Republic Services, Inc. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011. The filing also reports fourth-quarter results. Republic is a U.S. non-hazardous solid-waste collection, transfer, recycling and disposal provider operating in 39 states and Puerto Rico.
Business context and key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $8,192.9 million | $8,106.6 million |
| Operating income / margin | $1,552.7 million / 19.0% | $1,539.1 million / 19.0% |
| Net income attributable to Republic | $589.2 million | $506.5 million |
| Diluted EPS | $1.56 | $1.32 |
| Cash from operating activities | $1,766.7 million | $1,433.7 million |
| Capital expenditures | $936.5 million | $794.7 million |
| Free cash flow (company-defined, non-GAAP) | $864.8 million | $676.4 million |
| Cash and cash equivalents at year-end | $66.3 million | $88.3 million |
| Total debt, carrying value | $6,921.8 million | $6,743.6 million |
For Q4 2011, revenue was $2,025.2 million, operating income $366.7 million, net income attributable to Republic $191.0 million and diluted EPS $0.51.
Material changes versus the prior year
- Revenue increased 1.1%; core price contributed 0.8%, fuel recovery fees 1.0%, recycling commodities 1.0%, and net acquisitions/divestitures 0.1%. Volume reduced revenue 0.4%, while the expiration of the San Mateo County and City of Toronto contracts reduced growth by 1.4%.
- Operating margin remained 19.0%, but cost of operations rose to 59.4% of revenue from 58.8%. Fuel expense increased 26.7% to $516.5 million.
- Net income rose despite a $210.8 million loss on debt extinguishment, compared with $160.8 million in 2010. Interest expense declined to $440.2 million from $507.4 million.
- Operating cash flow increased by $333.0 million; free cash flow rose to $864.8 million. Capital expenditures increased by $141.8 million.
- Share repurchases totaled $459.7 million in 2011; dividends paid were $309.4 million. The quarterly dividend rose to $0.22 per share in the third quarter.
Outlook, risks and unusual items
- 2012 outlook: Management projected revenue growth of approximately 1.5%–2.0% and diluted EPS of $1.80–$1.84, with adjusted diluted EPS of $1.98–$2.02 excluding an anticipated $0.18-per-share debt-extinguishment loss. The forecast assumed no improvement or deterioration in the overall economy.
- Management expected approximately $920 million of cash purchases of property and equipment in 2012 and planned to call and refinance $750 million of 6.875% notes due 2017. The remaining unamortized discount on those notes was $75.8 million; early repayment could also incur premiums.
- Debt principal was approximately $7.1 billion at year-end. Revolving-credit availability was $1.515 billion after letters of credit. The company reported covenant compliance, with a 5.25 EBITDA-to-interest ratio against a 3.00 minimum and 2.99 debt-to-EBITDA against a 3.50 maximum. Senior debt ratings were BBB (S&P and Fitch) and Baa3 (Moody’s).
- Environmental and landfill obligations included $1.037 billion for capping, closure and post-closure and $543.7 million for remediation. Management said remediation liability could be approximately $197 million higher using the high ends of reasonably possible ranges.
- Legal proceedings carried an aggregate accrual of approximately $114 million; using the high ends of estimated loss ranges would increase that amount by approximately $109 million. Notable matters include ongoing landfill-related litigation, the $29.5 million Livingston settlement subject to appeal, and the Chicago contracting matter. The City of Chicago settlement required an $11 million payment and conversion of 79 temporary positions to full-time jobs; inquiries by law enforcement and other agencies remained ongoing.
- Key operating risks include fuel and recycled-commodity price volatility, competition and weak waste volumes, difficulty obtaining landfill permits or expansions, severe weather, environmental liability, self-insurance and pension funding exposure, and substantial debt. Fuel recovery fees offset about 68% of 2011 fuel costs; about 4% of fuel purchases were hedged. About 33% of recycling commodity tonnage sold was hedged.
- Reported earnings included significant debt-refinancing charges. Management’s adjusted earnings measures are non-GAAP and may not be comparable with similarly titled measures at other companies.
Most important facts for investors to verify
- Reconcile reported EPS with adjusted EPS, particularly the recurring debt-refinancing charges and the planned 2012 note redemption.
- Assess whether forecast pricing and volume growth can offset fuel costs, competitive pressures and contract expirations.
- Review debt maturities, revolving-credit availability, covenant headroom and the funding capacity for capital spending, dividends and repurchases.
- Track landfill permitting and expansion progress, environmental reserves, remediation estimates and developments in material legal proceedings.
- Confirm the sustainability of cash conversion and free cash flow after capital expenditures, dividends and other committed obligations.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.