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Organic Growth Pushes Stericycle Inc's Revenue Higher

Stericycle (NASDAQ: SRCL) continues to slowly turn things around, once again delivering a small revenue increase, though weaker margins pushed earnings back once again. That said, the bigger story this quarter was the announcement that Stericycle had reached a preliminary settlement of a class action lawsuit, which will reduce some of the uncertainty that has been weighing on the company.

Stericycle results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$892.4 million

$874.2 million

2.1%

Adjusted net income

$99.4 million

$101.3 million

(1.9%)

Adjusted EPS

$1.09

$1.11

(1.2%)

Data source: Stericycle.  

Image source: Getty Images.

What happened with Stericycle this quarter?

The organic sales growth continued.

  • Stericycle's revenue increased $26.1 million versus last year's second quarter thanks in part to a net $7.8 million contribution from acquisitions. Meanwhile, sales would have been up 4.2% if it wasn't for the impact of unfavorable foreign exchange rate fluctuations.
  • Revenue from regulated waste and compliance services was down 2.1% to $512.3 million due to a 1.1% organic sales decline and a 1.2% impact from exchange rates, which the company only partially offset with a 0.2% nudge from acquisitions. Revenue from manufacturing and industrial services was also down during the quarter, falling 5.4% to $90.1 million due to an organic revenue decline, an asset sale, and exchange rates.
  • On a more positive note, sales in the secured information destruction services segment leaped 11.5% to $212.4 million thanks to 9.7% organic growth and a 3.2% boost from acquisitions that were partially offset by exchange rates. Finally, communication and related services revenue surged 24.6% to $102.9 million thanks to a 24.3% jump in organic sales and a 1.7% increase from acquisitions, which again was partially offset by currencies. These two segments delivered brisk organic growth last quarter as well.
  • While revenue was up, profitably declined as adjusted gross margin as a percentage of sales slipped from 42.2% to 41.5% due to a jump in selling, general, and administrative expenses.

What management had to say

CEO Charlie Alutto commented on the second quarter, saying:

This quarter we continued to see strong performance from our Secure Information Destruction Services and Communication and Related Services. We also reached a preliminary settlement to the small quantity medical waste customer class action lawsuit. This preliminary settlement not only reduces the uncertainty and expense of continued litigation, it is an important step toward putting this matter behind us and allowing our team to focus on our customers and the growth of our business.

The company has proposed to establish a common fund of $295 million to settle the class action lawsuit brought against it by customers that accused the company of defrauding them out of hundreds of millions of dollars in an automatic price-increasing scheme. Plaintiffs had been seeking at least $608 million in damages, with the potential for it to rise to more than $1 billion. However, instead of continuing to fight and rack up more legal costs, Stericycle has agreed to settle even though it doesn't believe it did anything wrong. While the court must still approve the proposed settlement, the company recorded a $295 million charge against its earnings in the second quarter in preparation for that approval.

Looking forward

Stericycle tweaked its 2017 guidance once again on its second-quarter conference call. The CEO stated:

For 2017, we believe EPS will be in the range of $4.55 to $4.69 using a share count of approximately 91 million. This includes the impact from current foreign exchange rates, acquisitions, and divestitures. We believe revenues for 2017 will be in the range of $3.52 billion to $3.65 billion using current foreign exchange rates.

That's a minor adjustment from the guidance it provided last quarter of sales between $3.53 billion to $3.66 billion and earnings between $4.55 to $4.75 per share. 

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