STERICYCLE INC - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

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 1-37556

Stericycle, Inc.

(Exact name of registrant as specified in its charter)

28161 North Keith Drive

Lake Forest, Illinois 60045

(Address of principal executive offices, including zip code)

(847) 367-5910

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "accelerated filer", "large accelerated filer", "smaller reporting company", and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

On October 29, 2018, there were 90,594,855 shares of the Registrant’s Common Stock outstanding.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

STERICYCLE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN EQUITY

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

STERICYCLE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except per share data and unless otherwise indicated)

Unless the context requires otherwise, “Company”, “Stericycle”, "we," "us" or "our" refers to Stericycle, Inc. on a consolidated basis.

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

We are a multi-national business-to-business services company 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.  Today, we maintain operations in the United States (“U.S.”), Argentina, Australia, Belgium, Brazil, Canada, Chile, France, Germany, Ireland, Japan, Luxembourg, Mexico, the Netherlands, Portugal, Republic of Korea, Romania, Singapore, Spain, and the United Kingdom (“U.K.”) and serve a diverse customer base of more than one million.

Summary of Significant Accounting Policies

Basis of Presentation:  The accompanying Condensed Consolidated Financial Statements include the accounts of Stericycle, Inc. and its subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.  The Company's Condensed Consolidated Financial Statements were prepared in accordance with United States’ Generally Accepted Accounting Principles (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control.  Outside shareholders' interests in subsidiaries are shown on the Condensed Consolidated Financial Statements as “Noncontrolling interests."

The accompanying unaudited Condensed Consolidated Financial Statements as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements prepared in conformity with U.S. GAAP.  However, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows have been made.  These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).  The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Some areas where we make estimates include our allowance for doubtful accounts, credit memo reserve, accrued employee health and welfare benefits, environmental liabilities, stock-based compensation expense, income tax liabilities, accrued auto and workers’ compensation insurance claims, intangible asset valuations and goodwill impairment.  Such estimates are based on historical trends and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results could differ from our estimates.

The following information updates the description of significant accounting policies contained in Note 1 –  Basis of Presentation and Summary of Significant Accounting Policies in our Consolidated Financial Statements included in the Company’s 2017 Form 10-K.

Highly Inflationary Economy:  Effective July 1, 2018, as a result of the three-year cumulative inflation exceeding 100% and under the guidance given in ASC 830 “Foreign Currency Matters”, Argentina was classified as a highly inflationary economy. Accordingly, the Company recognized, in Other expense, net, a foreign exchange loss of $5.0 million arising from the remeasurement of our Argentinian peso denominated net monetary assets during the three months ended September 30, 2018.

Nonmonetary assets, liabilities and related expenses are measured using historical exchange rates and do not fluctuate with changes in the local exchange rate.

As of September 30, 2018, our Argentinian peso denominated net monetary assets amounted to approximately 430 million Argentinian pesos or $10.5 million.

Adoption of New Accounting Standards:

Revenue Recognition

Effective January 1, 2018, the Company adopted ASU No. 2014-19, “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective method for all contracts that were not completed as of the date of adoption.  The results of operations for reported periods after January 1, 2018 are presented under this amended guidance, while prior period amounts are reported in accordance with ASC 605 Revenue Recognition, which is also referred to herein as “legacy U.S. GAAP” or historical guidance.

The impact of adopting ASC 606 relates to (i) the deferral of certain costs associated with obtaining contracts with customers, which were previously expensed as incurred, but under the new guidance are capitalized as Other current assets and Other assets and amortized to Selling, general and administrative expenses (“SG&A”) over the expected period of benefit to be received, (ii) the write off of deferred installation costs, which were capitalized as Prepaid expenses under legacy U.S. GAAP but are expensed as incurred under ASC 606 and (iii) an increase in Deferred income tax liabilities with respect to the tax impact associated with these items.  We recognized a net increase to Retained earnings of $13.0 million as of January 1, 2018 for the cumulative effect of adopting ASC 606.  This was comprised of $22.9 million associated with the capitalization of contract acquisition costs offset by a $4.9 million write off of deferred installation costs and $5.0 million to recognize Deferred income tax liabilities.

The impact to Income from operations from the adoption of ASC 606 was a decrease in SG&A of $1.3 million and $7.6 million for the three and nine months ended September 30, 2018, respectively.

