10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015 or
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number 0-21229
 
Stericycle, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-3640402
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
28161 North Keith Drive
Lake Forest, Illinois 60045
(Address of principal executive offices, including zip code)
(847) 367-5910
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer”, "accelerated filer” and "smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
  
Accelerated filer ¨
Non-accelerated filer ¨
  
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
As of October 30, 2015 there were 84,984,775 shares of the registrant’s Common Stock outstanding.



Table of Contents

Stericycle, Inc.
Table of Contents
 
 
Page No.
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014
 
 
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014
 
 
Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2015 and year ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

In thousands, except share and per share data
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
32,883

 
$
22,236

Short-term investments
636,288

 
380

Accounts receivable, less allowance for doubtful accounts of $19,896 in 2015 and $19,083 in 2014
524,503

 
465,473

Deferred income taxes
51,094

 
28,322

Prepaid expenses
34,197

 
30,632

Other current assets
40,500

 
33,173

Total Current Assets
1,319,465

 
580,216

Property, plant and equipment, less accumulated depreciation of $402,113 in 2015 and $364,124 in 2014
464,898

 
460,408

Goodwill
2,447,454

 
2,418,832

Intangible assets, less accumulated amortization of $136,251 in 2015 and $114,922 in 2014
909,503

 
909,645

Other assets
35,137

 
32,621

Total Assets
$
5,176,457

 
$
4,401,722

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Current portion of long-term debt
$
106,405

 
$
131,969

Accounts payable
150,213

 
114,596

Accrued liabilities
192,506

 
131,743

Deferred revenues
18,223

 
21,624

Other current liabilities
66,587

 
61,599

Total Current Liabilities
533,934

 
461,531

Long-term debt, net of current portion
1,409,687

 
1,527,246

Deferred income taxes
430,203

 
431,643

Other liabilities
68,191

 
64,117

Equity:
 
 
 
Mandatory convertible preferred stock, Series A (par value $0.01 per share, 1,000,000 shares authorized, 770,000 issued and outstanding in 2015)
8

 

Common stock (par value $0.01 per share, 120,000,000 shares authorized, 84,942,134 issued and outstanding in 2015 and 84,883,517 issued and outstanding in 2014)
849

 
849

Additional paid-in capital
1,125,667

 
289,211

Accumulated other comprehensive loss
(237,246
)
 
(138,419
)
Retained earnings
1,826,835

 
1,743,371

Total Stericycle, Inc.’s Equity
2,716,113

 
1,895,012

Noncontrolling interest
18,329

 
22,173

Total Equity
2,734,442

 
1,917,185

Total Liabilities and Equity
$
5,176,457

 
$
4,401,722


The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

In thousands, except share and per share data
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
718,596

 
$
667,877

 
$
2,097,604

 
$
1,878,654

Costs and Expenses:
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation shown below)
404,918

 
373,973

 
1,169,051

 
1,026,149

Depreciation - cost of revenues
14,003

 
15,235

 
42,723

 
43,063

Selling, general and administrative expenses (exclusive of depreciation and amortization shown below)
185,932

 
125,603

 
509,047

 
355,330

Depreciation – selling, general and administrative expenses
4,248

 
5,033

 
12,753

 
12,325

Amortization
9,239

 
8,497

 
26,957

 
24,214

Total Costs and Expenses
618,340

 
528,341

 
1,760,531

 
1,461,081

Income from Operations
100,256

 
139,536

 
337,073

 
417,573

Other Income (Expense):
 
 
 
 
 
 
 
Interest income
8

 
27

 
82

 
97

Interest expense
(17,386
)
 
(16,644
)
 
(52,448
)
 
(47,980
)
Other expense, net
(1,754
)
 
(477
)
 
(3,956
)
 
(1,569
)
Total Other Expense
(19,132
)
 
(17,094
)
 
(56,322
)
 
(49,452
)
Income Before Income Taxes
81,124

 
122,442

 
280,751

 
368,121

Income Tax Expense
28,404

 
39,401

 
91,325

 
122,633

Net Income
52,720

 
83,041

 
189,426

 
245,488

Less: net income attributable to noncontrolling interests
457

 
196

 
1,256

 
1,558

Net Income Attributable to Stericycle, Inc.
52,263

 
82,845

 
188,170

 
243,930

Less: mandatory convertible preferred stock dividend
1,684

 

 
1,684

 

Net Income Attributable to Stericycle, Inc. Common Shareholders
$
50,579

 
$
82,845

 
$
186,486

 
$
243,930

Earnings Per Common Share Attributable to Stericycle, Inc. Common Shareholders:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.98

 
$
2.19

 
$
2.87

Diluted
$
0.59

 
$
0.96

 
$
2.16

 
$
2.83

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
84,884,599

 
84,858,360

 
84,960,955

 
84,940,975

Diluted
86,120,315

 
86,116,455

 
86,234,859

 
86,237,202


The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

In thousands
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net Income
$
52,720

 
$
83,041

 
$
189,426

 
$
245,488


 
 
 
 
 
 
 
Other Comprehensive Income/(Loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(55,214
)
 
(51,552
)
 
(95,155
)
 
(40,777
)
Amortization of cash flow hedge into income, net of tax ($176 and $55, and $284 and $155 for the three- and nine-months ended September 30, 2015 and 2014, respectively)
278

 
97

 
458

 
254

Change in fair value of cash flow hedge, net of tax ($79 and $0, and $2,577 and $47 for the three- and nine-months ended September 30, 2015 and 2014, respectively)
(216
)
 
(159
)
 
(3,994
)
 
(308
)
     Total Other Comprehensive Loss
(55,152
)
 
(51,614
)
 
(98,691
)
 
(40,831
)

 
 
 
 
 
 
 
Comprehensive (Loss)/Income
(2,432
)
 
31,427

 
90,735

 
204,657

Less: Comprehensive Income/(Loss) Attributable to Noncontrolling Interests
1,644

 
(1,621
)
 
1,392

 
(390
)
Comprehensive (Loss)/Income Attributable to Stericycle, Inc.
$
(4,076
)
 
$
33,048

 
$
89,343

 
$
205,047


The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In thousands
 
Nine Months Ended September 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net income
$
189,426

 
$
245,488

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock compensation expense
16,158

 
13,365

Excess tax benefit of stock options exercised
(15,483
)
 
(10,747
)
Depreciation
55,476

 
55,388

Amortization
26,957

 
24,214

Deferred income taxes
(17,169
)
 
8,833

Change in fair value of contingent consideration
(640
)
 
3,953

Other, net
6,326

 
1,379

Changes in operating assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable
(66,352
)
 
(25,420
)
Accounts payable
29,170

 
13,383

Accrued liabilities
77,820

 
17,640

Deferred revenues
(3,412
)
 
2,326

Other assets and liabilities
(4,986
)
 
(4,830
)
Net cash provided by operating activities
293,291

 
344,972

INVESTING ACTIVITIES:
 
 
 
Payments for acquisitions, net of cash acquired
(97,098
)
 
(328,811
)
Purchases of investments
(635,919
)
 
(2,051
)
Capital expenditures
(72,566
)
 
(66,262
)
Net cash used in investing activities
(805,583
)
 
(397,124
)
FINANCING ACTIVITIES:
 
 
 
Repayments of long-term debt and other obligations
(61,805
)
 
(45,031
)
Proceeds from foreign bank debt
42,535

 
151,605

Repayments of foreign bank debt
(76,387
)
 
(136,025
)
Proceeds from term loan
250,000

 

Repayment of term loan
(250,000
)
 

Proceeds from private placement of long-term note
300,000

 

Repayments of private placement of long-term note
(100,000
)
 

Proceeds from senior credit facility
1,338,140

 
1,154,100

Repayments of senior credit facility
(1,614,968
)
 
