10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
 
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $.01 per share
 
NASDAQ Global Select Market
Depositary Shares, each representing a 1/10th ownership interest in a share of 5.25% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share
 
NASDAQ Global Select Market
(Title of each class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934. YES ¨ NO x
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ¨
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 "accelerated filer", "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)
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 Exchange Act Rule 12b-2 of the Exchange Act). YES ¨ NO x
State the aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2015): $11,358,678,595.
On February 19, 2016, there were 84,647,029 shares of the Registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Items 10, 11, 12 and 13 of Part III of this Report is incorporated by reference from the Registrant’s definitive Proxy Statement for the 2016 Annual Meeting of Stockholders to be held on May 25, 2016.


Table of Contents

Stericycle, Inc.
Table of Contents
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I
Item 1. Business
Unless the context requires otherwise, "we," "us" or "our" refers to Stericycle, Inc. and its subsidiaries on a consolidated basis.
Overview
Services
Stericycle is a business-to-business services provider with a focus on regulated and compliance solutions for healthcare, retail, and commercial businesses. This includes the collection and processing of regulated and specialized waste for disposal and the collection of personal and confidential information for secure destruction, plus a variety of training, consulting, recall/return, communication, and compliance services. We operate integrated operations and customer service networks in the United States and 21 other countries. Our worldwide networks include a total of 253 processing facilities, 358 transfer sites, and 137 other service facilities. Our solutions for regulated or specialty waste streams include: medical waste disposal, pharmaceutical waste disposal, hazardous waste management, sustainability solutions for expired or unused inventory, and secure information destruction of documents and e-media. Our compliance solutions include: training and consulting through our Steri-Safe® and Clinical Services programs, inbound/outbound communications, data reporting, and other regulatory compliance services. Our regulated recall and returns management solutions consist of communication, logistics, and data management services to support the recall, withdrawal, or return of expired or recalled products.
More specifically, our services and products include:
Medical waste management services
Reusable sharps disposal management services
Pharmaceutical waste services
Integrated Waste Stream Solutions ("IWSS") program
Hazardous waste management services
Sustainability and recycling services for expired or unused inventory
Shred-it secure information destruction services
Steri-Safe® and Clinical Services compliances programs
Regulated recall and returns management services for expired or recalled products
Communication services including afterhours answering, appointment scheduling, appointment reminders, secure messaging, and event registration
Mailback solutions for regulated medical waste, universal wastes, pharmaceutical wastes, and other specialty wastes
Customers
Our broad offering of services appeals to a wide range of business customers. While healthcare businesses (hospitals, physician and dental practices, outpatient clinics, long-term care facilities, etc.) make the largest portion of customers, we also provide services to retailers, manufacturers, financial services providers, professional services providers, governmental entities, and other businesses. The majority of our customers are small businesses generating low volumes of regulated wastes or materials for disposal or destruction and having compliance needs consistent



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with a small staff or facility. However, we also provide services to large customers, which include hospitals, manufacturers, and laboratories.
In total, we serve more than 1,000,000 customers worldwide. No single customer accounts for more than 1.5% of our total revenues, and our top ten customers collectively account for approximately 8.0% of total revenues. We provide service to the majority of these customers through multi-year contracts. Although we have several standard forms of contract, terms vary depending upon the customer’s service requirements, the volume of regulated waste or material generated, or other factors including statutory and regulatory requirements.
Business Strategy
Focus on Regulated Business-to-Business Operations
We have a focus on business-to-business services in areas of operations that are highly regulated. By helping our customers maintain compliance with complex regulations, we protect people and brands, promote health, and safeguard the environment. Governmental legislation and regulation increasingly requires the proper handling and disposal of items such as medical waste, hazardous waste, pharmaceutical waste, and personal and confidential information. Regulated waste can be defined as any material with government-imposed guidelines for handling the material for transportation or disposal. Medical waste, such as needles, syringes, gloves, cultures and stocks of infectious agents, blood and blood products, can potentially cause an infectious disease. Hazardous waste is designated and governed by federal and local environmental protection agencies but generally includes waste that is considered dangerous or potentially harmful to our health or the environment. Hazardous wastes can be liquids, solids, gases, or sludges. Pharmaceutical waste may be hazardous or nonhazardous and consists of expired, recalled, or otherwise unused pharmaceuticals. Personal and confidential information includes documents and e-media containing protected healthcare information, financial information, or other confidential information. Additionally, the regulatory environment related to promoting overall health and protecting consumers from unsafe products continues to increase, especially in the United States.
Focus on the Small Customer with Recurring Service Need
Our business strategy recognizes that smaller businesses have an even greater need for support with compliance matters since they tend to lack the specialization of staff resources that is found among larger businesses. With a small business, regulatory and compliance matters are often managed by a business owner, office manager, or facility supervisor who manage multiple functions for the organization and often lack the time and resources to properly investigate and comply with a wide range of regulations that may impact their operation. In response to this unmet need of small businesses, we developed comprehensive, no-hassle compliance programs which feature scheduled service at low, flat monthly fees. This business fundamental has guided us as we have expanded into additional service offerings including hazardous or pharmaceutical waste management, communication services, and secure information destruction.
Organic Growth
As a leading provider in regulated and compliance solutions, we continue to focus on enhancing our service offerings and platforms to exceed customer expectations. We have developed a strong and loyal customer base, with a revenue retention rate exceeding 90%, and have been able to leverage these customer relationships to provide additional services. Allocation of our sales resources has and will continue to focus on driving incremental organic growth from cross selling and upselling various services in our portfolio.



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Growth through Acquisition
The various regulated waste and compliance services that we provide tend to be in highly fragmented industries. We have proved that acquisitions are a rapid and efficient way to scale operations, build critical customer density for transportation and treatment operations, and enter new markets or geographies, as well as an opportunity to introduce our additional services to the acquired customers. In our early history, acquisitions were a key strategy to building our customer base and route density in the United States. Beginning in 1998, we were able to expand internationally through acquisition and now operate in 21 different markets outside the U.S. Over our history, Stericycle has completed 435 acquisitions, with 230 in the United States and 205 internationally. During 2015, we completed 43 acquisitions. In addition to the Shred-it acquisition, which increased our international footprint by adding 8 countries we were not currently operating in, our acquisitions consisted of 19 domestic businesses and 24 international businesses.
The acquisition of Shred-it International ULC, the largest acquisition in Stericycle’s history, was completed on October 1, 2015. The acquisition expands our portfolio of services by adding secure information destruction, a highly complementary service to our regulated waste and compliance services. Shred-it adds substantially to Stericycle’s operational infrastructure bringing approximately 2,400 trucks and 5,400 team members based out of more than 200 facilities in 13 countries, including the United States. The acquisition provides operational synergies stemming from our core competencies in route logistics and lean management systems and a focus on small and loyal customers providing opportunities for growth from the cross sale of additional services.
We expect to continue our acquisition strategy in North America and internationally, remaining focused on small, highly accretive, tuck in acquisitions that broaden our various service capabilities while creating value for our shareholders.
Market Size and Growth Potential
We provide a wide range of services across multiple market segments and industries. We believe that in 2016, the size of the global market for the services we provide, in the geographies we currently operate in, is approximately $33 billion. Industry growth is driven by a number of factors. These factors include:
Aging of Population: The average age of the population in the countries where we operate is rising. As people age, they typically require more medical attention and a wider variety of tests, procedures and medications, leading to an increase in the quantity of regulated medical waste, hazardous waste, and pharmaceutical waste, as well as an increase in confidential healthcare records requiring secure destruction.
Pressure to Reduce Healthcare Costs: The healthcare industry is under pressure to reduce costs. We believe that our services can help healthcare providers to reduce their handling and compliance costs and to reduce their potential liability for employee exposure to bloodborne pathogens and other infectious agents. In addition, hospital institutions and smaller healthcare practices continue to outsource compliance, communication, and secure information destruction services which we can provide.
Enforcement of Regulations: Enforcement of regulations relating to the management of regulated waste and protected information is increasing. Penalties for violations can be costly as well as high profile thereby impacting a business’ overall reputation. Greater enforcement combined with higher penalties results in more compliance by waste generators and a corresponding increase in potential customers.



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Safety and Security Regulation: We believe that many businesses that are not currently using third party regulated waste management or secure information destruction services are unaware either of the need for proper training of employees or of the regulatory requirements regarding the handling of such materials. Similarly, the proper handling of expired or recalled products requires an expertise that many businesses lack or find inefficient to provide.
Increased Business Focus on Sustainability: Businesses large and small continue to realize that focus on sustainability is now a business essential in order to operate efficiently and meet the increasing demands of customers for environmental responsibility. Such pressures are driving proper disposal of pharmaceuticals, recycling efforts, creative disposal efforts for unused inventory, shred-all policies for paper, and other initiates supported by our services.
Shift to Off-Site Healthcare Treatment: We believe that patient care in the U.S. is continuing to shift from institutional higher-cost acute-care settings to less expensive, smaller, off-site treatment alternatives, with a resulting increase in the number of healthcare providers generating regulated medical waste, pharmaceutical waste, and protected health information requiring secure destruction.
Regulation of Privacy and Information Security and Concerns over Data Breaches: Continued development and growth of the secure information destruction industry have been driven, in part, by compliance with government regulations in respect of privacy and information security. These regulations take different forms, with some requiring organizations to establish reasonable measures to protect against loss, theft and unauthorized access, use and disclosure, and others imposing data retention requirements that require businesses to destroy or render anonymous personal information when no longer required for a legal or legitimate business purpose. Secure information destruction services are increasingly a standard measure that organizations take to meet their legal safeguarding and retention requirements.
International Market Development: The development of regulated medical waste regulations, hazardous waste regulations, and secure information destruction regulations in certain international markets are at an early stage of development relative to North American and certain European Markets. As emerging markets continue to advance their healthcare practices, environmental controls, and their data privacy regulations, we expect to see further demand for our services on a global scale.
Competitive Strengths
We believe that we benefit from the following competitive strengths, among others:
Broad Range of Services: We offer our customers a broad range of services. We work with businesses across a number of industries such as healthcare, manufacturing, and retail to safely and efficiently dispose of regulated materials, ensure regulatory compliance, improve employee and customer safety, protect their brands, improve communications with patients, and manage corporate and personal risk.
Strong Service Relationships with Customers: We offer our customers necessary services which require access to our customers’ facilities and operating information. This relationship, supported by a history of service, provides us with access to decision makers to offer additional opportunities.
Long-term Contracts: The majority of services we provide involve long-term contracts.
Established Network of Processing and Transportation Locations in Each Country: We believe that our infrastructure network results in a very efficient operation. The network also



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provides redundancy so that we can quickly redirect services or operations to another location should such needs exist due to severe weather, power outages, or other such situations.
Industry Leadership and Expertise: We maintain a global leadership position across our various services lines, including regulated medical waste, retail and healthcare hazardous waste, secure information destruction, and product recalls and returns. We believe that we maintain the most experienced teams, the deepest understanding of regulatory climate, and the thought leadership that drives progress in each of these industries.
Experienced Senior Management Team: We have experienced leadership. Our seven most senior executives collectively have over 155 years of management experience in the health care and waste management industries.
Ability to Integrate Acquisitions: Since 1993 we have completed 435 acquisitions in the United States and internationally and have demonstrated a consistent ability to integrate our acquisitions into our operations successfully.
Volume-based Leverage for Disposal, Treatment or Recycling: As the leading service provider for regulated medical waste, hazardous waste, and secure information destruction, we can leverage large volumes of wastes, recyclables, and paper to obtain better pricing on final treatment, disposal and/or recycling.
Secure Management of Information for Destruction: With the acquisition of Shred-it, Stericycle is now the global leader in secure information destruction. Our process for managing information for destruction meet or exceed the NAID AAA Certification and support our customers’ requirements in complying with GLBA, FACTA, and HIPAA in the U.S. and other data security regulations abroad.
Regulated Waste and Secure Information Destruction Operations
Collection and Transportation
Logistics is a key element of our business, especially in regard to managing regulated waste and secure information destruction. Efficiency of collection and transportation is a critical element of our operations because it represents the largest component of our operating costs.
For medical waste, hazardous waste, pharmaceutical waste, or secure information for destruction, the collection process begins at the customer location with segregation. To assure regulatory compliance, we will not accept regulated waste from customers unless it complies with our waste acceptance protocols and is properly stored or packaged in containers that we have either supplied or approved.
Our fleet of transportation vehicles then collects containers at the customer location. The majority of collected waste is then transported directly to one of our processing facilities or to one of our transfer stations for further transport to a processing facility. Our use of transfer stations in a "hub and spoke" configuration improves the efficiency of our collection and transportation operations by expanding the geographic area that a particular processing facility can serve thereby increasing utilization of the facility by increasing the volume of waste that it processes.
Processing and Disposal of Regulated Medical Waste
Stericycle was founded on the belief that there was a need for safe, secure and environmentally responsible management of regulated medical waste. From our beginning, we have encouraged the use of non-incineration treatment technologies. While we recognize that some state regulations currently mandate that some types of regulated waste must be incinerated, we also know from years of experience working with our customers that there are ways to reduce the amount of



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regulated waste that is ultimately incinerated. The most effective strategy that we have seen involves comprehensive education of our customers in waste minimization and segregation.
Upon arrival at a processing facility, containers or boxes of regulated waste undergo a quality control process to verify that they do not contain any unacceptable substances. Any container or box that is discovered to contain unacceptable waste goes through a corrective action process which could include redirecting the waste, returning the waste to the customer, and/or notifying the appropriate regulatory authorities. From there, regulated medical waste is processed using one of several treatments or processing technologies, predominantly at one of our wholly-owned facilities.
Autoclaving: Autoclaving treats regulated waste with steam at high temperature and pressure to kill pathogens.
Incineration: Incineration burns regulated waste at elevated temperatures and reduces it to ash. Incineration reduces the volume of waste, and it is the recommended treatment and disposal option for some types of regulated waste such as anatomical waste or residues from chemotherapy procedures and non-hazardous pharmaceutical waste. Air emissions from incinerators can contain certain byproducts that are subject to federal, state, and in some cases, local regulation. In some circumstances, the ash byproduct of incineration may be regulated.
Upon completion of the particular process, the resulting waste or incinerator ash is transported for disposal in a landfill owned by unaffiliated third parties.
Processing and Disposal of Hazardous Wastes
Our technicians receive hazardous wastes either as expired goods requiring deconstruction or as defined hazardous wastes. Expired goods are deconstructed to recover metals and plastics for recycling thereby minimizing the total volume of waste disposed of as hazardous waste. Materials that are predefined as hazardous upon collection are bulked together or consolidated at treatment storage and disposal facilities for more efficient transport to final disposal or processing. Whenever possible, we seek sustainability solutions for managing materials including alternative uses, recovery processes, recycling options, fuel blending, or energy recovery. When sustainability options do not exist, these wastes are sent to third parties for incineration, landfill and water treatment.
Destruction and Recycling of Secure Information
If not sorted on site in a proprietary Shred-it information destruction truck, documents are sent to a shredding facility for secure destruction. Documents are cross-cut shredded and then baled to be sold as office paper (SOP) for recycling.
Communication Solutions and Expert Solutions Business Overview
Stericycle’s Communication Solutions provide a broad range of services to help our customers keep in touch with their patients and clients. These services include daytime and after hours answering, live voice scheduling, online self-scheduling, automated notifications, appointment follow-up, and on-hold messaging services. On a daily basis, we execute more than 350,000 automated communications and our agents conduct more than 100,000 live conversations on behalf of our customers. Providing these solutions requires sophisticated information management systems to redirect calls, store and quickly retrieve live voice protocols, or send automated communications as well as provide easily accessible reporting and activity details to our customers. To that end, we have developed a proprietary communications platform which manages call flows, messaging, and data tracking. This system is being launched during 2016 to connect our multiple call center locations onto one master information management system.