Definition of a Business

Effective January 1, 2018, the Company adopted ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which provides guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The amendments in ASU 2017-01 provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business.  The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.  This screen reduces the number of transactions that need to be further evaluated.  If the screen is not met, the amendments require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace the missing elements.  The guidance in ASU 2017-01 was applied in evaluating the transactions discussed in Note 3 – Acquisitions, but did not otherwise impact the accompanying Condensed Consolidated Financial Statements.  Due to the number of acquisitions the Company completes in any year, there may be instances where the acquisition will be determined to be an acquisition of assets instead of a business.  The Company believes this will be a minority of the acquisitions completed in any year and that there will not be a material impact to our financial statements.

Intra-Entity Transfers of Assets Other Than Inventory

On January 1, 2018, the Company adopted the guidance in ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”).  ASU 2016-16 requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs, instead of when the asset is sold to an outside party.  The Company’s adoption of ASU 2016-16 did not have an impact on the accompanying Condensed Consolidated Financial Statements.

Compensation – Stock Compensation

On January 1, 2018, the Company adopted ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”).  ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification.  Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.  The Company’s adoption of ASU 2017-09 did not have an impact on the accompanying Condensed Consolidated Financial Statements.

Accounting Standards Issued But Not Yet Adopted

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”).  This guidance will require lessees to record a right-of-use asset and lease liability on the balance sheet for all leases with terms of more than 12 months.  ASU 2016-02 also requires certain quantitative and qualitative disclosures.  Accounting guidance for lessors is largely unchanged.  The guidance must be applied at one of two application dates using a modified retrospective method. A cumulative effect adjustment to retained earnings will be recorded at the beginning of the earliest period presented or the effective date depending on the application date selected. This ASU is effective for the Company beginning January 1, 2019, and the Company expects to apply the standard’s transition

provisions, and record the cumulative adjustment as of that date. In addition, the Company expects to avail itself of the package of practical expedients allowing the Company not to reassess (a) whether any expired or existing contact contains a lease, (b) the lease classification of any expired or existing leases, and (c) the initial direct costs for any existing leases. The Company previously engaged a third party service provider to assist in its implementation of the new leases standard and is continuing to gather, document and analyze lease agreements related to this ASU and anticipates recognizing material right-of-use assets and related liabilities upon adoption.  The Company has also selected and is advancing the process of implementing a software package, including user acceptance testing and training, to manage and account for leases under the new guidance.  Additionally, the Company is continuing to monitor industry activities and any additional guidance provided by or changed by regulators, standards setters, or the accounting profession to adjust the Company’s assessment and implementation plans accordingly.

Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”).  ASU 2017-12 amends the hedge accounting recognition and presentation requirements with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and enhance the transparency and understandability of hedge transactions.  In addition, ASU 2017-12 makes improvements to simplify the application of the hedge accounting guidance.  ASU 2017-12 is effective for us on January 1, 2019, with early adoption permitted.  The Company does not expect the adoption to materially impact our Condensed Consolidated Financial Statements.

Financial Instrument Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” (“ASU 2016-13”) associated with the measurement of credit losses on financial instruments.  ASU 2016-13 replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates.  The amended guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019.  We are evaluating the impact on our Condensed Consolidated Financial Statements.

Stranded Tax Effects

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) to be reclassified to retained earnings.  ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018.  We will adopt ASU 2018-02 on January 1, 2019.  The adoption of ASU 2018-02 will result in a reclassification between accumulated other comprehensive income and retained earnings, and will have no impact on our results of operations or financial position.

Implementation Costs Incurred in a Cloud Computing Arrangement

In August 2018, the FASB issued ASU 2018-15, “Goodwill and Other Intangibles- Internal Use Software – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation

costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. The accounting for any hosting contract is unchanged. ASU 2018-15 is effective for us on January 1, 2020 with early adoption permitted, including adoption in any interim period. We are evaluating the impact on our Condensed Consolidated Financial Statements.

NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services.  The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. Revenue is recognized net of revenue-based taxes assessed by governmental authorities.

The Company provides regulated and compliance services, which include the collection and processing of regulated and specialized waste for disposal, the collection of personal and confidential information for secure destruction, recall and returns (“Expert Solutions”) and communication services.  The associated activities for each of these are a series of distinct services that are substantially the same and have the same pattern of transfer over time; therefore, the respective services are treated as a single performance obligation.

