STERICYCLE INC - Annual Report: 2019 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

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)

2355 Waukegan Road

Bannockburn, Illinois 60015

(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:

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 ☒ NO ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒

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 such 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 (§ 232.405 of this chapter) 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 definition of "large accelerated filer", "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 Act). YES ☐ NO ☒

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, 2019): $4,350,940,797.

On February 24, 2020 there were 91,271,184 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 2020 Annual Meeting of Stockholders.

Table of Contents

PART II

PART II

PART II

PART I

Disclosure Regarding Forward-Looking Statements

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

This document may contain forward-looking statements.  When we use words such as "believes," "expects," "anticipates," "estimates" or similar expressions, we are making forward-looking statements.  Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements.  Factors that could cause such differences include, among others, SOP pricing volatility, foreign exchange rate volatility in the jurisdictions in which we operate, the volume and size of any recall events, changes in governmental regulation of the collection, transportation, treatment and disposal of regulated waste or the proper handling and protection of personal and confidential information, the level of government enforcement of regulations governing regulated waste collection and treatment or the proper handling and protection of personal and confidential information, decreases in the volume of regulated wastes or personal and confidential information collected from customers, the ability to implement our ERP system, charges related to portfolio rationalization or the failure of divestitures to achieve the desired results, failure to consummate transactions with respect to non-core businesses, including the risk that the Domestic Environmental Solutions transaction may not be completed in a timely manner or at all, the failure to satisfy the conditions to the consummation of such transaction, including the receipt of certain governmental and regulatory approvals, the effect of the announcement or pendency of the Domestic Environmental Solutions transaction on Stericycle’s business relationships, operating results and business generally and risks related to diverting management’s attention from Stericycle’s ongoing business operations, the obligations to service substantial indebtedness and comply with the covenants and restrictions contained in our credit agreements and notes, a downgrade in our credit rating resulting in an increase in interest expense, political, economic, inflationary and other risks related to our foreign operations, the outcome of pending or future litigation or investigations including with respect to the U.S. Foreign Corrupt Practices Act, changing market conditions in the healthcare industry, competition and demand for services in the regulated waste and secure information destruction industries, failure to maintain an effective system of internal control over financial reporting, delays or failures in implementing remediation efforts with respect to existing or future material weaknesses, disruptions in or attacks on information technology systems, as well as other factors described in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequent Quarterly Reports on Forms 10-Q.  As a result, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate future results or trends.  We disclaim any obligation to update or revise any forward-looking or other statements contained herein other than in accordance with legal and regulatory obligations.

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Item 1. Business

Overview

Company Overview

Incorporated in 1989, Stericycle protects people, safeguards communities and reduces risk through highly specialized medical and hazardous waste management and secure information services.  Our team of more than 19,500 employees serves customers in the U.S. and 18 other countries with a concentration on the growing healthcare industry. We are a world-leading services company with the scale, expertise, and experience to handle complicated and behind-the-scenes essential services for waste management, regulatory compliance and information security.  To our customers, team members and the communities we serve, Stericycle is a company that protects what matters.

Segments

Our three operating segments are North America RWCS, (formerly Domestic and Canada), (excluding Mexico prior to the divestiture of our operations there), International RWCS and Domestic CRS.

Domestic CRS does not meet the quantitative criteria to be a separate reportable segment and therefore is included in the “All Other” reporting segment along with costs related to our corporate enabling and shared services functions.

Financial and other information related to our reporting segments is included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8. Financial Statements and Supplementary Data; Note 18 - Segment Reporting.

Services

Within our operating segments, our revenues are further broken down into these service categories:

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Revenues by service category for each of the operating segments were as follows:

Divestitures

During the year ended December 31, 2019, we entered into separate arrangements to dispose of several service lines and geographies.  The 2019 divestitures include:

The 2019 revenues for these divested businesses were $114.7 million with $75.7 million from the Communication and Related Services revenue category, primarily in All Other, and $39.0 million from the Regulated Waste and Compliance Services revenue category, primarily in International RWCS.

On February 6, 2020, we entered into the Purchase Agreement, pursuant to which we have agreed to sell our Domestic Environmental Solutions business, exclusive of the Retained Business, for cash consideration of approximately $462.5 million, subject to regulatory approval and customary adjustments as set forth in the Purchase Agreement.

The Purchase Agreement includes customary termination provisions, including if the closing of the Transaction has not occurred on or before November 6, 2020 (which may be extended until February 6, 2021, if needed, to obtain applicable regulatory approvals). Both we and Buyer have agreed to indemnify the other party for losses arising from certain breaches of the Purchase Agreement and other liabilities, subject to certain limitations.

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The Domestic Environmental Solutions business generated revenue in 2019 of $559.6 million, including approximately $100.0 million related to the Retained Business, which is included in the Regulated Waste and Compliance Services revenue category within our North America RWCS segment. The ESOL Disposal Group includes approximately 2,000 employees and 60 North America locations.

Customers

Our offering of services appeals to a wide range of small and large business customers.  The majority of our customers are healthcare businesses (hospitals, physician, and dental practices, outpatient clinics, long-term care facilities, etc.).  We also provide services to retailers, manufacturers, financial services providers, professional services providers, governmental entities, and other businesses.  While we manage large volumes of waste and other materials, the average volume per customer site is small.

No single customer accounted for more than 1.4% of our total revenues, and our top ten customers collectively accounted for approximately 7.3% of total revenues.  We have developed a strong and loyal customer base, with, we believe, a revenue retention rate of approximately 90% (based on our internal customer attrition analysis) and have been able to leverage these customer relationships to provide additional services. We use several different contracts across our services lines and terms vary depending upon the customer’s service requirements, types of services, and geographies.

As of December 31, 2019, regulated waste and compliance services are provided to customers in the U.S., Argentina, Brazil, Canada, Ireland, Japan, the Netherlands, Portugal, the Republic of Korea, Romania, Spain, and the U.K.  Secure information destruction services under the Shred-it® brand are provided in the U.S., Australia, Austria, Belgium, Canada, France, Germany, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Singapore, and the U.K. Secure information destruction service are also provided in the United Arab Emirates through a joint venture.  Manufacturing and industrial hazardous waste services are predominately provided in the U.S., Canada, and Latin America.  The vast majority of services for CRS are provided within the U.S. and Canada.

Facilities and Fleet

Our worldwide network includes a fleet of more than 7,200 trucks and properties both leased and owned as described below:

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In addition to the above we have one landfill, located in Argentina and we retained an inactive landfill in Mexico. We are currently headquartered in Bannockburn, Illinois, having occupied our new corporate headquarters during the year ended December 31, 2019.

Our Key Business Priorities

Following its founding in 1989, Stericycle grew rapidly as the medical waste industry developed and largely through inorganic acquisitions.  Growth from medical waste acquisitions helped us achieve scale of infrastructure, route density, and a leadership position in the U.S.  We also leveraged acquisitions to enter new geographies or add additional services to our portfolio.  As we grew and evolved, we operated without centralization and the efficiencies that come from an integrated, modern corporate structure and associated information systems.

