Republic Services, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Republic is a major U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services, operating in 38 states and Puerto Rico.
Business context and financial performance
Republic operates collection, transfer, landfill and recycling businesses across East, Central and West regions. It reported 332 collection operations, 191 active landfills and 71 recycling centers. Approximately 67% of collected waste was disposed at company-operated or owned landfills.
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $8,118.3 million | $8,192.9 million |
| Operating income / margin | $1,320.6 million / 16.3% | $1,552.7 million / 19.0% |
| Net income attributable to Republic | $571.8 million | $589.2 million |
| Diluted EPS | $1.55 | $1.56 |
| Cash from operations | $1,513.8 million | $1,766.7 million |
| Capital expenditures | $903.5 million | $936.5 million |
| Free cash flow, company-defined non-GAAP | $639.0 million | $864.8 million |
| Total debt, carrying value | $7,070.5 million | $6,921.8 million |
| Cash and cash equivalents | $67.6 million | $66.3 million |
Fourth-quarter 2012 revenue was $2,028.3 million, operating income $288.8 million, net income attributable to Republic $127.0 million and diluted EPS $0.35. In fourth-quarter 2011, the respective figures were $2,025.2 million, $366.7 million, $191.0 million and $0.51.
At year-end, current assets were $1,231.3 million and current liabilities $1,695.0 million. Restricted cash and marketable securities totaled $164.2 million. Credit-facility availability was $1,315.6 million after letters of credit. The company reported compliance with its credit covenants; its debt-to-EBITDA covenant ratio was 3.09 against a maximum of 3.50, and its EBITDA-to-interest ratio was 5.87 against a minimum of 3.00.
Changes versus prior periods
- Revenue declined 0.9% year over year. Core price rose 0.8% and acquisitions net of divestitures added 0.4%, but volume fell 1.0% and recycling commodity revenue fell 1.2%.
- Operating margin fell to 16.3% from 19.0%, reflecting higher labor, maintenance, fuel and landfill operating costs, including a $74.1 million remediation charge for a closed Missouri landfill.
- Net income and diluted EPS were slightly lower than 2011. Results included a $112.6 million loss on extinguishment of debt and a $35.8 million charge related primarily to withdrawal from the Central States Pension Fund.
- Operating cash flow decreased by $252.9 million and company-defined free cash flow fell by $225.8 million. Cash flow included $68 million of synergy incentive plan payments and increased remediation expenditures.
- In the fourth quarter, Republic reorganized its field and corporate operations, consolidating four regions into three and 28 areas into 20. The filing recasts historical segment reporting to reflect the new structure.
Outlook, commentary and notable items
- 2013 guidance: Revenue growth of approximately 2.0%–2.5%; adjusted diluted EPS of $1.86–$1.91, compared with adjusted 2012 EPS of $1.80. The EPS outlook assumes an approximately 38% effective tax rate and cash taxes equal to 90%–100% of the tax provision. Guidance assumes no improvement or deterioration in the overall economy.
- Management expected approximately $860 million of property and equipment to be received in 2013 and approximately $880 million of cash purchases. It expected about $15 million of additional restructuring expense in 2013; the restructuring was projected to reduce annual SG&A by approximately $23 million.
- The 2012 effective tax rate was 30.6%, favorably affected by approximately $35 million from an IRS settlement and approximately $16 million from tax credits and state-rate estimate changes. These items contributed to lower reported tax expense.
- Debt refinancing included issuing $850 million of 3.55% notes due 2022 and redeeming $750 million of 6.875% notes due 2017. Despite refinancing, total debt increased to $7.07 billion. Senior debt ratings were BBB (S&P), BBB (Fitch) and Baa3 (Moody’s).
- Key exposures include fuel and recycled-commodity prices, economic and waste-volume weakness, competition and pricing, landfill permitting and capacity, environmental obligations, severe weather, and labor and pension matters. A $0.20-per-gallon diesel change was estimated to affect annual fuel costs by about $24 million; a $10-per-ton change in recycling prices was estimated to affect annual revenue and operating income by about $29 million and $20 million, respectively.
- Accrued landfill final-capping, closure and post-closure obligations were $1,052.4 million. Total accrued landfill and environmental costs, including remediation, were $1,616.1 million. Management stated actual remediation costs could exceed recorded estimates.
- The filing identifies ongoing litigation and regulatory matters, including landfill odor claims and proceedings. The aggregate legal accrual was approximately $66 million; using the high ends of estimated loss ranges would have increased it by approximately $79 million.
Important facts for investors to verify
- Whether 2013 pricing and acquisition contributions can offset weak volumes, commodity pressure and cost inflation, and whether the stated revenue and adjusted EPS guidance is achieved.
- The scope, timing and ultimate cost of Missouri landfill remediation: $64.2 million was recorded for the site, with a stated reasonably possible range of $50 million–$240 million.
- Potential further Central States Pension Fund withdrawal exposure: Republic estimated an additional $113 million–$146 million liability for a complete withdrawal in 2013, beyond the 2012 charge.
- Whether recorded environmental and legal reserves adequately reflect possible outcomes; the filing estimates aggregate remediation exposure could be approximately $374 million above recorded amounts using high-end ranges.
- Debt refinancing, covenant headroom and liquidity, including the use of credit-facility capacity for letters of credit and the company’s substantial long-term closure and remediation commitments.