Republic Services, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. Republic provides non-hazardous waste collection, transfer, recycling and disposal services across 40 states and Puerto Rico. The filing is an annual report, not a standalone fourth-quarter report; quarterly results are included below where relevant. Republic completed its acquisition of Allied Waste in December 2008 and completed the integration during 2010.
Key financial metrics
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $8,106.6 million | $8,199.1 million |
| Operating income | $1,539.1 million; 19.0% margin | $1,589.8 million; 19.4% margin |
| Net income attributable to Republic | $506.5 million | $495.0 million |
| Diluted EPS | $1.32 | $1.30 |
| Cash provided by operating activities | $1,433.7 million | $1,396.5 million |
| Capital expenditures | $794.7 million | $826.3 million |
| Free cash flow (company-defined, non-GAAP) | $676.4 million | $602.0 million |
| Total debt, carrying value | $6,743.6 million | $6,962.6 million |
| Cash and cash equivalents | $88.3 million | $48.0 million |
Collection generated 76.2% of 2010 revenue; transfer and disposal contributed 18.2%. Cost of operations declined to 58.8% of revenue from 59.1%, while selling, general and administrative expense was 10.6% versus 10.7%. Interest expense fell to $507.4 million from $595.9 million. The company reported a $160.8 million loss on extinguishment of debt, which weighed on reported earnings.
Liquidity included $172.8 million of restricted cash and marketable securities, which is not generally available for operations, and $1.638 billion of availability under revolving credit facilities at year-end. Current maturities of debt were $878.5 million on the balance sheet. The company was in covenant compliance; its reported debt-to-EBITDA ratio was 2.85 against a 3.25 maximum, and EBITDA-to-interest was 4.64 against a 3.00 minimum.
Material changes versus FY2009
- Revenue decreased 1.1% ($92.5 million). Excluding divested revenue, core revenue was unchanged: 1.6% core price growth and increases in commodity prices and fuel charges were offset by a 3.5% decline in core volume.
- Operating income declined 3.2%, and operating margin fell 0.4 percentage points. Lower volumes and cost-control measures helped reduce operating costs, but higher fuel costs and fewer asset-sale gains affected comparisons.
- Net income attributable to Republic increased 2.2%, and diluted EPS rose from $1.30 to $1.32. Management’s non-GAAP adjusted net income was $657.8 million, or $1.71 per diluted share, versus $564.6 million, or $1.48, in 2009; these adjusted measures exclude specified gains and charges and may not be comparable with other companies’ measures.
- Operating cash flow rose 2.7%; company-defined free cash flow increased to $676.4 million from $602.0 million. Debt carrying value declined by about $219 million year over year.
- Allied integration delivered approximately $190 million of annual run-rate synergies, including $161 million in operating synergies and $29 million in financing synergies, exceeding the original $150 million target. Management said it did not expect further synergy-achievement or acquisition-related restructuring charges in 2011.
Outlook, risks and unusual items
- 2011 guidance: Revenue growth of approximately 0.5%–1.5%, assuming neither improvement nor deterioration in overall economic conditions. Components include core price growth of 1.0%–1.5%, volume growth of 0.0%–0.5%, contract losses of 1.5%, fuel surcharges of 0.5% and commodities of 0.5%.
- Capital spending: Management expected approximately $870 million of 2011 cash purchases of property and equipment; anticipated equipment received during 2011 was $750 million, with the difference principally reflecting prior-year purchases paid in 2011.
- Debt and capital allocation: Republic issued $1.5 billion of senior notes in 2010, refinanced or repaid tax-exempt debt, paid $294.6 million of dividends and repurchased $41.1 million of shares under a newly authorized $400 million program. It planned further debt issuance in 2011 and expected to use remaining buyback authorization during 2011. Subsequent to year-end, it used its credit facilities to finance the $262.9 million maturity of 5.75% notes and entered into interest-rate locks for a planned note issuance.
- Operating pressures: Management cited continuing economic weakness and volume declines, particularly in manufacturing and construction-related business; competitive pricing; fuel and commodity price volatility; and the possibility that price increases may not offset cost inflation. Fuel expense was $407.6 million, or 5.0% of revenue, and fuel recovery fees covered approximately 66% of fuel costs.
- Environmental and legal exposure: Recorded landfill capping, closure and post-closure liabilities were $1,046.5 million; remediation liabilities were $552.1 million. The company cautioned that estimates may change and that actual costs could exceed reserves. Legal proceedings had an aggregate recorded accrual of approximately $113 million; use of the high ends of estimated loss ranges would have increased that accrual by approximately $121 million.
- Notable contingencies: An IRS dispute over a 2002 partnership-interest exchange could involve approximately $156 million of tax plus $71 million of interest and asserted penalties and penalty-related interest of approximately $49 million; tax and interest, but not penalties, were reserved. A separate IRS dispute over methane-gas costs was also pending. A government-contract subcontracting compliance matter could result in restitution, damages, penalties or loss of future business. Other significant matters include Countywide and Congress landfill claims and remediation, and an appeal of a $46.6 million jury verdict in the Luri employment case.
- Other risks: Approximately $7.0 billion of principal debt and capital leases, covenant and refinancing exposure, permit and landfill-capacity risk, potential greenhouse-gas regulation, self-insurance and pension exposure, and weather-related disruptions. The company reported no goodwill impairment in 2010; reporting-unit fair values were estimated to exceed carrying values by 120% to more than 170%.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal control over financial reporting was effective at December 31, 2010.
Important facts for investors to verify
- Whether 2011 revenue guidance and the assumed volume recovery materialized, especially after the San Mateo and Toronto contract losses.
- How much of the $190 million synergy run rate was sustained, and whether operating margins recovered despite fuel costs and weak volumes.
- Debt maturities, refinancing activity, covenant headroom and the effect of planned borrowing on interest expense and investment-grade ratings.
- Whether the $1.5986 billion combined recorded landfill closure and remediation liabilities adequately reflect ultimate cash obligations, including the significant site-specific ranges and legal exposures.
- Resolution and cash consequences of the IRS disputes, government-contract compliance matter, and material litigation, including the Luri appeal.
- Whether 2011 capital spending, dividends and share repurchases remained consistent with free cash flow and the company’s stated leverage objectives; free cash flow is a non-GAAP measure and excludes debt service and dividends.