At the end of 2017, we began advancement of a business transformation, including the development and implementation of an ERP system, focused on driving long-term growth, improving profitability, and enhancing shareholder value.  During 2019, we refocused our transformation efforts and aligned around five key business priorities.

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Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data; Note 4 – Restructuring and Divestitures and Note 9 - Debt.

Regulated Waste and Compliance Services

Collection and Transportation

The collection process for regulated waste streams or secure information destruction begins at the customer location with segregation.  To assure regulatory compliance, we will not accept material 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 vehicles then collects containers at the customer location.  The majority of collected waste or information for destruction is then transported directly to one of our processing facilities or to one of our transfer stations until it’s transported 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 the utilization of the facility and the volume of waste that it processes.

Processing and Disposal of Regulated Medical Waste

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

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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:

Upon completion of the particular treatment process, the resulting waste or incinerator ash is transported to for disposal in a landfill owned by unaffiliated third parties.  In some countries, where permitted by regulation, the treated waste is recovered, including recovery as fuel in waste-to-energy processes.

Processing and Disposal of Hazardous Wastes

Our technicians receive hazardous wastes either as expired goods requiring deconstruction or as defined hazardous wastes that were generated by healthcare, retail or manufacturing and industrial organizations.  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 the final disposal or processing destination.  Whenever possible, we seek sustainable solutions for managing materials including alternative uses, recovery processes, recycling options, fuel blending, or energy recovery.  When sustainable options do not exist, these wastes are sent to third parties for incineration, landfill, or water treatment.

Destruction and Recycling of Secure Information

We leverage a combination of off-site and on-site shredding methods.  Approximately 63% of collected documents for secure destruction in 2019 were sent off-site to a regional shredding facility for secure destruction.  The remainder of collected documents are shredded on-site in a Shred-it® truck with proprietary information destruction technology.  For both methods, documents are cross-cut shredded to enhance the security level of destruction.

Shredded paper is then baled to be sold as SOP for recycling.  SOP consists of paper typically generated by offices that contains primarily white paper. It’s a higher value recyclable than mixed paper, old newspapers or magazines. Stericycle collected and delivered approximately 750,000 tons of SOP for recycling into paper products to be used in the hospitality industry including napkins, paper towels, and bathroom tissue.  During 2019, prices for SOP declined consecutively each month of the year resulting in an average annual SOP price of $132 per ton in 2019 as reported by Fastmarkets RISI, a decline of 30.5% over 2018.

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Communication and Related Services

During the year ended December 31, 2019 we divested of our North American telephone answering services business, which provided live voice and automated communication services for small healthcare providers and other small businesses.

Our remaining Communication Solutions provides live voice and automated services to assist hospitals and IDNs in communications with their patients.  Our team serves as a client representative providing appointment scheduling, appointment reminders, event registration, and other communications.  Providing this service requires information management systems to redirect calls, store and quickly retrieve live voice protocols or client data, send automated communications, or provide easily accessible reporting and activity details to our customers.  Beyond the information management system infrastructure, call center staffing and proper education levels are critical to our success.

Our Expert Solutions specializes in partnering with automotive, food/beverage, medical device, pharmaceutical, consumer goods manufacturers, and others to support them through critical recalls, retrievals, or audit processes to ensure brand protection.  Services could include notification services to impacted customers, call center services to support a recall or retrieval, removing impacted product from distribution, processing recalled product and supporting remedy requirements, and compliance reporting.  These solutions are highly customized based on the product being recalled or retrieved and the specific needs of the client.

Our Business Model and Key Business Attributes

Regulated Business-to-Business Operations

We focus on providing 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 require the proper handling and disposal of items such as medical waste, hazardous waste, pharmaceutical waste, and personal confidential information.  Regulated waste can be defined as any material with government-imposed guidelines for handling the material for transportation or disposal.

Growing Markets

The services we offer, especially core services of regulated medical waste and secure information destruction, are growing.  This growth is driven by multiple factors:

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Stable and Recurring Customer Needs Supported by Long-term Contracts

The services we provide most often require service on a routine and scheduled basis.  Historically, our revenues have not been significantly affected by economic downturns.  The majority of our customer relationships include long-term contracts ranging from two to five years in length.  We have developed a strong and loyal customer base, with, we believe, a revenue retention rate of approximately 90% (based on our internal customer attrition analysis).

Strong Service Relationships with Customers

We are a trusted provider of outsourced services that address complex, regulated, or compliance-based business needs and do so with high customer service levels.  Our U.S. net promoter scores, an index ranging from -100 to 100 that measures the willingness of customers to recommend a company's products or services, were over 69% for regulated medical waste and over 75% for secure information destruction.  Based on the global Net Promoter Score standards, any score above 0 would be considered “good”, 50 and above being “excellent” while 70 and above is considered "world class".

Established Network of Processing and Transportation Locations

We believe that our infrastructure network results in an expansive operational network with alternate treatment or destruction options for our customers.  The scale of our network also provides us the ability to be the single-source provider for customers with multiple locations across the country and gives us the flexibility to quickly redirect services or operations to another location if the need arises due to severe weather, power outages, or other disruptions.

Routing Logistics

While we manage large volumes of waste or secure information for destruction, the average volume per customer site is small and the resulting revenue per stop is low.  As such, route logistics and route efficiency are a core focus.  This vast transportation network provides us with an advantage compared to our competition.  Additionally, we have continued to make route density and technological investments to optimize routing at both the individual truck and geographic market level.  We believe that our ERP

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implementation will further improve our routing efficiencies by providing the opportunity to leverage our infrastructure across services lines and driving standard work across the network.

Industry Leadership and Expertise

Based on our infrastructure and revenues, 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 attract and retain highly experienced team members who have a deep understanding of the industries they serve, the regulatory climate, and the evolving needs of the customers we serve.  We collaborate regularly with a wide range of stakeholders and interest groups. We proactively work with organizations like the CDC, DEA, OSHA, EPA, and many other government and regulatory bodies, including law enforcement.  Our experts are frequent speakers at hospital networks, industry trade associations, and actively engage in numerous community meetings each year.

Over the course of 2019, we significantly elevated the importance of safety across the organization and executed against multiple initiatives to improve our safety performance.  We established safety metrics and tracking that are shared across the organization and kicked off a behavior-based safety program designed to influence our team members’ actions toward safer outcomes.  To reduce vehicle accidents, we began the roll-out of a new driver camera safety program, installing cameras in our North American RWCS trucks. We also initiated a Toolbox Talk program for transportation teams in North America to promote routine conversations targeting driver safety.  These efforts and others resulted in a 22% reduction in lost time days and a 13% reduction in vehicle related accident claims in 2019.

