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| RSG > SEC Filings for RSG > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto included under
Item 1. In addition, reference should be made to our audited Consolidated
Financial Statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing in our
Annual Report on Form 10-K for the year ended December 31, 2007.
Overview of Our Business
We are a leading provider of non-hazardous solid waste collection and
disposal services in the United States. We provide solid waste collection
services for commercial, industrial, municipal and residential customers through
136 collection companies in 21 states. We also own or operate 93 transfer
stations, 58 solid waste landfills and 33 recycling facilities.
We generate revenue primarily from our solid waste collection operations. Our
remaining revenue is from other services including landfill disposal and
recycling.
The following table reflects our revenue by source for the three and nine
months ended September 30, 2008 and 2007 (in millions of dollars and as a
percentage of our revenue):
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Collection:
Residential $ 216.2 25.9 % $ 201.3 25.0 % $ 633.4 26.0 % $ 598.7 25.2 %
Commercial 259.2 31.1 237.8 29.5 762.5 31.2 701.8 29.5
Industrial 161.3 19.3 165.8 20.6 476.3 19.5 488.3 20.5
Other 5.9 .7 4.9 .6 16.2 .7 14.7 .6
Total collection 642.6 77.0 609.8 75.7 1,888.4 77.4 1,803.5 75.8
Transfer and
disposal 304.7 307.6 886.6 899.5
Less:
Intercompany (154.0 ) (156.7 ) (455.2 ) (461.9 )
Transfer and
disposal, net 150.7 18.1 150.9 18.7 431.4 17.7 437.6 18.4
Other 40.7 4.9 45.5 5.6 120.9 4.9 139.1 5.8
Revenue $ 834.0 100.0 % $ 806.2 100.0 % $ 2,440.7 100.0 % $ 2,380.2 100.0 %
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Our revenue from collection operations consists of fees we receive from
commercial, industrial, municipal and residential customers. Our residential and
commercial collection operations in some markets are based on long-term
contracts with municipalities. We generally provide industrial and commercial
collection services to individual customers under contracts with terms up to
three years. Our revenue from landfill operations is from disposal or tipping
fees charged to third parties. In general, we integrate our recycling operations
with our collection operations and obtain revenue from the sale of recyclable
materials. No one customer has individually accounted for more than 10% of our
consolidated revenue or of our reportable segment revenue in any of the periods
presented.
The cost of our collection operations is primarily variable and includes
disposal, labor, self-insurance, fuel and equipment maintenance costs. It also
includes capital costs for equipment and facilities. We seek operating
efficiencies by controlling the movement of waste from the point of collection
through disposal. During the three months ended September 30, 2008 and 2007,
approximately 58% and 59%, respectively, of the total volume of waste we
collected was disposed of at landfills we own or operate.
Our landfill costs include daily operating expenses, costs of capital for
cell development and other environmental structures, costs for final capping,
closure and post-closure, and the legal and administrative costs of ongoing
environmental compliance. Daily operating expenses include leachate treatment
and disposal, methane gas and groundwater monitoring and system maintenance,
interim cap maintenance, and costs associated with the application of daily
cover materials. We expense all indirect landfill development costs as they are
incurred. We use life cycle accounting and the units-of-consumption method to
recognize certain direct landfill costs related to cell development. In life
cycle
accounting, certain direct costs are capitalized, and charged to expense based
on the consumption of cubic yards of available airspace. These costs include all
costs to acquire and construct a site including excavation, natural and
synthetic liners, construction of leachate collection systems, installation of
methane gas collection and monitoring systems, installation of groundwater
monitoring wells, and other costs associated with the acquisition and
development of the site. Obligations associated with final capping, closure and
post-closure are capitalized and amortized on a units-of-consumption basis as
airspace is consumed.
Cost and airspace estimates are developed at least annually by engineers.
These estimates are used by our operating and accounting personnel to adjust our
rates used to expense capitalized costs. Changes in these estimates primarily
relate to changes in costs, timing of payments, available airspace, inflation
and applicable regulations. Changes in available airspace include changes in
engineering estimates, changes in design and changes due to the addition of
airspace lying in expansion areas that we believe have a probable likelihood of
being permitted.