(979,059
)
Payments on capital lease obligations
(2,813
)
 
(4,014
)
Payments of deferred financing costs

 
(2,280
)
Payment for hedge
(8,833
)
 

Purchases and cancellations of treasury stock
(103,029
)
 
(157,004
)
Proceeds from issuance of mandatory convertible preferred stock
746,900

 

Proceeds from issuance of common stock
53,529

 
33,904

Excess tax benefit of stock options exercised
15,483

 
10,747

Payments to noncontrolling interests
(5,236
)
 
(732
)
Net cash provided by financing activities
523,516

 
26,211

Effect of exchange rate changes on cash and cash equivalents
(577
)
 
759

Net increase/ (decrease) in cash and cash equivalents
10,647

 
(25,182
)
Cash and cash equivalents at beginning of period
22,236

 
67,167

Cash and cash equivalents at end of period
$
32,883

 
$
41,985


 
 
 
NON-CASH ACTIVITIES:
 
 
 
Issuances of obligations for acquisitions
$
71,905

 
$
100,944

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Nine Months Ended September 30, 2015 and
Year Ended December 31, 2014
(Unaudited)

In thousands
 
Stericycle, Inc. Equity
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
 Equity
 
Shares
Amount
 
Shares
Amount
 
 
 
 
 
Balance at January 1, 2014

$

 
85,500

$
855

 
$
195,110

 
$
1,610,964

 
$
(56,468
)
 
$
17,077

 
$
1,767,538

Net income


 

 
 
 
 
326,456

 
 
 
1,690

 
328,146

Currency translation adjustment


 

 
 
 
 
 
 
(80,221
)
 
(2,650
)
 
(82,871
)
Change in qualifying cash flow hedge, net of tax


 

 
 
 
 
 
 
(1,730
)
 
 
 
(1,730
)
Issuance of common stock for exercise of options, restricted stock units and employee stock purchases




 
1,061

11

 
58,551

 
 
 
 
 
 
 
58,562

Purchase and cancellation of treasury stock




 
(1,677
)
(17
)
 


 
(194,049
)
 
 
 
 
 
(194,066
)
Stock compensation expense


 

 
 
17,773

 
 
 
 
 
 
 
17,773

Excess tax benefit of stock options exercised


 

 
 
17,906

 
 
 
 
 
 
 
17,906

Noncontrolling interests attributable to acquisitions


 

 
 
 
 
 
 
 
 
6,781

 
6,781

Reduction to noncontrolling interests due to additional ownership


 

 
 
(129
)
 
 
 
 
 
(725
)
 
(854
)
Balance at December 31, 2014


 
84,884

849

 
289,211

 
1,743,371

 
(138,419
)
 
22,173

 
1,917,185

Net income
 
 
 
 
 
 
 
 
188,170

 
 
 
1,256

 
189,426

Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
(95,291
)
 
136

 
(95,155
)
Change in qualifying cash flow hedge, net of tax
 
 
 
 
 
 
 
 
 
 
(3,536
)
 
 
 
(3,536
)
Issuance of common stock for exercise of options, restricted stock units and employee stock purchases
 
 
 
822

7

 
57,923

 
 
 
 
 
 
 
57,930

Issuance of mandatory convertible preferred stock
770

8

 
 
 
 
746,892

 
 
 
 
 
 
 
746,900

Purchase and cancellation of treasury stock
 
 
 
(764
)
(7
)
 


 
(103,022
)
 
 
 
 
 
(103,029
)
Preferred stock dividend
 
 
 
 
 
 
 
 
(1,684
)
 
 
 
 
 
(1,684
)
Stock compensation expense
 
 
 
 
 
 
16,158

 
 
 
 
 
 
 
16,158

Excess tax benefit of stock options exercised
 
 
 
 
 
 
15,483

 
 
 
 
 
 
 
15,483

Reduction to noncontrolling interests due to additional ownership
 
 
 
 
 
 
 
 
 
 
 
 
(5,236
)
 
(5,236
)
Balance at September 30, 2015
770

$
8

 
84,942

$
849

 
$
1,125,667

 
$
1,826,835

 
$
(237,246
)
 
$
18,329

 
$
2,734,442


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless the context requires otherwise, "we", "us" or "our" refers to Stericycle, Inc. and its subsidiaries on a consolidated basis.
NOTE 1 – BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes the disclosures included in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the Stericycle, Inc. and Subsidiaries Consolidated Financial Statements and notes thereto for the year ended December 31, 2014, as filed with our Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2015.
There were no material changes in the Company’s critical accounting policies since the filing of its 2014 Form 10-K. As discussed in the 2014 Form 10-K, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.
We have evaluated subsequent events through the date of filing this quarterly report on Form 10-Q. No events have occurred that would require adjustment to or disclosure in the condensed consolidated financial statements.
NOTE 2 – ACQUISITIONS
The following table summarizes the locations of our acquisitions for the nine months ended September 30, 2015:
Acquisition Locations
 
2015
United States
 
13

Brazil
 
2

Canada
 
1

Ireland
 
1

Mexico
 
2

Netherlands
 
1

Romania
 
4

Republic of Korea
 
6

Spain
 
3

Total
 
33


6

Table of Contents

During the quarter ended March 31, 2015, we completed fifteen acquisitions. Domestically, we acquired 100% of the stock of one regulated waste business and selected assets of three regulated waste businesses. Internationally, in Brazil, we acquired 100% of the stock of two regulated waste businesses. In Ireland, we acquired 100% of the stock of one regulated waste business. In Mexico, we acquired 100% of the stock of two regulated waste businesses. In Romania, we acquired selected assets of two regulated waste businesses. In the Republic of Korea, we acquired selected assets of three regulated waste businesses. In Spain, we acquired selected assets of one regulated waste business.
During the quarter ended June 30, 2015, we completed eight acquisitions. Domestically, we acquired 100% of the stock of one regulated waste business, selected assets of four regulated waste businesses and one communication services business. Internationally, in Canada, we acquired 100% of the stock of one communication services business, and in the Netherlands, we acquired 100% of the stock of one regulated waste business.
During the quarter ended September 30, 2015, we completed ten acquisitions. Domestically we acquired 100% of the stock of one communication services business and selected assets of two regulated waste businesses. Internationally, in Romania, we acquired selected assets of one regulated waste business and 100% of the stock of one regulated waste business. In Spain, we acquired selected assets of two regulated waste businesses. In the Republic of Korea, we acquired selected assets of three regulated waste businesses.
The following table summarizes the aggregate purchase price paid for acquisitions and other adjustments of consideration to be paid for acquisitions during the nine months ended September 30:
In thousands
 
Nine Months Ended September 30,
 
2015
 
2014
Cash
$
97,098

 
$
328,811

Promissory notes
55,793

 
78,325

Deferred consideration
3,167

 
6,124

Contingent consideration
12,945

 
16,495

Total purchase price
$
169,003

 
$
429,755

For financial reporting purposes, our acquisitions were accounted for using the acquisition method of accounting. These acquisitions resulted in the recognition of goodwill in our financial statements reflecting the premium paid to acquire businesses that we believe are complementary to our existing operations and fit our growth strategy. During the nine months ended September 30, 2015, we recognized a net increase in goodwill of $85.4 million, excluding the effect of foreign currency translation (see Note 9 – Goodwill and Other Intangible Assets). A net increase of $56.6 million was assigned to our United States reportable segment, and a net increase of $28.8 million was assigned to our International reportable segment. Approximately $28 million of the goodwill recognized during the nine months ended September 30, 2015 will be deductible for income taxes.
During the nine months ended September 30, 2015, we recognized a net increase in intangible assets from acquisitions of $70.3 million, excluding the effect of foreign currency translation. The changes include $64.7 million in the estimated fair value of acquired customer relationships with amortizable lives of 15 to 40 years, $1.4 million in permits with indefinite lives, and $4.2 million in tradenames with indefinite lives.
The purchase prices for these acquisitions in excess of acquired tangible assets have been primarily allocated to goodwill and other intangibles and are preliminary, pending completion of certain intangible asset valuations and completion accounts. The following table summarizes the preliminary purchase price allocation for current period acquisitions and other adjustments to purchase price allocations during the nine months ended September 30:

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Table of Contents

In thousands
 
Nine Months Ended September 30,
 
2015
 
2014
Fixed assets
$
13,635

 
$
127,621

Intangibles
70,282

 
242,792

Goodwill
85,393

 
202,391

Accounts receivable
22,475

 
56,696

Accounts payable
(10,637
)
 
(32,561
)
Net other liabilities
(4,875
)
 
(67,564
)
Debt
(4,803
)
 
(22,097
)
Net deferred tax liabilities
(2,467
)
 
(70,580
)
Noncontrolling interests

 
(6,943
)
Total purchase price allocation
$
169,003

 
$
429,755

During the nine months ended September 30, 2015 and 2014, the Company incurred $40.0 million and $10.7 million, respectively, of acquisition related expenses. These expenses are included with "Selling, general and administrative expenses" on our Condensed Consolidated Statements of Income. The results of operations of these acquired businesses have been included in the Condensed Consolidated Statements of Income from the date of the acquisition.
NOTE 3 – NEW ACCOUNTING STANDARDS

Accounting Standards Recently Adopted
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
On January 1, 2015, we adopted guidance on the presentation and disclosures of reporting discontinued operations. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and "represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results." For disposals of individually significant components that do not qualify as discontinued operations, an entity must disclose pre-tax earnings of the disposed component. The Company has not disposed of a component of our entity and therefore the implementation of this guidance did not affect our financial position, results of operations, or disclosure requirements.

Accounting Standards Issued But Not Yet Adopted
Interest-Imputation of Interest
In April 2015, the Financial Accounting Standards Board (the "FASB") issued guidance that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. The recognition and measurement guidance for debt issuance costs are not affected by the accounting standard update. The standard will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The revised standard will be adopted by the Company on January 1, 2016, will be applied retrospectively and will require reclassifications within the Company’s consolidated balance sheets and statements of cash flows.  The revised standard only affects presentation and therefore will not have an impact on the Company’s results of operations.


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Table of Contents

Revenue From Contracts With Customers
In May 2014, the FASB issued guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. The revenue guidance contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The amended authoritative guidance associated with revenue recognition is effective for the Company on January 1, 2018. The amended guidance may be applied retrospectively for all periods presented or retrospectively with the cumulative effect of initially applying the amended guidance recognized at the date of initial application. We are in the process of assessing the provisions of the amended guidance and have not determined whether the adoption will have a material impact on our consolidated financial statements.

Accounting for Share-Based Payment When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period
In June 2014, the FASB issued guidance that applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The standard will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company does not have any share-based payments with a performance target and therefore does not expect the adoption of this guidance to have any impact on the Company’s financial position or results of operations.

Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, the FASB issued guidance that eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustments during the period in which it determines the amount of the adjustment. The standard will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. We are in the process of assessing the provisions of the amended guidance and have not determined whether the adoption will have a material impact on our consolidated financial statements.
NOTE 4 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 – Quoted prices in active markets for identical assets or liabilities.

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Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. The impact of our creditworthiness has been considered in the fair value measurements noted below. In addition, the fair value measurement of a liability must reflect the nonperformance risk of an entity. There were no movements of items between fair value hierarchies.
In thousands
 
 
 
Fair Value Measurements Using
 
Total as of September 30, 2015
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
32,883

 
$
32,883

 
$

 
$

Short-term investments
636,288

 
636,288

 

 

Derivative financial instruments
1,111

 

 
1,111

 

Total assets
$
670,282

 
$
669,171

 
$
1,111

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
25,835

 
$

 
$

 
$
25,835

Total liabilities
$
25,835

 
$

 
$

 
$
25,835

In thousands
 
 
 
Fair Value Measurements Using
 
Total as of
December 31, 2014
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
22,236

 
$
22,236

 
$

 
$

Short-term investments
380

 
380

 

 

Derivative financial instruments
515

 

 
515

 

Total assets
$
23,131

 
$
22,616

 
$
515

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
19,941

 
$

 
$

 
$
19,941

Derivative financial instruments
2,408

 

 
2,408

 

Total liabilities
$
22,349

 
$

 
$
2,408

 
$
19,941

In September 2015, short-term investments increased by $636.2 million due to funds received from the issuance of mandatory convertible preferred stock which were invested in short-term money market funds until the funding of a portion of the Shred-it acquisition described in Note 15 - Subsequent Events.
For our derivative financial instruments we use a market approach valuation technique based on observable market transactions of spot and forward rates.
We recorded a $1.1 million asset related to the fair value of the U.S. dollar-Canadian dollar foreign currency swap which was classified as other assets at September 30, 2015. The objective of the swap is to offset the foreign exchange risk to the U.S. dollar equivalent cash outflows for our Canadian subsidiary.

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In March 2015, we cash settled a treasury lock hedge for $8.8 million of which $5.3 million, net of $3.5 million tax, was recognized in accumulated other comprehensive income. The purpose was to lock in the interest rate on the issuance of private placement debt in July 2015 and to eliminate interest rate risk.
We had contingent consideration liabilities recorded using Level 3 inputs in the amount of $25.8 million, of which $8.9 million was classified as current liabilities, at September 30, 2015. Contingent consideration liabilities were $19.9 million at December 31, 2014. Contingent consideration represents amounts expected to be paid as part of acquisition consideration only if certain future events occur. These events are usually targets for revenues or earnings related to the business acquired. We arrive at the fair value of contingent consideration by applying a weighted probability of potential outcomes to the maximum possible payout. The calculation of these potential outcomes is dependent on both past financial performance and management assumptions about future performance. If the financial performance measures were all fully met, our maximum liability would be $45.2 million at September 30, 2015. Contingent consideration liabilities are reassessed each quarter and are reflected in the Condensed Consolidated Balance Sheets as part of "Other current liabilities" and "Other liabilities". Changes to contingent consideration are reflected in the table below:
In thousands
Contingent consideration at December 31, 2014
 
$
19,941

Increases due to acquisitions
 
12,945

Decrease due to payments
 
(1,444
)
Changes due to foreign currency fluctuations
 
(4,967
)
Changes in fair value reflected in Selling, general, and administrative expenses
 
(640
)
Contingent consideration at September 30, 2015
 
$
25,835

Fair Value of Debt: At September 30, 2015, the fair value of the Company’s debt obligations was estimated, using Level 2 inputs, at $1.52 billion, the same as its carrying amount. At December 31, 2014, the fair value of the Company’s debt obligations was estimated, using Level 2 inputs, at $1.67 billion, as compared to its carrying amount of $1.66 billion. The fair values were estimated using an income approach by applying market interest rates for comparable instruments. The Company has no current plans to retire a significant amount of its debt prior to maturity.
NOTE 5 – INCOME TAXES
We file income tax returns in the U.S, in various states and in certain foreign jurisdictions.
The Company has recorded accruals to cover uncertain tax positions taken on previously filed tax returns. Such liabilities relate to additional taxes, interest and penalties the Company may be required to pay in various tax jurisdictions. During the course of examinations by various taxing authorities, proposed adjustments may be asserted. The Company evaluates such items on a case-by-case basis and adjusts the accrual for uncertain tax positions. During the quarter ended September 30, 2015, we had no material changes to our accruals related to previous  or current uncertain tax positions. The effective tax rates for the quarters ended September 30, 2015 and 2014 were approximately 35.0% and 32.2%, respectively. The increase in the current quarter tax rate is primarily related to larger discrete benefits utilized by the Company in the comparable 2014 period.