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Beyond the information management system infrastructure, call center staffing and education levels are critical to business success. We leverage sophisticated workflow analysis and staffing tools to ensure redundancies are in place in order to handle call volumes quickly and consistently across our multiple call centers during peak volumes. Maintaining consistent and quality responses to our customers’ clients requires an educated staff of call center experts. We rely on a multi-level certification program that ensures our experts are appropriately suited to manage the dispatch methodology required for the specific call type. Training, retraining, and quality monitoring systems are critical to meeting the communication needs of our customers.
Stericycle Expert Solutions acts as a business partner to automotive, food/beverage, medical device, pharmaceutical, and consumer goods manufacturers as well as retailers to guide them through a critical recall, retrieval, return, or audit processes. Our comprehensive suite of highly focused services provides global and local expertise before, during, and after a recall threat. Our services include:
Preparation and consulting
Notification services
Customer response
Product retrievals
Product processing, remedy and response
Compliance and regulatory reporting
Stericycle entered the recall and returns business in 2006 as a service expansion that leveraged our expertise in communication, logistics, regulatory management and data tracking. Since that time, we’ve become an industry leader in outsourced recall management. Our expertise stemming from handling more than 4,000 recalls has established Stericycle as a foremost thought leader on recalls handling. This expertise includes a deep understanding of the regulatory climate surrounding consumer and healthcare products, including those established by the Food and Drug Administration, the Consumer Product Safety Commission, the National Highway Traffic Safety Administration, and others.
Competition
The industries and markets in which we operate are highly competitive, and barriers to entry are low. Our competitors consist of many different types of service providers, including national, regional and local companies. In the regulated waste and secure information destruction industries, another major source of competition is on-site treatment. For regulated medical waste, some large-quantity generators, particularly hospitals may choose an onsite autoclave or other treatment process. For secure information destruction, many businesses may choose to use small, on-site shredders for their documents. Similarly, customers could handle recalls or communication solutions internally.
In addition, we face potential competition from businesses that are attempting to commercialize a wide range of technologies that directly or indirectly reduce the need for regulated medical waste, hazardous waste or secure information destruction services.
Governmental Regulation
The regulated medical waste, hazardous waste, and secure information destruction industries are subject to numerous regulations. In many countries there are multiple regulatory agencies at the local and national level that affect our services. This statutory and regulatory framework imposes



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a variety of compliance requirements, including requirements to obtain and maintain government permits. We maintain numerous governmental permits, registrations, and licenses to conduct our business in the jurisdictions in which we operate. Our permits vary by jurisdiction based upon our activities within that jurisdiction and on the applicable laws and regulations of that jurisdiction. These permits grant us the authority, among other things:
to construct and operate collection, transfer and processing facilities;
to transport regulated waste within and between relevant jurisdictions; and
to handle particular regulated substances.
Our permits must be periodically renewed and are subject to modification or revocation by the issuing authority. Periodic renewals are subject to public participation and can lead to additional regulatory oversight. We are also subject to regulations that govern the definition, generation, segregation, handling, packaging, transportation, treatment, storage and disposal of regulated waste. In addition, we are subject to extensive regulations to ensure public and employee health and safety.
U.S. Federal and Foreign Regulation
We are subject to substantial regulations enacted and enforced by the U.S. government and by the governments of the foreign jurisdictions in which we conduct regulated waste and secure information destruction operations. The specific statutory and regulatory requirements we must comply with vary from jurisdiction to jurisdiction. The laws governing our domestic and international operations generally consist of statutes, legislation and regulations concerning environmental protection, employee health and welfare, transportation, the use of the mail, and proper handling and management of regulated waste streams, controlled substances and personal and confidential information.
Environmental Protection
Our business is subject to extensive and evolving environmental regulations in all of the geographies in which we operate. Generally, the environmental laws we are subject to regulate the handling, transporting, and disposing of hazardous and non-hazardous waste, the release or threatened release of hazardous substances into the environment, the discharge of pollutants into streams, rivers, groundwater and other surface waters, and the emission of pollutants into the air. The principal environmental laws that govern our operations in the U.S. are state environmental regulatory agencies as they provide the specific legislative and or regulatory frameworks which require the management and treatment of regulated medical waste. Additionally, the Resource Conservation and Recovery Act of 1976 ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), and the Clean Air Act of 1970 are the federal regulations that affect management of certain aspects of regulated medical waste and all RCRA hazardous wastes. CERCLA and state laws similar to it may impose strict, joint and severe liabilities on the current and former owners and operators of facilities from which release of hazardous substances has occurred and on the generators and transporters of the hazardous substances that come to be located at these facilities. The ten incinerators at seven facilities we currently operate in the U.S. must comply with the emissions standards imposed by the applicable states permitting authorities pursuant to regulations promulgated under the Clean Air Act as well as state and/or municipal waste permit requirements.
Examples of environmental laws applicable to our international operations include the Waste Framework Directive, Environmental Liabilities Directive, Integrated Pollution Prevention and



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Control Directive, and Waste Incineration Directive in the European Union ("EU"), the Waste Management Act in Ireland, Ley 154 (Residuos Patogenicos) in Argentina, Lei 12.305/2010 (Lei Ordinária) Institui A Política Nacional De Resíduos Sólidos in Brazil, and the Canadian Environmental Protection Act and related regulations in Canada.
Employee Health and Welfare
We are also subject to numerous regulations promulgated to protect and promote worker health and welfare through the implementation and enforcement of standards designed to prevent illness, injury and death in the workplace. The primary federal laws relating to employee health and welfare applicable to our business in the U.S. is the Occupational Safety and Health Act of 1970 ("OSHA"), which establishes specific employer responsibilities including engineering controls, administrative controls, training, policies and programs complying with the regulations and ultimately recordkeeping and reporting, all in an effort to ensure a safe workplace. Various OSHA standards apply to almost all aspects of our operations and govern such matters as exposure to bloodborne pathogens, hazard communication, personal protective equipment, etc.
Employee health and welfare laws governing our business in foreign jurisdictions include examples such as the Workplace Health and Safety Directive and the Directive concerning ionizing radiation in the EU, and various provisions of the Canada Labour Code and related regulations in Canada.
Transportation
Various laws regulating the transportation of waste and other potentially hazardous materials also apply to the services we provide. In the U.S., the Department of Transportation ("DOT") has promulgated regulations which deal with two different aspects of transportation: hazardous materials transport and safety in transportation. First, the Pipeline Hazardous Materials Safety Administration ("PHMSA") requires specific packaging and labeling of regulated hazardous materials and wastes to ensure public safety. For regulated medical waste PHMSA incorporates the OSHA bloodborne pathogens standard and requires containers that meet certain specifications including but not limited to: proper markings (biohazard symbol, UN-ID, etc.), sufficient strength and rigidity, leak-proof and puncture resistance. Other hazardous materials such as expired pharmaceuticals, waste chemicals, damaged retail products which are hazardous wastes are also subject to DOT PHMSA regulations. We identify pharmaceutical products by their National Drug Code number and classify them according to the Environmental Protection Agency ("EPA") classification criteria and identify the proper handling, transportation and disposal requirements. Second, the Federal Motor Carrier Safety Administration ("FMCSA") regulates safety of drivers and vehicles which requires us to ensure driver and vehicle fitness through training, medical surveillance and inspection. These federal requirements plus additional state requirements are closely monitored internally and due to our fleet size we are regularly subject to road side inspections. These inspections have a cumulative effect on our compliance history and require us to remain in good standing so as not to jeopardize our permits.
Examples of transportation laws we must comply with internationally include the Directive on the Inland Transportation of Dangerous Goods in the EU and the Transport of Dangerous Goods Act and related regulations in Canada.
Document Management
Numerous laws and regulations require proper protection of confidential customer information by business parties that have access to such information. In the U.S., the most commonly cited



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regulations include FACTA Final Disposal Rule, the FACTA Red Flag Rule, the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules, and the Gramm-Leach-Bliley Act.
For the transportation of secure information for destruction, we are regulated by the U.S. Department of Transportation as a commercial motor carrier. The processes for the destruction of secure information destruction processes are not regulated by any government agency. However, the National Association for Information Destruction ("NAID") maintains a certification to ensure that destruction processes support the needs of organizations to meet laws and regulations relating to the protection of confidential information. We currently hold the NAID AAA Certification. Further, Payment Card Industry ("PCI") Security Standards Council has developed Data Security Standards which are imposed upon merchants utilizing credit cards and require destruction of documents and media in accordance with their standards.
Use of the Mail
United States Postal Service ("USPS") has its own set of specific regulations defined in Publication 52 which governs the use of the postal system for mailing of hazardous, restricted and perishable materials. More specifically, mailback management offerings for sharps, medical waste, and pharmaceutical wastes, require us to obtain and maintain authorization permits from the USPS. We have obtained permits from the USPS to conduct our "mail-back" programs which provide a convenient service for customers who need such a service with approved containers for "sharps" (needles, knives, broken glass and the like) or other regulated wastes to be sent directly to a treatment facility.
Controlled Substances
In the U.S. our service offerings for the recall, return and destruction of controlled substance pharmaceuticals are subject to laws and regulations under the Drug Enforcement Administration ("DEA"). These regulations apply to both the closed loop management of controlled substances from other DEA registrants as well as the return of unused controlled substances from consumers. These regulations require facilities to obtain a registration from the DEA and meet certain criteria in order to collect, process, and dispose of controlled substances. The DEA has very strict requirements for the management of employees, the type of security within facilities, recordkeeping, and the reporting of all controlled substances managed at the facility. Much like permitting, the registration must be updated regularly and subjects us to inspection and enforcement by DEA agents.
U.S. and Foreign Local Regulation
We conduct business in all 50 states and Puerto Rico. Because the federal EPA did not promulgate regulations for regulated medical waste at a national level, each state has its own regulations related to the handling, treatment and storage of regulated medical waste. Many states have followed requirements similar to the Medical Waste Tracking Act of 1988 or have placed medical waste regulations under solid waste regulations. Hazardous waste in the U.S. is regulated under the Resource Recovery and Conservation Act. In addition, certain states may have their own regulations for handling, treatment and storage of hazardous wastes. Regulated Garbage (sometimes referred to as APHIS waste) is another area of regulatory requirements we are subject to pursuant to regulations promulgated by the United States Department of Agriculture ("USDA") and Customers and Border Patrol. The USDA typically inspects our facilities receiving such APHIS waste on a quarterly basis.



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In each state where we operate a processing facility or a transfer station, we are required to comply with varying state and local laws and regulations which may also require a specific operating plan. In addition, many local governments have ordinances and regulations, such as zoning or wastewater regulations that affect our operations. Similarly, our international operations are subject to regulations enacted and enforced at the provincial, municipal, and local levels of government in addition to the national regulations with which we must comply.
Patents and Proprietary Rights
With the acquisition of Shred-it, we hold patents in the U.S. for a two-staged shredder with patents pending in Canada and Europe. We also hold patents in the U.S., Canada, and Europe for Securshield, propriety locks for shredding containers.
We own federal registrations for a number of trademarks/servicemarks including Stericycle®, Steri-Safe®, Stericycle ExpertRECALL®, Sustainable Solutions®, Bio Systems®, Shred-it®, Securit®, Community Shred-it®, Making Sure it’s Secure®, and our company logo service mark consisting of a nine-circle design. We also hold international registrations for Stericycle, the nine-circle design used in our logo, and the Shred-it name and design.
Potential Liability and Insurance
The regulated waste industry involves potentially significant risks of statutory, contractual, tort and common law liability claims. Potential liability claims could involve, for example:
cleanup costs;
personal injury;
damage to the environment;
employee matters;
property damage; or
alleged negligence or professional errors or omissions in the planning or performance of work.
We could also be subject to fines or penalties in connection with violations of regulatory requirements.
We carry $75 million in general liability insurance (including umbrella coverage), and under separate policies, $25 million in aggregate of pollution legal liability insurance and contractor’s operations and professional services environmental insurance ($10 million per incident and $15 million excess per incident under each respective policy). We carry comprehensive policies that include: privacy liability, security liability, event management, cyber-liability and miscellaneous professional services errors and omissions coverages with the total of $15 million in coverage ($5 million primary with $10 million excess). We consider this insurance sufficient to meet regulatory and customer requirements and to protect our employees, assets and operations.