Competition

The industries and markets in which we operate are highly competitive on pricing, and barriers to entry are low.  Our competitors consist of many different types of service providers, including national, regional, and local companies. Some of these companies provide only a portion of the services of Stericycle, for example just collection and transportation but not treatment of medical waste or medical waste service but not a sharps management program. In the regulated waste and secure information destruction industries, another source of competition is on-site management.

For regulated medical waste, some large-quantity waste 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.  In both medical waste and secure information destruction, there is no other competitor in North America with Stericycle’s overall scale, breadth of services, national transportation network, and comprehensive treatment network.

Governmental Regulation

The regulated medical waste, hazardous waste, secure information destruction, and recall industries are subject to numerous regulations.  In many countries there are multiple regulatory agencies at the local and national level that oversee our customers or our services.  This regulatory framework imposes 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:

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Our permits, registrations, and licenses may be subject to modification or revocation by the issuing authority and, in some jurisdictions, are subject to periodic renewal.  Periodic renewals may be 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 at the federal, state and local levels.

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 regulatory requirements with which we must comply 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, document management, ethical business conduct, and proper handling and management of regulated waste streams, and controlled substances.

Environmental Protection

Certain services within our business are 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 potential 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 RCRA, the 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 several 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 10 HMIW incinerators, located at 7 sites, 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, Industrial Emissions Directive and the Shipments of Waste Regulations in the EU, 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.  Additional environmental laws at the federal and/or local levels apply to regulated waste management in other markets in which we conduct business.

Employee Health and Welfare

We are 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 U.S. federal laws relating to employee health and welfare applicable to our business are in OSHA, which establishes specific employer responsibilities including engineering controls,

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administrative controls, training, policies and programs complying with the regulations, and 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 blood-borne pathogens, hazard communication, personal and protective equipment.

Examples of employee health and welfare laws applicable to our international operations include the European Framework Directive on Safety and Health at Work (Directive 89/391 EEC), and various provisions of the Canada Labour Code and related occupational safety and health regulations in the provinces and territories of 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 DOT has established regulations which deal with two different aspects of transportation: hazardous materials transport and safety in transportation.  These regulations are defined within the PHMSA and the FMCSA.  Due to our fleet size we are regularly subject to roadside 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 applicable to our international operations 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, and globally the International Maritime Dangerous Goods Code and the IATA Dangerous Goods Regulations.

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 cited regulations include the FACTA Final Disposal Rule, the FACTA Red Flag Rule, HIPAA, and the Gramm-Leach Bliley Act.  Furthermore, the GDPR provides the framework for data privacy and data protection for companies that conduct business in Europe.

For the transportation of secure information for destruction, we are regulated by the DOT as a commercial motor carrier.  The processes for the destruction of secure information destruction processes are not regulated by any government agency.  However, the 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 for our operations in North America.  Further, the Payment Card Industry 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.

Ethical Business Conduct

Various international regulations governing ethical business practices apply to our business, including but not limited to, the FCPA, the U.K. Bribery Act, and the Brazilian Clean Companies Act.  These laws may apply to our business on both a global and local basis, and ban unethical behavior such as the payment of bribes to government officials for the purpose of gaining an improper business advantage, improper maintenance of our books and records, as well as other financial transparency requirements.

Controlled Substances

Our service offerings for the recall, return and/or destruction of controlled substance pharmaceuticals are subject to numerous laws and regulations under various international federal agencies, such as the DEA in

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the U.S. and the Home Office Drugs and Firearm Licensing Unit in the U.K.  These regulations apply to both the closed loop management of controlled substances as well as the return of unused controlled substances from consumers.  These regulations typically require facilities to obtain a controlled substance registration in addition to other pharmaceutical licenses and meet certain criteria in order to collect, process, and dispose of controlled substances.  These regulations have 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 our other permitting, the registration must be updated regularly and subjects us to inspection and enforcement.

U.S. and Foreign Local Regulation for Waste Management

We conduct business in all 50 U.S. States and Puerto Rico.  Because the EPA does 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 RCRA.  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” taken from the Animal Plant and Health Inspection Service) is another area of regulatory requirements we are subject to pursuant to regulations promulgated by the USDA and Customers and Border Patrol.  The USDA typically inspects our facilities receiving such APHIS waste on a quarterly basis.

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.

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:

We could also be subject to fines or penalties in connection with violations of regulatory requirements.

We carry several insurance coverages including property, workers compensation, general liability, employer’s liability, pollution liability, privacy and security liability, event management, cyber-liability, directors and officers, and miscellaneous professional services errors and omissions coverages.  We also carry umbrella policies that cover general liability, auto and employers liability.  We regularly evaluate other lines of coverage to respond to specific business needs but consider our current insurance coverage

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to be sufficient to meet regulatory as well as customer requirements and to protect our employees, assets, and operations.

Patents, Trademarks and Proprietary Rights

Stericycle holds eight patents in the U.S., Canada, and Australia for the recovery of reusable medical devices in a sharps container and holds two patents (U.S. and Canada) for the processing and updating of event-related information using automated reminders.  With the acquisition of Shred-it, we hold patents in the U.S. and Canada for a three-staged shredder, with one related patent application pending in the EU, expected to be issued in 2020.  We also hold patents in the U.S., Canada, and U.K. for Securshield®, our proprietary locks for shredding containers.

We own federal registrations for a number of trademarks/service marks including Stericycle®, SRCL, Steri-Safe®, Stericycle ExpertRECALL®, Sustainable Solutions®, CSRX, Shred-it®, Securit®, Community Shred-it®, Making Sure it’s Secure®, We Protect What Matters®, 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.

Information about our Executive Officers

The following table contains certain information regarding our nine current executive officers:

Cindy Miller was named President and Chief Executive Officer in May 2019 after serving as President and Chief Operating Officer since October 2018. Ms. Miller previously served as President, Global Freight Forwarding for UPS. Ms. Miller had a 30-year career with UPS starting as a driver and progressing to district manager for operating regions in the United States and then managing director for regions in Europe, the Middle East, and Africa before becoming President of the European region. Ms. Miller received her bachelor’s degree from Pennsylvania State University and an executive MBA from the London Business School.

Janet Zelenka was named Executive Vice President Chief Financial Officer in June 2019. Ms. Zelenka previously served 15 years with Essendant Inc., most recently serving as Chief Financial Officer until the company’s acquisition by Sycamore Partners. She also served in the roles of Chief Information Officer and Senior Vice President of Business Integration during a transformational period for the company, and held leadership positions in finance, analytics, audit, and pricing. Prior to Essendant, she spent 16 years at

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SBC/Ameritech (AT&T) in a range of information technology, financial, and operational roles. Ms. Zelenka received her bachelor’s degree from Rockford University and a masters of business administration from Northern Illinois University.