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NOTE 6 – STOCK BASED COMPENSATION
At September 30, 2015, we had the following stock option and stock purchase plans:

the 2014 Incentive Stock Plan, which our stockholders approved in May 2014;
the 2011 Incentive Stock Plan, which our stockholders approved in May 2011;
the 2008 Incentive Stock Plan, which our stockholders approved in May 2008;
the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;
the 2000 Non-statutory Stock Option Plan, which expired in February 2010;
the 1997 Stock Option Plan, which expired in January 2007;
the 1996 Directors Stock Option Plan, which expired in May 2006; and
the Employee Stock Purchase Plan ("ESPP"), which our stockholders approved in May 2001.
Stock-Based Compensation Expense:
The following table presents the total stock-based compensation expense resulting from stock option awards, restricted stock units ("RSUs"), and the ESPP included in the Condensed Consolidated Statements of Income:
In thousands
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Cost of revenues – stock option plan
 
$
24

 
$
14

 
$
69

 
$
42

Selling, general and administrative – stock option plan
 
4,416

 
3,600

 
13,795

 
11,459

Selling, general and administrative – RSUs
 
382

 
319

 
1,103

 
948

Selling, general and administrative – ESPP
 
432

 
308

 
1,191

 
916

Total pre-tax expense
 
$
5,254

 
$
4,241

 
$
16,158

 
$
13,365

The following table sets forth the tax benefits related to stock compensation:
In thousands
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Tax benefit recognized in Statement of Income
 
$
1,501

 
$
1,319

 
$
5,103

 
$
3,248

Excess tax benefit of stock options exercised
 
4,584

 
3,667

 
15,483

 
10,747



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Stock Options:
Stock option activity for the nine months ended September 30, 2015, is summarized as follows:
 
 
Number of
Options
 
Weighted
Average
Exercise
Price per
Share
 
Weighted Average Remaining Contractual Life
 
Total Aggregate Intrinsic Value
 
 
 
 
 
 
(in years)
 
(in thousands)
Outstanding at beginning of year
 
5,377,857

 
$
80.88

 
 
 
 
Granted
 
959,551

 
131.20

 
 
 
 
Exercised
 
(791,434
)
 
67.83

 
 
 
 
Forfeited
 
(138,249
)
 
108.71

 
 
 
 
Canceled or expired
 
(1,876
)
 
76.08

 
 
 
 
Outstanding at September 30, 2015
 
5,405,849

 
$
91.02

 
5.89
 
$
261,110

Exercisable at September 30, 2015
 
2,837,919

 
$
72.66

 
4.95
 
$
189,143

Vested and expected to vest at September 30, 2015
 
5,183,104

 
$
89.90

 
 
 
 
As of September 30, 2015, there was $44.0 million of total unrecognized compensation expense related to non-vested option awards, which is expected to be recognized over a weighted average period of 3.03 years.
The following table sets forth the total intrinsic value of options exercised:
In thousands
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Total intrinsic value of options exercised
 
$
14,888

 
$
14,375

 
$
54,538

 
$
40,893

The total intrinsic value of options exercised represents the total pre-tax value (the difference between the sales price on that trading day the option was exercised and the exercise price associated with the respective option).
The Company uses historical data to estimate expected life and volatility. The estimated fair value of stock options at the time of the grant using the Black-Scholes option pricing model was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Stock options granted (shares)
 
24,275

 
11,555

 
959,551

 
975,038

Weighted average fair value at grant date (per share)
 
$
23.88

 
$
21.32

 
$
22.83

 
$
21.30

Assumptions:
 
 
 
 
 
 
 
 
Expected term (in years)
 
4.79

 
4.78

 
4.79

 
4.75

Expected volatility
 
16.01
%
 
16.98
%
 
16.56
%
 
17.39
%
Expected dividend yield
 
%
 
%
 
%
 
%
Risk free interest rate
 
1.49
%
 
1.59
%
 
1.44
%
 
1.52
%

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Restricted Stock Units:
Restricted stock units ("RSUs") vest at the end of three or five years. Our 2008, 2011 and 2014 Plans include a share reserve related to RSUs granted at a 2-1 ratio. A summary of the status of our non-vested RSUs and changes during the nine months ended September 30, 2015, are as follows:
 
 
Number of
Units
 
Weighted Average Grant Date Fair Value
 
Total Aggregate Intrinsic Value
 
 
 
 
 
 
(in thousands)
Non-vested at beginning of year
 
63,600

 
$
96.04

 
 
Granted
 
10,624

 
130.40

 
 
Vested and released
 

 

 
 
Forfeited
 
(4,273
)
 
101.20

 
 
Non-vested at September 30, 2015
 
69,951

 
$
100.94

 
$
9,745

As of September 30, 2015, there was $4.2 million of total unrecognized compensation expense related to RSUs, which is expected to be recognized over a weighted average period of 2.44 years.
NOTE 7 – EQUITY
Series A Mandatory Convertible Preferred Stock Offering: On September 15, 2015, we completed a registered public offering of 7,700,000 depositary shares, each representing a 1/10th interest in a share of our 5.25% Series A Mandatory Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), at a public offering price of $100.00 per depository share for total gross proceeds of $770.0 million. Net proceeds were $746.9 million after deducting underwriting discounts, commissions and expenses. We used the net proceeds from this offering to fund a portion of the purchase price paid under our acquisition of Shred-it (see Note 15 - Subsequent Events).
Unless earlier converted or redeemed, each share of the Series A Preferred Stock will automatically convert into between 5.8716 and 7.3394 shares of our common stock, subject to anti-dilution and other adjustments, on the mandatory conversion date, which is expected to be September 15, 2018. The number of shares of our common stock issuable on conversion will be determined based on the volume-weighted average price of our common stock over the 20 trading day period commencing on and including the 23rd scheduled trading day prior to September 15, 2018. Subject to certain restrictions, at any time prior to September 15, 2018, holders of the Series A Preferred Stock may elect to convert all or a portion of their shares into common stock at the minimum conversion rate of 5.8716 shares of common stock per share of Series A Preferred Stock, subject to adjustment.
Dividends on shares of the Series A Preferred Stock are payable on a cumulative basis when, as and if declared by our board of directors, or an authorized committee thereof, at an annual rate of 5.25% on the liquidation preference of $1,000 per share (and, correspondingly, $100.00 per share with respect to the depositary shares). The dividends may be payable in cash, or subject to certain limitations, in shares of our common stock or any combination of cash and shares of our common stock on March 15, June 15, September 15 and December 15 of each year, commencing on December 15, 2015, and to, and including, September 15, 2018.

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The following table provides information about our repurchase of shares of our common stock during the nine months ended September 30, 2015:
 
 
Number of
Shares
Repurchased
and
Canceled
 
Amount for
Repurchases
 
Average
Price Paid
per Share
 
 
 
 
(in thousands)

 
 
Three months ended March 31, 2015
 
100,713

 
$
13,771

 
$
136.74

Three months ended June 30, 2015
 
574,807

 
77,390

 
134.64

Three months ended September 30, 2015
 
88,376

 
11,868

 
134.29

Nine months ended September 30, 2015
 
763,896

 
$
103,029

 
$
134.87

 
 
 
 
 
 
 
Three months ended March 31, 2014
 
685,990

 
$
78,340

 
$
114.20

Three months ended June 30, 2014
 
527,243

 
58,846

 
111.61

Three months ended September 30, 2014
 
198,728

 
23,173

 
116.60

Nine months ended September 30, 2014
 
1,411,961

 
$
160,359

 
$
113.57


NOTE 8 – EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan, RSUs, and the assumed conversion of mandatory convertible preferred stock. The effect of potentially dilutive securities is reflected in diluted earnings per share by application of the "treasury stock method" for outstanding restricted stock awards and stock options. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. For the issue of the mandatory convertible preferred stock, we use the more dilutive of the "dividend method" or the "if-converted method". Under the dividend method, the net income is reduced by the amount of the accrued dividend related to mandatory convertible preferred stock. Under the if-converted method, the dividend is ignored in favor of the diluted share count that would occur under the assumption that the mandatory convertible preferred shares were converted to common shares at the closing share price on the date of issuance.