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Executive Officers of the Registrant
The following table contains certain information regarding our seven current executive officers:
Name
Position
Age

Mark C. Miller
Executive Chairman
60

Charles A. Alutto
President and Chief Executive Officer
50

Brent Arnold
Executive Vice President and Chief Operating Officer
47

Daniel V. Ginnetti
Executive Vice President and Chief Financial Officer
47

Michael J. Collins
Executive Vice President and President, Recall and Returns Management Services
59

John P. Schetz
Executive Vice President and General Counsel
39

Brenda Frank
Executive Vice President and Chief People Officer
46

Mark Miller has served as our Executive Chairman since January 2013 and director as of May 1992. He became our Chief Executive Officer in May 1992 and Chairman of the Board of Directors in August 2008. From May 1989 until joining us, Mr. Miller served as vice president for the Pacific, Asia and Africa in the international division of Abbott Laboratories, a diversified health care company, which he joined in 1976 and where he held a number of management and marketing positions. Mr. Miller serves as a director of Accelerate Diagnostics, Inc., a developer of automated diagnostics systems, and formerly served as a director of Ventana Medical Systems, Inc., a developer and supplier of automated diagnostic systems. He received a B.S. degree in computer science from Purdue University, where he graduated Phi Beta Kappa. Mr. Miller was selected by Morningstar, Inc. as its "2009 CEO of the Year."
Charlie Alutto has served as President and Chief Executive Officer since January 2013 and as a Director since November 2012. He joined us in May 1997 following our acquisition of the company where he was then employed. He became an executive officer in February 2011 and served as President, Stericycle USA. He previously held various management positions with us, including vice president and managing director of SRCL Europe and corporate vice president of our large quantity generator business unit. Mr. Alutto received a B.S. degree in finance from Providence College and a M.B.A. degree in finance from St. John’s University.
Brent Arnold was named as Chief Operating Officer effective January 1, 2015. He served as Executive Vice President and President, Stericycle USA/Canada since April 2014. He joined Stericycle in April 2005 and has worked in various leadership positions including Senior Vice President of Operations, Senior Vice President of Sales & Marketing for the US and Canada and Corporate Vice President of our large and small quantity business units. He has more than 24 years of experience primarily focused in the healthcare industry. Prior to joining Stericycle, he held various leadership roles at Baxter International Inc. and Cardinal Health, Inc. Mr. Arnold received a B.S. degree in marketing from Indiana University.
Daniel Ginnetti was named as Chief Financial Officer effective August 1, 2014. He joined Stericycle as Area Vice President of Finance in 2003. In 2004 he was promoted to Area Vice President for Stericycle’s Western, and later, Midwestern business units. Following that, he was promoted to Senior Vice President of Operations for the United States and Canada. He returned to financial management in 2013 becoming Vice President of Corporate Finance and then CFO in August 2014. Prior to joining Stericycle, Mr. Ginnetti held various finance and accounting positions with The Ralph M. Parsons Company, a worldwide engineering firm, and Ryan Herco Products



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Corp., a national industrial plastics distributor. Mr. Ginnetti has a B.S. degree in Business Economics from the University of California, Santa Barbara.
Michael Collins joined Stericycle as President, Recall and Returns Management Services in June 2006. Prior to joining Stericycle, he was Medical Products Group of Abbott Laboratories. He joined Abbott in 1982 as a sales representative and later served in various management positions, including Divisional Vice President, U.S. Sales; Divisional Vice President, U.S. Marketing, Divisional Vice President and General Manager, MediSense and Corporate Vice President Abbott Diagnostics Divisions. Mr. Collins was a commissioned officer for the U.S. Marine Corps. He holds a B.S degree from the University of New Haven and a M.B.A. degree from National University, San Diego.
John Schetz has served as Executive Vice President and General Counsel since April 2015. Mr. Schetz previously served as Vice President and Senior Counsel from January 2013. He joined us in June 2009 as Senior Counsel, Mergers and Acquisitions. Prior to joining Stericycle, Mr. Schetz was a partner at McDermott Will & Emery LLP in Chicago. Mr. Schetz received a B.A. degree from the University of Michigan and a J.D. degree from the University of Michigan Law School.
Brenda Frank has served as Executive Vice President and Chief People Officer since January 2016. Brenda joined Stericycle with our acquisition of Shred-it in October 2015 where she spent six years as General Counsel and Executive Vice President of Human Resources and Franchise Relations. Brenda has spent the last 20 years focusing on people, labor and employment, holding senior human resources and legal roles at global services companies such as ITOCHU INTERNATIONAL and Pitney Bowes. Brenda started her career as a labor and employment attorney and litigator at Wilson Sonsini Goodrich & Rosati and Proskauer Rose. Brenda received her B.S. in Accounting from S.U.N.Y Albany and her J.D. from New York University Law School.
Website Access
We maintain an Internet website, www.stericycle.com, providing a variety of information about us and the services we provide. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K that we file with the Securities and Exchange Commission are available, as soon as practicable after filing, at the Investors page on our website, or by a direct link to our filings on the SEC’s free website, www.sec.gov.
Item 1A. Risk Factors
We are subject to extensive governmental regulation, which is frequently difficult, expensive and time-consuming to comply.
The regulated waste management and secure information destruction industries are subject to extensive federal, state and local laws and regulations relating to the collection, transportation, packaging, labeling, handling, documentation, reporting, treatment and disposal of regulated waste and the proper handling and protection of personal and confidential information. Our business requires us to obtain many permits, authorizations, approvals, certificates, and other types of governmental permission from and to comply with various regulations in every jurisdiction in which we operate. Federal, state and local regulations change often, and new regulations are frequently adopted. Changes in the regulations could require us to obtain new permits or to change the way in which we operate our business. We might be unable to obtain the new permits that we require, and the cost of compliance with new or changed regulations could be significant.
Many of the permits that we require, especially those to build and operate processing plants and transfer facilities, are difficult and time-consuming to obtain. They may also contain conditions



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or restrictions that limit our ability to operate efficiently, and they may not be issued as quickly as we need them (or at all). If we cannot obtain the permits that we need when we need them, or if they contain unfavorable conditions, it could substantially impair our operations and reduce our revenues and/or profitability.
The level of governmental enforcement of environmental regulations has an uncertain effect on our business and could reduce the demand for our services.
We believe that strict enforcement of laws and regulations relating to regulated waste collection and treatment and the proper handling and protection of personal and confidential information by governmental authorities can have a positive effect on our business. These laws and regulations increase the demand for our services. Relaxation of enforcement or other changes in governmental regulation of regulated waste and personal and confidential information could increase the number of competitors we face or reduce the need for our services.
The amount of our indebtedness could adversely affect our business.
As of December 31, 2015, we had a total of $3.2 billion of outstanding indebtedness, including long-term debt and short-term debt. We also have the ability to incur a substantial amount of additional indebtedness, including up to an additional $685.8 million under our revolving credit facility.
Our annual cash obligations to service our indebtedness are approximately $375 million. In addition, the aggregate amount of dividends payable on our depositary shares is approximately $40.4 million on an annual basis. If we are unable to generate sufficient cash to repay or to refinance our debt as it comes due or to pay dividends on our depositary shares, this would have a material adverse effect on our business and the market price of our common stock and depositary shares. Our leverage could have adverse consequences on our business, including the following:
we may be required to dedicate a substantial portion of our available cash to payments of principal of and interest on our indebtedness;
our ability to access credit markets on terms we deem acceptable may be impaired; and
our leverage may limit our flexibility to adjust to changing market conditions.
Servicing debt and funding other obligations requires a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.
Our ability to make payments on and refinance our indebtedness and to fund our operations and capital expenditures depends on our ability to generate cash flow and secure financing in the future. Our ability to generate future cash flow depends, among other things, upon:
future operating performance;
general economic conditions;
competition; and
legislative and regulatory factors affecting our operations and business.
Some of these factors are beyond our control. There is no assurance that our business will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness or to fund other needs. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our indebtedness on favorable terms, or at all. Any inability to generate



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sufficient cash flow or refinance our indebtedness on favorable terms could have an adverse effect on our financial condition.
Restrictions in our private placement notes, the Term Loan Credit Facility and the Revolving Credit Facility could adversely affect our business, financial condition, results of operations, ability to make distributions and value of our securities.
The terms of our private placement notes require that we comply with certain covenants and will include events of default and other terms similar to those in certain of our existing private placement notes. Each of the Term Loan Credit Facility and Revolving Credit Facility also contains customary affirmative covenants, including, among others, covenants pertaining to the delivery of financial statements; notices of default and certain other material events; payment of obligations; preservation of corporate existence, rights, privileges, permits, licenses, franchises and intellectual property; maintenance of property and insurance and compliance with laws, as well as customary negative covenants for facilities of this type, including, among others, limitations on the incurrence of liens, investments and indebtedness; mergers and certain other fundamental changes; dispositions of assets; restricted payments; changes in our line of business; transactions with affiliates and burdensome agreements. Each facility contains a financial covenant requiring maintenance of a minimum consolidated interest coverage ratio of 3.00 to 1.00 as of the end of any quarter and a financial covenant requiring maintenance of a maximum consolidated leverage ratio of between 3.75 and 4.35 to 1.00, depending on factors determined in accordance with the terms of the applicable facility. These covenants could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise.
Our ability to comply with the covenants and restrictions contained in the private placement notes, the Term Loan Credit Facility and the Revolving Credit Facility may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. A failure to comply with these provisions could result in a default or an event of default. Upon an event of default, unless waived, the lenders could elect to terminate its commitments, cease making further loans, require cash collateralization of letters of credit, cause its loans to become due and payable in full and force us and our subsidiaries into bankruptcy or liquidation. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment.
We will incur significant acquisition-related integration costs in connection with the Shred-it acquisition.
We have developed and are in the process of executing a plan to integrate the operations of Shred-it to achieve anticipates synergies of between $20 million to $30 million in connection with the acquisition by fiscal year 2018. We also expect to incur costs to implement such cost savings measures. We anticipate that we will incur certain non-recurring charges in connection with this integration, including costs and charges associated with integrating operations, processes and systems. We cannot identify the timing, nature and amount of all such charges. The significant acquisition-related integration costs could adversely affect our results of operations in the period in which such charges are recorded or our cash flow in the period in which any related costs are actually paid. Although we believe that the elimination of duplicative costs such as selling, general and administrative expenses, as well as the realization of other efficiencies related to the integration of the businesses such as the optimization of logistics, truck and plant utilization, cross-utilization of fleet, improvements in route density and facility optimization, will offset incremental acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all. We expect it will take approximately two years from the closing of the Shred-it acquisition to implement the



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cost savings measures to achieve our anticipated annual cost savings from synergies. We have identified some, but not all, of the actions necessary to achieve our anticipated cost and operational savings. Accordingly, the cost and operational savings may not be achievable in our anticipated amount or timeframe or at all.
We may not realize the synergies and growth opportunities that are anticipated from the Shred-it acquisition or other acquisitions.
The benefits we expect to achieve as a result of the Shred-it acquisition or other acquisitions that we complete will depend, in part, on our ability to realize targeted synergies and anticipated growth opportunities. Our success in realizing these synergies and growth opportunities, and the timing of this realization, depends on the successful integration of other business and operations with our pre-existing business and operations. Even if we are able to integrate these businesses and operations successfully, this integration may not result in the realization of the full benefits of the synergies and growth opportunities we currently expect within the anticipated time frame or at all. While we anticipate that certain expenses will be incurred, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the Shred-it acquisition or other acquisitions may be offset by unexpected costs incurred or delays in integrating the companies, which could cause our financial estimates to be inaccurate.
If we are unable to acquire regulated waste, secure information destruction and other businesses, our revenue and profit growth may be slowed.
Historically, our growth strategy has been based in part on our ability to acquire and integrate other businesses. We do not know whether in the future we will be able to:
identify suitable businesses to buy;
complete the purchase of those businesses on terms acceptable to us; and
avoid or overcome any concerns expressed by regulators.
We compete with other potential buyers for the acquisition of regulated waste and secure information destruction companies and other businesses. This competition may result in fewer opportunities to purchase companies that are for sale. It may also result in higher purchase prices for the businesses that we want to purchase.
We also do not know whether our growth strategy will continue to be effective. Our business is significantly larger than before, and new acquisitions may not have the incremental benefits that we have obtained in the past.
The implementation of our acquisition strategy could be affected in certain instances by the concerns of federal and state regulators, which could result in our not being able to realize the full synergies or profitability of particular acquisitions.
We may become subject to inquiries and investigations by federal or state antitrust regulators from time to time in the course of completing acquisitions of other regulated waste and secure information destruction businesses. In order to obtain regulatory clearance for a particular acquisition, we could be required to modify certain operating practices of the acquired business or to divest ourselves of one or more assets of the acquired business. Changes in the terms of our acquisitions required by regulators or agreed to by us in order to settle regulatory investigations could impede our acquisition strategy or reduce the anticipated synergies or profitability of our acquisitions. The likelihood and outcome of inquiries and investigations from federal or state regulators in the course of completing acquisitions cannot be predicted.