If there is a significant change in the facts and circumstances related to a
landfill during the year, we will review our calculations for the landfill as
soon as practical after the significant change has occurred. During the nine
months ended September 30, 2007, we reviewed our landfill retirement obligations
for certain of our landfills and recorded an increase of $7.3 million in
amortization expense. We conduct our annual reviews of our landfill asset
retirement obligations during the fourth quarter of each year.
Summarized financial information concerning our reportable segments for the
respective nine months ended September 30, 2008 and 2007 is shown in the
following tables (in millions of dollars and as a percentage of our revenue):
Depreciation,
Amortization, Operating
Net Depletion and Income Operating
2008 Revenue Accretion (Loss) Margin
Eastern Region $ 440.0 $ 36.5 $ 55.5 12.6 %
Central Region 516.9 64.7 96.1 18.6
Southern Region 635.2 55.7 137.4 21.6
Western Region 848.5 77.6 160.2 18.9
Corporate Entities .1 5.9 (54.4 ) -
Total $ 2,440.7 $ 240.4 $ 394.8 16.2
Depreciation, SFAS 143
Amortization, Adjustments to
Depletion and Amortization
Accretion Expense for Depreciation,
Before Changes in Amortization, Operating
Net SFAS 143 Estimates and Depletion and Income Operating
2007(a) Revenue Adjustments Assumptions Accretion (Loss) Margin
Eastern Region $ 433.2 $ 38.2 $ 2.1 $ 40.3 $ 40.8 9.4 %
Central Region 484.2 66.3 - 66.3 87.0 18.0
Southern Region 620.3 54.5 - 54.5 136.2 22.0
Western Region 842.0 74.8 5.2 80.0 178.9 21.2
Corporate Entities .5 5.4 - 5.4 (46.8 ) -
Total $ 2,380.2 $ 239.2 $ 7.3 $ 246.5 $ 396.1 16.6
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(a) Certain amounts for 2007 have been reclassified to conform with the 2008 presentation.
Our operations are managed and reviewed through four regions that we
designate as our reportable segments. During the three months ended March 31,
2008, we consolidated our Southwestern operations into our Western Region. The
historical operating results of our Southwestern operations have been
consolidated into our Western Region to provide financial information that
reflects our current approach to managing our operations. Significant changes in
the revenue and operating margins of our reportable segments for the nine month
period ended September 30, 2008 compared to the nine month period ended
September 30, 2007 are discussed below:
• Revenue in our Eastern Region increased during 2008 compared to 2007 due to
price increases in all lines of business and increases in the prices of
commodities. This increase in revenue was partially offset by lower volumes
in the industrial collection line of business, primarily due to less
temporary work, and lower transfer station volumes due to less construction
activity and lower landfill volumes. Residential volumes were also slightly
lower in our Eastern Region during 2008 compared to 2007.
Operating margins in our Eastern Region increased to 12.6% in 2008 from 9.4% in 2007. Operating expenses include a charge of $34.0 million recorded during the nine months ended September 30, 2008 related to estimated costs to comply with Final Findings and Orders issued by the Ohio Environmental Protection Agency in response to environmental conditions at our Countywide facility. Operating income for the nine months ended September 30, 2007 includes a $44.6 million charge to operating expenses, including a $2.1 million increase in landfill amortization expense associated with environmental conditions at Countywide. Excluding these expenses in the respective periods, operating margins increased to 20.3% in 2008 from 19.7% in 2007. This increase in operating margins is primarily due to higher revenue and lower disposal costs partially offset by an increase in fuel costs.
• Revenue in our Central Region increased during 2008 compared to 2007 due to price increases in all lines of business and an increase in the prices of commodities. This increase in revenue was partially offset by lower industrial collection and transfer station volumes due to a slowdown in commercial and residential construction. Commercial collection volumes were also lower during 2008.