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The following table sets forth the computation of basic and diluted earnings per share:
In thousands, except share and per share data
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to Stericycle, Inc.
 
$
52,263

 
$
82,845

 
$
188,170

 
$
243,930

Mandatory convertible preferred stock dividend (1)
 
(1,684
)
 

 
(1,684
)
 

Numerator for basic earnings per share attributable to Stericycle, Inc. common shareholders
 
$
50,579

 
$
82,845

 
$
186,486

 
$
243,930

Denominator:
 
 
 
 
 
 
 
 
Denominator for basic earnings per share-weighted average shares
 
84,884,599

 
84,858,360

 
84,960,955

 
84,940,975

Effect of diluted securities:
 

 
 
 

 
 
Employee stock options
 
1,235,716

 
1,258,095

 
1,273,904

 
1,296,227

Mandatory convertible preferred stock (2)
 

 

 

 

Denominator for diluted earnings per share-adjusted weighted average shares and after assumed exercises
 
86,120,315

 
86,116,455

 
86,234,859

 
86,237,202

Earnings per share – Basic
 
$
0.60

 
$
0.98

 
$
2.19

 
$
2.87

Earnings per share – Diluted
 
$
0.59

 
$
0.96

 
$
2.16

 
$
2.83

(1)
Mandatory convertible preferred stock dividend - no dividend was declared or paid as of September 30, 2015.
(2)
Weighted average common shares issuable upon the assumed conversion of the mandatory convertible preferred stock totaling 921,207 shares were excluded from the computation of diluted earnings per share as such conversion would have been antidilutive.
For additional information regarding outstanding employee stock options, see Note 6 - Stock Based Compensation.
NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other identifiable indefinite lived intangibles are not amortized, but are subject to an annual impairment test, or more frequent testing if circumstances indicate that they may be impaired.
Goodwill:
We have two geographical reportable segments, "United States" and "International", both of which have goodwill. We have retroactively reclassified $4.3 million of goodwill related to Puerto Rico from the United States segment to the International segment. The changes in the carrying amount of goodwill since January 1, 2014, by reportable segment, were as follows:

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Table of Contents

In thousands
 
 
United States
 
International
 
Total
Balance as of January 1, 2014
 
$
1,673,810

 
$
557,772

 
$
2,231,582

Goodwill acquired during the year
 
169,754

 
88,263

 
258,017

Purchase accounting allocation adjustments
 
(4,825
)
 
(17,595
)
 
(22,420
)
Changes due to foreign currency fluctuations
 
(2,337
)
 
(46,010
)
 
(48,347
)
Balance as of December 31, 2014
 
1,836,402

 
582,430

 
2,418,832

Goodwill acquired during the year
 
71,119

 
29,200

 
100,319

Purchase accounting allocation adjustments
 
(14,514
)
 
(412
)
 
(14,926
)
Goodwill other changes
 

 
(440
)
 
(440
)
Changes due to foreign currency fluctuations
 
(4,210
)
 
(52,121
)
 
(56,331
)
Balance at September 30, 2015
 
$
1,888,797

 
$
558,657

 
$
2,447,454

Current year adjustments to goodwill for certain 2014 acquisitions are primarily due to the finalization of intangible asset valuations.
During the quarter ended June 30, 2015, we performed our annual goodwill impairment evaluation for our three reporting units: Domestic Regulated and Compliance Services, Domestic Regulated Recall and Returns Management Services, and International Regulated and Compliance Services. We calculated fair value for our reporting units using an income method and validated those results using a market approach. Both the income and market approaches indicated no impairment to goodwill to any of our three reporting units.
Income Approach: The income approach uses expected future cash flows of each reporting unit and discounts those cash flows to present values. Expected future cash flows are calculated using management assumptions of internal growth, capital expenditures, and cost efficiencies. Future acquisitions are not included in the expected future cash flows. We use a discount rate based on our Company calculated weighted average cost of capital which is adjusted for each of our reporting units based on size risk premium and country risk premium. Significant assumptions used in the income approach include realization of future cash flows and the discount rate used to present value those cash flows.
The results of our goodwill impairment test using the income approach indicated the fair value of our Domestic Regulated and Compliance Services and Recall and Returns Management Services reporting units exceeded book value by a substantial amount; in excess of 100%. Our International Regulated and Compliance Services reporting units' fair value exceeded book value by approximately 88% and had $589.3 million in assigned goodwill at June 30, 2015.
Market Approach: Our market approach begins by calculating the market capitalization of the Company using the average stock price for the prior twelve months and the outstanding share count at June 30, 2015. We then look at the Company's Earnings Before Interest, Tax, Depreciation, and Amortization ("EBITDA"), adjusted for stock compensation expense and other items, such as changes in the fair value of contingent consideration, restructuring and plant conversion expenses, and litigation settlement, for the prior twelve months. The calculated market capitalization is divided by the modified EBITDA to arrive at a valuation multiple. The fair value of each reporting unit is then calculated by taking the product of the valuation multiple and the trailing twelve months' modified EBITDA of that reporting unit. The fair value was then compared to the reporting units' book value and determined to be in excess of the book value. We believe that starting with the fair value of the company as a whole is a reasonable measure as that fair value is then allocated to each reporting unit based on that reporting unit's individual earnings. A sustained drop in our stock price would have a negative impact to our fair value calculations. A temporary drop in earnings of a reporting unit would have a negative impact to our fair value calculations.

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Table of Contents

The results of our goodwill impairment test using the market approach corroborated the results of the impairment test under the income approach and indicated the fair value of our reporting units exceeded their respective book values by substantial amounts.
Other Intangible Assets:
As of September 30, 2015 and December 31, 2014, the values of other intangible assets were as follows:
In thousands
 
September 30, 2015
 
December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Value
Amortizable intangibles:
 
 
 
 
 
 
 
 
 
 
 
Covenants not-to-compete
$
8,343

 
$
6,404

 
$
1,939

 
$
8,474

 
$
5,688

 
$
2,786

Customer relationships
783,615

 
128,178

 
655,437

 
755,148

 
107,365

 
647,783

Tradenames
4,257

 
1,004

 
3,253

 
6,062

 
1,313

 
4,749

Technology
611

 
601

 
10

 
611

 
521

 
90

Other
501

 
64

 
437

 
539

 
35

 
504

Indefinite lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Operating permits
238,517

 

 
238,517

 
247,933

 

 
247,933

Tradenames
9,910

 

 
9,910

 
5,800

 

 
5,800

Total
$
1,045,754

 
$
136,251

 
$
909,503

 
$
1,024,567

 
$
114,922

 
$
909,645

The changes in the carrying amount of intangible assets since January 1, 2014 were as follows:
In thousands
 
 
Total
Balance as of January 1, 2014
 
$
720,035

Intangible assets acquired during the year
 
277,041

Impairments during the year
 
(9,863
)
Amortization during the year
 
(32,692
)
Changes due to foreign currency fluctuations
 
(44,876
)
Balance as of December 31, 2014
 
909,645

Intangible assets acquired during the year
 
70,282

Impairments during the year
 
(2,414
)
Amortization during the year
 
(26,957
)
Changes due to foreign currency fluctuations
 
(41,053
)
Balance at September 30, 2015
 
$
909,503

During the quarter ended March 31, 2015 we wrote off $0.2 million in customer relationships, $1.2 million in operating permits, and $1.0 million in tradenames, due to rationalizing certain of our domestic and international operations (see Note 13 - Restructuring Charges). These expenses are reflected as part of SG&A on our Condensed Consolidated Statements of Income. Under generally accepted accounting principles, a fair value must be assigned to all acquired assets based on a theoretical "market participant" regardless of the acquirer's intended use for those assets. This accounting treatment can lead to the recognition of losses when a company disposes of acquired assets. We complete our annual impairment analysis of our indefinite lived intangibles during the quarter ended December 31 of each year, or more frequently, if circumstances indicate that they may be impaired.
Our finite-lived intangible assets are amortized over their useful lives. We have determined that our customer relationships have useful lives from 10 to 40 years based upon the type of customer, with a weighted