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Aggressive pricing by existing competitors and the entrance of new competitors could drive down our profits and slow our growth.
The industries in which we participate are very competitive because of low barriers to entry, among other reasons. This competition has required us in the past to reduce our prices, especially to large account customers, and may require us to reduce our prices in the future. Substantial price reductions could significantly reduce our earnings.
We face direct competition from a large number of small, local competitors. Because it requires very little financial investment or technical know-how to compete in the collection and transportation of regulated wastes or the secure destruction of personal and confidential information, there are many regional and local companies in these industries. We face competition from these businesses, and competition from them is likely to exist in new locations to which we may expand in the future. In addition, large national companies with substantial resources operate in the markets we serve. For example, in the United States, Waste Management, Inc., and Clean Harbors, and Iron Mountain all offer competing services.
Our competitors could take actions that would hurt our growth strategy, including the support of regulations that could delay or prevent us from obtaining or keeping permits. They might also give financial support to citizens’ groups that oppose our plans to locate a processing or transfer facility at a particular location.
Risks from our international operations could impair our ability to expand in certain international markets and adversely affect our business, financial condition and results of operations.
We plan to continue to grow both domestically and internationally. We have established operations in the United States and 21 other countries. Foreign operations carry special risks including:
exchange rate fluctuations;
government controls;
import and export license requirements;
political or economic instability;
trade restrictions;
changes in tariffs and taxes;
permitting and regulatory standards;
differences in local laws, regulations, practices, and business customs;
restrictions on repatriating foreign profits back to the United States or movement of funds to other countries;
difficulties in staffing and managing international operations; and
increases and volatility in labor costs.
Any of the foregoing or other factors associated with doing business abroad could adversely affect our business, financial condition and results of operations.
We face risks associated with project work and services that are provided on a non-recurring basis.
While the majority of our business is based on long-term contracts for regularly scheduled service, we do have a portion of revenue which is derived from short-term projects or services that



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we provide on a non-recurring basis. Product recall and retrieval events, one-time purge events for secure information destruction, and certain hazardous waste services that we provide on a project or non-recurring basis are not predictable in terms of frequency, size or duration. Our customers’ need for these services could be influenced by regulatory changes, fluctuations in commodity market performance, natural disasters and acts of God, or other factors beyond our control. Variability in the demand for these services could adversely affect our business, financial condition and results of operations.
Fluctuations in the commodity market related to the demand and price for recycled paper may affect our business, financial condition and results of operations.
We sell nearly all of the shredded paper from our secure information destruction business to paper companies and recycled paper brokers. Sorted office paper is marketed as a commodity and is subject to significant demand and price fluctuations beyond our control. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for pulp and paper products. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of industry capacity. The overall levels of demand for the pulp and paper products, and consequently its sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general macroeconomic conditions in North America and worldwide, as well as the threat of digitization. As a result, the market demand for recycled paper can be volatile due to factors beyond our control. Lack of demand for our shredded paper material could adversely affect our business, financial condition and results of operations.
Our earnings could decline resulting in charges to impair intangible assets, such as goodwill.
As a result of our various acquisitions, our balance sheet at December 31, 2015 contains goodwill of $3.8 billion and other intangible assets, net of accumulated amortization of $1.8 billion. In accordance with the FASB Accounting Standards Codification Topic 350, Intangibles - Goodwill and Other, we evaluate on an ongoing basis whether facts and circumstances indicate any impairment to the value of indefinite-lived intangible assets such as goodwill. As circumstances after an acquisition can change, we may not realize the value of these intangible assets. If we were to determine that a significant impairment has occurred, we would be required to incur non-cash charges for the impaired portion of goodwill or other unamortized intangible assets, which could have a material adverse effect on our results of operations in the period in which the impairment charge occurs.
The loss of our senior executives could affect our ability to manage our business profitably.
We depend on a small number of senior executives. Our future success will depend upon, among other things, our ability to keep these executives and to hire other highly qualified employees at all levels. We compete with other potential employers for employees, and we may not be successful in hiring and keeping the executives and other employees that we need. We do not have written employment agreements with any of our executive officers, and officers and other key employees could leave us with little or no prior notice, either individually or as part of a group. Our loss of, or inability to hire, key employees could impair our ability to manage our business and direct its growth.
We face risks relating to our size and scale.
We have over 800 facilities in 22 countries and more than 25,000 employees worldwide. The sheer size of our operations exposes us to the risk that systems and practices will not be implemented uniformly throughout our Company and that information will not be shared across the locations and countries in a timely and appropriate manner. Any misalignment in strategic initiatives



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and/or difficulties or delays in transmission of information could adversely affect our business, financial condition and results of operations.
The handling and treatment of regulated waste carries with it the risk of personal injury to employees and others.
Our business requires us to handle materials that may be infectious or hazardous to life and property in other ways. While we try to handle such materials with care and in accordance with accepted and safe methods, the possibility of accidents, leaks, spills, and acts of God always exists. Examples of possible exposure to such materials include:
truck accidents;
damaged or leaking containers;
improper storage of regulated waste by customers;
improper placement by customers of materials into the waste stream that we are not authorized or able to process, such as certain body parts and tissues; or
malfunctioning treatment plant equipment.
Human beings, animals or property could be injured, sickened or damaged by exposure to regulated waste. This in turn could result in lawsuits in which we are found liable for such injuries, and substantial damages could be awarded against us.
While we carry liability insurance intended to cover these contingencies, particular instances may occur that are not insured against or that are inadequately insured against. An uninsured or underinsured loss could be substantial and could impair our profitability and reduce our liquidity.
The handling of regulated waste exposes us to the risk of environmental liabilities, which may not be covered by insurance.
As a company engaged in regulated waste management, we face risks of liability for environmental contamination. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") and similar state laws impose strict liability on current or former owners and operators of facilities that release hazardous substances into the environment as well as on the businesses that generate those substances and the businesses that transport them to the facilities. Responsible parties may be liable for substantial investigation and clean-up costs even if they operated their businesses properly and complied with applicable federal and state laws and regulations. Liability under CERCLA may be joint and several, which means that if we were found to be a business with responsibility for a particular CERCLA site, we could be required to pay the entire cost of the investigation and clean-up even though we were not the party responsible for the release of the hazardous substance and even though other companies might also be liable.
Our pollution liability insurance excludes liabilities under CERCLA. Thus, if we were to incur liability under CERCLA and if we could not identify other parties responsible under the law whom we are able to compel to contribute to our expenses, the cost to us could be substantial and could impair our profitability and reduce our liquidity. Our customer service agreements make clear that the customer is responsible for making sure that only appropriate materials are disposed of. If there were a claim against us that a customer might be legally liable for, we might not be successful in recovering our damages from the customer.
The handling of secure information for destruction exposes us to potential data security risks that could result in monetary damages against us and could otherwise damage our reputation, and adversely affect our business, financial condition and results of operations.



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The protection of customer, employee, and company data is critical to our business. The regulatory environment in the United States and Canada surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Certain legislation, including the Fair and Accurate Credit Transactions Act, the Health Insurance Portability and Accountability Act, and the Economic Espionage Act in the United States and the Personal Information Protection and Electronic Documents Act in Canada, require documents to be securely destroyed to avoid identity theft and inadvertent leakage of confidential and sensitive information. A significant breach of customer, employee, or company data could attract a substantial amount of media attention, damage our customer relationships and reputation and result in lost sales, fines, or lawsuits. In addition, an increasing number of countries have introduced and/or increased enforcement of comprehensive privacy laws, or are expected to do so. The continued emphasis on information security as well as increasing concerns about government surveillance may lead customers to request us to take additional measures to enhance security and/or assume higher liability under our contracts. As a result of legislative initiatives and customer demands, we may have to modify our operations to further improve data security. Any such modifications may result in increased expenses and operational complexity, and adversely affect our business, financial condition and results of operations.
Attacks on our information technology systems could damage our reputation, harm our businesses and adversely affect our results of operations.
Our reputation for the secure handling of customer and other sensitive information is critical to the success of our business. We rely heavily on various proprietary and third party information systems. Although we have implemented safeguards and taken steps to prevent potential security breaches, our information technology and network infrastructure may be vulnerable to attacks by hackers or breaches due to employee error, malfeasance, cyber-attacks, computer viruses, power outages, natural disasters, acts of terrorism or other disruptions. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to prevent these techniques or to implement adequate preventative measures. A successful breach of the security of our information systems could lead to theft or misuse of our customers’ proprietary or confidential information and result in third party claims against us and reputational harm, all of which could adversely affect our businesses, financial condition or results of operations.
Our management depends on relevant and reliable information for decision making purposes, including key performance indicators and financial reporting. A lack of relevant and reliable information could preclude us from optimizing our overall performance. Any significant loss of data, failure to maintain reliable data, disruptions affecting our information systems, or delays or difficulties in transitioning to new systems could adversely affect our business, financial condition and results of operations. In addition, our ability to continue to operate our businesses without significant interruption in the event of a disaster or other disruption depends in part on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans. If our information systems fail and our redundant systems or disaster recovery plans are not adequate to address such failures, or if our business interruption insurance does not sufficiently compensate us for any losses that we may incur, our revenues and profits could be reduced and the reputation of our brands and our business could be adversely affected. In addition, remediation of such problems could result in significant, unplanned capital investments.
Item 1B. Unresolved Staff Comments
None.



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Item 2. Properties
We lease office space for our corporate offices in Lake Forest, Illinois. Domestically, we own or lease 114 processing facilities, which are primarily autoclaves for medical waste and shredders for secure information destruction. All of our processing facilities also serve as collection sites. We own or lease 218 additional transfer sites, 21 additional sales/administrative sites, and 83 other service facilities. Internationally, we own or lease 139 processing facilities, the majority of which use autoclave waste processing technology. We also own or lease 140 additional transfer sites, 62 additional sales/administrative sites, 54 other service facilities, and 3 landfills. We believe that these processing and other facilities are adequate for our present and anticipated future needs.
Item 3. Legal Proceedings
See Note 19 - Legal Proceedings in the Notes to the Consolidated Financial Statements (Item 8 of Part II).
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market Price for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The Company’s common stock is listed on the NASDAQ Global Select Market under the ticker symbol "SRCL." There were 103 shareholders of record as of February 19, 2016.
We did not declare or pay any cash dividends during 2015 on our common stock. We currently expect that we will retain future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
The holders of our Series A Mandatory Convertible Preferred Stock (the "Series A Preferred Stock") are entitled to receive quarterly dividends, which accrue at an annual rate of 5.25%. Dividends of $10.1 million were paid on December 15, 2015 to holders of our Series A Preferred Stock.
See Item 7 of Part II, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
The following table provides the high and low sales prices of our Common Stock for each calendar quarter during our two most recent fiscal years:
Quarter
 
High
 
Low
First quarter 2015
 
$
140.86

 
$
130.10

Second quarter 2015
 
141.93

 
132.76

Third quarter 2015
 
148.26

 
132.33

Fourth quarter 2015
 
150.84

 
113.64

 
 
 
 
 
First quarter 2014
 
$
120.09

 
$
111.96

Second quarter 2014
 
118.90

 
109.33

Third quarter 2014
 
119.98

 
115.31

Fourth quarter 2014
 
133.43

 
116.15




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Under resolutions that our Board of Directors adopted, we have been authorized to purchase a cumulative total of 24,621,640 shares of our common stock on the open market. As of December 31, 2015, we had purchased a cumulative total of 20,890,819 shares.
The following table provides information about our purchases of shares of our common stock during the year ended December 31, 2015:
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share (or Unit)
 
Number of Shares or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 - January 31, 2015
 

 
$

 

 
4,735,185

February 1 - February 28, 2015
 

 

 

 
4,735,185

March 1 - March 31, 2015
 
100,713

 
136.74

 
100,713

 
4,634,472

April 1 - April 30, 2015
 
322,800

 
135.09

 
322,800

 
4,311,672

May 1 - May 31, 2015
 
131,367

 
133.26

 
131,367

 
4,180,305

June 1 - June 30, 2015
 
120,640

 
134.93

 
120,640

 
4,059,665

July 1 – July 31, 2015
 

 

 

 
4,059,665

August 1 – August 31, 2015
 
68,729

 
133.37

 
68,729

 
3,990,936

September 1 – September 30, 2015
 
19,647

 
137.52

 
19,647

 
3,971,289

October 1 - October 31, 2015
 
45,000

 
117.61

 
45,000

 
3,926,289

November 1 – November 30, 2015
 
76,907

 
121.96

 
76,907

 
3,849,382

December 1 – December 31, 2015
 
118,561

 
117.86

 
118,561

 
3,730,821

Total
 
1,004,364

 
$
131.10

 
1,004,364

 
3,730,821

As of December 31, 2015, there were 9,000 share repurchases that had not yet settled. An amount of $1.1 million related to these unsettled repurchases was recognized as part of other accrued liabilities on our Consolidated Balance Sheet at December 31, 2015.
Equity Compensation Plans
The following table summarizes information as of December 31, 2015 relating to our equity compensation plans pursuant to which stock option grants, restricted stock awards or other rights to acquire shares of our common stock may be made or issued:
Equity Compensation Plan Information
Plan Category
 
Number of Securities to be Issued Upon Exercise of Outstanding Options
(a)
 
Weighted-Average Exercise Price of Outstanding Options
(b)
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
(c)
Equity compensation plans approved by our security holders (1)
 
5,398,111

 
$
92.11

 
3,317,483

Equity compensation plans not approved by our security holders (2)
 
8,143

 
$
45.59

 





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(1)
These plans consist of our 2014 Incentive Compensation Plan, 2011 Incentive Compensation Plan, 2008 Incentive Stock Plan, 2005 Incentive Stock Plan, and the Employee Stock Purchase Plan.
(2)
The only plan in this category is our 2000 Non-statutory Stock Option Plan.
In 2000, our Board of Directors approved the 2000 Non-statutory Stock Option Plan (the "2000 Plan"), which authorized the granting of non-statutory stock options for 7,000,000 shares of our common stock to employees (but not to officers or directors). See Note 6 - Stock Based Compensation in the Notes to the Consolidated Financial Statements (Item 8 of Part II) for a description of this plan.
Performance Graph
The following graph compares the cumulative total return (i.e., share price appreciation plus dividends) on our common stock over the five-year period ending December 31, 2015 with the cumulative total return for the same period on the NASDAQ National Market Composite Index, the S&P 500 Index, the Russell 3000 Index, and the Dow Jones US Waste & Disposal index. The graph assumes that $100 was invested on December 31, 2010 in our common stock and in the shares represented by each of the four indices, and that all dividends were reinvested.
The stock price performance of our common stock reflected in the following graph is not necessarily indicative of future performance.




