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Republic Services Tops EPS

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Republic Services, Inc. (RSG - Analyst Report) reported fiscal 2011 fourth quarter results, posting an EPS of 53 cents in the quarter, a 26% increase from the year-earlier quarter and above the Zacks Consensus Estimate of 45 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 1 cent each. Including these items, EPS amounted to 51 cents compared with 38 cents in the year-ago quarter.

Total revenue remained flat at $2.02 billion, falling short of the Zacks Consensus Estimate of $2.03 billion. Positives like 0.6% increase in core prices, 1% hike in fuel recovery fees, net effect of 0.3% from acquisitions/divestitures were negatively impacted by 1.4% due to the expiration of the company’s contracts with San Mateo County and the City of Toronto, decreases in recycling commodities pricing of 0.1% and volume of 0.2%.

Costs and Margins

Cost of goods sold was $1.21 billion in the reported quarter, up from $1.18 billion in the year-ago quarter. Selling, general and administrative expenses declined to $213.9 million from $227.5 million in the year-ago quarter.

Adjusted operating income dipped 3% to $370 million during the quarter and operating margins contracted 70 basis points year over year to 18.3% in the quarter.

Segment Performance

Total revenue from the Collection segment was essentially flat at $1.53 billion from year-ago levels. During the quarter, residential collections dipped 2% year over year to $534 million while commercial collections remained flat at $616 million.

Industrial collections increased 3% year over year to $374 million and other collections improved remained flat at $8.5 million. The Transfer and Disposal segment reported total revenue of $239 million, a 2% decline from the year ago levels.

Fiscal 2011 Performance

Adjusted EPS in fiscal 2011 was $1.96, up 15% from $1.71 in fiscal 2010 and above the Zacks Consensus Estimate of $1.88.

Fiscal 2011 EPS excluded a loss of 34 cents related to extinguishment of debt and fiscal 2010 excluded a loss on extinguishment of debt of 26 cents and restructuring charges and costs of achieving synergies of 2 cents and 5 cents, respectively. Including these items, EPS stood at $1.56 compared with $1.32 in the prior year.

Revenues inched up 1% to $8.192 billion, falling short of the Zacks Consensus Estimate of $8.196 billion by a small margin.

Financial Update

As of December 31, 2011, cash and cash equivalents decreased to $66.3 million, from $88.3 million as of December 31, 2010. As of December 31, 2011, the debt-to-capitalization ratio increased to 47.4% from 46.2% as of December 31, 2010.

During the year Republics Services expended $770 million toward share repurchase and dividends. The company has $650 million remaining under its share repurchase authorization. Adjusted free cash flow during the year improved to $909 million from $776 million in the prior year. Cash from operations for 2011 improved to $1.77 billion from $1.43 billion during the prior year.

Fiscal 2012 Outlook

Revenues are expected to increase in the range of 1.5 to 2.0%. Core price increases are expected to contribute 1.0 to 1.5% to the increase along with 0.5% increase in volume and net increase from acquisitions / divestitures each. However, a net decline of 0.5% from fuel recovery fees and commodities pricing has also been factored into the guidance. Adjusted EPS is envisioned in the range of $1.98–$2.02 and free cash flow in the range of $775 million to $800 million.

Our Take

Revenue declines to flat revenues 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. The company is also witnessing volume expansion in the collection lines of business. 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. Republic Services competes with Waste Management Inc. (WM - Analyst Report) and privately held Waste Industries USA, Inc.

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