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average remaining useful life of 23.2 years. We have covenants not-to-compete intangibles with useful lives from 3 to 14 years, with a weighted average remaining useful life of 5.3 years. We have tradename intangibles with useful lives from 10 to 40 years, with a weighted average remaining useful life of 16.4 years. We have determined that our permits have indefinite lives due to our ability to renew these permits with minimal additional cost, and therefore these are not amortized.
During the quarters ended September 30, 2015 and 2014, the aggregate amortization expense was $9.2 million and $8.5 million, respectively. For the nine months ended September 30, 2015 and 2014, the aggregate amortization expense was $27.0 million and $24.2 million, respectively.
The estimated amortization expense for each of the next five years, assuming no additional amortizable intangible assets, is as follows for the years ended December 31:
In thousands
2015
 
$
35,839

2016
 
35,547

2017
 
35,422

2018
 
35,384

2019
 
35,363

Future amortization expense may fluctuate depending on changes in foreign currency rates, future acquisitions, or changes to the estimated amortizable life of the intangibles. The estimates for amortization expense noted above are based upon foreign exchange rates as of September 30, 2015.
NOTE 10 – ENVIRONMENTAL REMEDIATION LIABILITIES
We record a liability for environmental remediation when such liability becomes probable and the costs or damages can be reasonably estimated. We accrue environmental remediation costs, on an undiscounted basis, associated with identified sites where an assessment has indicated that cleanup costs are probable and can be reasonably estimated, but the timing of such payments is not fixed and determinable. Such accruals are based on currently available information, estimated timing of remedial actions, existing technology, and enacted laws and regulations. The liability for environmental remediation is included in the Condensed Consolidated Balance Sheets in current liabilities within "Accrued liabilities" and in non-current liabilities within "Other liabilities."
At September 30, 2015, the total environmental remediation liabilities recorded were $32.0 million, of which $2.8 million was classified as accrued liabilities and $29.2 million was classified as other liabilities.

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Table of Contents

NOTE 11 – DEBT
Long-term debt consisted of the following:
In thousands
 
 
September 30,
2015
 
December 31,
2014
Obligations under capital leases
 
$
8,390

 
$
9,185

$1.2 billion senior credit facility weighted average rate 1.51%, due in 2019
 
176,387

 
459,975

$1.5 billion term loan facility, due in 2020
 

 

$100 million private placement notes 5.64%, due in 2015
 

 
100,000

$175 million private placement notes 3.89%, due in 2017
 
175,000

 
175,000

$125 million private placement notes 2.68%, due in 2019
 
125,000

 
125,000

$225 million private placement notes 4.47%, due in 2020
 
225,000

 
225,000

$125 million private placement notes 3.26%, due in 2022
 
125,000

 
125,000

$200 million private placement notes 2.72%, due in 2022
 
200,000

 

$100 million private placement notes 2.79%, due in 2023
 
100,000

 

Promissory notes and deferred consideration weighted average rate of 3.74% and weighted average maturity of 3.5 years
 
271,568

 
279,590

Foreign bank debt weighted average rate 9.20% and weighted average maturity of 2.3 years
 
109,747

 
160,465

Total debt
 
1,516,092

 
1,659,215

Less: current portion of total debt
 
106,405

 
131,969

Long-term portion of total debt
 
$
1,409,687

 
$
1,527,246

Our $1.2 billion senior credit facility maturing in June 2019, our $175.0 million private placement notes maturing in October 2017, our $125.0 million private placement notes maturing in December 2019, our $225.0 million private placement notes maturing in October 2020, our $125.0 million private placement notes maturing in December 2022, our $200.0 million private placement notes maturing July 2022, and our $100.0 million private placement notes maturing in July 2023 all require us to comply with various financial, reporting and other covenants and restrictions, including a restriction on dividend payments. The financial debt covenants are the same for the senior credit facility and the private placement notes. At September 30, 2015, we were in compliance with all of our financial debt covenants.
As of September 30, 2015 and December 31, 2014, we had $149.2 million and $162.9 million, respectively, committed to outstanding letters of credit under our senior credit facility. The unused portion of the revolving credit facility as of September 30, 2015 and December 31, 2014 was $874.4 million and $577.1 million, respectively.
We repaid our $100.0 million private placement notes that matured in April 2015 by borrowing from our long-term senior credit facility.
On April 30, 2015, we entered into a note purchase agreement with several institutional purchasers pursuant to which we have issued and sold to the purchasers $200.0 million of our new seven-year 2.72% unsecured senior notes ("Series A") and $100.0 million of our new eight-year 2.79% unsecured senior notes ("Series B"). Closing of the issuance and sale of the notes occurred on July 31, 2015.
The Series A notes bear interest at the fixed rate of 2.72% per annum, and the Series B notes bear interest at the fixed rate of 2.79% per annum. Interest will be payable in arrears semi-annually on January 1 and July 1 beginning on January 1, 2016. The principal of the Series A notes will be payable at the maturity of the notes on July 1, 2022, and the principal of the Series B notes will be payable at the maturity of the notes on July 1, 2023. The notes are unsecured obligations.

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The Company entered into a Term Loan Credit Agreement dated as of August 21, 2015 (the “Term Loan Credit Agreement”) with Bank of America, N.A., as the Administrative Agent maturing on August 21, 2020. The Term Loan Credit Agreement provides for a term loan facility (“Term Loan Facility”) under which the Company may obtain loans up to an aggregate amount of $1.5 billion.
Borrowings under the Term Loan Facility may bear interest at a Base Rate or Eurodollar Rate, respectively, plus the Applicable Rate. The Base Rate is for any day a fluctuating rate per annum equal to the highest of (i) the Federal Funds Rate plus 1/2 of 1.00%, (ii) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate” and (iii) the Eurodollar Rate plus 1.00%. The Eurodollar Rate is a rate per annum determined for the applicable interest period by reference to the London interbank offered rate. The Applicable Rate for any Base Rate Loans is between 0 and 100 basis points per annum, and the Applicable Rate for any Eurodollar Rate Loan is between 100 and 200 basis points per annum, in each case depending on the consolidated leverage ratio for the Company and its subsidiaries as set forth in the most recent compliance certificate received by the administrative agent.
NOTE 12 – GEOGRAPHIC INFORMATION
Management has determined that we have two reportable segments: United States and International. Revenues are attributed to countries based on the location of customers. The same accounting principles and critical accounting policies are used in the preparation of the financial statements for both reportable segments.
We have retroactively reclassified immaterial amounts related to Puerto Rico from the United States segment to the International segment.
Detailed information for our United States reportable segment is as follows:
In thousands
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Regulated and compliance solutions revenues
 
$
493,234

 
$
452,106

 
$
1,435,407

 
$
1,246,381

Recall and returns solutions revenues
 
30,274

 
16,610

 
78,531

 
64,395

Total revenues
 
523,508

 
468,716

 
1,513,938

 
1,310,776

Net interest expense
 
11,110

 
11,538

 
32,254

 
33,804

Income before income taxes
 
78,200

 
108,575

 
261,005

 
326,215

Income taxes
 
27,924

 
34,243

 
96,395

 
114,902

Net income attributable to Stericycle, Inc.
 
