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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 1-14267
REPUBLIC SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0716904
(State of Incorporation) (IRS Employer Identification No.)
110 S.E. 6th Street, 28th Floor
Ft. Lauderdale, Florida 33301
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 769-2400
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On November 5, 2001, the registrant had outstanding 169,099,379 shares of
Common Stock, par value $.01 per share.
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REPUBLIC SERVICES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2001 (Unaudited) and December 31, 2000...................... 3
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2001
and 2000.................................................... 4
Unaudited Condensed Consolidated Statement of Stockholders'
Equity for the Nine Months Ended September 30, 2001......... 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001 and 2000....... 6
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 26
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.............................. 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPUBLIC SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30, December 31,
2001 2000
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ -- $ 2.0
Accounts receivable, less allowance for doubtful accounts
of $15.2 and $13.2, respectively ........................ 271.5 241.3
Prepaid expenses and other current assets .................. 76.9 78.2
---------- ----------
Total Current Assets ............................. 348.4 321.5
RESTRICTED CASH .............................................. 99.7 84.3
PROPERTY AND EQUIPMENT, NET .................................. 1,786.9 1,667.8
INTANGIBLE ASSETS, NET ....................................... 1,600.8 1,435.0
OTHER ASSETS ................................................. 53.3 52.9
---------- ----------
$ 3,889.1 $ 3,561.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 79.7 $ 103.4
Accrued liabilities ........................................ 167.5 89.9
Amounts due to former owners ............................... 4.7 15.3
Deferred revenue ........................................... 75.5 67.6
Notes payable and current maturities of long-term debt ..... 30.1 56.5
Other current liabilities .................................. 62.8 49.1
---------- ----------
Total Current Liabilities ........................ 420.3 381.8
LONG-TERM DEBT, NET OF CURRENT MATURITIES .................... 1,301.6 1,200.2
ACCRUED ENVIRONMENTAL AND LANDFILL COSTS ..................... 202.8 151.9
DEFERRED INCOME TAXES ........................................ 145.1 126.6
OTHER LIABILITIES ............................................ 33.6 26.1
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 50,000,000
shares authorized; none issued .......................... -- --
Common stock, par value $.01 per share; 750,000,000 shares
authorized; 177,967,988 and 175,658,285 issued, including
shares held in treasury, respectively ................... 1.8 1.8
Additional paid-in capital ................................. 1,249.1 1,208.4
Retained earnings .......................................... 680.0 515.6
Treasury stock, at cost (8,897,000 and 3,644,000 shares,
respectively) ........................................... (144.1) (50.9)
Accumulated other comprehensive loss, net of tax .......... (1.1) --
---------- ----------
Total Stockholders' Equity ....................... 1,785.7 1,674.9
---------- ----------
$ 3,889.1 $ 3,561.5
========== ==========
The accompanying notes are an integral part of these statements.
3
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------------
2001 2000 2001 2000
--------- --------- ----------- -----------
REVENUE .................................. $ 582.6 $ 539.1 $ 1,694.0 $ 1,574.2
EXPENSES:
Cost of operations ..................... 358.2 324.9 1,042.4 951.6
Depreciation, amortization and depletion 56.6 50.6 160.8 146.1
Selling, general and administrative .... 57.4 49.4 169.7 144.7
Other charges .......................... -- 6.7 -- 6.7
--------- --------- ----------- -----------
OPERATING INCOME ......................... 110.4 107.5 321.1 325.1
INTEREST EXPENSE ......................... (20.7) (19.7) (61.2) (60.3)
INTEREST INCOME .......................... 1.8 .7 3.3 1.2
OTHER INCOME (EXPENSE), NET .............. -- 1.0 2.0 1.5
--------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES ............... 91.5 89.5 265.2 267.5
PROVISION FOR INCOME TAXES ............... 34.8 34.5 100.8 103.0
--------- --------- ----------- -----------
NET INCOME ............................... $ 56.7 $ 55.0 $ 164.4 $ 164.5
========= ========= =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE ..... $ .33 $ .31 $ .96 $ .94
========= ========= =========== ===========
WEIGHTED AVERAGE DILUTED COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ......... 171.1 175.7 171.4 175.7
========= ========= =========== ===========
</Table>
The accompanying notes are an integral part of these statements.