S. Cory White was named Executive Vice President and Chief Commercial Officer in October 2019. He previously served as our Executive Vice President of CRS from April 2019 and retains his current CRS responsibilities in his new role. Mr. White had previously served as the Global Chief Commercial Officer for Startek, Inc. for nearly three years and as Vice President, Healthcare and Government Vertical Leader, with Convergys, Inc. for six years. Prior to those roles, he spent eleven years with ACS Healthcare, a Xerox Company, in a variety of sales and operational roles including Senior Vice President of ACS Healthcare Payment Integrity Solutions. Mr. White received his bachelor’s degree from the University of Kentucky.

Joe Reuter was named Executive Vice President and Chief People Officer in January 2019.  Mr. Reuter previously served as President, International Human Resources at UPS, since April 2016.  Mr. Reuter previously served as Vice President of the Europe Region human resources for three years and Vice President of Human Resources for the Global Freight Forwarding business for one year.  He began his career as a parcel service provider and supervisor before moving into the human resources field and supporting UPS operating districts across the U.S. with increasingly larger areas of responsibility.  Mr. Reuter received his bachelor’s degree from the University of South Dakota.

David Stahl was named Executive Vice President and Chief Information Officer in April 2018 after serving as Senior Vice President for approximately 18 months.  Mr. Stahl previously served as Chief Information Officer at Hillshire Brands Company for two years, where he implemented an IT transformation, and as Chief Information Officer at Duracell (a Berkshire Hathaway Company) for two years, where he established a new operating platform for Duracell following its separation from the Procter & Gamble Company.  He also spent eight years with Tellabs, Inc. in roles of increasing responsibility within quality and IT, as well as quality roles with Underwriters Laboratories, 3Com Corporation, and Emerson Electronics.  Mr. Stahl received his bachelor’s degree from Ohio Northern University.

Dominic Culotta was named Executive Vice President and Chief Engineer in April 2019. Prior to joining Stericycle, Mr. Culotta spent 35 years with United Parcel Services (UPS) most recently serving six years as Vice President of Engineering for Global Freight Forwarding and eight years as Vice President of Engineering and Operations for UPS' Europe, Middle East and Africa region. His early career included various operations and engineering assignments, working his way to multiple engineering division manager roles as well as a regional Vice President of operations and engineering. Mr. Culotta has a bachelor’s degree from Loyola College in Baltimore.

Michael Weisman was named Executive Vice President and Chief Ethics and Compliance Officer in April, 2018.  Mr. Weisman previously served as Chief Ethics and Compliance Officer for The Kraft Heinz Company, a publicly-listed packaged foods company, which he joined through Kraft Foods in July of 2015. Prior to the merger with Heinz Foods he served as Chief Counsel, Compliance for Kraft Foods from July 2014 and as Vice President, Ethics and Compliance for U.S. Foods from February, 2013 and as Associated General Counsel at Career Education Corporation from 2010.  He was also with the law firm Katten Muchin Rosenman, LLP for more than 10 years, four as partner, and served as a member of the firm's White Collar Defense, Internal Investigations and Compliance Practice Group.  Mr. Weisman received his bachelor’s degree from the University of Illinois and his juris doctor degree from Chicago-Kent College of Law.

Rich Moore was named Executive Vice President of North American Operations in January 2019.  Mr. Moore previously served 30 years with UPS, most recently serving as President of the UPS Illinois District

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from 2016.  Previously he served for three years as Vice President of European Operations, five years as President of the Northeast District, and three years as District Manager for Utah, Idaho, and Southern Nevada, in addition to other operations and transportation staff roles.  Mr. Moore received his bachelor’s degree from Manhattan College and a master’s of business administration from National Louis University.

Daniel Ginnetti was named Executive Vice President, International in June 2019 having previously served as Chief Financial Officer from August, 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 U.S. 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 previously served in various finance and accounting positions with The Ralph M. Parsons Company, a worldwide engineering firm, and Ryan Herco Products Corp., a national industrial plastics distributor.  Mr. Ginnetti received his bachelor’s degree from the University of California, Santa Barbara.

Employees

At December 31, 2019 we had approximately 19,500 full time employees worldwide, of which approximately 1,500 are covered by collective bargaining agreements.

Available Information

We maintain an internet website, www.stericycle.com, which provides a variety of information about the Company and where the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available free of charge, as soon as reasonably practicable, following the time they are filed with or furnished to the SEC.  Reports and proxy and information statements that are filed electronically with the SEC are available on the SEC’s website, www.sec.gov.

Item 1A. Risk Factors

Our consolidated results of operations, financial position, cash flows and reputation can be adversely affected by various risks.  These risks include the principal factors listed below and the other matters set forth in this Form 10-K.  There may be additional risks of which we are not presently aware or that we currently believe are immaterial that could have an adverse impact on our business.

We are subject to extensive governmental regulation, which is frequently difficult, expensive, and time-consuming with which to comply; noncompliance could adversely affect our operations and efforts to grow our business results.

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 permissions 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.

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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 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, or if they contain unfavorable conditions, it could substantially impair our operations and reduce our revenues and/or profitability.

If we encounter regulatory compliance issues in the course of operating our businesses, we may experience adverse publicity, which may intensify if such non-compliance results in civil or criminal liability.  This adverse publicity may harm our reputation, and result in difficulties in attracting new customers, or retaining existing customers.

The level of governmental enforcement of environmental and other 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, the proper handling and protection of personal and confidential information, and recalls and retrieval of products by governmental authorities can have a positive effect on our business, as these laws and regulations may increase the demand for our services.  Relaxation of enforcement, government shutdowns, or other changes in governmental regulation of regulated waste, personal and confidential information or products to be recalled or retrieved could increase the number of competitors we face or reduce or delay the need for our services.

Complications with the implementation of our ERP system could adversely impact our business and operations.

We rely on information systems and technology to manage our business and summarize operating results.  We are in the process of an implementation of an ERP system, which will replace most of our existing operating and financial systems.  The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of our business.  The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources.  We may not be able to successfully implement the ERP system without experiencing delays, increased costs and other difficulties.  If we are unable to successfully implement our ERP system as planned, our business, results of operations, and financial condition could be negatively impacted.  Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed.

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 their 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 a result, the market

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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.

We may incur significant charges as a result of portfolio optimization; portfolio optimization may not achieve the desired results.

We continue to evaluate the performance of our portfolio of assets and businesses.  Based on this evaluation, we may sell certain assets or businesses or exit particular markets.  Any impairments and losses on divestiture resulting from this process may cause us to record significant charges, including those related to goodwill, other intangible assets, and accumulated currency translation adjustment losses.  In addition, divestitures may not yield the targeted improvements in our business.  Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, disruption in our operations or businesses, finding a suitable purchaser, the diversion of management’s attention from our other businesses, the potential loss of key employees, the erosion of employee morale or customer confidence, and the retention of contingent liabilities related to the divested business.  Any charges that we are required to record or the failure to achieve the intended financial results associated with divestitures of businesses or assets could have a material adverse effect on our business, financial condition or results of operations.

