Republic Services, Inc. (RSG) reported fiscal 2011 third quarter results, posting an EPS of 53 cents in the quarter, an 18% increase from the year-earlier quarter and above the Zacks Consensus Estimate of 50 cents.
The quarter’s EPS excluded a loss of 1 cent related to extinguishment of debt and the prior-year quarter excluded a loss on extinguishment of debt of 2 cents and restructuring charges and costs of achieving synergies of 2 cents. Including these items, EPS amounted to 52 cents compared with 35 cents in the year-ago quarter.
Total revenue for the quarter was $2.12 billion, up from $2.06 billion in the prior-year quarter and above the Zacks Consensus Estimate of $2.11 billion.
Sales improved due to a 0.7% increase in core prices, 1.2% contribution from fuel surcharges, 1.7% from commodities pricing, 0.3% increase in volumes and a net effect of 0.1% from acquisitions/divestitures. However, these increases were negatively impacted by 1.4% due to the expiration of the company’s contracts with San Mateo County and the City of Toronto.
Costs and Margins
Cost of goods sold was $1.26 billion in the reported quarter, up from $1.22 billion in the year-ago quarter. Selling, general and administrative expenses declined to $207.5 million from $209.4 million in the year-ago quarter.
Adjusted operating income improved 5% to $414.3 million during the quarter and operating margins upped 40 basis points year over year to 19.6% in the quarter.
Segment Performance
Total revenue from the Collection segment was essentially flat at $1.57 billion from year-ago levels. During the quarter, residential collections dipped 1.8% year over year to $538.3 million while commercial collections remained flat at $625.9 million.
Industrial collections increased 3% year over year to $397.5 million and other collections improved 16% year over year to $8.5 million. The Transfer and Disposal segment reported total revenue of $778.5 million, flat on a year-over-year basis.
Financial Update
As of September 30, 2011, cash and cash equivalents decreased to $72.6 million, from $320.5 million as of June 30, 2011.
As of September 30, 2011, the debt-to-capitalization ratio increased to 48% from 47.4% as of June 30, 2011.
In August, Republic Services’ board of directors authorized the repurchase of $750 million of its stock through December 31, 2013 in addition to the previous $400 million repurchase program authorized in November 2010. Of the programs, the company has repurchased more than 4% of its stock worth $470 million and paid $300 million in dividends.
The board of directors has declared a regular quarterly dividend of 22 cents per share, which will be paid on January 17, 2012 to stockholders of record on January 3, 2012.
Free cash flow during the quarter improved to $283.9 million from $187.7 million in the year-earlier period. Cash from operations for the first nine months of 2011 improved to $1.29 billion from $963.7 million during the comparable year-ago period.
Outlook
Management reaffirmed its full year guidance with expected earnings in the range of $1.86–$1.89 per share and free cash flow in the range of $875 million to $900 million.
Performance of Competitor
Waste Management Inc. (WM), competing with Republic Services, recorded a 15% increase in EPS to 63 cents (excluding special items) in the third quarter from 55 cents in the year-ago quarter, outperforming the Zacks Consensus Estimate of 61 cents. Revenues increased 9% to $3.52 billion from $3.23 billion in the year-ago quarter, higher than the Zacks Consensus Estimate of $3.42 billion.
Our Take
Revenue declines at the majority of its business lines remain a concern. However, the company has secured a number of new contracts that is expected to improve its performance in 2012. During the third quarter, the company reported a 2.5% increase in internal top-line growth, the highest since 2008.
The company is also witnessing volume expansion in the collection lines of business, the ninth straight quarter of sequential improvement. Looking forward, collection volumes are expected to improve further. Besides, share repurchases are sure to bring bottom-line benefits to the company in the upcoming quarters. We currently have a Zacks #3 Rank (short-term hold rating) on the stock.
Republic Services is the second largest domestic non-hazardous solid waste company in the U.S. It provides non-hazardous solid waste disposal services for commercial, industrial, municipal and residential applications through a network of 375 collection companies in 40 states and Puerto Rico.
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