4
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
Common Stock Accumulated
------------------- Additional Other
Shares, Par Paid-In Retained Treasury Comprehensive
Net Value Capital Earnings Stock Loss
------- ------ ---------- -------- -------- -------------
BALANCE AT DECEMBER 31, 2000 .................. 172.0 $ 1.8 $ 1,208.4 $ 515.6 $ (50.9) $ --
Net income ................................... -- -- -- 164.4 -- --
Issuance of common stock ..................... 2.4 -- 40.7 -- -- --
Purchase of common stock for treasury ........ (5.3) -- -- -- (93.2) --
Change in value of derivative instruments, net
of tax ...................................... -- -- -- -- -- (1.1)
----- ------ ---------- -------- ------- -----
BALANCE AT SEPTEMBER 30, 2001 ................. 169.1 $ 1.8 $ 1,249.1 $ 680.0 $(144.1) $(1.1)
===== ====== ========== ======== ======= =====
The accompanying notes are an integral part of this statement.
5
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Nine Months Ended
September 30,
-------------------------
2001 2000
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income ....................................................... $ 164.4 $ 164.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and depletion of property
and equipment ............................................... 126.1 116.3
Amortization of intangible assets ............................. 34.7 29.8
Deferred tax provision ........................................ 22.1 29.0
Provision for doubtful accounts ............................... 12.7 8.3
Other non-cash charges ........................................ .2 8.0
Changes in assets and liabilities, net of effects from business
acquisitions:
Accounts receivable ......................................... (30.2) (15.4)
Prepaid expenses and other assets ........................... 2.6 (9.8)
Accounts payable and accrued liabilities .................... 26.1 (27.5)
Other liabilities ........................................... 22.4 12.0
-------- --------
381.1 315.2
-------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment .............................. (179.0) (147.8)
Proceeds from sale of property and equipment ..................... 7.5 11.7
Cash used in business acquisitions, net of cash
acquired ...................................................... (261.1) (137.7)
Cash proceeds from business dispositions ......................... 42.1 31.2
Amounts due and contingent payments to former owners ............. (29.3) (31.8)
Restricted cash .................................................. 46.4 (30.8)
-------- --------
(373.4) (305.2)
-------- --------
CASH USED IN FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt ................... 71.1 30.8
Payments of notes payable and long-term debt ..................... (5.6) (5.8)
Proceeds from issuance of unsecured notes, net of
discount ....................................................... 447.4 --
Net payments on revolving credit facility ........................ (467.5) (30.5)
Issuance of common stock ......................................... 38.1 .4
Purchases of common stock for treasury ........................... (93.2) (12.7)
Purchase of common stock to fund employee benefit plan ........... -- (.5)
-------- --------
(9.7) (18.3)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS .............................. (2.0) (8.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 2.0 13.1
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ -- $ 4.8
======== ========
</Table>
The accompanying notes are an integral part of these statements.
6
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data)
1. BASIS OF PRESENTATION
Republic Services, Inc. (together with its subsidiaries, the "Company") is a
leading provider of non-hazardous solid waste collection and disposal services
in the United States.
The accompanying Unaudited Condensed Consolidated Financial Statements
include the accounts of the Company and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
All significant intercompany accounts and transactions have been eliminated.
Certain information related to the Company's organization, significant
accounting policies and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In the opinion of management, these Unaudited
Condensed Consolidated Financial Statements reflect all material adjustments
(which include only normal recurring adjustments) necessary to fairly state the
financial position and the results of operations for the periods presented, and
the disclosures herein are adequate to make the information presented not
misleading. Operating results for interim periods are not necessarily indicative
of the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited Consolidated
Financial Statements and notes thereto appearing in the Company's Form 10-K for
the year ended December 31, 2000. Certain amounts in the 2000 Condensed
Consolidated Financial Statements, as previously reported, have been
reclassified to conform to the fiscal 2001 presentation.
