Republic Services, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in millions of dollars, except per-share data. Republic is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services, operating through four geographic regions.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,116.2 | $2,061.7 | $6,167.7 | $6,085.8 |
| Operating income | $408.5 | $367.6 | $1,185.9 | $1,149.7 |
| Operating margin | 19.3% | 17.8% | 19.2% | 18.9% |
| Net income attributable to Republic | $193.5 | $134.2 | $398.2 | $358.9 |
| Diluted EPS | $0.52 | $0.35 | $1.05 | $0.93 |
| Cash from operations | $491.2 | $368.9 | $1,286.8 | $963.7 |
| Free cash flow | $283.9 | $187.7 | $614.1 | $409.7 |
Q3 revenue rose 2.6% year over year; nine-month revenue rose 1.3%. Nine-month growth included 3.3% from price, fuel surcharges and recycling commodities, partly offset by lost San Mateo and Toronto contracts, lower volumes and divestitures. Q3 operating income increased 11.1% and net income attributable to Republic increased 44.2%; nine-month increases were 3.1% and 10.9%, respectively.
Cost of operations was 59.6% of revenue in Q3 and 59.3% year to date, versus 59.4% and 58.8%. Higher fuel and recycling-material costs pressured results; productivity and lower disposal, subcontracting and risk-management costs provided offsets. Average diesel cost increased about 31% year over year in both comparison periods. Nine-month recycling-material sales rose to $317.0 from $221.0.
Cash, debt and liquidity
- Cash and cash equivalents were $72.6 at September 30, 2011, versus $88.3 at December 31, 2010. Restricted cash and marketable securities were $160.5 and are not generally available for operating purposes.
- Total debt was $7,031.3, up from $6,743.6 at year-end; long-term debt was $7,021.6. The current portion fell to $9.7 from $878.5, largely reflecting repayment and refinancing of maturities.
- Credit-facility availability was $1,460.4 after $919.6 of letters of credit. The company reported covenant compliance, with a 5.09 EBITDA-to-interest ratio against a 3.00 minimum and debt-to-EBITDA of 3.02 against a 3.50 maximum.
- Operating cash flow increased to $1,286.8 for the first nine months. Capital expenditures paid were $696.1; management expected 2011 capital expenditures of approximately $985, with property and equipment received expected at approximately $865, excluding $120 received in 2010 and paid in 2011.
- Free cash flow is a company-defined, non-GAAP measure and excludes debt service and dividends. Nine-month dividends paid were $227.8; treasury-share purchases were $429.9.
Material changes, outlook and unusual items
- Republic issued $1.85 billion of senior notes in 2011, including 3.800% notes due 2018, 4.750% notes due 2023 and 5.700% notes due 2041, and used proceeds in part to refinance or retire existing debt. Nine-month debt-extinguishment loss was $207.3, including $90.6 of cash premiums and fees and $116.7 of non-cash charges.
- Reported nine-month results included a $28.8 Southern Region landfill impairment and accelerated closure obligations, partly offset by a $17.1 gain on business dispositions. The company also recorded $7.2 of Western Region impairments. Q3 net income benefited from approximately $19 of tax credits and lower estimated state tax rates; the Q3 effective tax rate was 34.6%, versus 41.5% a year earlier.
- The board authorized an additional $750 share-repurchase program through December 31, 2013. Together with the prior authorization, 16.0 million shares had been repurchased from November 2010 through September 2011 for $470.2. The quarterly dividend was increased to $0.22 per share.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management expected to remain in compliance with credit covenants through 2011 and said available cash, operating cash flow and revolver capacity should meet anticipated capital needs and maturities.
- Environmental liabilities totaled $1,603.7, including landfill closure obligations and remediation. Management said a reasonably possible high-end remediation estimate could be approximately $131 above recorded amounts. It identified uncertainty in landfill estimates, self-insurance reserves, litigation and tax positions.
- Legal proceedings carried an aggregate accrual of approximately $113; using high ends of estimated ranges would increase potential liability by approximately $107. Significant matters include landfill-related claims, the Luri employment judgment under appeal, and a government-contract subcontracting compliance matter that could result in restitution, damages, penalties or lost business.
- An IRS dispute over a historical partnership-interest exchange could involve $156.2 of tax, approximately $80.7 of interest and approximately $50.6 of asserted penalties and penalty-related interest. The company said tax and interest were reserved, but the potential penalty and related interest were not included in that reservation.
- Other risks include fuel and commodity-price exposure, pricing increases that may not offset cost inflation, severe weather, regulation and landfill permitting, and potential multi-employer pension-plan withdrawal or funding liabilities. Management reported effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether pricing and fuel surcharges can continue to offset higher fuel, labor and maintenance costs without worsening volume trends.
- The sustainability of cash generation after planned capital expenditures, dividends, repurchases and debt service.
- Debt refinancing costs, variable-rate exposure and continued compliance with credit covenants; a 100-basis-point rate change was estimated to affect annual interest expense and cash interest by about $9.
- Developments in environmental remediation estimates, landfill litigation, the IRS dispute and the government-contract compliance matter.
- How much reported earnings growth reflects recurring operations versus tax credits, refinancing charges, impairments and disposition gains; adjusted results are non-GAAP and depend on company-defined exclusions.