Headwinds Continue to Hit Stericycle Inc.

By Markets Fool.com

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The headwinds from volatile foreign currencies and a challenging hazardous waste market continued to beat against Stericycle (NASDAQ: SRCL) in the second quarter. While revenue was up sharply thanks to the impact of recent acquisitions, profits remain under pressure. That pressure is not expected to abate, which is why the company is watering down full-year guidance for the second straight quarter.

Stericycle results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$891.6 million

$715.7 million

24.6%

Non-GAAP gross profit

$381.6 million

$305.3 million

25%

Non-GAAP earnings per share

$1.18

$1.20

(1.7%)

YOY = year over year. Data source: Stericycle.

What happened with Stericycle this quarter?

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Acquisitions drove Stericycle's growth again.

  • Stericycle's revenue increased by $175.9 million due in large part to the $185.9 million contributed by recent acquisitions, which boosted the top line by 26%. Offsetting acquisition-driven growth was a $20 million impact due to unfavorable foreign exchange rates. FX had a negative 2.8% impact on revenue, more than offsetting the 1.4% boost from organic growth.
  • Revenue from manufacturing and industrial services continues to weigh on results, with sales from those sources down 5.8% year over year.
  • On a more positive note, the company's secure information destruction business Shred-it performed well. That segment set a new sales record and closed several new major national accounts during the quarter. Meanwhile, the integration of that business remains on track with prior guidance.
  • Elevated selling, general, and administrative expenses (SG&A) continues to pressure earnings, with SG&A as a percentage of revenue rising to 21.3% on an adjusted basis compared to 17.7% in the year-ago quarter. CEO Charlie Alutto noted on the conference call that the company is purposefully making investments in SG&A to drive new customer growth.
  • While earnings were down year-over-year, the company did see a sequential bump in profitability with non-GAAP gross profit rising from $369.4 million to $381.6 million while non-GAAP earnings increased from $1.11 to $1.18 per share.

What management had to say

CEO Charlie Alutto led off the company's conference call by discussing the results:

In the second quarter despite softer than anticipated revenues, the team was able to provide strong sequential increases of profitability, which allowed us to deliver a solid quarter. We are pleased with the results given the time and effort that our team members invested in both running our business and implementing our recently announced organizational redesign.

Stericycle has been working with a consulting firm to optimize its organizational structure, and began to implement that new structure during the quarter. That optimization plan includes realigning its sales organization to focus on four key initiatives, establishing one field operations structure to provide best-in-class service, and developing a long-term plan for a shared services model across all its business segments. Those actions started to pay off during the quarter as evidenced by the sequential boost in profitability.

Looking forward

Despite that progress, the headwinds are not getting any weaker. This forced the company to tame its guidance expectations for 2016, with Alutto providing the following guidance on the call:

For 2016, we believe the analyst EPS estimates will be in the range of $4.68 to $4.75. We believe that analyst revenue estimates for 2016 will be in the range of $3.56 billion to $3.6 billion, depending on assumptions for growth and the impact of foreign exchange rates.

This represents another step down in its forecast, which started the year with a revenue projection of $3.65 billion to $3.72 billion and non-GAAP earnings in the range of $5.28 to $5.35 per share. This second consecutive step down in projections suggests that the company might not yet have a firm handle on the headwinds it is facing.

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Matt DiLallo owns shares of Stericycle. The Motley Fool recommends Stericycle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.