$
50,276

 
$
74,332

 
$
164,610

 
$
211,313

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
16,905

 
$
16,822

 
$
49,400

 
$
45,354



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Detailed information for our International reportable segment is as follows:
In thousands
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Regulated and compliance solutions revenues
 
$
195,088

 
$
199,161

 
$
583,666

 
$
567,878

Net interest expense
 
6,268

 
5,079

 
20,112

 
14,079

Income before income taxes
 
2,924

 
13,867

 
19,746

 
41,906

Income taxes
 
480

 
5,158

 
(5,070
)
 
7,731

Net income
 
2,444

 
8,709

 
24,816

 
34,175

Less: net income attributable to noncontrolling interests
 
457

 
196

 
1,256

 
1,558

Net income attributable to Stericycle, Inc.
 
$
1,987

 
$
8,513

 
$
23,560

 
$
32,617

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
10,585

 
$
11,943

 
$
33,033

 
$
34,248


NOTE 13 – RESTRUCTURING CHARGES
During the first quarter of 2015, management began executing a realignment of our operations to reduce labor redundancies and facility costs. As part of this realignment, the Company recorded charges related to severance, fixed asset impairments, write-off of intangible assets, and recognition of lease expense for properties no longer used but for which we have a contractual obligation. The recorded restructuring liabilities are expected to be paid primarily within the current year. While the Company believes the recorded restructuring liabilities are adequate, revisions to current estimates may be recorded in future periods based on new information as it becomes available. There could be additional initiatives in the future to further streamline our operations. As such, the Company expects further expenses related to workforce reductions and other facility rationalization costs when those restructuring plans are finalized and related expenses are estimable.
The following table below highlights $2.2 million and $16.5 million of pre-tax restructuring charges by reporting segment for the three- and nine-months ended September 30, 2015, respectively, which are reflected as part of SG&A on our Condensed Consolidated Statements of Income.
In thousands
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
United States
 
International
 
Total Charges to Income
 
United States
 
International
 
Total Charges to Income
Employee severance and related costs
$
946

 
$
759

 
$
1,705

 
$
3,348

 
$
3,859

 
$
7,207

Other costs
351

 
309

 
660

 
2,141

 
1,183

 
3,324

Non-cash items:
 
 
 
 
 
 
 
 
 
 
 
Fixed assets impairment

 

 

 
3,133

 

 
3,133

Intangible assets impairment

 

 

 
2,167

 
247

 
2,414

Other

 
(183
)
 
(183
)
 

 
445

 
445

Total pre-tax restructuring expenses
$
1,297

 
$
885

 
$
2,182

 
$
10,789

 
$
5,734

 
$
16,523


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The following table summarizes restructuring activity during 2015 which is reflected in the Condensed Consolidated Balance Sheets as part of "Accrued liabilities":
In thousands
 
 
Employee Severance and Related Costs
 
Other Costs
 
Total
Liability balance at January 1, 2015
 
$

 
$

 
$

Charges to income
 
7,207

 
3,324

 
10,531

Payments
 
(5,589
)
 
(1,544
)
 
(7,133
)
Other
 
(69
)
 

 
(69
)
Liability balance at September 30, 2015
 
$
1,549

 
$
1,780

 
$
3,329

NOTE 14 – LEGAL PROCEEDINGS
We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from time to time that may be instituted for a variety of reasons. We are also involved in a variety of civil litigation from time to time.
We review all of our outstanding legal proceedings with counsel quarterly, and we will disclose an estimate of any reasonably possible loss or range of reasonably possible losses if and when we are able to make such an estimate and the reasonably possible loss or range of reasonably possible losses is material to our financial statements.
Qui Tam Action. As disclosed in our current report on Form 8-K filed on October 14, 2015, we entered into a settlement agreement on October 8, 2015 to resolve all claims made against us in the previously-disclosed qui tam (or “whistle blower”) action pending in the United States District Court for the Northern District of Illinois captioned United States of America ex rel. Jennifer D. Perez v. Stericycle, Inc., Case No. 1:08-cv-2390 (the “Qui Tam Action”). Originally filed under seal on April 28, 2008 by a former employee of ours (“Relator”) on behalf of the federal government, the Qui Tam Action was amended on June 28, 2010 to add the States of California, Delaware, Florida, Illinois, Indiana, Nevada, New Hampshire, New Jersey, New York, North Carolina, Rhode Island, Tennessee, the Commonwealths of Massachusetts and Virginia, and the District of Columbia (except for New Hampshire and New York, the “Government Entities”). The Qui Tam Action was further amended on July 23, 2013 to allege certain claims on behalf of the Government Entities and to drop any claims on behalf of the State of New Hampshire. The State of New York pursued its own investigation under the New York False Claims Act resulting in our settlement announced by the New York Attorney General’s office on January 8, 2013. Brought under the federal False Claims Act and comparable state statutes, the Qui Tam Action alleged that, from January 1, 2003 to June 30, 2014, we improperly increased our service price to certain government customers without their consent or contractual authorization. We have denied all liability for the claims made in the Qui Tam Action but have agreed to settle to avoid the expense, burden and inherent risk and uncertainty of litigation.
Under the terms of the settlement agreement entered into with Relator (the “Settlement”), we paid (i) $26.75 million to a third-party administrator to be allocated among the Government Entities as determined by the Government Entities themselves without any involvement by us and (ii) $1.75 million in full satisfaction of any claims by Relator and Relator’s counsel for attorneys’ fees, expenses and costs. We did not admit in the Settlement to any of the allegations in the Qui Tam Action, and the Settlement cannot be used as an admission of wrongdoing or liability on our part. In addition, we are completely released from any and all claims brought by Relator and the Government Entities.

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In view of the status of negotiations underlying the pending Settlement, we recorded a pre-tax accrual of $28.5 million in accrued liabilities on our consolidated balance sheet as of September 30, 2015 and a pre-tax charge of $28.5 million in selling, general and administrative expenses on our consolidated statement of income for the three months ended September 30, 2015. We made the payments described above on October 21, 2015 in accordance with the terms of the settlement agreement.
Class Action Lawsuits. As we have previously disclosed, we were served on March 12, 2013 with a class action complaint filed in the U.S. District Court for the Western District of Pennsylvania by an individual plaintiff for itself and on behalf of all other “similarly situated” customers of ours. The complaint alleges, among other things, that we imposed unauthorized or excessive price increases and other charges on our customers in breach of our contracts and in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The complaint sought certification of the lawsuit as a class action and the award to class members of appropriate damages and injunctive relief.
The Pennsylvania class action complaint was filed in the wake of a settlement with the State of New York of an investigation under the New York False Claims Act which arose out of the Qui Tam Action described above.
Following the filing of the Pennsylvania class action complaint, we were served with class action complaints filed in federal court in California, Florida, Illinois, Mississippi and Utah and in state court in California. These complaints asserted claims and allegations substantially similar to those made in the Pennsylvania class action complaint. All of these cases appear to be follow-on litigation to our settlement with the State of New York. On August 9, 2013, the Judicial Panel on Multidistrict Litigation (MDL) granted our Motion to Transfer these related actions to the Northern District of Illinois for centralized pretrial proceedings. On December 10, 2013, we filed our answer to the Amended Consolidated Class Action Complaint in the MDL action, generally denying the allegations therein. The MDL action is in the discovery stage.
We believe that we have operated in accordance with the terms of our customer contracts and that these complaints are without merit. We intend to vigorously defend ourselves against each of these lawsuits.
We have not accrued any amounts in respect of these class action lawsuits, and we cannot estimate the reasonably possible loss or the range of reasonably possible losses that we may incur. We are unable to make such an estimate because (i) litigation is by its nature uncertain and unpredictable, (ii) the proceedings are at an early stage and (iii) in our judgment, there are no comparable proceedings against other defendants that might provide guidance in making estimates.
Junk Fax Lawsuit. As previously disclosed, on May 20, 2015, we entered into a settlement agreement to resolve all claims made against us and certain of our subsidiaries in Sawyer v. Stericycle, et al., Case No. 2015 CH 07190 (the “TCPA Action”), a class action complaint pending in the Circuit Court of Cook County, Illinois (the “Court”). The TCPA Action is the successor lawsuit to the class action complaint filed in the U.S. District Court for the Northern District of Illinois (Case 1:14-cv-02070) that we have previously disclosed and that was dismissed pursuant to the parties’ joint stipulation of dismissal. The TCPA Action alleges that from 2010 to 2014 we violated the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005, by sending facsimile advertisements to plaintiffs or putative class members that either were unsolicited and/or did not contain a valid opt-out notice. We have denied all liability for the claims made in the TCPA Action but have agreed to settle to avoid the expense, burden and inherent risk and uncertainty of litigation.
Under the terms of the settlement agreement entered into with the two class representatives, we agreed to make available a fund of $45.0 million (the “Settlement Fund”) to pay class members who submit a valid