Restrictions in our Credit Agreement and our Senior Notes could adversely affect our business, financial condition, results of operations, ability to make distributions and the value of our securities.

Our Credit Agreement contains customary affirmative covenants, including, among others, covenants pertaining to the delivery of financial statements; certain financial covenants; 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, 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.  These covenants could affect our ability to operate our business, increase the amount of interest expense we ultimately pay pursuant to the Credit Agreement, and may limit our ability to take advantage of potential business opportunities as they arise. Our Senior Notes also contain certain covenants that could have a similar effect on our ability to operate our business (see Part II, Item 8. Financial Statements and Supplementary Data; Note 9 – Debt in the Consolidated Financial Statements).

Our ability to comply with the covenants and restrictions contained in our Credit Agreement, along with certain of the covenants and restrictions contained in our Senior Notes, 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 their commitments, cease making further loans, require cash collateralization of letters of credit, cause their loans to become due and payable in full, foreclose against any assets securing the debt under our Credit Agreement 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 stock could experience a partial or total loss of their investment.  See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

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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, on future operating performance, general economic conditions, competition, and litigation, 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 sufficient cash flow or refinance our indebtedness on favorable terms could have an adverse effect on our financial condition.

The amount of our indebtedness could adversely affect our business.

As of December 31, 2019, we had a total of $2.7 billion of outstanding indebtedness, including long-term debt and short-term debt and excluding unamortized debt issuance costs.  We also have the ability to incur additional indebtedness subject to our financial covenants.

Our leverage could have adverse consequences on our business, including the following:

Risks from our international operations could adversely affect our business, financial condition and results of operations.

We have established operations in the U.S. and 18 other countries.  Foreign operations carry special risks including:

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Any of the foregoing or other factors associated with doing business abroad could adversely affect our business, financial condition and results of operations.

We have operations in Latin America, and changes in the business, regulatory, political or social climate could adversely affect our operations there, which could adversely affect our results of operations and growth plans.

We have business operations in Argentina and Brazil.  Doing business in those countries exposes us to risks related to political instability, corruption, economic volatility, social unrest, tax and foreign investment policies, public safety and security, and uncertain application of laws and regulations.  Consequently, actions or events in any of those countries that are beyond our control could restrict our ability to operate there or otherwise adversely affect the financial results of those operations. Furthermore, changes in the business, regulatory or political climate in any of those countries, or significant fluctuations in currency exchange rates, could affect our ability to continue our operations there, which could have a material adverse impact on our prospects, results of operations, and cash flows.

We face continuing risks relating to compliance with the FCPA and other anti-corruption and anti-bribery laws.

On June 12, 2017, the SEC issued a subpoena to us, requesting documents and information relating to our compliance with the FCPA or other foreign or domestic anti-corruption laws with respect to certain of the our operations in Latin America.  In addition, the DOJ has notified us that it is investigating this matter in parallel with the SEC.  We are cooperating with these agencies and are also conducting an internal investigation of these and other matters, including outside of Latin America, under the oversight of the Audit Committee of the Board of Directors and with the assistance of outside counsel, and this investigation has found evidence of improper conduct.  These matters (and other matters which may arise or of which we become aware in the future) may be deemed to violate the FCPA and other anti-corruption and anti-bribery laws.  Such determinations could subject us to, among other things, enforcement actions by the SEC or the DOJ or other regulatory bodies, fines, penalties, or litigation, which could adversely affect our business, financial condition and results of operations.  In addition, any significant settlement amount may require us to incur additional indebtedness, adversely affect our liquidity and ability to service our indebtedness, or require us to restructure or amend the terms of our indebtedness.  See Part II, Item 8. Financial Statements and Supplementary Data; Note 20 – Legal Proceedings in the Consolidated Financial Statements for more information regarding currently pending legal proceedings.

We are subject to a number of pending lawsuits.

We are a defendant in a number of pending lawsuits and may be named as a defendant in future lawsuits.  These current and future matters may result in significant liabilities and diversion of our management’s time, attention, and resources.  Given the uncertain nature of litigation generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome in these matters.  In view of these uncertainties, the outcome of these matters may result in charges in excess of any established reserves and, to the extent available, liability insurance.  Protracted litigation, including any adverse outcomes, may have an adverse impact on our reputation, business, financial condition or results of operations.  In addition, any significant judgment or settlement amount may require us to incur additional indebtedness, adversely affect our liquidity and ability to service our indebtedness, or require us to restructure or amend the terms of our indebtedness.  See Part II, Item 8. Financial Statements and Supplementary Data; Note 20 - Legal Proceedings in the Consolidated Financial Statements for more information regarding currently pending legal proceedings.

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Changing market conditions in the healthcare industry, healthcare consolidation and healthcare reform, could adversely affect our results of operations.

Within the U.S., the healthcare industry is evolving to meet competing demands for increased healthcare coverage of a growing and aging population and economic pressures to reduce healthcare costs.  As a result of these dynamics, hospital networks are consolidating physician practices into their networks, independent practices are consolidating together, and healthcare providers are focused on cutting costs within their businesses.  These changes exert downward pricing pressure, including the impact of GPO rebates and administrative fees, on services that we provide to healthcare customers which could adversely affect our results of operations.  Commitments made in connection with the SQ Settlement may affect our ability to increase prices in the future and a deterioration in our customer relationships as a result of the MDL Action may affect our ability to sell additional services to our customers, both of which could adversely affect our results of operations.

Aggressive pricing by existing competitors and the entrance of new competitors could significantly and adversely affect our results of operations.

The industries in which we participate are highly competitive.  This competition has required us in the past to reduce our prices to our customers, may require us to reduce our prices in the future or may affect our ability to increase prices in the future.  Price reductions or our inability to increase prices could significantly and adversely affect our results of operations.

We face direct competition from a large number of small, local competitors.  Because it requires very little financial investment 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 U.S., Waste Management, Inc., Clean Harbors, Inc., and Iron Mountain Incorporated all offer competing services.

Unfavorable market conditions, including those driven by economic or social trends, may impact the volume of regulated wastes or personal and confidential information we collect from customers.

The compliance-based services we provide rely on the generation of regulated wastes or personal and confidential information by our customers.  The amount of material generated by our customers may be impacted by macro-economic trends associated with manufacturing and industrial markets, healthcare market dynamics, and trends associated with electronic and digital record keeping.  Many of our services are provided on a subscription basis with a monthly fee to minimize short-term or cyclical variability associated with these factors.  However, some of our services are provided on a transactional basis, and long-term trends resulting from these factors could reduce the demand for our services, whether we provide them on a subscription or transactional basis.

If we fail to maintain an effective system of internal controls over financial reporting, including remediating known material weaknesses in our internal controls as of December 31, 2019, we may not be able to report our financial results timely and accurately or prevent fraud, which could adversely affect investor confidence in our company, our results of operations and our stock price.

