Republic Services, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 5, 2010. Financial statements are unaudited. Republic provides non-hazardous solid-waste collection, transfer, recycling and disposal services across four geographic regions.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $2,061.7 million | $2,073.5 million | $6,085.8 million | $6,200.1 million |
| Operating income | $367.6 million | $386.9 million | $1,149.7 million | $1,260.6 million |
| Operating margin | 17.8% | 18.7% | 18.9% | 20.3% |
| Net income attributable to Republic | $134.2 million | $120.5 million | $358.9 million | $459.4 million |
| Diluted EPS | $0.35 | $0.32 | $0.93 | $1.21 |
| Operating cash flow | $368.9 million | $324.8 million | $963.7 million | $1,012.4 million |
| Free cash flow | $187.7 million | $143.5 million | $409.7 million | $492.7 million |
Free cash flow is a company-defined, non-GAAP measure: operating cash flow less property-and-equipment purchases plus asset-sale proceeds. It excludes debt service, dividends and other required or committed expenditures.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $120.5 million; restricted cash and marketable securities were $206.1 million. Current assets totaled $1.330 billion versus current liabilities of $2.835 billion.
- Total debt was $6.928 billion, including $1.092 billion classified as current, compared with $6.963 billion total debt and $543.0 million current at year-end 2009. Long-term debt was $5.836 billion.
- No borrowings were outstanding under the revolving credit facilities; availability was $1.380 billion after letters of credit. The company reported compliance with covenants: leverage ratio 3.01 versus a 3.25 maximum, and EBITDA-to-interest ratio 4.27 versus a 3.00 minimum.
- Nine-month capital expenditures were $571.4 million. Cash dividends paid were $217.7 million; the quarterly dividend was increased to $0.20 per share in July 2010.
Changes versus prior comparable periods
- Q3 revenue declined 0.6%; nine-month revenue declined 1.8%. For the nine months, internal revenue growth was negative 0.5%: core price rose 1.7% and commodity price 1.4%, while core volume fell 4.3%. Divestitures reduced revenue growth by 1.3%.
- Nine-month operating income and reported diluted EPS decreased year over year. The comparison was affected by a $144.3 million net gain on asset dispositions in 2009 versus a $27.1 million net loss in 2010, and by 2010 debt-extinguishment losses of $151.7 million versus $31.8 million in 2009.
- Management’s adjusted, non-GAAP diluted EPS was $0.45 for Q3 versus $0.39, and $1.29 for the nine months versus $1.16. These adjustments exclude specified items and may not be comparable with similarly titled measures at other companies.
- Interest expense fell to $387.0 million for the nine months from $448.8 million. Cost of operations as a share of revenue was unchanged at 58.8% year to date but increased to 59.4% from 58.2% in Q3, reflecting higher fuel and landfill operating costs, partly offset by lower labor and other costs.
Outlook, commentary and notable items
- Management said the business performed well despite a challenging economy, citing the essential nature of its services, pricing, cost controls and integration synergies. It reported $190 million in annual run-rate synergies from the Allied integration.
- Management expected 2010 capital expenditures of approximately $915 million and property and equipment received of approximately $835 million; an approximately 42% effective tax rate was expected for 2010. No full-year revenue or EPS guidance is stated in the provided filing text.
- Expected remaining integration costs included $0.9 million of restructuring charges and $7.5 million of synergy-plan costs in Q4 2010. The company expected an approximately $10 million Q4 loss on extinguishment of debt from tax-exempt refinancing.
- In November 2010, the board authorized repurchases of up to $400 million of common stock through December 31, 2011; timing and amount are at management’s discretion.
- Republic reported $1.638 billion of accrued landfill and environmental liabilities, including $1.088 billion for capping, closure and post-closure and $549.8 million for remediation. Management estimated the reasonably possible high end of remediation costs could exceed recorded amounts by approximately $191 million.
- Other exposures include approximately $110 million accrued for legal proceedings, with the aggregate potential liability approximately $118 million higher at the high end of estimated ranges; a former-employee jury verdict under appeal; environmental and odor-related proceedings; and a government-contract subcontracting compliance matter that could result in restitution, damages, penalties or lost business.
- A tax dispute concerning a partnership-interest exchange could involve $156.2 million of potential tax and $68.2 million of accrued interest, which the company says are fully reserved; asserted penalties and related interest of $47.8 million are not included in that statement of reserved tax and interest. Multi-employer pension plan exposure is not yet determinable.
- Management identified economic weakness and lower waste volumes, fuel and commodity prices, environmental obligations, litigation, debt and refinancing needs, regulation, weather, and pension-plan exposure as risks. It stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the period.
Investor verification priorities
- Reconcile reported and adjusted earnings, especially the 2009 asset-sale gains and 2010 debt-extinguishment charges.
- Assess the drivers and persistence of declining volumes, rising fuel costs and lower operating margins.
- Review the debt maturity schedule, refinancing plans, covenant headroom and the use of revolver capacity and restricted cash.
- Evaluate the assumptions behind landfill closure and remediation reserves, legal accruals and unresolved tax and pension exposures.
- Track capital spending, free cash flow after dividends and debt service, and whether the authorized share repurchases proceed.