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Item 6. Selected Financial Data
In thousands, except per share data
 
 
 
Years Ended December 31,
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
Statement of Income Data
(1
)
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
$
2,985,908

 
$
2,555,601

 
$
2,142,807

 
$
1,913,149

 
$
1,676,048

Depreciation and amortization
 
 
127,412

 
104,616

 
88,408

 
76,283

 
66,046

Income from operations
 
 
487,612

 
556,336

 
535,619

 
468,836

 
424,311

Mandatory convertible preferred stock dividend
 
 
10,106

 

 

 

 

Net income attributable to Stericycle, Inc. common shareholders
(2
)
 
256,940

 
326,456

 
311,372

 
267,996

 
234,751

Earnings per common share attributable to Stericycle, Inc. common shareholders - diluted
(2
)
 
$
2.98

 
$
3.79

 
$
3.56

 
$
3.08

 
$
2.69

Statements of Cash Flow Data
 
 
 
 
 
 
 
 
 
 
 
Net cash flow provided by/(used for):
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
 
$
390,328

 
$
448,500

 
$
405,307

 
$
390,784

 
$
306,104

Investing activities
 
 
(2,533,904
)
 
(462,774
)
 
(234,972
)
 
(288,928
)
 
(504,197
)
Financing activities
 
 
2,181,208

 
(30,049
)
 
(136,019
)
 
(91,526
)
 
137,872

Balance Sheet Data
(1
)
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
 
 
$
55,703

 
$
22,616

 
$
67,580

 
$
35,163

 
$
22,927

Total assets
 
 
7,077,450

 
4,373,302

 
3,887,973

 
3,550,074

 
3,177,090

Long-term debt, net of current portion
 
 
3,052,639

 
1,527,246

 
1,280,663

 
1,268,303

 
1,284,113

Stericycle, Inc. equity
 
 
$
2,729,891

 
$
1,895,012

 
$
1,750,461

 
$
1,541,793

 
$
1,198,166


(1)
See Note 3 - Acquisitions in the Notes to the Consolidated Financial Statements (Item 8 of Part II) for information concerning our acquisitions during the three years ended December 31, 2015, 2014 and 2013.
(2)
See Note 8 - Earnings per Common Share ("EPS") in the Notes to the Consolidated Financial Statements (Item 8 of Part II) for information concerning the computation of diluted EPS.
In 2015, net income included the following after-tax effects: $29.0 million of expenses related to acquisitions, $33.3 million of expenses related to the integration of our acquisitions, $15.9 million of restructuring and plant conversion expenses, $39.8 million of expense related to litigation expenses, $1.8 million of expense related to the write-down of intangible assets, and a $0.6 million gain related to the change in fair value of contingent consideration. The net effect of these adjusting items negatively impacted diluted EPS by $1.38.
In 2014, net income included the following after-tax effects: $12.5 million of expenses related to acquisitions, $16.8 million of expenses related to the integration of our acquisitions, $10.1 million of plant conversion and restructuring expenses, $4.0 million of expense related to litigation expenses, and a $1.5 million gain related to the change in fair value of contingent consideration. The net effect of these adjusting items negatively impacted diluted EPS by $0.48.
In 2013, net income included the following after-tax effects: $10.2 million of expenses related to acquisitions, $4.3 million of expenses related to the integration of our acquisitions, $1.8 million of restructuring and plant closure costs, $1.4 million of expense related to litigation settlement, $1.3 million of expense related to the write-down of intangible assets, and a $2.2 million gain related to the change in fair value of contingent consideration. The net effect of these adjusting items negatively impacted diluted EPS by $0.19.



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In 2012, net income included the following after-tax effects: $7.8 million of expenses related to acquisitions, $3.1 million of expenses related to the integration of our acquisitions, $3.3 million of restructuring and plant closure costs, $3.7 million related to litigation settlement expense, $3.7 million loss related to the U.K. divestiture, and $0.8 million loss related to the change in fair value of contingent consideration. The net effect of these adjusting items negatively impacted diluted EPS by $0.26.
In 2011, net income included the following after-tax effects: $15.6 million of expenses related to acquisitions, $3.2 million of restructuring and plant closure costs, $0.7 million related to litigation settlement expense, $0.8 million related to accelerated interest expense due to early term loan repayment, $1.3 million benefit due to a net release of prior years’ tax reserves, and $4.7 million gain related to the change in fair value of contingent consideration. The net effect of these adjusting items negatively impacted diluted EPS by $0.16.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes in Item 8 of this Report.
Introduction
We are a business-to-business services provider with a focus on regulated and compliance solutions for healthcare, retail, and commercial businesses. This includes the collection and processing of regulated and specialized waste for disposal and the collection of personal and confidential information for secure destruction, plus 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 1,000,000 customers throughout the United States, Argentina, Austria, Australia, Belgium, Brazil, Canada, Chile, France, Germany, Ireland, Japan, Luxembourg, Mexico, the Netherlands, Portugal, Romania, Republic of Korea, Singapore, South Africa, Spain, and the United Kingdom.
Our solutions for regulated or specialty waste streams include: medical waste disposal, pharmaceutical waste disposal, hazardous waste management, sustainability solutions for expired or unused inventory, and secure information destruction of documents and e-media. Our compliance solutions include: training and consulting through our Steri-Safe® and Clinical Services programs, inbound/outbound communications, data reporting, and other regulatory compliance services. Our regulated recall and returns management solutions consist of communication, logistics, and data management services to support the recall, withdrawal, or return of expired or recalled products.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We believe that of our significant accounting policies (see Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements, Item 8 of Part II), the following policies may involve a higher degree of judgment on our part and greater complexity of reporting:
Revenue Recognition: Revenues for our regulated medical waste management services, other than our compliances services, and secure information destruction services are recognized



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at the time of waste collection. Our compliance service revenues are recognized evenly over the contractual service period. Payments received in advance are deferred and recognized as services are provided. Revenues from hazardous waste services are recorded at the time waste is received at our processing facility. Revenues from regulated recall and returns management services and communication solutions are recorded at the time services are performed. Revenues from product sales are recognized at the time the goods are shipped to the ordering customer. Charges related to sales taxes and international value added tax ("VAT") and other similar pass through taxes are not included as revenue.
Acquisition Accounting: Acquisition accounting requires us to recognize assets and liabilities at their fair value. The process of determining fair value requires time to complete therefore we will make some estimates at the time of acquisition. These estimates are primarily for amortizable intangibles and, if appropriate, an associated deferred tax liability. These estimates are based on historical experience and allow us to recognize amortization expense until the final valuation is complete.
Goodwill and Other Identifiable Intangible Assets: Goodwill associated with the excess of the purchase price over the fair value of the net assets acquired is not amortized, but is subject to an annual impairment test. In accordance with applicable accounting standards, we evaluate on at least an annual basis, using the fair value of reporting units, whether goodwill is impaired. If we were to determine that a significant impairment has occurred, we would be required to incur non-cash charges of the impaired portion of goodwill that could have a material adverse effect on our results of operations in the period in which the impairment charge occurs. 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 calculate the fair value of our reporting units using an income method and validate those results using a market approach. Both the income and market approaches indicated no impairment to goodwill in any of our three reporting units. See Note 11 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements, Item 8 of Part II for more information about goodwill and the annual impairment test.
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 derive the present value of 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 100% of book value by a substantial amount. Our International Regulated and Compliance Services reporting units' fair value exceeded book value by approximately 88%.
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



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changes in the fair value of contingent consideration, restructuring and plant conversion expense, and litigation settlements, for the prior twelve months. The calculated market capitalization is divided by the adjusted 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' adjusted EBITDA of that reporting unit. The fair value is then compared to each 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.
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.
We have determined that our permits have indefinite lives due to our ability to renew these permits with minimal additional cost, and therefore they are not amortized. We also have a tradename that we have determined has an indefinite life. Our indefinite lived intangible assets are tested for impairment annually at December 31, or more frequently, if circumstances indicate that they may be impaired. We use a qualitative assessment, as provided for under the FASB Accounting Standards Codification Topic 350, Intangibles - Goodwill and Other, to determine if is more likely than not that the asset is impaired. If there is an indication of impairment, we test the recoverability of the asset using either a discounted income or cost savings model to calculate fair value. The calculated fair value is based upon, among other things, certain assumptions about expected future operating performance, internal and external processing costs, and an appropriate discount rate determined by management. Our estimates of discounted income may differ from actual income due to, among other things, inaccuracies in economic estimates. See Note 11 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements, Item 8 of Part II for more information about indefinite lived intangible assets.
In 2015, we impaired $4.2 million of intangibles due to rationalizing certain of our domestic and international operations. These expenses are reflected as part of "Selling, general and administrative expenses" on our 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 these assets. This accounting treatment can lead to the recognition of losses when a company disposes of acquired assets.
Our finite-lived intangible assets are amortized over their useful lives using straight-line method. We have determined that our customer relationships have useful lives from 10 to 40 years based upon the type of customer. We have covenants not-to-compete intangibles with useful lives from 5 to 14 years. We have tradename intangibles with useful lives from 15 to 40 years. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may be less than its undiscounted estimated future cash flows. See Note 11 - Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements, Item 8 of Part II for more information about our intangible assets other than goodwill.
Valuation of Intangibles: Valuation of our intangible assets other than goodwill is derived using a discounted income and cost savings approach. Financial information such as revenues, costs, assets and liabilities, and other assumptions related to the intangible asset are input into a standard valuation model to determine a stream of income attributable to that intangible. The income stream is then discounted to the present to arrive at a valuation. We perform annual impairment tests on our indefinite lived intangible assets.



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Our customer relationship valuation model, using the multi-period excess earnings method, assumes straight-line revenue loss. The calculation of determining a revenue loss rate starts with a base-line revenue point and then tracks revenue by customer, assuming no further revenue growth, to a point of zero revenues. A calculation of base-line revenue to zero revenue determines the useful life of customer relationships. Determining an accurate consumption of benefits from acquired customer relationships cannot be reliably determined because the services we provide to acquired customers changes from the base-line revenues over an extended period of time due to factors such as volume increase, price increase, and complementary service offerings. Therefore we amortize our finite-lived intangible assets using the straight-line method consistent with our valuation model.
Income Taxes: We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities and for operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods. Undistributed earnings of foreign subsidiaries are considered permanently reinvested, and therefore no deferred taxes are recorded thereon. To provide for uncertain tax positions, we maintain a reserve for tax benefits assumed that do not meet a threshold of "more likely than not" to be sustained. Management believes the amount provided for uncertain tax positions is adequate.
Accounts Receivable: Accounts receivable consist of amounts due to us from our normal business activities and are carried at their estimated collectible amounts. Our accounts receivable balance includes amounts related to VAT and similar international pass-through taxes. We do not require collateral as part of our standard trade credit policy. Accounts receivable balances are determined to be past due when the amount is overdue based on the contractual terms with the customer. We maintain an allowance for doubtful accounts to reflect the expected uncollectability of accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are written off against the allowance for doubtful accounts when we have determined that the receivable will not be collected and/or when the account has been referred to a third party collection agency. No single customer accounts for more than approximately 1.5% of our accounts receivable.
Stock-Based Compensation: We issue stock options and restricted stock units ("RSU") to employees and directors as an integral part of our compensation programs. Stock options cost is measured at the grant date using the Black-Scholes model and is recognized as expense over the vesting period. Determining the fair value of stock options at the grant date requires estimating the expected volatility of our stock, the expected term of the award, and the risk-free rate. Our stock’s expected volatility and the expected term of the awards are based upon historical experience. The risk-free interest rate assumption is based upon the U.S. Treasury yield rates of a comparable period. The fair value of RSU is based on the closing price of the Company's common stock on the date of grant and is amortized to expense over the service period. If factors change and we



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employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past.
Litigation: We operate in a highly regulated industry and 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. Liabilities from litigation are accrued when known, probable and estimable.
Share Repurchases: The purchase price over par value for share repurchases is allocated to retained earnings.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Highlights for the year ended December 31, 2015 included the following:
revenues grew to $2.99 billion, a 16.8% increase over $2.56 billion in 2014;
gross margins decreased to 42.4% in 2015 from 42.8% in 2014;
operating income decreased 12.4% to $487.6 million from $556.3 million in 2014;
we incurred $174.4 million in pre-tax expenses related to acquisitions, integration expenses related to acquisitions, restructuring and plant conversion expenses, litigation expenses, impairment of intangible assets, and a favorable change in the fair value of contingent consideration;
cash flow from operations was $390.3 million;
the acquisition of Shred-it International ULC ("Shred-it"), the largest acquisition in Stericycle’s history, was completed on October 1, 2015. The aggregate purchase price was $2.3 billion in cash;
borrowed $1.30 billion under the Term Loan Credit Facility on October 1, 2015 to fund a portion of the purchase price paid for Shred-it;
net proceeds of $746.9 million from a registered public offering of Series A Mandatory Convertible Preferred Stock completed on September 15, 2015 to fund a portion of the purchase price paid for Shred-it;
Dividends of $10.1 million were paid on December 15, 2015 to holders of our Series A Preferred Stock.
In analyzing our Company’s performance, it is necessary to understand that our various regulated services share a common infrastructure and customer base. We market our regulated and compliance services by offering various pricing options to meet our customers’ preferences, and customers move between these different billing paradigms. For example, our customers may contract with us for "Medical Waste Disposal" services that are billed based on the weight of waste collected, processed and disposed during a particular period, and in a subsequent period, the same customer could move to our standard service ("Steri-Safe OSHA Compliance Program"), which packages the same regulated medical waste services with some training and education services for a contracted subscription fee. Another example is a customer that purchases our "Medical Waste Disposal" and "Sharps Disposal Management" services which provides the customer with the same regulated services under a different pricing and billing arrangement. We do not track the movement of customers between the various types of regulated services we offer. Although we can identify directional trends in our services, because the regulated services are similar in nature and there are inherent inaccuracies in disaggregation, we believe that aggregating these revenues communicates the appropriate metric. We analyze our revenue growth by identifying changes related to organic growth, acquired growth, and changes due to currency exchange fluctuations.



