Stericycle
Annual Report 2002

Plain-text annual report

2002 Annual Report continued… Since 1989, Stericycle has committed to: F i n a n c i a l H i g h l i g h t s 2 0 0 2 1 Year ended December 31, 2002 2001 2000 1999 1998 (Dollars in thousands except per share amounts) Statement of Operations Data Net Sales Income from Operations Net Income* Diluted Net Income Per Share EBITDA** Balance Sheet Data Cash and Short-Term Investments Total Assets Long-Term Debt Shareholders’ Equity $401,519 $359,024 $323,722 $132,848 12,284 13,968 0.46 $114,039 $ 97,395 $ 86,512 $ 22,728 100,832 45,724 1.01 73,294 14,710 0.35 63,466 14,511 0.36 $ 8,887 $ 13,017 $ 2,947 $ 19,629 595,786 355,444 $326,729 $232,510 $134,700 $118,114 667,095 224,124 614,530 267,365 597,982 345,104 $66,681 6,424 5,713 0.26 $10,489 $ 1,819 97,755 23,460 $53,651 * Please see footnote 2 included in Item 6. Selected Financial Data in the enclosed Form 10-K for an explanation of the impact in 1999, 2000, 2001 and 2002 of acquisition-related charges and other excluded charges on Net Income and Diluted Net Income Per Share. ** Please see footnote 3 included in Item 6. Selected Financial Data in the enclosed Form 10-K for the calculation of EBITDA. ’98 ’99 ’00 ’01 ’02 ’98 ’99 ’00 ’01 ’02 ’98 ’99 ’00 ’01 ’02 $66.7 $132.8 $323.7 $359.0 $401.5 NET SALES ($ in millions) $6.4 $12.3 $63.5 $73.3 $100.8 INCOME FROM OPERATIONS ($ in millions) $10.5 $22.7 EBITDA ($ in millions) $86.5 $97.4 $114.0 continued growth… 2 L e t t e r t o S h a r e h o l d e r s Dear Fellow Shareholders: Accomplishments in 2002 our debt, dramatically improving the 2002 was another record year for Steri- cycle. We continued to set new financial records, increased the account penetration of our new Steri-SafeSM OSHA Compliance Program, successfully completed 11 acqui- sitions, enjoyed strong growth in our base business, and significantly strengthened our balance sheet. We feel confident that Stericycle is well positioned for continued revenue growth and accelerating profit growth in 2003 and beyond. In addition to reporting record finan- cial results in 2002, we continued to strengthen Stericycle’s industry leadership position by successfully expanding the penetration of our new Steri-SafeSM OSHA Compliance Program for small quantity generators throughout the United States. Following a limited offering to selected customers in 2000, we now have approxi- mately 50,000 Steri-SafeSM subscribers. We are the only national provider of Our revenues in 2002 grew to over integrated medical waste and compli- strength of our balance sheet. Our debt to total capitalization continued to decline, falling to 39.1% at the end of 2002 from 50.2% a year ago. Priorities for 2003 By expanding on Stericycle’s industry lead- ership position in 2002, we feel confident we have built an operating platform needed to drive future growth and explore new frontiers for our business. Our priorities for 2003 are as follows — $401.5 million, an 11.8% increase over ance services in North America. Other Revenue Growth. In the large 2001. Gross margins increased to 41.0% accomplishments in 2002 include: quantity generator customer arena, our from 39.8% in 2001. Operating income before excluded charges (primarily premiums paid in connection with the repurchase of subordinated debt and the write-down of idled incinerators) rose 35.2% to $104.1 million compared to $77.0 million in 2001. Operating margins for the year were 25.9%, versus 21.4% in 2001. Our after-tax net income before excluded charges increased by 57.3% to $49.1 million from $31.2 million in 2001, after adjusting 2001 net income for the effect of the pro forma adoption of FAS 142. Our diluted earnings per share, before excluded charges, were $1.09, up 47.3% from $0.74 in 2001. Strong Growth. Our $401.5 million in reported revenues for 2002 reflects strong growth from four areas. Our large quantity generator business (primarily hospitals) continued to grow internally at an approximate rate of 5%. We also continued to see improving margins in this very competitive market segment. Our small quantity generator business (primarily physicians’ offices) grew inter- nally at an approximate rate of 10% as a result of our focused direct selling efforts and our innovative Steri-SafeSM OSHA Compliance Program. We com- pleted 11 acquisitions and integrated the acquired customers into our existing collection route, transfer station and treatment plant infrastructure. Finally, we continued to strengthen our position in international markets. We added a second ETD placement in Japan and expanded our presence in Mexico with our Mexican subsidiary’s acquisition of a local medical waste business. Debt Reduction. We continued to generate strong free cash flow from operations. In 2002, we utilized $57.5 million of the $96.9 million of cash that we generated from operations to reduce focus will be on capitalizing on the oppor- tunity created by the decision of potential customers to outsource their waste man- agement services rather than spend capital for on-site treatment. We will continue, however, to maintain our discipline of acquir- ing hospital business only if it meets our minimum margin expectations. In January 2003, we acquired Scherer Healthcare, Inc. During the year, we will focus on expanding Scherer’s Bio Systems sharps management outsourcing system through- out our nationwide network. In the small quantity generator segment, our marketing efforts will focus on selling our Steri-SafeSM OSHA compliance services in addition to infectious waste management services and on shifting accounts to a subscription serv- ice rather than billing by the pick-up, which has benefits to both our customers and us. We will continue to aggressively pursue “tuck-in” acquisitions and international growth opportunities. We are finding attrac- tive opportunities for our proprietary ETD processing technology in a number of inter- national markets that are anxious to use an alternative to incineration technology. 3 Profit Growth. We hope to be We remain very excited about the future able to continue to improve our operating for Stericycle. Stericycle is the clear leader margins in 2003. Productivity will remain in providing medical waste management a key focus for our team. We will seek to and OSHA compliance services to the further improve our collection route den- healthcare community. We plan to focus sities, reduce our long haul transportation on the many growth opportunities our costs, and reduce our plant operating industry leadership position affords us costs. We are enhancing our continuous and to continually refine the efficiency improvement culture to encourage produc- of our operations. Thank you for your tivity improvement ideas across all areas continuing support. of our organization. Service Innovation. During 2003, we will remain focused on our customers as our top priority, as we continue to enhance our offering of comprehensive solutions to their compliance and medical waste management needs. We will con- tinue to fulfill our commitment to customer responsiveness by exploring new service offerings to both our large and small quan- tity generator customers. Our innovative Steri-SafeSM OSHA compliance services that help customers enjoy a safer workplace in a cost effective manner, and new out- sourcing programs like the Bio Systems sharps management program, are some of the additional services that we will be offering in the future. Jack W. Schuler, Chairman Mark C. Miller, President and CEO continued innovation… 4 O p e r a t i o n s Continuing Our Leadership in Medical Waste Management and Compliance Services for the Healthcare Industr y In 2002, the activities in Stericycle’s In 2002, the sales team also achieved operating areas emphasized the continued great results with the continued national execution of our core business strategy. rollout of our Steri-SafeSM OSHA Compliance The operating team maintained its histori- Program. The sales team continued to In 2002, Stericycle maintained its industry cal focus on leveraging our existing busi- convert more customers to the program, leading position as the only national provi- ness to grow revenues, expand margins, and we finished 2002 with approximately der of medical waste management services. and improve profitability. We also continued 50,000 customers on the new subscription New services, in particular our Steri-SafeSM to grow through acquisitions by completing model program. The outlook for continued OSHA Compliance Program, enabled us to 11 transactions that added density to conversion in 2003 remains very encour- broaden the scope of services that we pro- existing operations and expanded our net- aging. As healthcare providers come to vide to the healthcare industry. At the end work of treatment and transportation assets. understand the value and benefits of the of 2002, we were uniquely positioned as a In order to offset increased costs in the compliance program, we believe that provider of medical waste and OSHA com- areas of wages, benefits, and insurance, more and more accounts will choose to pliance services, giving our customers a the operating units focused on productivity switch to Steri-SafeSM. more comprehensive service offering than improvements in every area within the is available from other service providers. organization. Their ultimate success in Stericycle leads the industry in the number of customers served and in its unmatched operational infrastructure, reflecting both internal growth and the acquisition of meeting this challenge and reducing costs is reflected in the significant margin expansion and net income improvement that we achieved in 2002. over 66 medical waste businesses since The Stericycle sales team was very suc- 1993. Stericycle now services approxi- cessful on all fronts in 2002. In addition mately 290,000 customers utilizing its to maintaining strong internal growth by 42 treatment/collection facilities and 97 continuing to add new large and small transfer/collection sites in North America. customers, the group capitalized on the Our national network of treatment/collec- tion facilities and transfer/collection sites enables us to uniquely address customer needs. Stericycle uses both incineration and non-incineration treatment techno- logies to insure that customers’ waste are managed in strict compliance with appli- cable regulations. By offering customers a choice in treatment technology, we are able to help our customers to maximize the use of non-incineration treatment while maintaining regulatory compliance for those wastes that require incineration. outsourcing trend that continues in the hospital segment of our business. The full implementation of the Federal EPA Title V air quality regulations resulted in the decision of many hospitals to close their incinerators and outsource their medical waste services. Through the hard work of our team, we successfully added new customers as a result of this new business opportunity. For those customers who wished to continue on-site treatment, the sales team emphasized back-up contracts, which allow us to provide interim service when the customer cannot operate its own on-site treatment equipment. We have found that over time back-up contracts often convert to full service outsource contracts when the customer realizes the economic benefits of outsourcing. S T E R I - S A F E S M O S H A C O M P L I A N C E P R O G R A M C O N T I N U I N G T O G A I N M O M E N T U M We successfully test marketed our Steri-SafeSM OSHA Compliance Program to our small quantity customers in 1999 and 2000. We completed our first level training and national launch of the program in 2001. We continued to show tremendous success in adding new customers and upgrading existing customers to the program during 2002. CUSTOMERS ON THE PROGRAM 50,000 22,500 4,700 less than 300 ’99 ’00 ’01 ’02 continued leadership… 6 O p e r a t i o n H i g h l i g h t s International Operations: Continuing Development of Future Oppor tunities In 2002 our joint ventures in Argentina and South Africa, in which we hold minority interests, became fully operational. Our international operating team completed installations of our patented electro-thermal- deactivation (ETD) treatment equipment in both Japan and Australia in 2002. We believe that our ETD technology provides a competitive advantage in international incinerated, we also know from years In 2003, we will continue our efforts of experience working with our many to shift more and more of the waste we customers that there are ways to reduce collect into non-incineration treatment. the amount of waste that is ultimately Additionally, we will focus on providing incinerated. The most effective strategy comprehensive, on-going waste elimination/ we have seen to date involves comprehen- minimization/segregation training to our sive waste minimization and segregation customers. Our current waste auditing and education and training of our customers. training programs have been updated to Working in a cooperative partnership with include an increased emphasis on educat- our customers, we have made tremendous ing our customers on the proper disposal strides in shifting away from incineration of their non-medical waste materials and moving towards alternate treatment and toxic substances, such as mercury containing waste. To assist our customers in complying with proper waste disposal, we have developed new offerings, such as our Mercury Mailback program that enables the customer to easily and economically manage wastes that should be kept out of the medical waste stream. Finally, we remain committed to lending our assis- tance and expertise wherever practical in support of programs that reduce toxic substances in the environment. For exam- ple, in 2002 we were recognized by the State of Rhode Island for our contribution towards significantly reducing mercury in the environment. markets because the ETD process does not technologies. create any regulated air or water emissions In 2002, the company was able to close and can enhance the ability to reuse and recycle post treated materials. We believe our patents and other intellectual property can provide additional opportunities to cre- ate shareholder value in many countries around the world. Continuing Responsibility to the Environment Stericycle was founded on the belief that there was a need for safe, secure, and environmentally responsible management of regulated medical waste. From its begin- nings, Stericycle has championed the use of non-incineration, alternate treatment technologies such as our patented ETD process. While we recognize that regula- tions as currently in force mandate that some types of medical waste must be two of its incinerators (located in Missouri and Arizona) as more and more customers made the decision to segregate their waste streams and move away from incineration. At the same time, we added or expanded six non-incineration treatment plants. We facilitated the shift in customer behavior by providing additional training and non- incineration treatment options to our cus- tomers. The new non-incineration treatment capacity that came on-line provided lower cost and convenient treatment alternatives for customers previously using incineration. Our commitment to moving away from incineration and towards non-incineration resulted in a substantial decrease in the amount of customer waste that is inciner- ated. At the close of 2002, incineration was less than 13% of our treatment capacity, compared to over 30% two years ago. Clearly the strategy of working cooperatively with our customers, offering educational and alternate treatment options is proving to be effective. 7 97 Collection/Transfer Facilities 42 Treatment Facilities continued responsibility… O u r M i s s i o n … to be the leading company dedicated to the e nv i r o n m e n t a l l y r e s p o n s i b l e m a n a g e m e n t of infection control and compliance services for the healthcare community This report has been printed on recycled paper containing 10% post-consumer waste. Design: Petertil Design Partners • Oak Park, IL C o r p o r a t e I n f o r m a t i o n O F F I C E R S Mark C. Miller President, Chief Executive Officer and Director Richard Kogler Executive Vice President, Chief Operating Officer Frank J.M. ten Brink Executive Vice President, Chief Financial Officer Richard L. Foss Executive Vice President, Corporate Development B O A R D O F D I R E C T O R S Jack W. Schuler Chairman of the Board Chairman, Nominating and Governance Committee Member Audit Committee Mark C. Miller President & Chief Executive Officer Patrick F. Graham Vice President, Business Development and Strategic Projects, The Gillette Company Member Compensation Committee John Patience Co-Founder & Partner, Crabtree Partners Member Nominating and Governance Committee Member Audit Committee Peter Vardy Managing Partner, Peter Vardy & Associates (Ret.) Member Compensation Committee L. John Wilkerson, Ph.D. General Partner, Galen Partners, L.P. Chairman, Compensation Committee John P. Connaughton Managing Director, Bain Capital Member Compensation Committee Thomas R. Reusché Managing Director & Co-Founder, Madison Dearborn Partners, Inc. Member Audit Committee I N D E P E N D E N T A U D I T O R S Ernst & Young LLP Sears Tower 233 S. Wacker Drive Chicago, Illinois 60606 L E G A L C O U N S E L Johnson and Colmar 300 S. Wacker Drive, Suite 1000 Chicago, Illinois 60606 T R A N S F E R A G E N T LaSalle Bank N.A. 135 S. LaSalle Street, Suite 1960 Chicago, Illinois 60603 F O R M 1 0 - K Additional copies of this Annual Report or Form 10-K filed with the Securities and Exchange Commission are available, without charge, upon request from the company, Attention: Investor Relations A N N U A L M E E T I N G The annual meeting of stockholders will be held on Tuesday, May 6, 2003 at 11:00 AM at Embassy Suites Hotel, 5500 N. River Road, Rosemont, Illinois 60018 Rod F. Dammeyer President, CAC, LLC Chairman, Audit Committee Member Nominating and Governance Committee N A S D A Q ® S Y M B O L SRCL to be continued in 2003… Stericycle, Inc. • 28161 N. Keith Drive, Lake Forest, IL 60045 • 800-643-0240 • www.stericycle.com Stericycle, Inc. • 28161 N. Keith Drive, Lake Forest, IL 60045 • 800-643-0240 • www.stericycle.com 

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