Operating margins in our Central Region increased due to higher revenue, lower disposal costs, lower labor costs and lower depreciation, amortization, depletion and accretion costs. These reductions in costs were partially offset by higher fuel costs.
• In our Southern Region, price increases in all lines of business resulted in an increase in revenue during 2008 compared to 2007. This increase in revenue was partially offset by lower industrial collection, commercial collection, transfer station and landfill volumes, primarily due to a general economic slowdown.
Operating margins in our Southern Region decreased due to higher fuel costs partially offset by higher revenue, lower disposal costs and lower insurance costs.
• In our Western Region, price increases in all lines of business, volume increases in our commercial collection line of business and an increase in the prices of commodities resulted in an increase in revenue during 2008 compared to 2007. This increase in revenue was partially offset by a decrease in industrial collection, residential collection, transfer station and landfill volumes resulting from a general economic slowdown. This increase in revenue was also partially offset by the sale of our Texas-based compost, mulch and soil business in November 2007.
Operating margins in our Western Region decreased to 18.9% in 2008 from 21.2% in 2007. Operating expenses include a charge of $34.0 million recorded during the nine months ended September 30, 2008 related to estimated costs to comply with a Consent Decree and Settlement Agreement signed with the U.S. EPA, the Bureau of Land Management and Clark County, Nevada related to the Sunrise Landfill. Operating expenses for the nine months ended September 30, 2007 include an $8.1 million increase in landfill operating costs and a $5.2 million increase in SFAS 143 amortization expense associated with environmental conditions at our closed disposal facility in Contra Costa County, California. Excluding these charges in the respective periods, operating margins slightly increased to 22.9% in 2008 from 22.8% in 2007. This increase is due primarily to higher revenue, lower costs of goods sold due to the sale of our Texas-based compost, mulch and soil business, lower landfill operating costs, and lower insurance costs during 2008. This reduction in costs was almost entirely offset by an increase in fuel costs.
Business Combinations
We make decisions to acquire or invest in businesses based on financial and
strategic considerations. Businesses acquired are accounted for under the
acquisition method of accounting and are included in our Unaudited Condensed
Consolidated Financial Statements from the date of acquisition.
We acquired various solid waste businesses, including a transfer station in
California, during the nine months ended September 30, 2008. The aggregate
purchase price we paid in these transactions was $13.4 million in cash.
Proposed Merger with Allied Waste Industries, Inc.: On June 22, 2008, we entered
into an Agreement and Plan of Merger with Allied Waste Industries, Inc. The
completion of the merger is subject to certain terms and conditions, including,
but not limited to, approval of the transaction by our shareholders as well as
Allied's shareholders, regulatory approval from the Department of Justice, and
receipt of a credit rating for the combined company classifying its senior
unsecured debt as investment grade. The merger agreement also contains other
terms and conditions that are customary for a merger of equals transaction. At
the effective time of the merger, each share of Allied common stock outstanding
will be converted into .45 shares of our common stock. We expect to issue
approximately 196.2 million shares of our common stock to Allied shareholders in
the transaction. Mr. James E. O'Connor, currently Chairman of the Board of
Directors and Chief Executive Officer of our company, and Mr. Tod C. Holmes,
currently Chief Financial Officer of our company, will continue in their present
positions with the combined company. The transaction is expected to close in the
fourth quarter of 2008. As of September 30, 2008, we had capitalized
$33.3 million of costs to other assets that are directly related to the
transaction and had expensed $3.2 million of integration costs. We have filed
with the Securities and Exchange Commission a definitive Joint Proxy
Statement/Prospectus in connection with the proposed transaction with Allied.
The definitive Joint Proxy Statement/Prospectus was mailed on or about
October 14, 2008 to stockholders of Republic and Allied of record as of the
close of business on October 6, 2008. Republic and Allied have both established
November 14, 2008 as the date of their respective special stockholder meetings.
Stockholders of record as of the October 6, 2008 record date are eligible to
vote on the proposed merger.
Upon consummation of the proposed merger, in accordance with the terms of the
1998 Plan, all outstanding unvested equity-based awards of Republic will vest,
including those held by executive officers. Compensation expense will be
recognized as of the effective time of the merger for the acceleration of the
vesting of these equity-based awards.