The Company recognizes revenue by applying the right to invoice practical expedient as our right to consideration corresponds directly to the value provided to the customer for performance to date. Revenues for our Medical Waste Solutions and Secure Information Destruction Services are recognized upon waste collection.  Our Compliance Solution revenues are recognized over the contractual service period.  Revenues from Hazardous Waste Solutions and Manufacturing and Industrial Services are recognized at the time the waste is received by a facility with an appropriate permit, either our processing facility or a third party.  Revenues from Communication Services and Expert Solutions are recorded as the services are performed.

Our customers typically enter into a contract for the provision of services on a regular and scheduled basis, e.g. weekly, monthly or on an as needed basis over the contract term.  Under the contract terms, the Company receives fees based on a monthly, quarterly or annual rate or fees based on contractual rates depending upon measures including the volume, weight and type of waste, number and size of containers collected, weight and type of shredded paper and number of call minutes.

Amounts are invoiced based on the terms of the underlying contract either on a regular basis, e.g., monthly or quarterly, or as services are performed and are generally due within a short period of time after invoicing based upon normal terms and conditions for our business type and the geography of the services performed.

Disaggregation of Revenues

The following table presents our revenues disaggregated by service and primary geographical regions, and includes a reconciliation of disaggregated revenue to revenue reported by our reportable segments, Domestic and Canada Regulated Waste and Compliance Services (“RCS”) and International RCS:

Accounts Receivable

Accounts receivable are recorded when invoiced or when goods or services are provided.  The carrying value of our receivables is presented net of an allowance for doubtful accounts.

We estimate our allowance for doubtful accounts based on past collection history and specific risks identified among uncollected amounts. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly.  Past-due receivable balances are written off when our collection efforts have been exhausted.

Contract Liabilities

We record a contract liability when cash payments are received or due in advance of our services being performed.  The majority of the contract liability is classified as current in Other current liabilities on the Condensed Consolidated Balance Sheets since amounts are generally earned in the subsequent quarter.  

The contract liability at September 30, 2018, June 30, 2018, and December 31, 2017 was $15.5 million, $17.4 million, and $17.9 million, respectively.

Contract Acquisition Costs

Our incremental direct costs of obtaining a contract, which consist primarily of sales incentives, are deferred and amortized to SG&A over the estimated period of benefit to be received from the cost, over a weighted average period of 6.3 years.

We had $7.7 million and $22.8 million of contract acquisition costs, related to deferred sales incentives included in Other current assets and Other assets, respectively, on the Condensed Consolidated Balance Sheet as of September 30, 2018.  During the three and nine months ended September 30, 2018, we amortized $1.8 million and $5.0 million, respectively, of deferred sales incentives to SG&A.

NOTE 3 – ACQUISITIONS

Acquisitions

During the nine months ended September 30, 2018, the Company completed 19 acquisitions, all within our Domestic and Canada RCS reportable segment, which we believe are complementary to our existing operations and fit our growth strategy. Each acquisition met the business definition in ASU 2017-01 and for financial reporting purposes was accounted for using the acquisition method of accounting.

The following table summarizes the location and services of the acquisitions for the nine months ended September 30, 2018:

The following table summarizes the acquisition date fair value of consideration transferred for current year acquisitions and the adjustment to the consideration transferred for the prior year acquisitions during the nine months ended September 30, 2018:

During the nine months ended September 30, 2018, we recognized an increase in goodwill of $42.0 million related to current year acquisitions, excluding the effect of foreign currency translation, which will be deductible for income taxes.

During the nine months ended September 30, 2018, we recognized an increase in customer relationships intangibles from current year acquisitions of $22.7 million, excluding the effect of foreign currency translation, with amortizable lives of 10 to 30 years.

The fair value of consideration transferred in a business combination is allocated to the tangible and intangible assets assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill.  The allocations of the acquisition price for recent acquisitions have been prepared on a preliminary basis, pending completion of certain intangible asset valuations and finalization of the opening balance sheets.

The following table summarizes the preliminary purchase price allocations for current year acquisitions and adjustments to purchase price allocations for prior year acquisitions for the nine months ended September 30, 2018:

The results of operations of these acquired businesses have been included in the Condensed Consolidated Statements of Income (Loss) from the date of the acquisitions.  Pro forma results of operations for these acquisitions are not presented because the pro forma effects, individually or in the aggregate, were not material to the Company’s condensed consolidated results of operations.