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The following summarizes the Company’s operations:
In thousands, except per share data
 
Years Ended December 31,
 
2015
 
2014
 
$
 
%
 
$
 
%
Revenues
$
2,985,908

 
100.0

 
$
2,555,601

 
100.0

Cost of revenues
1,656,573

 
55.5

 
1,401,797

 
54.9

Depreciation - cost of revenues
61,642

 
2.1

 
56,478

 
2.2

Plant conversion expenses
1,508

 
0.1

 
2,915

 
0.1

Total cost of revenues
1,719,723

 
57.6

 
1,461,190

 
57.2

Gross profit
1,266,185

 
42.4

 
1,094,411

 
42.8

Selling, general and administrative expenses (exclusive of adjusting items shown below)
539,944

 
18.1

 
433,865

 
17.0

Acquisition expenses
39,138

 
1.3

 
13,333

 
0.5

Integration expenses
51,689

 
1.7

 
25,968

 
1.0

Change in fair value of contingent consideration
(640
)
 

 
(1,452
)
 
(0.1
)
Impairment of intangible assets
1,781

 
0.1

 

 
0.0

Restructuring and plant conversion expenses
21,240

 
0.7

 
11,649

 
0.5

Litigation expenses
59,651

 
2.0

 
6,574

 
0.3

Total SG&A expenses (exclusive of depreciation and amortization shown below)
712,803

 
23.9

 
489,937

 
19.2

Depreciation
20,272

 
0.7

 
15,446

 
0.6

Amortization
45,498

 
1.5

 
32,692

 
1.3

Income from operations
487,612

 
16.3

 
556,336

 
21.8

Net interest expense
77,274

 
2.6

 
66,022

 
2.6

Other (income)/expense, net
(569
)
 

 
2,746

 
0.1

Income tax expense
142,894

 
4.8

 
159,422

 
6.2

Net income
268,013

 
9.0

 
328,146

 
12.8

Less: net income attributable to noncontrolling interests
967

 

 
1,690

 
0.1

Net income attributable to Stericycle, Inc.
267,046

 
8.9

 
326,456

 
12.8

Less: mandatory convertible preferred stock dividend
10,106

 
0.3

 

 

Net income attributable to Stericycle, Inc. common shareholders
$
256,940

 
8.6

 
$
326,456

 
12.8

Earnings per share- diluted
$
2.98

 
 
 
$
3.79

 
 
Revenues: Our revenues increased $430.3 million, or 16.8%, to $2.99 billion from $2.56 billion in 2014. Domestic revenues increased $376.6 million, or 21.1%, to $2.17 billion from $1.79 billion in 2014. Organic revenue growth for domestic small account customers increased by $69.4 million, or approximately 6.8%, driven by an increase in Steri-Safe® revenues and regulated waste services for retailers. Organic revenue from domestic large account customers increased by $22.5 million, or approximately 3.6%, as we increased the total number of accounts and expanded our reusable sharps services and pharmaceutical waste disposal programs. Organic revenues for both small account customers and large account customers were negatively impacted by lower fuel surcharges as well as lower hazardous waste volume from our industrial customers. Organic revenues for recall and returns management services increased by $7.0 million in 2015. Organic revenues exclude revenue growth attributed to businesses acquired within the preceding twelve months. Revenues from domestic acquisitions closed within the preceding twelve months contributed $277.7 million to the increase in revenues in 2015.



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International revenues increased $53.7 million, or 7.0%, to $820.9 million from $767.2 million in 2014. Organic growth, currency rate fluctuations and acquisitions impact the comparison of 2015 and 2014. Organic growth in the international segment contributed $63.1 million in revenues, or approximately 8.4%. Organic growth excludes the effect of foreign exchange and acquisitions less than one year old. The effect of foreign exchange rates unfavorably impacted international revenues in 2015 by $110.2 million as foreign currencies declined against the U.S. dollar. Revenues from international acquisitions closed within the preceding twelve months contributed $100.8 million to the increase in revenues in 2015.
Cost of Revenues: Our 2015 cost of revenues increased $258.5 million, or 17.7%, to $1.72 billion from $1.46 billion in 2014. As a percent of revenues, our costs of revenues increased 0.4% which resulted in consolidated gross profit of 42.4% in 2015 as compared to 42.8% in 2014. We incurred $1.5 million and $2.9 million in plant conversion expenses during the years ended December 31, 2015 and 2014, respectively.
In general, international gross profits are lower than domestic gross profits because the international operations have fewer small account customers, which tend to provide higher gross profits. Historically, the international operations have had most of their revenues from large account customers, such as hospitals. As the international revenues increase, consolidated gross profits receive downward pressure due to this "business mix" shift, which may be offset by additional international small account market penetration, integration savings, and domestic business expansion.
Our domestic cost of revenues increased $220.8 million, or 23.5%, to $1.16 billion from $940.2 million in 2014. Domestic gross profit as a percent of revenues decreased to 46.4% in 2015 from 47.4% in 2014 primarily due to higher operating costs related to the current and more stringent compliance requirements for medical waste incinerators under Title V. Additionally, less than anticipated revenues from our industrial customers, which have a higher fixed cost structure, further unfavorably impacted gross margins.
Our international cost of revenues increased $37.7 million, or 7.2%, to $558.7 million from $521.0 million in 2014. International gross profit as a percent of revenues decreased to 31.9% in 2015 from 32.1% in 2014 due to a foreign exchange impact on a profitability mix as we experienced unfavorable foreign exchange impact primarily in areas with higher profitability. Similarly, we experienced higher compensation costs in areas of high inflation.
Selling, General and Administrative Expenses Exclusive of Adjusting Items, Depreciation and Amortization ("SG&A"): Our SG&A expenses increased $106.1 million, or 24.4%, to $539.9 million from $433.9 million in 2014 to support our increase in revenues and the inclusion of our 2015 acquisitions, mainly Shred-it. As a percent of revenues, these costs increased to 18.1% in 2015 as compared to 17.0% in 2014.
Domestically, SG&A expenses increased $75.0 million, or 25.1%, to $374.2 million from $299.2 million in 2014 primarily related to increased healthcare benefit costs, higher professional fees, and increased investments for growth and the inclusion of the Shred-it acquisition in 2015. As a percent of revenues, SG&A increased to 17.3% in 2015 as compared to 16.7% in 2014. As a percent of revenues, amortization expense of acquired intangible assets increased to 1.3% in 2015 as compared to 1.0% in 2014.
Internationally, SG&A expenses increased $31.0 million, or 23.0%, to $165.7 million from $134.7 million in 2014. As a percent of revenues, SG&A increased to 20.2% in 2015 as compared



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to 17.6% in 2014 primarily related to compensation expenses in support of new business growth opportunities and the inclusion of the Shred-it acquisition in 2015. As a percent of revenues, amortization expense of acquired intangible assets increased to 2.0% in 2015 as compared to 1.9% in 2014.
Income from Operations: Income from operations decreased by $68.7 million, or 12.4%, to $487.6 million from $556.3 million in 2014. Comparison of income from operations between 2015 and 2014 was affected by Adjusting Items as described below.
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, impairment of intangible assets, and recognition of lease expense for properties no longer used but for which we have a contractual obligation.
During the year ended December 31, 2015, we recognized $59.7 million in litigation expenses (mostly due to the $28.5 million settlement of the Qui Tam Action and the $28.2 million settlement of the Junk Fax Lawsuit described in Note 19 - Legal Proceedings in the Notes to the Consolidated Financial Statements, Item 8 of Part II), $39.1 million in acquisition expenses, most of which relates to our recent acquisition of Shred-it, $51.7 million of expenses related to the integration of our acquisitions, most of which relates to our recent acquisition of Shred-it, $19.1 million in restructuring expenses (see Note 17 - Restructuring Charges in the Notes to the Consolidated Financial Statements, Item 8 of Part II), $3.6 million in plant conversion expenses, $1.8 million of impairment charges on intangible assets, and a $0.6 million favorable change in the fair value of contingent consideration.
During the year ended December 31, 2014, we recognized $13.3 million in acquisition expenses, $26.0 million of expenses related to the integration of our acquisitions, $14.6 million in plant conversion and restructuring expenses related to the impairment of permit intangibles in support of plant rationalization and new plant start up costs, $6.6 million in litigation expenses, partially offset by a $1.5 million gain related to a change in fair value of contingent consideration.
Domestically, our income from operations decreased $41.0 million, or 8.5%, to $441.8 million from $482.8 million in 2014.
Internationally, our income from operations decreased $27.7 million, or 37.7%, to $45.8 million from $73.5 million in 2014.
Net Interest Expense: Net interest expense increased to $77.3 million during 2015 from $66.0 million in 2014, due to increased borrowings to fund the acquisition of Shred-it in the fourth quarter of 2015, as well as higher interest costs in Latin America.
Income Tax Expense: Income tax expense decreased to $142.9 million during 2015 from $159.4 million during 2014. The reported tax rates for the years 2015 and 2014 were 34.8% and 32.7%, respectively. The increase in the current year tax rate, when compared to the prior year, is primarily related to an increase in the State tax rate, partially offset by a benefit from the recognition of tax deductible goodwill associated with entity mergers in Spain, Brazil, and Chile in the prior year.



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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Highlights for the year ended December 31, 2014 included the following:
revenues grew to $2.56 billion, a 19.3% increase over $2.14 billion in 2013;
gross margins decreased to 42.8% in 2014 from 45.0% in 2013;
operating income was $556.3 million, a 3.9% increase from $535.6 million for 2013;
we incurred $59.0 million in pre-tax expenses related to acquisitions, integration expenses related to acquisitions, plant conversion and restructuring expenses, litigation expenses, partially offset by the gain on changes in the fair value of contingent consideration;
cash flow from operations was $448.5 million.
The following summarizes the Company’s operations:
In thousands, except per share data
 
Years Ended December 31,
 
2014
 
2013
 
$
 
%
 
$
 
%
Revenues
$
2,555,601

 
100.0

 
$
2,142,807

 
100.0

Cost of revenues
1,401,797

 
54.9

 
1,125,627

 
52.5

Depreciation - cost of revenues
56,478

 
2.2

 
50,003

 
2.3

Plant conversion expenses
2,915

 
0.1

 
423

 

Litigation settlement

 

 
2,120

 
0.1

Total cost of revenues
1,461,190

 
57.2

 
1,178,173

 
55.0

Gross profit
1,094,411

 
42.8

 
964,634

 
45.0

Selling, general and administrative expenses (exclusive of adjusting items shown below)
433,865

 
17.0

 
372,091

 
17.4

Acquisition expenses
13,333

 
0.5

 
10,275

 
0.5

Integration expenses
25,968

 
1.0

 
6,521

 
0.3

Change in fair value of contingent consideration
(1,452
)
 
(0.1
)
 
(2,278
)
 
(0.1
)
Plant conversion and restructuring expenses
11,649

 
0.5

 
2,480

 
0.1

Impairment of intangible assets

 

 
1,405

 
0.1

Litigation expenses
6,574

 
0.3

 
116

 
0.0

Total SG&A expenses (exclusive of depreciation and amortization shown below)
489,937

 
19.2

 
390,610

 
18.2

Depreciation
15,446

 
0.6

 
11,338

 
0.5

Amortization
32,692

 
1.3

 
27,067

 
1.3

Income from operations
556,336

 
21.8

 
535,619

 
25.0

Net interest expense
66,022

 
2.6

 
54,949

 
2.6

Other expense, net
2,746

 
0.1

 
2,924

 
0.1

Income tax expense
159,422

 
6.2

 
164,662

 
7.7

Net income
328,146

 
12.8

 
313,084

 
14.6

Less: net income attributable to noncontrolling interests
1,690

 
0.1

 
1,712

 
0.1

Net income attributable to Stericycle, Inc.
$
326,456

 
12.8

 
$
311,372

 
14.5

Earnings per share- diluted
$
3.79

 
 
 
$
3.56

 
 
Revenues: Our revenues increased $412.8 million, or 19.3%, to $2.56 billion from $2.14 billion in 2013. Domestic revenues increased $290.2 million, or 19.3%, to $1.80 billion from $1.51 billion in 2013. Organic revenue growth for domestic small account customers increased by $71.9 million, or approximately 8%, driven by higher revenues from Steri-Safe® revenues and regulated waste services for retailers. Organic revenue from domestic large account customers increased



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by $35.3 million, or approximately 7%, as we increased the total number of accounts and expanded our reusable sharps services and pharmaceutical waste disposal programs as well as strong performance in our specialty waste services. Organic revenues for recall and returns management services decreased by $17.3 million in 2014. Although our recall and returns management services had an overall increase in the number of recall events, there were fewer large scale events. Organic revenues exclude revenue growth attributed to businesses acquired within the preceding twelve months. Revenues from domestic acquisitions closed within the preceding twelve months contributed $200.3 million to the increase in revenues in 2014.
International revenues increased $122.6 million, or 19.3%, in 2014, to $758.8 million from $636.2 million in 2013. Organic growth, currency rate fluctuations and acquisitions impact the comparison of 2014 and 2013. Organic growth in the international segment contributed $54.9 million in revenues, or approximately 9%. Organic growth excludes the effect of foreign exchange and acquisitions less than one year old. The effect of foreign exchange rates unfavorably impacted international revenues in 2014 by $33.6 million as foreign currencies declined against the U.S. dollar. Revenues from international acquisitions closed within the preceding twelve months contributed $101.3 million to the increase in revenues in 2014.
Cost of Revenues: Our 2014 cost of revenues increased $283.0 million, or 24.0%, to $1,461.2 million from $1,178.2 million in 2013. During the years ended December 31, 2014 and 2013, we recognized $2.9 million and $0.4 million in plant conversion expenses, respectively. During the year ended December 31, 2013, we recognized $2.1 million in litigation settlement costs.
Our domestic cost of revenues increased $186.7 million, or 24.5%, to $947.3 million in 2014 compared to $760.6 million in 2013 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth.
Our international cost of revenues increased $96.3 million, or 23.1%, to $513.9 million in 2014 from $417.6 million in 2013 as a result of costs related to proportional increase in revenues from acquisitions and internal growth.
Our consolidated gross profit as a percent of revenues decreased to 42.8% in 2014 from 45.0% in 2013. As identified above, plant conversion expenses negatively impacted our consolidated gross profit. In general, international gross profits are lower than domestic gross profits because the international operations have fewer small account customers, which tend to provide higher gross profits. Historically, the international operations have had most of their revenues from large account customers, such as hospitals. As the international revenues increase, consolidated gross profits receive downward pressure due to this "business mix" shift, which may be offset by additional international small account market penetration, integration savings, and domestic business expansion.
Domestic gross profit as a percent of revenues decreased to 47.3% in 2014 from 49.5% in 2013 primarily due to the inclusion of the PSC Environmental acquisition results in 2014 and less contribution from high margin recall events. International gross profit as a percent of revenues decreased to 32.3% in 2014 from 34.4% in 2013 due to service mix shift on new revenues.
SG&A: Our SG&A expenses increased $61.8 million, or 16.6%, in 2014 to $433.9 million from $372.1 million in 2013 primarily as investment spending supported the increase in revenues and acquired SG&A expenses. As a percent of revenues, these costs decreased to 17.0% in 2014 from 17.4% in 2013.



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Domestically, 2014 SG&A increased $35.9 million, or 13.6%, to $300.5 million from $264.6 million in 2013. As a percent of revenues, SG&A decreased to 16.7% in 2014 compared to 17.6% in 2013. As a percent of revenues, amortization expense of acquired intangible assets did not change and remained at 1.0%.
Internationally, 2014 SG&A increased $25.9 million, or 24.1%, to $133.4 million from $107.5 million in 2013. As a percent of revenues, SG&A was at 17.6% in 2014 compared to 16.9% in 2013. As a percent of revenues, amortization expense of acquired intangible assets did not change and remained at 1.9%.
Income from Operations: Income from operations increased by $20.7 million, or 3.9%, to $556.3 million in 2014 from $535.6 million in 2013. Comparison of income from operations between 2014 and 2013 was affected by Adjusting Items as described below.
During the year ended December 31, 2014, we recognized $13.3 million in acquisition expenses, $26.0 million of expenses related to the integration of our acquisitions, $14.6 million in plant conversion and restructuring expenses related to the impairment of permit intangibles in support of plant rationalization and new plant start up costs, $6.6 million in litigation expenses, partially offset by a $1.5 million gain related to a change in fair value of contingent consideration.
During the year ended December 31, 2013, we recognized $10.3 million in acquisition expenses, $6.5 million of expenses related to the integration of our acquisitions, $2.5 million of restructuring and plant closure expenses, $1.4 million impairment of intangible assets, $0.1 million in litigation expenses, partially offset by a $2.3 million gain related to a change in fair value of contingent consideration.
Domestically, our income from operations increased $34.0 million, or 7.6%, to $482.8 million in 2014 from $448.8 million in 2013. Internationally, our income from operations decreased $13.3 million, or 15.3%, to $73.5 million in 2014 from $86.8 million in 2013. The decrease in international income from operations is primarily related to an increase in integration expenses related to acquisitions and restructuring expenses related to the impairment of permit intangibles in support of plant rationalization.
Net Interest Expense: Net interest expense increased to $66.0 million during 2014 from $54.9 million in 2013, due to increased borrowings and higher interest costs in Latin America as well as increased borrowings on the senior credit facility to fund the acquisition of PSC Environmental on April 22, 2014.
Income Tax Expense: Income tax expense decreased to $159.4 million during 2014 from $164.7 million during 2013. The reported tax rates for the years 2014 and 2013 were 32.7% and 34.5%, respectively. The decrease in the current year tax rate is primarily related to a benefit from the recognition of tax deductible goodwill associated with legal entity mergers in Brazil as well as a reduction of some international statutory tax rates.




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Liquidity and Capital Resources:
The following senior credit facility, term loan, and the private placement notes require us to comply with various financial, reporting and other covenants and restrictions, including a restriction on dividend payments:
$1.20 billion senior credit facility weighted average rate 1.54%, due in 2019
$1.25 billion term loan weighted average rate 1.71%, due in 2020
$100 million private placement notes 5.64%, due in 2015
$175 million private placement notes 3.89%, due in 2017
$125 million private placement notes 2.68%, due in 2019
$225 million private placement notes 4.47%, due in 2020
$150 million private placement notes 2.89%, due in 2021
$125 million private placement notes 3.26%, due in 2022
$200 million private placement notes 2.72%, due in 2022
$100 million private placement notes 2.79%, due in 2023
$150 million private placement notes 3.18%, due in 2023
The financial debt covenants are the same for the senior credit facility, term loan, and the private placement notes. At December 31, 2015, we were in compliance with all of our financial debt covenants. Our senior credit facility, term loan, and the private placement notes rank pari passu to each other and all other unsecured debt obligations.
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.
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 credit facility ("Term Loan Credit Facility") under which the Company may obtain loans up to an aggregate amount of $1.5 billion. Borrowings under the Term Loan Credit 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 Applicable Rate depends 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. We used the proceeds from the term loan to fund a portion of the purchase price paid for the Shred-it acquisition (see Note 3 - Acquisitions in the Notes to the Consolidated Financial Statements for more information).
On October 1, 2015, 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 in arrears semi-annually on the first (1st)



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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 unsecured senior notes to fund a portion of the purchase price paid for the Shred-it acquisition (see Note 3 - Acquisitions in the Notes to the Consolidated Financial Statements for more information).
At December 31, 2015, we had $353.8 million of borrowings outstanding under our $1.20 billion senior unsecured credit facility, which includes foreign currency borrowings of $101.8 million. We also had $160.4 million committed to outstanding letters of credit under this facility. The unused portion of the revolving credit facility at December 31, 2015 was $685.8 million. At December 31, 2015, our interest rates on borrowings under our revolving credit facility were as follows:

A fee of 0.1% on our revolving credit facility
For borrowings less than one month, the higher of the following
Federal funds rate plus 0.5%
Euro Currency rate plus 0.9% or the prime rate
For borrowings greater than one month: LIBOR plus 0.9%
The weighted average rate of interest on the unsecured revolving credit facility was 1.54% per annum, which includes the 0.1% facility fee at December 31, 2015.
As of December 31, 2015, we had $1.25 billion outstanding under our $1.50 billion term loan credit facility, weighted average rate of interest on the unsecured term loan facility was 1.71% per annum.
As of December 31, 2015, we had outstanding $175.0 million of seven-year 3.89% unsecured senior notes and $225.0 million of 10-year 4.47% unsecured senior notes issued to 39 institutional purchasers in a private placement completed in October 2010. Interest is payable in arrears semi-annually on April 15 and October 15 beginning on April 15, 2011, and principal is payable at the maturity of the notes, October 15, 2017 in the case of the seven-year notes and October 15, 2020 in the case of the 10-year notes.
As of December 31, 2015, we had outstanding $125.0 million of seven-year 2.68% unsecured senior notes and $125.0 million of 10-year 3.26% unsecured senior notes issued to 46 institutional purchasers in a private placement completed in December 2012. Interest is payable in arrears semi-annually on June 12 and December 12 beginning on June 12, 2013, and principal is payable at the maturity of the notes, December 12, 2019 in the case of the seven-year notes and December 12, 2022 in the case of the 10-year notes.
As December 31, 2015, we had outstanding $200.0 million of seven-year 2.72% unsecured senior notes and $100.0 million of eight-year 2.79% unsecured senior notes issued to several institutional purchasers in a private placement completed in July 2015. Interest is payable in arrears semi-annually on January 1 and July 1 beginning on January 1, 2016, and principal is payable at the maturity of the notes, July 1, 2022 in the case of the seven-year notes and July 1, 2023 in the case of the eight-year notes.
As December 31, 2015, we had outstanding $150.0 million of six-year 2.89% unsecured senior notes and $150.0 million of eight-year 3.18% unsecured senior notes issued to several institutional purchasers in a private placement completed in October 2015. Interest is payable in arrears semi-annually on April 1 and October 1 beginning on April 1, 2016, and principal is payable at the maturity of the notes, October 1, 2021 in the case of the six-year notes and October 1, 2023 in the case of the eight-year notes.



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As of December 31, 2015, we had $239.7 million in promissory notes issued in connection with acquisitions during 2008 through 2015, $105.5 million in foreign subsidiary bank debt outstanding, and $15.0 million in capital lease obligations.
Working Capital: At December 31, 2015, our working capital increased $83.5 million to $174.5 million compared to $91.0 million at December 31, 2014.
Current assets increased by $209.9 million, of which $162.6 million were acquired from Shred-it (see Note 3 - Acquisitions in the Notes to the Consolidated Financial Statements for more information). Net accounts receivable excluding acquisitions increased by $13.2 million. Days sales outstanding ("DSO") was calculated at 64 days at December 31, 2015 and 63 days at December 31, 2014.
Current liabilities increased by $126.4 million in 2015, of which $72.2 million were acquired from Shred-it. At December 31, 2015, current portion of the new term loan facility was $50 million.
Net Cash Provided or Used: Net cash provided by operating activities decreased $58.2 million, or 13.0%, to $390.3 million during 2015 from $448.5 million in 2014. Cash provided by operations as a ratio to net income in 2015 and 2014 was 146% and 137% , respectively.
Net cash used in investing activities during 2015 was $2.53 billion compared to $462.8 million in 2014. We used $2.05 billion more in funds to acquire new businesses in 2015, notably Shred-it in October 2015. Our capital expenditures increased by $28.3 million in 2015 and, as a percent of revenues, were at 3.8% and 3.4% in 2015 and 2014, respectively.
Net cash provided by financing activities was $2.18 billion during 2015 compared to $30.0 million net cash used in 2014. In 2015, we had $500 million net proceeds from private placement notes and $1.25 billion net proceeds from our new term loan, which we used to fund our current year acquisitions. In September 2015, we completed a registered public offering of Series A Mandatory Convertible Preferred Stock for total gross proceeds of $770.0 million, or $746.9 million net of $23.1 million for underwriting discounts, commissions and expenses, see Note 7 - Preferred Stock in the Notes to the Consolidated Financial Statements, Item 8 of Part II. We used the net proceeds from this offering to fund a portion of the purchase price paid for our acquisition of Shred-it. We had share repurchases of $130.6 million in 2015 compared to $194.1 million in 2014, a decrease of $63.5 million.
Contractual Obligations
The following table summarizes our significant contractual obligations and cash commitments at December 31, 2015:
Payments due by period (dollars in thousands)
 
 
 
 
Total
 
2016
 
2017-2018
 
2019-2020
 
2021
and After
Long-term debt
 
(1
)
 
$
3,564,963

 
$
242,714

 
$
703,115

 
$
1,833,787

 
$
785,347

Capital lease obligations
 
(1
)
 
16,229

 
4,622

 
7,405

 
3,783

 
419

Operating leases
 
 
 
399,675

 
104,958

 
160,548

 
87,001

 
47,168

Purchase obligations
 
 
 
40,536

 
22,558

 
10,454

 
7,524

 

Total contractual cash obligations
 
 
 
$
4,021,403

 
$
374,852

 
$
881,522

 
$
1,932,095

 
$
832,934


(1)
The long-term debt, capital leases, and other long-term liabilities items include both the future principal payment amount as well as an aggregate amount calculated for expected future interest payments of $366 million on the long-term debt and $1.2 million on the capital leases.



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Long-term debt that has floating interest rates requires the use of management judgment to estimate the future rates of interest.
Payments for unrecognized tax benefits are excluded from contractual obligations. Based on the contingent and uncertain nature of our liability for unrecognized tax benefits, we are unable to make an estimate of the period of potential settlement, if any, with the applicable taxing authorities.
At December 31, 2015, we had $160.4 million in stand-by letters of credit issued.
We anticipate that our operating cash flow, together with borrowings under our senior unsecured credit facility, will be sufficient to meet our anticipated future operating expenses, capital expenditures and debt service obligations as they become due during the next 12 months and the foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risks arising from changes in interest rates. Our potential additional interest expense over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate on all of our variable rate obligations would be approximately $17.3 million on a pre-tax basis.
We have exposure to commodity pricing for gas and diesel fuel for our trucks and for the purchase of containers and boxes. We do not hedge these items to manage the exposure.
We have exposure to foreign currency fluctuations. We have subsidiaries in twelve foreign countries whose functional currency is the local currency. Our international subsidiaries use local currency denominated lines of credit for their funding needs which is has no exposure to currency fluctuations. We translate results of operations of our international operations using an average exchange rate. Changes in foreign currency exchange rates could unfavorably impact our consolidated results of operations.




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Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company acquired Shred-it International ULC (“Shred-it”) on October 1, 2015. Due to the timing of the acquisition, the Company has excluded the acquired operations of Shred-it from its assessment of the effectiveness of the Company’s internal control over financial reporting. Shred-it represented 32% of the Company’s assets as of December 31, 2015 and 6% of the Company’s revenues for the year ended December 31, 2015.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control-Integrated Framework (the “COSO Framework”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were material weaknesses in internal controls over financial reporting described below.
COSO Component - Risk Assessment
The Company’s risk assessment process did not operate effectively, resulting in a material weakness pertaining to this component of the COSO Framework. Specifically, the Company did not sufficiently identify risks associated with certain routine processes and related information systems, including revenue, and certain non-routine transactions. In addition, the Company did not properly design and implement appropriate process-level internal controls at the Environmental Solutions component of the Domestic Regulated and Compliance Services segment. The Environmental Solutions component primarily consists of the PSC Environmental Services, LLC component acquired on April 22, 2014, which was excluded from management assessment of internal controls over financial reporting as of December 31, 2014. The material weakness relating to the risk assessment component of the internal control framework contributed to the other material weaknesses described below.
COSO Component - Control Activities
Revenue - The design and operating effectiveness of revenue control activities are inadequate to ensure that revenue transactions are properly measured and recorded in the appropriate period.



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Environmental Solutions - The design and operating effectiveness of control activities at the Environmental Solutions component of the Domestic Regulated and Compliance Services segment of the business were inadequate to ensure the component’s financial statements were appropriately stated.
Conclusion
Management concluded that there is a reasonable possibility that a material misstatement could occur in the consolidated financial statements if the control deficiencies were not remediated. Accordingly, management concluded that the matters described above are material weaknesses in the Company’s internal control over financial reporting and that the Company did not maintain effective internal control over financial reporting as of December 31, 2015.  
The Company’s independent registered public accounting firm has issued an opinion on the Company’s internal control over financial reporting. That report appears on page 42.

Stericycle, Inc.
Lake Forest, IL
March 15, 2016



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Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Stericycle, Inc. and Subsidiaries
We have audited Stericycle, Inc. and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Shred-it International ULC (“Shred-it”) which is included in the 2015 consolidated financial statements of the Company and constituted 32% of the Company’s assets as of December 31, 2015 and 6% of the Company’s revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Shred-it.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in controls related to the Company’s revenue process, the Environmental Solutions component of the Domestic Regulated and Compliance Services component of the Domestic Regulated and Compliance Services segment, and in its risk assessment process pertaining to this component of the COSO Framework. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Stericycle, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2015, and our report dated March 15, 2016 expressed an unqualified opinion thereon. The material weaknesses were



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considered in determining the nature, timing and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated March 15, 2016, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Stericycle, Inc. and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.

/s/ Ernst & Young LLP
Chicago, Illinois
March 15, 2016



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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Stericycle, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Stericycle, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stericycle, Inc. and Subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stericycle Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 15, 2016 expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
March 15, 2016




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STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share data
 
December 31,
 
2015
 
2014
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
55,634

 
$
22,236

Short-term investments
69

 
380

Accounts receivable, less allowance for doubtful accounts of $22,329 in 2015 and $19,083 in 2014
614,494

 
465,473

Prepaid expenses
46,740

 
30,632

Other current assets
44,891

 
33,173

Total Current Assets
761,828

 
551,894

Property, Plant and Equipment, less accumulated depreciation of $426,019 in 2015 and $364,124 in 2014
665,602

 
460,408

Goodwill
3,758,177

 
2,418,832

Intangible assets, less accumulated amortization of $151,025 in 2015 and $114,922 in 2014
1,842,561

 
909,645

Other assets
49,282

 
32,523

Total Assets
$
7,077,450

 
$
4,373,302

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Current portion of long-term debt
$
161,409

 
$
131,969

Accounts payable
149,202

 
114,596

Accrued liabilities
197,329

 
131,743

Deferred revenues
16,989

 
21,624

Other current liabilities
62,420

 
60,975

Total Current Liabilities
587,349

 
460,907

Long-term debt, net of current portion
3,052,639

 
1,527,246

Deferred income taxes
608,272

 
403,847

Other liabilities
81,352

 
64,117

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

 

Common stock (par value $0.01 per share, 120,000,000 shares authorized, 84,852,584 issued and outstanding in 2015 and 84,883,517 issued and outstanding in 2014)
849

 
849

Additional paid-in capital
1,143,020

 
289,211

Accumulated other comprehensive loss
(282,631
)
 
(138,419
)
Retained earnings
1,868,645

 
1,743,371

Total Stericycle, Inc.’s Equity
2,729,891

 
1,895,012

Noncontrolling interest
17,947

 
22,173

Total Equity
2,747,838

 
1,917,185

Total Liabilities and Equity
$
7,077,450

 
$
4,373,302




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



45

Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

In thousands, except share and per share data
 
Years Ended December 31,
 
2015
 
2014
 
2013
Revenues
$
2,985,908

 
$
2,555,601

 
$
2,142,807

Costs and Expenses:
 
 
 
 
 
Cost of revenues (exclusive of depreciation shown below)
1,658,081

 
1,404,712

 
1,128,170

Depreciation - cost of revenues
61,642

 
56,478

 
50,003

Selling, general and administrative expenses (exclusive of
depreciation and amortization shown below)
712,803

 
489,937

 
390,610

Depreciation – SG&A
20,272

 
15,446

 
11,338

Amortization
45,498

 
32,692

 
27,067

Total Costs and Expenses
2,498,296

 
1,999,265

 
1,607,188

Income from Operations
487,612

 
556,336

 
535,619

Other Income (Expense):
 
 
 
 
 
Interest income
224

 
120

 
294

Interest expense
(77,498
)
 
(66,142
)
 
(55,243
)
Other income/ (expense), net
569

 
(2,746
)
 
(2,924
)
Total Other Expense
(76,705
)
 
(68,768
)
 
(57,873
)
Income Before Income Taxes
410,907

 
487,568

 
477,746

Income tax expense
142,894

 
159,422

 
164,662

Net Income
268,013

 
328,146

 
313,084

Less: net income attributable to noncontrolling interests
967

 
1,690

 
1,712

Net Income Attributable to Stericycle, Inc.
267,046

 
326,456

 
311,372

Less: mandatory convertible preferred stock dividend
10,106

 

 

Net Income Attributable to Stericycle, Inc. Common Shareholders
$
256,940

 
$
326,456

 
$
311,372

Earnings Per Common Share Attributable to Stericycle, Inc. Common Shareholders:
 
 
 
 
 
Basic
$
3.02

 
$
3.84

 
$
3.62

Diluted
$
2.98

 
$
3.79

 
$
3.56

Weighted Average Number of Common Shares Outstanding:
 
 
 
 
 
Basic
84,944,841

 
84,932,792

 
85,902,550

Diluted
86,162,609

 
86,233,612

 
87,391,988




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



46

Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands
 
Years Ended December 31,
 
2015
 
2014
 
2013
Net Income
$
268,013

 
$
328,146

 
$
313,084

 
 
 
 
 
 
Other Comprehensive Income/ (Loss):
 
 
 
 
 
Foreign currency translation adjustments
(140,648
)
 
(82,871
)
 
(19,160
)
Amortization of cash flow hedge into income, net of tax ($452, $209 and $200) for the years ended December 31, 2015, 2014 and 2013, respectively)
716

 
339

 
314

Change in fair value of cash flow hedge, net of tax ($2,623, $813 and $0 for the years ended December 31, 2015, 2014 and 2013, respectively)
(4,119
)
 
(2,069
)
 

Total Other Comprehensive Loss
(144,051
)
 
(84,601
)
 
(18,846
)
 
 
 
 
 
 
Comprehensive Income
123,962

 
243,545

 
294,238

Less: comprehensive loss/ (income) attributable to noncontrolling interests
1,128

 
(960
)
 
270

Comprehensive Income Attributable to Stericycle, Inc. Common Shareholders
$
122,834

 
$
244,505

 
$
293,968




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



47

Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
 
Years Ended December 31,
 
2015
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
 
 
Net income
$
268,013

 
$
328,146

 
$
313,084

Adjustments to reconcile net income to net cash provided by operating activities:

 
 
 
 
Stock compensation expense
21,750

 
17,773

 
17,457

Excess tax benefit of stock options exercised
(16,897
)
 
(17,906
)
 
(17,153
)
Depreciation
81,914

 
71,924

 
61,341

Amortization
45,498

 
32,692

 
27,067

Deferred income taxes
(10,294
)
 
16,550

 
30,930

Other, net
7,467

 
8,932

 
1,103

Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:


 
 
 
 
Accounts receivable
(55,890
)
 
(34,116
)
 
(54,767
)
Accounts payable
26,366

 
(5,712
)
 
7

Accrued liabilities
26,060

 
21,279

 
4,547

Deferred revenues
(4,615
)
 
1,017

 
(1,319
)
Other assets and liabilities
956

 
7,921

 
23,010

Net cash provided by operating activities
390,328

 
448,500

 
405,307

INVESTING ACTIVITIES:
 
 
 
 
 
Payments for acquisitions, net of cash acquired
(2,419,437
)
 
(374,321
)
 
(161,936
)
Proceeds from/ (purchases of) investments
294

 
(1,957
)
 
73

Capital expenditures
(114,761
)
 
(86,496
)
 
(73,109
)
Net cash used in investing activities
(2,533,904
)
 
(462,774
)
 
(234,972
)
FINANCING ACTIVITIES:
 
 
 
 
 
Repayments of long-term debt and other obligations
(93,172
)
 
(101,231
)
 
(88,507
)
Proceeds from foreign bank debt
53,747

 
205,086

 
218,968

Repayments of foreign bank debt
(87,308
)
 
(193,284
)
 
(201,967
)
Proceeds from term loan
1,550,000

 

 

Repayment of term loan
(300,000
)
 

 

Proceeds from private placement of long-term note
600,000

 

 

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

 

Proceeds from senior credit facility
1,907,402

 
1,413,026

 
1,029,718

Repayments of senior credit facility
(2,004,385
)
 
(1,216,031
)
 
(984,979
)
Payments of capital lease obligations
(3,865
)
 
(5,826
)
 
(4,024
)
Payments of deferred financing costs
(9,903
)
 
(2,280
)
 

Payment of cash flow hedge
(8,833
)
 

 

Purchases and cancellations of treasury stock
(130,576
)
 
(194,066
)
 
(163,700
)
Proceeds from issuance of mandatory convertible preferred stock
746,900

 

 

Dividends paid on mandatory convertible preferred stock
(10,106
)
 

 

Proceeds from issuance of common stock
60,124

 
51,852

 
42,345

Excess tax benefit of stock options exercised
16,897

 
17,906

 
17,153

Payments to noncontrolling interests
(5,714
)
 
(5,201
)
 
(1,026
)
Net cash provided by/ (used in) financing activities
2,181,208

 
(30,049
)
 
(136,019
)
Effect of exchange rate changes on cash and cash equivalents
(4,234
)
 
(608
)
 
(1,809
)
Net increase/ (decrease) in cash and cash equivalents
33,398

 
(44,931
)
 
32,507

Cash and cash equivalents at beginning of period
22,236

 
67,167

 
34,660

Cash and cash equivalents at end of period
$
55,634

 
$
22,236

 
$
67,167

 
 
 
 
 
 
NON-CASH ACTIVITIES:
 
 
 
 
 
Issuances of obligations for acquisitions
$
80,189

 
$
145,938

 
$
100,101

Issuances of obligations for noncontrolling interest

 

 
6,119


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



48

Table of Contents

STERICYCLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended December 31, 2015, 2014 and 2013
In thousands
 
Stericycle, Inc. Equity
 
 
 
 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
Amount
 
Shares
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total Equity
Balance at January 1, 2013

$

 
85,988

$
860

 
$
116,720

 
$
1,463,277

 
$
(39,064
)
 
$
15,530

 
$
1,557,323

Net income
 
 
 
 
 
 
 
 
311,372

 
 
 
1,712

 
313,084

Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
(17,718
)
 
(1,442
)
 
(19,160
)
Change in qualifying cash flow hedge, net of tax
 
 
 
 
 
 
 
 
 
 
314

 
 
 
314

Issuance of common stock for exercise of options and employee stock purchases
 
 
 
973

10

 
47,991

 
 
 
 
 
 
 
48,001

Purchase and cancellation of treasury stock
 
 
 
(1,461
)
(15
)
 


 
(163,685
)
 
 
 
 
 
(163,700
)
Stock compensation expense
 
 
 
 
 
 
17,457

 
 
 
 
 
 
 
17,457

Excess tax benefit of stock options exercised
 
 
 
 
 
 
17,153

 
 
 
 
 
 
 
17,153

Noncontrolling interests attributable to acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
4,211

 
4,211

Reduction to noncontrolling interests due to additional ownership
 
 
 
 
 
 
(4,211
)
 
 
 
 
 
(2,934
)
 
(7,145
)
Balance at December 31, 2013


 
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
 
 
 
 
 
 
 
 
267,046

 
 
 
967

 
268,013

Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
(140,809
)
 
161

 
(140,648
)
Change in qualifying cash flow hedge, net of tax
 
 
 
 
 
 
 
 
 
 
(3,403
)
 
 
 
(3,403
)
Issuance of common stock for exercise of options, restricted stock units and employee stock purchases
 
 
 
973

10

 
68,630

 
 
 
 
 
 
 
68,640

Issuance of mandatory convertible preferred stock
770

8

 
 
 
 
746,892

 
 
 
 
 
 
 
746,900

Purchase and cancellation of treasury stock
 
 
 
(1,004
)
(10
)
 


 
(131,666
)
 
 
 
 
 
(131,676
)
Preferred stock dividend
 
 
 
 
 
 
 
 
(10,106
)