After the effective time of the proposed merger, we expect that the combined
company will continue to pay quarterly dividends to stockholders of the combined
company at a quarterly dividend rate per share of $.19. The combined company's
payment of dividends in the future, however, will depend on business conditions,
its financial condition and earnings and other factors, and there can be no
guarantee that dividends will continue to be paid at the same rate by the
combined company.
See Note 4, Business Combinations, of the Notes to our Unaudited Condensed
Consolidated Financial Statements for further discussion of business
combinations.
Consolidated Results of Operations
Our net income was $88.7 million, or $.48 per diluted share, for the three
months ended September 30, 2008, as compared to $67.0 million, or $.35 per
diluted share, for the three months ended September 30, 2007. Our net income was
$205.5 million, or $1.11 per diluted share, for the nine months ended
September 30, 2008, as compared to $208.1 million, or $1.08 per diluted share,
for the nine months ended September 30, 2007.
During the three months ended March 31, 2007, we recorded a pre-tax charge of
$22.0 million ($13.5 million, or $.07 per diluted share, net of tax) related to
estimated costs we believed would be required to comply with Final Findings and
Orders issued by the Ohio Environmental Protection Agency in response to
environmental conditions at the Countywide Recycling and Disposal Facility in
East Sparta, Ohio. We have complied with and will continue to comply with the
F&Os. However, even though indications existed that the reaction had begun to
subside, we nevertheless agreed with the OEPA to take certain additional
remedial actions at Countywide. Consequently, during the three months ended
September 30, 2007, we recorded an additional pre-tax charge of $23.3 million
($14.4 million, or $.08 per diluted share, net of tax).
During the three months ended June 30, 2008, we received additional orders
from the OEPA. We also entered into an Agreed Order on Consent with the U.S. EPA
requiring the reimbursement of costs incurred by the U.S. EPA and requiring us
to take additional remedial actions. The AOC became effective on April 17, 2008
and we are complying with the terms of the AOC. Based upon current information
and engineering analyses and discussions with the OEPA and U.S. EPA subsequent
to the signing of the above-mentioned agreement, we recorded an additional
pre-tax charge of $34.0 million ($21.8 million, or $.12 per diluted share, net
of tax) during the three months ended June 30, 2008. While we are vigorously
pursuing financial contributions from third parties for our costs to comply with
the F&Os and the additional remedial actions, we have not recorded any
receivables for potential recoveries.
Also during the three months ended June 30, 2008, we recorded a pre-tax
charge of $35.0 million ($22.0 million, or $.12 per diluted share, net of tax)
related to estimated costs to comply with a Consent Decree and Settlement
Agreement with the U.S. EPA, the Bureau of Land Management and Clark County,
Nevada related to the Sunrise Landfill.
These charges affected our Unaudited Condensed Consolidated Statements of Income for the nine months ended September 30, 2008 and 2007 as follows (in millions):
Nine Months Ended
September 30,
2008 2007
Expenses:
Cost of operations $ 66.1 $ 49.1
Depreciation, amortization and depletion - 3.6
Selling, general and administrative 1.9 1.5
Operating income (68.0 ) (54.2 )
Other income (expense), net (1.0 ) (.7 )
Income before income taxes $ (69.0 ) $ (54.9 )
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During the three months ended March 31, 2007, we recorded a charge of
$4.2 million, or approximately $.02 per diluted share, in our provision for
income taxes related to the resolution of various income tax matters. During the
three months ended June 30, 2007, we recorded a benefit of $5.0 million, or
approximately $.03 per diluted share, in our provision for income taxes related
to the resolution of various tax matters, which effectively closed the Internal
Revenue Service's audits of our consolidated tax returns for fiscal years 2001
through 2004.
