Business context and reporting period
Republic Services, Inc. is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Operations are reported in East, Central and West regions.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2,165.4 million | $2,046.9 million | $6,275.7 million | $6,089.9 million |
| Operating income | $352.3 million | $317.9 million | $807.7 million | $1,031.8 million |
| Operating margin | 16.3% | 15.5% | 12.9% | 16.9% |
| Net income attributable to Republic | $171.4 million | $152.7 million | $352.3 million | $444.8 million |
| Diluted EPS | $0.47 | $0.42 | $0.97 | $1.20 |
| Operating cash flow | Quarterly value not separately provided here | Quarterly value not separately provided here | $1,137.2 million | $1,056.7 million |
| Free cash flow | $153.4 million | $119.9 million | $460.5 million | $373.8 million |
Q3 revenue increased 5.8%; management attributed growth to pricing, stronger collection and disposal volumes, and recycling revenue. For the nine-month period, revenue rose 3.1%, including 1.3% from average yield, 0.9% from volume, 0.5% from net acquisitions and 0.1% from recycling commodity pricing. Q3 operating margin expanded, while year-to-date margin contracted.
Cost of operations was 60.9% of revenue in Q3 versus 62.6% a year earlier, but 62.9% year to date versus 61.1%. Nine-month results include materially higher pension negotiation and withdrawal charges and a Bridgeton remediation charge. Management’s non-GAAP adjusted diluted EPS was $0.55 in Q3 versus $0.53, and $1.44 for nine months versus $1.50; these adjustments exclude selected items and are not GAAP measures.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $97.3 million; restricted cash and marketable securities were $175.5 million.
- Total debt carrying value was approximately $7.04 billion, including $7.02 billion of long-term debt net of current maturities. The company reported no borrowings on its revolving credit facilities and $1.54 billion of availability after letters of credit; it also had $14.0 million outstanding under an uncommitted facility.
- Debt covenant ratios were within limits: EBITDA-to-interest was 6.04 against a 3.00 minimum, and debt-to-EBITDA was 3.21 against a 3.75 maximum for the relevant quarters. The permitted leverage ceiling is scheduled to decline to 3.50 after the quarter ending March 31, 2014.
- Nine-month capital expenditures were $688.7 million. Cash dividends paid were $254.9 million and treasury-stock purchases were $214.1 million. The quarterly dividend declared was $0.26 per share.
Material changes, outlook and key risks
- Pension withdrawal: The company withdrew from the Central States multiemployer pension fund and estimated its liability at approximately $169 million, payable in installments over 20 years. Nine-month negotiation and withdrawal costs were $157.7 million, including other plan-related amounts.
- Environmental matters: Republic recorded a $108.7 million Bridgeton remediation charge in June 2013. Its recorded Bridgeton liability was $119.4 million, with a remaining reasonably possible loss range of $88 million to $368 million. Across remediation liabilities, the reasonably possible high end could exceed recorded amounts by approximately $561 million.
- Other contingencies: Accrued legal proceedings totaled approximately $67.7 million; using the high ends of estimated ranges would add approximately $73.5 million. The Bridgeton landfill faces regulatory proceedings and a resident class action; a separate Congress Landfill case remains in discovery. Republic disclosed preliminary discussions with authorities concerning potentially inaccurate or incomplete information provided by a landfill subsidiary, while stating that it did not expect a material impact based on information then available.
- Operating and market risks: Fuel and commodity prices, labor and maintenance costs, severe weather, regulation and permitting, landfill liabilities, litigation, and multiemployer pension obligations could affect earnings and cash flow. A $10-per-ton change in recyclable-material prices was estimated to change annual revenue and operating income by approximately $29 million and $20 million, respectively.
- Outlook and capital allocation: No specific earnings or revenue guidance is provided in the supplied filing text. Management expected approximately $1.2 million of additional restructuring expense during the remainder of 2013. In October 2013, the board increased share-repurchase authorization by $650 million, bringing the total remaining authorization to $760.6 million through December 31, 2015; timing and amounts are discretionary.
- Management stated that cash, operating cash flow and credit availability were sufficient for anticipated capital needs and obligations. The company reported investment-grade ratings and effective disclosure controls at period end.
Important facts for investors to verify
- Track the final Central States withdrawal liability, payment schedule and related expense, including any developments in other multiemployer plans.
- Monitor Bridgeton remediation costs, regulatory actions and litigation, and compare changes in recorded reserves with the disclosed loss ranges.
- Assess whether improved Q3 revenue and margin performance continues, given year-to-date operating-income and diluted-EPS declines and the company’s reliance on adjusted non-GAAP measures.
- Review covenant headroom, debt and liquidity, planned capital spending, and the actual pace of repurchases and dividends.
- Follow the EPA-related inquiry and other pending legal matters; the filing says outcomes and estimates may change and actual results may differ materially.