Republic Services, Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. Republic provides non-hazardous solid-waste collection, transfer, recycling and disposal services. Results include Allied Waste from its December 5, 2008 acquisition; therefore, reported comparisons with 2008 are not like-for-like. Unless noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $2,073.5 | $834.0 | $6,200.1 | $2,440.7 |
| Operating income | $386.9 | $167.0 | $1,260.6 | $394.8 |
| Operating margin | 18.7% | 20.0% | 20.3% | 16.2% |
| Net income attributable to Republic | $120.5 | $88.7 | $459.4 | $205.5 |
| Diluted EPS | $0.32 | $0.48 | $1.21 | $1.11 |
- Reported revenue rose 149% in Q3 and 154% year to date, primarily because of Allied. On a pro forma basis, adjusted revenue fell 12.8% in Q3 and 11.4% year to date, after divestitures and intercompany items. Core price increased 2.8% in Q3 and 3.2% year to date, but core volume declined 10.1% and 9.6%, respectively; lower fuel surcharges and commodity prices also weighed on revenue.
- Cost of operations was 58.2% of revenue in Q3 and 58.8% year to date, versus 59.9% and 63.6% in 2008. Q3 operating margin declined year over year; year-to-date margin benefited from $144.3 of net disposition gains and comparison with $69.0 of prior-year remediation charges.
- Management’s adjusted, non-GAAP results were $149.3 net income and $0.39 diluted EPS for Q3, versus $90.7 and $0.49; year to date, $438.6 and $1.16, versus $251.3 and $1.36. The sharp increase in weighted-average shares following the merger helps explain why reported Q3 EPS fell despite higher net income.
- Nine-month operating cash flow was $1,012.4, compared with $474.2; capital expenditures were $542.5, compared with $264.1. Company-defined free cash flow was $492.7 versus $215.9. Operating cash flow included the enlarged business and was affected by payment timing and working-capital uses.
- At September 30, cash was $107.3, restricted cash and marketable securities were $254.9, and total debt was $7,055.8, down from $7,702.5 at year-end 2008. Current debt was $242.5. Credit facilities had no borrowings outstanding, but $1,630.7 of capacity supported letters of credit, leaving $1,119.3 available; the company reported covenant compliance.
- Interest expense increased to $144.8 in Q3 and $448.8 year to date, mainly reflecting Allied debt and acquisition-accounting accretion. Total assets were $19,530.1 and stockholders’ equity was $7,554.5 at September 30.
Material changes, outlook and management commentary
- The Allied merger substantially increased scale and debt and drove the reported year-over-year growth. Integration restructuring charges were $55.9 year to date; the company expected approximately $12.8 of additional charges and substantial completion by Q4 2009.
- Management projected $145 of annual run-rate merger synergies by year-end 2009, raised from prior guidance of $125, and $165–$175 by year-end 2010. An integration bonus plan is tied to achieving targeted synergies.
- Management expected economic weakness and declining volumes to continue through the rest of 2009 and potentially into 2010, with low recycling commodity prices. It cited pricing and cost controls as offsets and said slower growth could help preserve free cash flow by reducing capital needs. No specific earnings or revenue guidance was provided.
- In September, Republic issued $650 of 5.5% senior notes due 2019 and used proceeds in part to retire $325.5 of notes due 2010–2011; the transaction generated a $31.8 debt-extinguishment charge. The company also notified holders it would redeem its 7.875% 2013 notes and 4.25% convertible debentures in Q4 2009, anticipating an approximately $55 loss on extinguishment, funded with cash and potentially revolver borrowings or new capital-market financing.
- Quarterly dividends were $0.19 per share; share repurchases remained suspended, with suspension expected to continue until approximately 2011. The company reported investment-grade ratings and no off-balance-sheet debt, apart from operating leases and financial-assurance arrangements.
Risks, contingencies and unusual items
- Tax disputes are significant. The company fully accrued an estimated potential $449 of federal and state taxes and interest and $172 of penalties and penalty-related interest related to challenged capital-loss deductions; it had already paid approximately $395 of tax and interest and $11 of penalties and related interest. Further payments could affect cash flow. A separate partnership-interest tax dispute could involve approximately $156 of tax plus $56 of accrued interest; penalties and related interest were not fully reserved and could be material.
- Environmental and landfill obligations include $1,076.1 of capping, closure and post-closure liabilities and $363.3 of remediation liabilities. At Countywide, the company recorded $76.6 of remaining remediation liability and agreed to $10.0 of civil penalties and financial relief; related lawsuits involved approximately 782 plaintiffs, and the potential loss was not estimable.
- Other disclosed exposures include a former-employee jury verdict of $46.6 plus interest and fees, with appeal dismissed on procedural grounds; class-action claims challenging fuel, environmental and administrative fees; and a government-contract subcontracting compliance matter that could result in restitution, damages, penalties or lost business. Management said the contracting matter could materially affect results or cash flows in the period recognized or paid.
- Some contributing multi-employer pension plans may be underfunded; potential assessments were not determinable. Self-insurance reserves were $435.1. Management cautioned that environmental, litigation, tax, acquisition-valuation and reserve estimates may change. Fuel, commodity-price, interest-rate, regulatory, weather, labor and integration risks were also identified.
Most important facts for investors to verify
- Underlying operating trends: pro forma core revenue decline, volume losses, pricing and segment margins, separating recurring performance from merger effects and asset-sale gains.
- Cash generation and debt service: free-cash-flow definition and sustainability, capital expenditure needs, debt maturities, available revolver capacity and planned Q4 redemptions.
- Delivery and cost of merger synergies, including remaining integration charges and the assumptions behind the $145 and $165–$175 run-rate targets.
- Developments in the tax disputes, environmental obligations and significant litigation, including exposures not fully reserved or not reasonably estimable.
- Acquisition accounting remained preliminary, with substantial goodwill and estimates subject to revision; confirm final purchase-price allocations and any resulting earnings or balance-sheet adjustments.