The following table summarizes our costs and expenses for the three and nine
months ended September 30, 2008 and 2007 (in millions of dollars and as a
percentage of our revenue):
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007(a) 2008 2007(a)
Revenue $ 834.0 100.0 % $ 806.2 100.0 % $ 2,440.7 100.0 % $ 2,380.2 100.0 %
Cost of
operations 499.5 59.9 520.4 64.6 1,553.5 63.6 1,506.7 63.3
Depreciation,
amortization and
depletion of
property and
equipment 75.7 9.1 76.4 9.5 222.2 9.1 229.0 9.7
Amortization of
intangible
assets 1.6 .2 1.6 .2 4.7 .2 4.9 .2
Accretion 4.6 .5 4.3 .5 13.5 .6 12.6 .5
Selling, general
and
administrative
expenses 85.6 10.3 75.2 9.3 252.0 10.3 230.9 9.7
Operating income $ 167.0 20.0 % $ 128.3 15.9 % $ 394.8 16.2 % $ 396.1 16.6 %
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(a) Certain amounts for 2007 have been reclassified to conform with the 2008 presentation.
Revenue. Revenue was $834.0 million and $806.2 million for the three months ended September 30, 2008 and 2007, respectively, an increase of 3.4%. Revenue was $2,440.7 and $2,380.2 for the nine months ended September 30, 2008 and 2007, respectively, an increase of 2.5%. The following table reflects the components of our revenue growth for the three and nine months ended September 30, 2008 and 2007:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Core price 3.8 % 4.0 % 4.0 % 4.1 %
Fuel surcharges 2.8 (.1 ) 1.9 -
Environmental fees .4 .1 .3 .3
Recycling commodities .3 .9 .6 .9
Total price 7.3 4.9 6.8 5.3
Core volume (3.3 ) (1.9 ) (3.1 ) (1.5 )
Non-core volume .2 (.1 ) .2 (.1 )
Total volume (3.1 ) (2.0 ) (2.9 ) (1.6 )
Total internal growth 4.2 2.9 3.9 3.7
Acquisitions, net of divestitures (.9 ) (.6 ) (1.5 ) (.4 )
Taxes(a) .1 .1 .1 -
Total revenue growth 3.4 % 2.4 % 2.5 % 3.3 %
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(a) Represents new taxes levied on landfill volumes in certain states that are passed on to customers.
During the nine months ended September 30, 2008, our revenue growth from core
pricing continued to benefit from a broad-based pricing initiative which we
started during the fourth quarter of 2003. We anticipate that we will continue
to realize this benefit throughout 2008. During the nine months ended
September 30, 2008, we experienced negative core volume growth due primarily to
less temporary construction work.
Cost of Operations. Cost of operations was $499.5 million and
$1,553.5 million for the three and nine months ended September 30, 2008, versus
$520.4 million and $1,506.7 million for the comparable 2007 periods. Cost of
operations as a percentage of revenue was 59.9% and 63.6% for the three and nine
months ended September 30, 2008, versus 64.6% and 63.3% for the comparable 2007
periods. The increase in cost of operations in aggregate dollars and as a
percentage of revenue for the nine months ended September 30, 2008 versus the
comparable 2007 periods is primarily a result of the $34.0 million charge we
recorded during the nine months ended September 30, 2008 for remediation related
to Sunrise Landfill and a $32.1 million charge we recorded during the nine
months ended September 30, 2008 related to estimated costs to comply with Final
Findings and Orders issued by the Ohio and U.S. Environmental Protection
Agencies in response to environmental conditions at our Countywide facility.
This increase was partially offset by a $41.0 million charge related to
environmental conditions at our Countywide facility and an $8.1 million charge
related to our closed disposal facility in California recorded during the nine
months ended September 30, 2007.
The following table summarizes the major components of our cost of operations
for the three and nine months ended September 30, 2008 and 2007 (in millions of
dollars and as a percentage of our revenue):
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007(a) 2008 2007(a)
Subcontractor,
disposal and
third-party fees $ 177.0 21.2 % $ 178.5 22.2 % $ 518.3 21.2 % $ 526.5 22.1 %
Labor and
benefits 155.7 18.7 156.0 19.4 461.8 18.9 464.3 19.5
. . .
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