Republic Services, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Republic is a major U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services, operating across four geographic regions.
Financial performance
Dollar amounts are in millions, except per-share data.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2,046.9 | $2,116.2 | $6,089.9 | $6,167.7 |
| Operating income | $317.9 | $408.5 | $1,031.8 | $1,185.9 |
| Operating margin | 15.5% | 19.3% | 16.9% | 19.2% |
| Net income attributable to Republic | $152.7 | $193.5 | $444.8 | $398.2 |
| Diluted EPS | $0.42 | $0.52 | $1.20 | $1.05 |
| Cash provided by operations | — | — | $1,056.7 | $1,286.8 |
| Capital expenditures | — | — | $707.4 | $696.1 |
| Free cash flow | — | — | $373.8 | $614.1 |
- For the nine months, total revenue declined 1.3%: core price growth of 0.7% and net acquisitions/divestitures of 0.4% were outweighed by volume declines of 1.1% and lower recycling commodity revenue of 1.3%. Q3 revenue fell 3.3% year over year.
- Cost of operations rose to 62.6% of revenue in Q3 from 59.6%; year-to-date it was 61.1% versus 59.3%. Management cited labor, fleet maintenance, landfill operating costs and a $37.1 million remediation charge at a closed Missouri disposal facility.
- Q3 adjusted diluted EPS, excluding specified items, was $0.47 versus $0.53. Nine-month adjusted diluted EPS was $1.44 versus $1.43. These are non-GAAP measures defined by the company.
- Interest expense declined to $296.3 million for the nine months from $335.4 million. The reported debt-extinguishment loss was $112.6 million versus $207.3 million in the prior-year period, substantially affecting comparisons.
Balance sheet and liquidity
- At September 30, 2012, cash and cash equivalents were $74.0 million; restricted cash and marketable securities were $132.9 million.
- Total debt carrying value was $7.104 billion, including $44.4 million current and $7.060 billion long-term. Long-term debt was $6.887 billion at December 31, 2011.
- Revolving credit facilities had $1.331 billion of remaining availability after letters of credit; there were no borrowings under those facilities. A separate uncommitted facility had $72.2 million drawn. The company reported covenant ratios within limits, except for an ERISA-related technical default that lenders waived in October.
- Operating cash flow fell to $1.057 billion from $1.287 billion, while free cash flow fell to $374 million from $614 million. The company attributed lower operating cash flow principally to working-capital movements, incentive-plan payments, taxes and environmental remediation payments.
- The company issued $850 million of 3.55% senior notes due 2022 and used proceeds to redeem $750 million of 6.875% notes due 2017 and for general purposes. The main revolving facility was extended to May 2017.
Outlook, commentary and material risks
- In November 2012, management updated 2012 adjusted diluted EPS guidance to $1.85–$1.87, versus reported diluted EPS guidance of $1.58–$1.60. The adjustment includes debt-extinguishment and Central States costs, restructuring expense, and a gain on asset dispositions and impairments.
- Preliminary 2013 adjusted diluted EPS outlook was $1.90–$1.92. Guidance assumes effective tax rates of 33.5% for 2012 and 38.0% for 2013. These are forward-looking, non-GAAP estimates, not guarantees.
- An October 2012 restructuring consolidated field regions from four to three and areas from 28 to 20, with office relocations and administrative staff reductions. Expected charges were approximately $30 million, about half in Q4 2012; anticipated annual SG&A savings were approximately $23 million.
- Two Central States pension withdrawal events generated a $31 million Q3 charge. Management estimated additional liability of approximately $95 million for a complete withdrawal in 2012 or $113–$146 million in 2013, based on current estimates; further withdrawal events could create material future charges.
- Environmental remediation liabilities totaled $546.3 million. The company said the reasonably possible high end of aggregate remediation estimates was approximately $198 million above recorded amounts. Countywide and Congress landfill remediation ranges were $51–$72 million and $53–$153 million, respectively.
- Other exposures include ongoing landfill-related litigation, legal proceedings with approximately $58 million accrued (with potential liability about $75 million higher using high-end estimates), fuel and recycling commodity volatility, variable-rate debt, labor negotiations, and regulatory, weather and volume risks. Management noted a $10 million annual interest-cost sensitivity to a 100-basis-point rate change on floating-rate debt.
Most important facts for investors to verify
- Whether revenue trends, particularly collection/disposal volumes and recycling commodity prices, stabilize and whether pricing offsets cost inflation.
- How much of the operating-margin and cash-flow deterioration is recurring versus attributable to specified charges, working capital, and remediation spending.
- Whether the restructuring delivers the projected $23 million annual savings and how its charges affect reported earnings.
- Actual Central States withdrawal obligations and any resulting charges or covenant implications; review the post-quarter credit-facility amendments.
- Updated estimates and cash-payment timing for environmental remediation, landfill closure obligations and material legal claims.
- Capacity to fund capital spending, dividends and repurchases while maintaining leverage, liquidity and investment-grade ratings.