As disclosed in more detail in Part II, Item 9A. Controls and Procedures of this Report, we have identified material weaknesses, including a material weakness related to ineffective general information technology controls, as of December 31, 2019, in our internal controls over financial reporting.  Due to these material

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weaknesses, we have also concluded our internal control over financial reporting was ineffective as of December 31, 2019.

Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial reporting. We are implementing remedial measures and there can be no assurance that our efforts will be successful. These measures will result in additional technology and other expenses. If we are unable to remediate the material weakness, or are otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.

Notwithstanding the material weaknesses that existed as of December 31, 2019, management has concluded that the consolidated financial statements included in this Annual Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.

Attacks on our information technology systems could damage our reputation, negatively impact our businesses and expose us to litigation risk.

We use computers in substantially all aspects of our business operations.  We also use mobile devices, social networking and other online activities to connect with our employees and our customers.  We rely heavily on various proprietary and third-party information systems.  Our reputation for the secure handling of customer and other sensitive information is critical to the success of our business.  Like other large multi-national corporations, we are potentially subject to cyber-attacks, including state-sponsored cyber-attacks, industrial espionage, insider threats, computer denial-of-service attacks, computer viruses, ransomware and other malware, wire fraud and other cyber incidents.  Our incident response efforts, business continuity procedures and disaster recovery planning may not be entirely effective as our information technology and network infrastructure may still be vulnerable to attacks by hackers or breaches due to employee error, malfeasance, computer viruses, power outages, natural disasters, acts of terrorism, breaches with respect to third-party systems or other disruptions.  A cybersecurity incident and breach of our information systems could lead to theft, destruction, misappropriation or release of sensitive and/or confidential information or intellectual property, which could result in business disruption, negative publicity, violation of privacy laws, loss of customers, brand damage, adverse financial and operational results, and potential litigation.

Our management depends on relevant and reliable information for decision-making purposes, including key performance indicators and financial reporting.  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.

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A change or deterioration in our relations with our employees or an increase in labor and employment costs could have a materially adverse effect on our business, financial condition and results of operations.

Labor and employment is one of our highest costs and increases in employment costs could materially affect our cost structure and our profitability.  We compete with other businesses in our markets for qualified employees and the labor supply is sometimes tight in our markets.  A shortage of qualified employees or further unionization would require us to incur additional costs related to wages and benefits; inefficiencies in operations; unanticipated costs in sourcing temporary or third party labor; legal fees and interference with customer relationships.

We are a party to 13 collective bargaining agreements in the U.S. and Canada, covering approximately 650 employees, or approximately 4.4%, of our total U.S. and Canadian workforce and further agreements and works councils covering approximately 1,000 employees in our other international locations.  These agreements expire on a scheduled basis depending upon the negotiated length of the contract’s term.  Collective bargaining agreement negotiations occur every year depending upon which agreements expire and whether one or both parties seek the modification of terms.

There can be no assurance that we will be able to negotiate the terms of future agreements with unions in a manner acceptable to us.  There is also no guarantee that current non-union employees will not seek union representation resulting in additional collective bargaining agreements with associated increased costs to us.  Potential work disruptions from labor disputes may disrupt our businesses and adversely affect our brand, customer relations, financial condition, and results of operations.

Market conditions could adversely change and our earnings could decline resulting in charges to impair intangible assets, such as goodwill.

As a result of our various acquisitions, the Consolidated Balance Sheet at December 31, 2019 contains goodwill of $3.0 billion and other intangible assets, net of accumulated amortization of $1.4 billion.  In accordance with 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.  During 2019 and 2018, we recorded non-cash impairment charges of $17.7 million and $16.0 million, respectively, of operating permits, tradenames, and customer relationships.  Additionally in 2019 we recognized $228.3 million in non-cash goodwill impairment charges related to our Canada, Domestic Environmental Solutions, and Latin America reporting units and in 2018, we recognized $358.7 million of non-cash goodwill impairment charges related to our Domestic CRS and Latin America reporting units.  We recognized these impairments due to a reduction of forecasted future cash flows in each reporting unit, as discussed in the Impairment section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data; Note 7 – Goodwill and Other Intangible Assets.  The recognition of any potential future impairments could have a material adverse impact on our results of operations.

The handling of regulated waste exposes us to the risk of environmental liabilities.

As a company engaged in regulated waste management, we face risks of liability for environmental contamination.  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 our facilities.  Responsible parties may be liable for substantial investigation and clean-up costs even if they operated their

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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 if we were not the party responsible for the release of the hazardous substance and 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, see Item 8. Financial Statements and Supplementary Data; Note 20 – Legal Proceedings. 

Tax interpretations and changes in tax regulations and legislation could adversely affect us.

Tax interpretations, regulations and legislation in the various jurisdictions in which we operate are subject to measurement uncertainty and the interpretations can impact net income, income tax expense or recovery, and deferred income tax assets or liabilities.  Tax rules and regulations, including those relating to foreign jurisdictions, are subject to interpretation and require judgment by us that may be challenged by the applicable taxation authorities upon audit.  Although we believe our assumptions, judgements and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act reduced the U.S. federal statutory tax rate, broadened the corporate tax base through the elimination or reduction of deductions, exclusions, and credits, limited the ability of U.S. corporations to deduct interest expense, and transitioned to a territorial tax system which allows for the repatriation of foreign earnings to the U.S. with a 100% federal dividends received deduction prospectively.  In addition, the Tax Act required a one-time transitional tax on foreign cash equivalents and previously unremitted earnings.  Several of the new provisions enacted as part of the Tax Act require clarification and guidance from the IRS and Treasury Department.  These or other changes in U.S. tax laws could impact our profits, effective tax rate, and cash flows.

We have accumulated NOLs arising from our operations and foreign and domestic acquisitions of approximately $379.4 million as of December 31, 2019.  We have recognized valuation allowances to reduce these amounts to our current estimate for NOLs that will be recoverable against future taxable income prior to their expiration in accordance with the appropriate tax regulations.  If our estimates change or we do not generate sufficient taxable income prior to the expiration of these NOLs we may have to record additional valuation allowances resulting in higher income tax expense, see Item 8. Financial Statements and Supplementary Data; Note 10 – Income Taxes.

In addition, we may periodically restructure our legal entities and if taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective tax rate could be materially affected.  In connection with such restructurings we could also incur additional charges associated with consulting fees and other charges.

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 we provide on a non-

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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.

The handling, transportation, and treatment of regulated waste carries with it the risk of personal injury to employees and others.

Our business requires our employees 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 natural disasters always exists.

Examples of incidents that may present possible exposure to hazardous materials include:

Human beings, or animals could be injured or sickened or property could be 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, 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 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.

The protection of customer, employee, and company data is critical to our business.  The regulatory environment in the U.S. and Canada surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements.  Certain legislation, including the FACTA, the HIPAA, the Economic Espionage Act in the U.S., the Personal Information Protection and Electronic Documents Act in Canada and the GDPR in the EU, require documents to be securely destroyed to avoid identity theft and inadvertent disclosure 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 reputation, business, financial condition and results of operations.