NOTE 4 – RESTRUCTURING, DIVESTITURES AND ASSETS HELD FOR SALE

Restructuring - Business Transformation

Stericycle is focused on driving long-term growth, profitability and delivering enhanced shareholder value.

As part of our business strategy, in the third quarter of 2017, we initiated a comprehensive multi-year Business Transformation with the objective to improve long-term operational and financial performance which we expect to complete by 2022, see Note 3 - Restructuring, Divestitures, and Assets Held For Sale to our Consolidated Financial Statements included in the 2017 Form 10-K.  We anticipate we will incur approximately $20.0 million of employee termination charges in connection with this restructuring, of which $8.0 million and $1.0 million is expected to impact our Domestic and Canada RCS and International reportable segments, respectively, with the remaining $11.0 million impacting All Other, see Note 12 – Segment Reporting.

During the three and nine months ended September 30, 2018, in connection with our evolving future information systems strategy, we recorded a $6.8 million non-cash impairment charge for software, which is reflected as part of Cost of revenues in the Condensed Consolidated Statements of Income (Loss).  The

impact of accelerated amortization on software that will continue to be in use until the enterprise resource planning system is implemented is immaterial for the three and nine months ended September 30, 2018.  The assets were held by our Domestic and Canada RCS reportable segment.

During the three and nine months ended September 30, 2018, we recorded $1.0 million in charges related to site closures/consolidation within our Domestic and Canada RCS reporting segment, which are reflected as part of Cost of revenues in the Condensed Consolidated Statements of Income (Loss).  The charges comprised $0.5 million related to lease termination fees and $0.5 million related to non-cash impairment charges for leasehold improvements.

During the three and nine months ended September 30, 2018, we incurred $0.1 million and $2.2 million, respectively, of severance payments related to Business Transformation.  The Domestic and Canada RCS and International RCS reportable segments incurred $1.7 million and $0.3 million, respectively, with the remaining $0.2 million impacting All Other. These amounts were fully paid as of September 30, 2018.

During the fourth quarter of 2017, we incurred restructuring charges of $13.9 million related to employee termination benefits of $11.5 million and non-cash impairment charges of $2.4 million related to software.  Our Domestic and Canada RCS and International RCS reportable segments incurred $5.5 million and $3.3 million, respectively, with the remaining $5.1 million impacting All Other.  The remaining liability of $2.2 million at December 31, 2017 was paid in the first quarter of 2018.

Restructuring – Other

During the three and nine months ended September 30, 2018, we recorded, in SG&A, severance costs of approximately $1.1 million, associated with a reduction in headcount undertaken as part of our Operational Optimization.  The charges were incurred within our All Other reporting segment and the severance payments are expected to be paid in the fourth quarter of 2018.

There could be additional initiatives in the future to further streamline our operations.  As such, the Company expects further charges related to workforce reductions and other facility rationalization costs when those restructuring plans are finalized and related charges are estimable.

Divestitures and Assets Held for Sale

During the three months ended September 30 2018, we completed, as part of our portfolio rationalization, the sale of the non-core clean room service business that was part of our Domestic and Canada RCS reportable segment and which had been classified as held for sale as of June 30, 2018. The proceeds of the sale were $17.0 million resulting in a pre- and after-tax loss of approximately $0.1 million. For the nine months ended September 30, 2018, we recorded non-cash impairment charges of $6.9 million, comprising non-cash impairments of goodwill and customer list intangibles of $5.8 million and $0.5 million, respectively, and a reduction in the fair value of net assets of $0.6 million, which are reflected in SG&A in the Condensed Consolidated Statements of Income (Loss) in connection with reclassifying the assets and liabilities as held for sale during the second quarter of 2018.

In the second quarter of 2018, the Company completed the sale of a business in the U.K. for consideration of approximately $11.5 million of which $8.2 million was received in cash and $3.3 million is held in escrow, subject to release upon renewal of a lease held by the sold business.  Prior to sale, we had recorded non-cash impairment charges of $14.8 million in connection with reclassifying the assets and liabilities as held for sale and subsequent changes in the fair value of these assets: $4.2 million during the nine months ended September 30, 2018; $6.8 million for the year ended December 31, 2017; and $3.8

million for the year ended December 31, 2016.  These charges are included in SG&A in the Condensed Consolidated Statements of Income (Loss) in the respective periods. In addition, the consideration received is subject to a potential adjustment based on the determination of the final net assets transferred under the sale agreement. During the three months ended September 30, 2018, the Company has recorded a charge of $0.4 million as an estimate of its exposure to this adjustment, which is reflected in SG&A in the Condensed Consolidated Statements of Income (Loss).

During the nine months ended September 30, 2017, we sold certain assets in the U.K. for $1.2 million, resulting in a pre-tax loss of $5.6 million ($4.5 million, net of tax), related to non-cash asset impairment charges arising from changes in the fair value of assets held for sale, which is included in SG&A in the Condensed Consolidated Statements of Income (Loss).

There were no assets or liabilities that were classified as held for sale on the Condensed Consolidated Balance Sheets as of September 30, 2018.

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill:

Changes in the carrying amount of goodwill by reportable segment and for the “All Other” category were as follows:

Current period adjustments to goodwill for certain prior year acquisitions are primarily due to the finalization, with the assistance of third party valuation specialists, of intangible asset valuations among other opening balance sheet adjustments.

Other Intangible Assets:

As of September 30, 2018 and December 31, 2017, the values of other intangible assets were as follows:

Changes in the carrying amount of intangible assets were as follows:

In the second quarter of 2018, in connection with entering into an agreement for the sale of a business (see Note 4 – Restructuring, Divestitures and Assets Held For Sale), which closed during the three months ended September 30, 2018, we reclassified $14.4 million of customer relationship intangibles to Assets held for sale and recorded a $0.5 million non-cash impairment of customer relationship intangibles.

During the three and nine months ended September 30, 2018, we impaired $0.0 million and $1.0 million, respectively, of tradenames, $0.0 million and $1.2 million, respectively, of operating permits, and $0.0 million and $3.0 million, respectively, of customer relationships in our International RCS segment, due to decisions to rationalize certain operations.

Our indefinite-lived intangible assets include permits and certain tradenames.  We have determined that our permits and certain tradenames have indefinite lives due to our ability to renew them with minimal additional cost, and therefore these are not amortized.

Our finite-lived intangible assets are amortized over their useful lives using the straight-line method.  Our customer relationships have useful lives ranging from 10 to 30 years, based upon the type of customer, and a weighted average remaining useful life of 11.0 years.  We have covenants not-to-compete with useful lives ranging from 5 to 14 years and a weighted average remaining useful life of 2.2 years.  Our tradenames have useful lives ranging from 4 to 40 years and a weighted average remaining useful life of 17.7 years.  Other intangibles mainly consist of landfill air rights with a remaining useful life of 16.0 years.

During the three months ended September 30, 2018 and 2017, the aggregate intangible asset amortization expense was $31.8 million and $29.9 million, respectively.  During the nine months ended September 30, 2018 and 2017, the aggregate intangible asset amortization expense was $96.6 million and $88.5 million, respectively.

The estimated amortization expense for each of the next five years (based upon exchange rates at September 30, 2018) is as follows for the years ended December 31:

NOTE 6 – DEBT

Long-term debt consisted of the following:

Our senior credit facility, term loan, and the private placement notes all require us to comply with the same financial, reporting and other covenants and restrictions, including a restriction on dividend payments.  At September 30, 2018, we were in compliance with all of our financial debt covenants.  Our

senior credit facility, term loan, and private placement notes rank pari passu to each other and all other unsecured debt obligations.

At September 30, 2018 and December 31, 2017, we had $119.5 million and $130.8 million, respectively, committed to outstanding letters of credit under our senior credit facility.  The unused portion of the revolving credit facility was $466.8 million and $597.5 million at September 30, 2018 and December 31, 2017, respectively.

The obligations under the senior credit facility, term loan, and the private placement notes agreements are unsecured.  All of these agreements contain a financial covenant to maintain a Consolidated Leverage Ratio of 3.75 to 1.00 at the end of any fiscal quarter.  Following the $295.0 million payment with respect to the small quantity (“SQ”) medical waste customer class action settlement (see Note 14 – Legal Proceedings), and provided the pro-forma Consolidated Leverage Ratio, which includes the impact of the payment, is at least 3.50 to 1, the Company had the option to adjust the requirement to 4.00 to 1.00 for up to two consecutive quarters in any fiscal quarter ending on or before September 30, 2018.  The Company paid the $295.0 million settlement on July 6, 2018 and exercised this option in the third quarter of 2018.

