Business context and reporting period
Republic Services, Inc. filed this Form 10-K for the fiscal year ended December 31, 2009. It is a national provider of non-hazardous waste collection, transfer, recycling and disposal services, operating in 40 states and Puerto Rico. Its December 2008 acquisition of Allied Waste Industries materially changed the scale of the business; 2009 includes Allied for the full year, while 2008 includes Allied only from December 5.
Financial performance and liquidity
- Revenue: $8.199 billion, up 122.5% from $3.685 billion, principally because of the Allied acquisition. On a pro forma basis including Allied in both periods and excluding divestitures, adjusted revenue declined 10.7% in 2009.
- Profit: Operating income was $1.590 billion (19.4% of revenue), versus $283.2 million (7.7%) in 2008. Net income attributable to Republic was $495.0 million, or $1.30 diluted EPS, versus $73.8 million, or $0.37. Comparisons are affected by the acquisition, asset-sale gains, remediation items and debt-extinguishment costs.
- Underlying revenue trends: Pro forma core price rose 3.0%, but core volume fell 9.5%; lower fuel surcharges reduced revenue 2.5% and lower commodity prices reduced it 1.7%.
- Costs and margins: Cost of operations improved to 59.1% of revenue from 65.6%, reflecting lower fuel and disposal costs, higher waste internalization and the absence of significant 2008 remediation charges. SG&A was 10.7% of revenue, versus 11.8%.
- Cash flow and investment: Operating cash flow was $1.397 billion, compared with $512.2 million. Capital expenditures were $826.3 million, versus $386.9 million. Company-defined free cash flow was $602.0 million, compared with $133.5 million; this non-GAAP measure excludes debt service and dividends.
- Debt and liquidity: Year-end debt carrying value was $6.963 billion; contractual principal value of notes, capital leases and other long-term debt was $7.430 billion. Cash was $48.0 million and restricted cash and marketable securities were $240.5 million. Credit facilities had $0.8 billion of availability after borrowings and letters of credit. The company reported covenant compliance, with debt-to-EBITDA of 2.87 against a 4.00 maximum.
- Other metrics: Dividends were $0.76 per share for the year; the quarterly rate was $0.19. Fuel expense was $349.8 million, and just 6.4% of fuel purchases were hedged.
Material changes versus the prior comparable period
Reported year-over-year growth is not a like-for-like comparison because Allied was consolidated for only the final 27 days of 2008. On the company’s pro forma basis, 2009 revenue contraction reflected sharp volume declines across business lines, especially industrial collection and landfill operations. Management said pricing and cost controls moderated the effect on margins. Operating results also benefited from a $137.0 million net gain on asset dispositions, including DOJ-required divestitures; 2008 included $156.8 million of remediation charges and $89.8 million of impairment and disposition losses.
Operating cash flow increased, while net debt repayments were $865.9 million. The company issued $1.25 billion of notes at 5.50% due 2019 and 5.25% due 2021, and used proceeds and other funds to repay or repurchase higher-cost debt. Weighted-average coupon costs on senior notes declined by more than 130 basis points, according to the filing.
Outlook, management commentary, risks and unusual items
- 2010 outlook: Management anticipated core internal revenue declining approximately 0.5%–2.0%, with 2.0%–2.5% core price growth offset by a 3.0%–4.0% volume decline. The forecast assumed no material economic improvement or deterioration from conditions at year-end 2009.
- Integration: Republic said it had reached its original $150 million annual run-rate synergy goal by year-end 2009 and raised its target to $165–$175 million by the end of 2010. It expected about $34 million of 2010 costs to achieve synergies and approximately $12 million of further restructuring charges.
- Capital spending and debt: The company expected 2010 capital expenditures of approximately $870 million. It planned continued debt reduction; share repurchases were suspended and were not expected to resume until approximately 2011. The company expected to redeem $425 million of 6.125% notes in March 2010, with an estimated $52 million extinguishment charge.
- Environmental and legal exposures: Recorded landfill and environmental liabilities totaled $1.629 billion, including $1.075 billion for capping, closure and post-closure and $554.1 million for remediation. Significant matters include Countywide landfill remediation and related litigation, the Congress landfill class action, and other landfill regulatory proceedings. The company also disclosed a government-contract subcontracting compliance matter that could result in restitution, damages, penalties or lost business.
- Tax matters: An IRS dispute concerning an Allied partnership-interest exchange could involve estimated federal and state cash taxes of $156 million plus approximately $59 million accrued interest; those amounts, but not potential penalties and penalty-related interest, were reserved. Separately, the company settled Allied risk-management-company tax matters for approximately $125 million, with about $67 million still expected to be paid in 2010 after a $58 million first-quarter payment.
- Other risks: Management highlighted the weak economy and continuing volume pressure, competitive pricing, fuel and recycled-commodity price volatility, high leverage, landfill permitting and capacity, environmental regulation and greenhouse-gas rules, self-insurance and pension obligations, and the possibility that merger synergies or integration benefits may be delayed or not fully realized.
- Controls and audit: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Separate acquisition-driven reported growth from underlying performance; verify pro forma volume, pricing and revenue trends.
- Assess whether the $165–$175 million synergy target is achieved, and track related costs and the company’s SG&A ratio.
- Review debt maturities, the May 2010 receivables-facility renewal or repayment, covenant headroom, and the use of cash for debt reduction and dividends.
- Monitor environmental reserves and cash payments, particularly Countywide, Sunrise and Congress, plus the status and potential cost of pending landfill litigation.
- Follow the IRS partnership-exchange dispute, remaining tax-settlement payments and the government-contract compliance matter.
- Compare actual 2010 revenue, volume, pricing and capital spending with management’s stated outlook.