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Our participation in multi-employer pension plans may subject us to liabilities that could materially adversely affect our liquidity, cash flows and results of operations.

We participate in multi-employer pension plans administered by employer and union trustees.  To the extent that those plans are underfunded, ERISA may subject us to substantial liabilities in the event we, whether partially or totally, cease to have obligations to contribute to the plans.  Under current law regarding multi-employer defined benefit plans, circumstances such as a plan's termination, an employer's partial or complete withdrawal from, or the mass withdrawal of all contributing employers from, an underfunded multi-employer defined benefit plan can trigger our obligation to make payments to the plan for our proportionate share of the multi-employer plan's unfunded vested liabilities.  Furthermore, the Pension Protection Act of 2006 added new funding rules generally applicable to plan years beginning after 2007 for multi-employer plans that are classified as "endangered," "seriously endangered," or "critical" status.  If plans in which we participate are in critical status or underfunded, we could be required to make additional contributions.

Based upon the information available to us from plan administrators as of March 29, 2019, one of the multi-employer pension plans in which we participate is underfunded.  The Pension Protection Act requires that underfunded pension plans improve their funding ratios within prescribed intervals based on the level of their underfunding.  We have been notified that one plan is in "critical" status and this plan may require additional contributions.  The amount of additional funds we may be obligated to contribute in the future cannot be estimated, as such amounts will be based on future levels of employee work that require the specific use of the union employees covered by these plans, investment returns and the level of underfunding of such plans.  Additional funding could adversely affect our liquidity, cash flows, and results of operations.  For more information, see Part II, Item 8. Financial Statements and Supplementary Data; Note 13 – Retirement and Other Employee Benefit Programs in the Consolidated Financial Statements.

Increases in transportation costs may adversely affect our business and reduce our earnings.

We maintain an extensive transportation network and fleet of vehicles.  A significant increase in market prices for trucks or fuel could adversely affect our business through higher transportation costs and reduce our operating margins and reported earnings.

Some of our customers have suffered financial difficulties affecting their credit risk, which could negatively impact our operating results.

We provide service to a number of customers, including governmental entities and municipalities, some of which have suffered significant financial difficulties in recent years.  Some of these entities could be unable to pay amounts owed to us or renew contracts with us at previous or increased rates.  The inability of our customers to pay us in a timely manner or to pay increased prices, particularly large national accounts, could negatively affect our operating results.

An inability to retain key personnel or difficulties in recruiting qualified personnel may adversely affect our business

Our businesses operate in highly competitive markets.  The labor market in the United States is very competitive and the unemployment rate is at historic lows.  We depend on the skills, working relationships, and continued services of key personnel, including our experience management team.  We must hire, train and develop effective employees.  We compete with other companies both within and outside of our industry for talented personnel.  In addition, employee turnover increases our cost of operations and makes it more difficult to operate our business.  Difficulty in replacing or adding personnel could have an adverse effect on our business, results of operations and financial condition.

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Our success depends on our executive officers and other key personnel.  If we lose key personnel or are unable to hire additional qualified personnel, our business may be harmed.

Our future success depends to a significant degree on the skills, experience and efforts of our executive officers and key personnel.  We have experienced unplanned turnover in our executive team in recent periods.  The unexpected loss of the services of any of our executive officers could have an adverse effect on our operations.  There can be no assurance that our executive succession planning, retention, or hiring efforts will be successful.  Competition for skilled and experienced management personnel is intense, and our future success will also depend on our ability to attract and retain qualified personnel, and a failure to attract and retain new qualified personnel could have an adverse effect on our operations.

Natural disasters or other catastrophic events could negatively affect our business, financial condition, and results of operations.

Natural disasters such as hurricanes, typhoons or earthquakes could negatively affect our operations and financial performance.  Such events could result in physical damage to one or more of our facilities or equipment, the temporary lack of an adequate work force in a market, and the temporary disruption in transportation services which we rely on to deliver waste to our facilities.  These events could prevent or delay shipments and reduce both volumes and revenue.  Weather conditions and other event driven special projects may also cause variations in our results.  We may be required to suspend operations in some of our locations, which could have a material adverse effect on our business, financial condition, and results of operations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Information regarding our worldwide properties can be found under Part I, Item 1. Business and is incorporated herein by reference. We believe that these processing and other facilities are adequate for our present and currently anticipated future needs.

Item 3. Legal Proceedings

Information regarding certain legal proceedings in which we are involved can be found in Part II, Item 8. Financial Statements and Supplementary Data; Note 20 - Legal Proceedings in the Consolidated Financial Statements and is incorporated herein by reference.

Item 4. Mine Safety Disclosures

Not Applicable.

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Item 5. Market Price for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the Nasdaq Global Select Market under the ticker symbol "SRCL."  There were 83 shareholders of record as of February 24, 2020.

We did not declare or pay any cash dividends on our common stock during 2019, 2018, or 2017.  We currently expect that we will retain future earnings for debt repayment and use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

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, 2019, we had purchased a cumulative total of 22,219,146 shares.  No common stock purchases were made during 2019.  

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 ended December 31, 2019 with the cumulative total return for the same period on the Nasdaq Global Select Market Composite Index, the S&P Mid Cap 400 Index, and  the Dow Jones U.S. Waste & Disposal Services Index.

The graph assumes that $100 was invested on December 31, 2014 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

For more details on the items below, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Net (loss) income attributable to Stericycle, Inc. common shareholders (including the total negative impact to (Loss) earnings per share attributable to Stericycle, Inc. common shareholders), included the following after-tax effects:

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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 Part II, Item 8. Financial Statements and Supplementary Data of this 2019 Form 10-K.

Overview

Incorporated in 1989, Stericycle protects people, safeguards communities, and reduces risk through highly specialized medical and hazardous waste management and secure information services.  Our team of more than 19,500 employees serves customers in the U.S. and 18 other countries with a concentration on the growing healthcare industry. We are a world-leading services company with the scale, expertise, and experience to handle complicated and behind-the-scenes essential services for waste management, regulatory compliance and destruction of secure information.  To our customers, team members and the communities we serve, Stericycle is a company that protects what matters.

Our offering of services appeals to a wide range of small and large business customers.  The majority of our customers are healthcare businesses (hospitals, physician, and dental practices, outpatient clinics, long-term care facilities, etc.).  We also provide services to retailers, manufacturers, financial services providers, professional services providers, governmental entities, and other businesses.  While we manage large volumes of waste and other materials, the volume per customer site on average is small.

Highlights for the year ended December 31, 2019 compared to the prior year include:

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During 2019, we completed the following debt related transactions:

On February 25, 2020, we executed the Fifth Amendment which amended the Credit Agreement to, among other things:

For additional information, see Part II, Item 8, Financial Statements and Supplementary Data; Note 9 – Debt in the Consolidated Financial Statements.