On March 23, 2018, the Company entered into certain amendments to its senior credit facility, term loan, and private placement note agreements related to the definition of EBITDA (as described in the credit agreements).  The amendments allow for certain add-backs, up to a maximum of $200.0 million on a trailing twelve month basis, related to cash charges associated with Business Transformation, Operational Optimization and litigation matters, to the calculation of EBITDA for debt covenant compliance purposes.  These amendments are in effect from January 1, 2018 through December 31, 2019.  The interest rate calculation related to these agreements is subject to adjustment based on unadjusted leverage, which is calculated excluding the add-backs.  If this unadjusted leverage is above 4.00, the interest rate on the senior credit facility and term loan would increase by 0.25%.  If the unadjusted leverage is above 3.75, the interest rate on the private placement notes would increase by:

The Company triggered the interest rate adjustment in a) above related to the private placement notes during the second quarter of 2018 and triggered the interest rate adjustment related to the senior credit facility and term loan during the third quarter of 2018. As a result the interest rate charged on the private placement notes was increased by 0.50% and the rate charged on the senior credit facility and term loan was increased by 0.25%.

The Company applied the provisions of ASC 470-50, “Modifications and Extinguishments” and accounted for the refinance as a modification in the first quarter of 2018 and recorded $2.7 million of pre-tax debt modification charges at the time.

NOTE 7 – INCOME TAXES

The effective tax rates for the three months ended September 30, 2018 and 2017 were 31.7% and 41.6%, respectively.  The effective tax rates for the nine months ended September 30, 2018 and 2017 were 26.9% and 23.9%, respectively.  The decrease in the tax rate for the three months ended September 30, 2018, when compared to the three months ended September 30, 2017 is a result of the reduction in the U.S. federal tax rate from 35.0% to 21.0% in accordance with the U.S. Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Act”) effective for tax years beginning after December 31, 2017, partially offset by the non-deductibility of the foreign exchange loss recorded for the impact of the change in functional currency of our operations in Argentina (see Note 1 – Basis of Presentation and Summary Of Significant Accounting Policies).  The higher rate for the nine months ended September 30, 2018, when compared to the nine months ended September 30, 2017 is a result of the impact to the annual effective rate of the accrual, in the second quarter, of the SQ customer class action settlement. The result was proportionally lower U.S. pre-tax income compared to international operations than in the current year.

In accordance with Staff Accounting Bulletin No. 118 (“SAB118”) and Accounting Standards Update No. 2018-05 “Income Taxes (Topic 740), Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118”, the Company recognized the provisional tax impacts related to the re-measurement of our deferred income tax assets and liabilities and the one-time, mandatory transition tax on deemed repatriation during the year ended December 31, 2017.  During the three months ended September 30, 2018, we recorded $0.4 million in measurement-period adjustments related to these items.  Such adjustments may be necessary in future periods due to, among other things, the significant complexity of the Act and anticipated additional regulatory guidance that may be issued by the U.S. Internal Revenue Service (“IRS”), changes in analysis, interpretations and assumptions the Company has made and actions the Company may take as a result of the U.S. Tax Act.

The $295.0 million SQ customer class action settlement payment, made in the third quarter, of 2018 is a current year tax deduction which we anticipate will result in the generation of a net operating loss on our U.S. federal tax return that will be carried forward to future years and is expected to be fully utilized. The current year deduction also causes a limitation of our deductible interest expense in 2018.  Based upon our current forecast, the deferred tax asset related to this excess interest expense limitation is expected to be approximately $13.8 million.  This excess amount will also be carried forward and is expected to be fully utilized.  In addition, the Company is reviewing the overall tax treatment associated with the SQ customer class action settlement payment and the applicable tax rate to apply as a result of the U.S. Tax Act.

The Company files income tax returns in the U.S., in various states and in certain foreign jurisdictions.  The Company has recorded liabilities to cover certain uncertain tax positions.  Such uncertain tax positions relate to additional taxes that the Company may be required to pay in various tax jurisdictions.  During the course of examinations by various taxing authorities, proposed adjustments may be asserted.  The Company evaluates such items on a case-by-case basis and adjusts the accrual for uncertain tax positions as deemed necessary.

During the first quarter of 2018, the IRS completed the audit of our 2014 corporate income tax return and made no changes to our reported tax.

NOTE 8 – FAIR VALUE MEASUREMENTS

The following table summarizes the basis used to measure financial assets and liabilities that are carried at fair value on a recurring basis on the Condensed Consolidated Balance Sheets: