4.21%) usually does a great job cleaning up after messy situations. Biomedical waste is one thing, but foreign currencies are known to mess up the results of even the best companies. That's exactly what happened to Stericycle this quarter as currencies caused the company to miss expectations on both the top and bottom lines.

Cleaning up the numbers
Stericycle reported first-quarter revenue of $663.3 million, which was up 16.4% from the $570 million the company earned in the first quarter of last year. Driving that strong growth was acquisitions, which added $86.3 million to the company's top line.

As strong as the revenue growth sounds, analysts wanted more as the company missed its revenue estimates by about $10 million. However, the bulk of this miss was due to the impact of foreign currencies. For the quarter, currencies had a negative impact of $23.1 million, which, if added back, would have resulted in 20.4% year-over-year revenue growth.

Turning to earnings, Stericycle reports both GAAP and non-GAAP results, which can make it confusing for investors. Because analysts prefer the non-GAAP numbers, which adjusts for items such as acquisition and integration expenses among other items, we'll focus on those.

For the quarter, the company reported a non-GAAP gross profit of $281.3 million, which was up 9.9% from the $256 million the company earned in last year's first quarter. However, profit growth could have been better if non-GAAP gross profit as a percentage of revenue hadn't slipped from 44.9% to 42.4% during the past year.

Non-GAAP earnings didn't grow quite as well as revenue or gross profit, as earnings only grew by 3.7%, to $1.08 per share. Unfortunately, that wasn't what analysts were expecting to see as Stericycle estimates came in $0.02 shy of estimates. Also on the slightly negative side was the fact that cash flow from operations slipped from $145.8 million in last year's first quarter to $132.6 million this quarter.

A look ahead
Clearly, this wasn't as robust a quarter as the company was hoping to deliver. However, there were some positives, as the company's acquisitions provided a very strong boost to the top line. In time, those acquisitions should also help improve the bottom line as they become more fully integrated.

Looking ahead, the company expects to continue to acquire in order to drive incremental growth. Currently, Stericycle's global pool of acquisition candidates is estimated to be about a $100 million annual revenue opportunity if it were to close all of the deals that it's eyeing. Given the company's history -- it has made 392 acquisitions since 1993 -- the odds are pretty good that it will close at least one of the opportunities it's watching before the year is out.

Investor takeaway
Overall, Stericycle delivered a fair quarter as the company was still able to grow despite headwinds from foreign exchange. Those headwinds are expected to persist in 2015 -- meaning the company will have to work a little harder to grow. The company does have visibility on acquisitions that could lead to $100 million in revenue being added, which would certainly help to offset what currencies are taking away.

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