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claim form within a 90-day period, to pay an incentive award to each of the class representatives, to pay attorneys’ fees and expenses to plaintiffs’ attorneys, and to pay fees and costs of a third-party settlement administrator (the “TCPA Settlement”). The plaintiffs’ attorneys sought attorneys’ fees of one-third of the Settlement Fund, plus out-of-pocket expenses, to be paid from the Settlement Fund. As part of the TCPA Settlement, we do not admit to any of the allegations in the TCPA Action and will be completely released from any claims related to faxes sent by us or on our behalf from March 25, 2010 through April 30, 2015.
In view of the TCPA Settlement, we recorded a pre-tax accrual of $45.0 million in accrued liabilities on our consolidated balance sheet and a pre-tax charge of $45.0 million in selling, general and administrative expenses on our consolidated statement of income during the second quarter of 2015. We made payments totaling approximately $15.2 million in respect of the incentive awards to each of the class representatives and the attorneys’ fees and expenses of plaintiffs’ attorneys during August 2015. Based on information provided by the third-party settlement administrator, we will pay a total of approximately $13.0 million in respect of valid claims submitted by class members within the claims period sometime during the fourth quarter of 2015. As a result, we will retain the balance of the Settlement Fund, or approximately $16.8 million, with no further obligation to make payments in respect of the TCPA Settlement. We have adjusted the accrual on our consolidated balance sheet as of September 30, 2015 and the charge on our consolidated statement of income for the three months ended September 30, 2015 accordingly. 
Environmental Matters. On April 22, 2014, we completed our acquisition of PSC Environmental Services, LLC (“PSC Environmental”) and consequently became subject to the legal proceedings in which PSC Environmental was a party on that date. PSC Environmental’s operations are regulated by federal, state and local laws enacted to regulate the discharge of materials into the environment, remediate contaminated soil and groundwater or otherwise protect the environment. As a result of this continuing regulation, PSC Environmental frequently becomes a party to legal or administrative proceedings involving various governmental authorities and other interested parties. The issues involved in these proceedings generally relate to alleged violations of existing permits and licenses or alleged responsibility under federal or state Superfund laws to remediate contamination at properties owned either by PSC Environmental or by other parties to which either PSC Environmental or the prior owners of certain of its facilities shipped wastes.
From time to time, PSC Environmental may be subject to fines or penalties in regulatory proceedings relating primarily to waste treatment, storage or disposal facilities. We believe that the fines or other penalties that PSC Environmental may pay in connection with any pending regulatory proceedings of this nature will not, individually or in the aggregate, be material to our financial statements.
NOTE 15 – SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date of filing this Quarterly Report on Form 10-Q.
As disclosed in our current report on Form 8-K filed on October 7, 2015, we completed our acquisition (the “Acquisition”) of Shred-it International ULC, an Alberta unlimited liability corporation (“SII”), Shred-it JV LP, an Ontario limited partnership (“Shred-it JV”), Boost GP Corp., an Ontario corporation (“Boost GP”), and Boost Holdings LP, an Ontario limited partnership (together with SII, Shred-it JV and Boost GP, “Shred-it”), on October 1, 2015 pursuant to the terms of a Securities Purchase Agreement dated as of July 15, 2015 (as amended, the “Purchase Agreement”) with the equity holders of Shred-it. Under the Purchase Agreement, we and certain of our subsidiaries acquired Shred-it for an aggregate purchase price of $2.3 billion , plus the total enterprise value of franchises acquired by Shred-it after July 15, 2015 of $12.7 million . The allocation of the purchase prices to acquired assets and liabilities is incomplete, pending finalization of asset valuations and completion accounts.

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As also disclosed in our current report on Form 8-K filed on October 7, 2015, we entered into a note purchase agreement with 25 institutional purchasers on October 1, 2015 pursuant to which we issued and sold to the purchasers $150.0 million of new six-year 2.89% unsecured senior notes and $150.0 million of new eight-year 3.18% unsecured senior notes (collectively, the “Notes”). The Notes bear interest on the unpaid principal thereof from October 1, 2015 at their respective stated rates of interest payable semiannually in arrears on the first (1st) day of April and October in each year and at maturity, commencing on April 1, 2016. The Notes are unsecured obligations. We used the proceeds from the sale of the Notes to fund a portion of the purchase price paid under the Acquisition.
On October 1, 2015, we borrowed $1.3 billion under the Term Loan Facility described in our current report on Form 8-K filed on August 27, 2015 to fund a portion of the purchase price paid under the Acquisition (see Note 11- Debt for more information).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are in the business of providing regulated and compliance solutions to healthcare and commercial businesses. This includes the collection and processing of specialized waste for disposal, and a variety of training, consulting, recall/return, communication, and compliance services. We were incorporated in 1989 and presently serve a diverse customer base of more than 615,000 customers throughout the United States, Argentina, Brazil, Canada, Chile, Ireland, Japan, Mexico, the Netherlands, Portugal, Romania, Republic of Korea, Spain, and the United Kingdom.
The regulated solutions we provide include: medical waste disposal, our Steri-Safe® medical waste and compliance program, our Clinical Services program, our Sharps Management Service featuring Bio Systems® reusable sharps containers, pharmaceutical waste disposal, and hazardous waste disposal. Our compliance solutions include: training, consulting, inbound/outbound communications, data reporting, and other regulatory compliance services. In addition to our regulated and compliance solutions, we offer regulated recall and returns management solutions which encompass a number of services for a variety of businesses, but consist primarily of managing the recall, withdrawal, or return of expired or recalled products and pharmaceuticals.
There were no material changes in the Company’s critical accounting policies since the filing of its 2014 Form 10-K. As discussed in the 2014 Form 10-K, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.
Highlights of the three months ended September 30, 2015:
revenues were $718.6 million, up $50.7 million or 7.6% from $667.9 million in the third quarter last year;
third quarter gross profit as a percent of revenues was 41.7% for both the third quarter of 2015 and 2014;
operating income was $100.3 million, down $39.3 million or 28.2% from $139.5 million in the third quarter last year;
we incurred $61.9 million in pre-tax expenses related to acquisitions, integration expense related to acquisitions, restructuring and plant conversion expenses, and litigation expenses.



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THREE MONTHS ENDED SEPTEMBER 30, 2015 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2014
The following summarizes the Company’s operations:
In thousands, except per share data
 
Three Months Ended September 30,
 
2015
 
2014
 
$
 
%
 
$
 
%
Revenues
$
718,596

 
100.0
 
$
667,877

 
100.0
Cost of revenues
404,431

 
56.3
 
373,128

 
55.9
Depreciation - cost of revenues
14,003

 
1.9
 
15,235

 
2.3
Plant conversion expenses
487

 
0.1
 
845