Over the course of 2019, we divested a texting business based in the UK, a telephone answering services business and pharmaceutical returns business in North America, and substantially all of our operations in Mexico and Chile.  The five transactions combined generated $83.7 million in gross proceeds during 2019.

As a result of these divestitures we recorded total non-cash divestiture losses, net of gains, of $103.0 million. (For additional information, see Part II, Item 8, Financial Statements and Supplementary Data; Note 4 – Restructuring and Divestitures in the Consolidated Financial Statements).

On February 6, 2020, we entered into the Purchase Agreement to sell our Domestic Environmental Solutions business to Harsco Corporation, exclusive of the Retained Business.

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Subject to the terms and conditions of the Purchase Agreement, the Buyer has agreed to purchase all of the outstanding equity interests of our Domestic Environmental Solutions subsidiary. Both we and Buyer have agreed to indemnify the other party for losses arising from certain breaches of the Purchase Agreement and other liabilities, subject to certain limitations.

The purchase price for the Transaction is approximately $462.5 million, and subject to adjustment based on the ESOL Disposal Group’s net working capital at closing and other adjustments as defined in the Purchase Agreement. The Transaction is anticipated to result in a loss which is currently not estimable. The expected charge is based on our current estimate of the proceeds that will be allocated to the disposal transaction as we evaluate the terms of the HSA agreement negotiated with the Buyer concurrently with the Transaction, the net assets that will be disposed of and an allocation of goodwill based on the relative fair value of the ESOL Disposal Group to the Domestic Environmental Solutions reporting unit.  The remaining goodwill will be allocated to the Retained Business which we anticipate will become part of the Domestic Healthcare Compliance Services reporting unit once the transaction closes.

The Purchase Agreement contains customary representations, warranties and covenants related to the Business and the Transaction. Between the date of the Purchase Agreement and the completion of the Transaction, we have agreed to conduct the ordinary course of the ESOL Disposal Group business consistent with past practices in all material respects and have agreed to certain other operating covenants with respect to the ESOL Disposal Group business as set forth more fully in the Purchase Agreement. The Purchase Agreement includes customary termination provisions, including if the closing of the Transaction has not occurred on or before November 6, 2020 (which may be extended until February 6, 2021, if needed, to obtain applicable regulatory approvals). Both we and the Buyer have agreed to indemnify the other party for losses arising from certain breaches of the Purchase Agreement and other liabilities, subject to certain limitations.

In connection with the closing of the Transaction, we and Buyer will enter into certain additional ancillary agreements, including a transition services agreement. We and Buyer will also enter into a long-term subcontracted HSA with respect to our Retained Business. We currently provide integrated waste compliance services to healthcare customers, including medical and hazardous waste disposal services. We will continue to be the integrated waste services provider to these customers and have subcontracted with the Buyer to performed hazardous waste services, including collection, transportation and disposal as necessary.

The Domestic Environmental Solutions business generated revenue of $559.6 million, including approximately $100.0 million related to the Retained Business, which is included in the Regulated Waste and Compliance Services revenue category and in the North America RWCS segment.

Key Business Priorities

Following its founding in 1989, Stericycle grew rapidly as the medical waste industry developed and largely through inorganic acquisitions.  Growth from medical waste acquisitions helped us achieve scale of infrastructure, route density, and a leadership position in the U.S.  We also leveraged acquisitions to enter new geographies or add additional services to our portfolio.  As we grew and evolved, we operated without centralization and the efficiencies that come from an integrated, modern corporate structure and associated information systems.

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The following table identifies key priorities and other significant matters impacting our business (amounts are stated pre-tax except when noted):

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The above priorities and other significant matters include the following types of activities:

At the end of 2017, we began implementation of a business transformation, including the development of an ERP system, focused on driving long-term growth, improving profitability, and enhancing shareholder value.  During 2019, we refocused our transformation efforts and aligned around five key business priorities.

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Business Transformation

Since the program’s inception, we have recognized the following charges and capital expenditures related to the Business Transformation:

Through December 31, 2019, we have completed activities originally contemplated as part of Business Transformation in the areas of investment in costs savings and business capability and other related matters.  Prospectively, Business Transformation activities will be focused on ERP development and implementation with additional operating expenditures and capital expenditures anticipated in 2020 to complete design, testing and deployment in North America.  Once the North America deployment occurs, additional costs will be added to ongoing operations to reflect the cost of the ERP post go-live.  For 2020, and beyond, we will continue to incur costs to maintain the legacy suite of applications supporting our global businesses until those applications are replaced by the new ERP.

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Business Transformation operating expenditures by reportable segment were as follows:

As part of our Business Transformation, we are undertaking legal entity organizational restructuring actions to assist with streamlining and simplifying business operations and to help lower general and administrative costs.  Such actions could result in additional charges associated with consulting and professional fees and increases in potential exposure to U.S. and foreign taxes and foreign exchange charges.

Intangible Amortization

For the years ended December 31, 2019, 2018, and 2017, we recognized $145.2 million, $130.3 million, and $118.4 million, respectively, of intangible amortization expense. The increase is partially due to the adjustment of the estimated useful lives of certain of our customer relationship intangibles (see Part II, Item 8. Financial Statements and Supplementary Data; Note 7 – Goodwill and Other Intangible Assets in the Consolidated Financial Statements) at the end of 2018 with the remaining changes, net arising from acquisitions and divestitures.

Acquisition and Integration

Details of the acquisitions completed in the years ended December 31, 2019, 2018, and 2017 can be found in Part II, Item 8. Financial Statements and Supplementary Data; Note 3 – Acquisitions in the Consolidated Financial Statements.

Acquisition and integration expenses were as follows:

Acquisition expenses in all years principally comprise internal costs and changes in deferred consideration.  Integration expenses incurred in the years ended December 31, 2018 and 2017 were primarily related to acquisitions completed in the U.S. and, in particular, the Shred-it® acquisition.  Prospectively, baring new acquisitions, we anticipate acquisition and integration expenses to be limited to deferred consideration changes, if any.

Operational Optimization

We aim to achieve a culture of continuous improvement that will enhance its efficiency, effectiveness and competitiveness to improve its cost base and cash flow and we have taken a number of actions to reduce operating costs and optimize operations.  For example, we believe plant throughput and route density are competitive strengths of Stericycle.  We maintain such strengths by making adjustments to our network of

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transportation and treatment facilities to optimize overall logistics and processing capabilities within a service category while reducing operational costs.  As part of these efforts, we seek to reduce network redundancies by consolidating facilities, closing the redundant facility, and restructuring the local organization and operation for efficiency.

Operational Optimization expenses, of which $9.8 million was recognized in COR and $4.7 million was recognized in SG&A, for the year ended December 31, 2019, were as follows:

Of the more significant charges:

Operational Optimization expenses, which were all recognized in SG&A, for the year ended December 31, 2018, were as follows: