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Slow Synergy Capture "Shreds" Stericycle Inc's Earnings Growth

By Matthew DiLallo - Apr 29, 2016 at 11:21AM

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The medical waste disposal specialist is now pulling back on 2016 guidance.

Image source: Flickr user Banalities. 

Stericycle's (SRCL 4.21%) top line continued to benefit from its recent acquisition of Shred-it. Unfortunately, the same can't be said for its bottom line, which was lower year over year because of weaker margins. That's partially because the company isn't integrating Shred-it quite as fast as expected, which is leading it to lower full-year guidance just a bit.

Stericycle results: The raw numbers

 

Q1 2016 Actuals

Q1 2015 Actuals

Growth (YOY)

Revenue

$874.2 million

$663.3 million

31.8%

Non-GAAP Gross Profit

$369.4 million

$281.3 million

31.3%

Non-GAAP EPS

$1.11

$1.15

-3.5%

Data source: Stericycle.  

What happened with Stericycle this quarter?
Acquisitions continued to be the story at Stericycle.

  • Stericycle's revenue increased by $210.90 million in the first quarter due primarily to the contributions of acquisitions, which alone added $194.5 million to the company's top line. That revenue growth would have been even stronger if it wasn't for the continued headwinds from the strong dollar, which led to a $23.8 million negative impact to revenue. Without the impact from foreign currency fluctuations, revenue would have increased by 35.4%.
  • Earnings roughly followed revenue higher on an absolute basis, with non-GAAP gross profit also soaring more than 31%. However, on a per share basis, earnings slipped 3.5%.
  • That was partially due to weaker margins, with Stericycle's income from operations as a percentage of revenue slipping from 24.4% to 20.6% because of an increase in sales, general, and administrative (SG&A) expenses.

What management had to say
CEO Charlie Alutto led off the company's conference call discussing the results by saying:

In the first quarter, we experienced strong revenue growth, strong cash flow and solid sequential growth for the Shred-It acquisition. Results in the quarter were unfavorably affected by the timing of the Shred-It synergies and lower industrial hazardous waste revenues. Despite the challenges in the quarter, we remain confident about our business.

As Alutto notes, the Shred-it acquisition drove strong revenue growth during the quarter. However, earnings growth was muted due to the timing of the expected synergies from that transaction, which was evidenced by the higher SG&A costs. COO Brent Arnold pinpointed the problem on the call, noting that the company has "reassessed the original timeline associated with the reroutes and onsite-to-offsite conversions." He also said the company still remains "confident in our ability to achieve the full $73 million in Cintas (CTAS 3.45%)-Shred-It synergies."

Looking forward
Given the slower-than-expected synergy capture, Alluto provided an update to the company's guidance for 2016:

For 2016, we believe analysts' EPS estimates will be in the range of $4.90 to $5.05, reflecting the unfavorable impact of the timing of the Shred-It synergies, softer industrial hazardous waste volume, and higher costs associated with our international operations. We believe analysts' revenue estimates for 2016 will be in the range of $3.6 billion to $3.66 billion.

That's a bit weaker than the prior guidance, which called for revenue growing to a range of $3.65 billion to $3.72 billion, with non-GAAP earnings growing to a range of $5.28 to $5.35 per share.

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Stocks Mentioned

Stericycle, Inc. Stock Quote
Stericycle, Inc.
SRCL
$42.61 (4.21%) $1.72
Cintas Corporation Stock Quote
Cintas Corporation
CTAS
$379.18 (3.45%) $12.65

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