The Unaudited Condensed Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles and necessarily
include amounts based on estimates and assumptions made by management. Actual
results could differ from these amounts. Significant items subject to such
estimates and assumptions include the depletion and amortization of landfill
development costs, accruals for closure and post-closure costs, valuation
allowances for accounts receivable, liabilities for potential litigation, claims
and assessments, and liabilities for environmental remediation, deferred taxes
and self-insurance.
Other comprehensive loss, net of tax, for the nine months ended September
30, 2001 was $1.1 million. During the three and nine months ended September 30,
2001, the Company recorded unrealized losses, net of tax, of $1.6 and $1.1
million, respectively, relating to the change in fair value of its fuel hedge
option agreements in accordance with Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). (For further information, see Note 10, Fuel Hedge.) The Company had no
other components of other comprehensive income or loss for the periods
presented.
Other charges of $6.7 million for the three and nine months ended September
30, 2000 are primarily related to the early closure of a landfill in South
Texas.
2. BUSINESS COMBINATIONS
The Company uses the purchase method of accounting to account for business
acquisitions. Businesses acquired are included in the Unaudited Condensed
Consolidated Financial Statements from the date of acquisition.
The Company acquired various solid waste businesses during the nine months
ended September 30, 2001. The aggregate purchase price paid by the Company in
these transactions was $266.4 million in cash. The aggregate purchase price
paid, less cash and restricted cash acquired plus debt assumed, was $226.6
million.
7
In July 1999, the Company entered into a definitive agreement with Allied
Waste Industries, Inc. ("Allied") to acquire certain solid waste assets. By
September 30, 2000, the Company had completed the purchase of these assets for
approximately $105.5 million in cash, $85.8 million of which were acquired
during the nine months ended September 30, 2000. In October 1999, the Company
entered into a definitive agreement with Allied for the simultaneous purchase
and sale of certain other solid waste assets. By September 30, 2000, the Company
and Allied completed the purchase and sale of these assets. Net proceeds from
the cash portion of the exchange of assets were $30.7 million. All of these
transactions have been accounted for under the purchase method of accounting.
In addition to the acquisitions from Allied, the Company also acquired
various other solid waste businesses during the nine months ended September 30,
2000. The aggregate purchase price paid by the Company in these transactions was
$50.3 million in cash.
During the nine months ended September 30, 2001 and 2000, $65.7 million and
$31.1 million, respectively, of the total purchase price paid for acquisitions
and contingent payments to former owners was allocated to landfill airspace.
These allocations were based on the discounted expected future cash flow of each
landfill relative to other assets within the acquired group, if applicable, and
were adjusted for other non-depletable landfill assets and liabilities acquired
(primarily closure and post-closure liabilities). Landfill purchase price is
amortized using the units-of-consumption method over total available airspace,
which includes likely to be permitted airspace where appropriate.
The following summarizes the preliminary purchase price allocations for
business combinations accounted for under the purchase method of accounting
consummated during the periods presented:
Nine Months
Ended September 30,
-------------------------
2001 2000
-------- --------
Property and equipment .......................... $ 91.4 $ 98.1
Cost in excess of net assets acquired ........... 206.9 218.1
Restricted cash ................................. 61.8 --
Working capital deficit ......................... (11.0) (158.8)
Debt assumed .................................... (28.1) (4.2)
Other liabilities ............................... (59.9) (15.5)
-------- --------
Cash used in acquisitions, net of cash acquired $ 261.1 $ 137.7
======== ========
The Company's unaudited pro forma consolidated results of operations
assuming all significant acquisitions during the nine months ended September 30,
2001 accounted for under the purchase method of accounting had occurred as of
the beginning of each nine month period presented are as follows:
2001 2000
----------- -----------
Revenue ......................................... $ 1,728.6 $ 1,646.5
Net income ...................................... $ 165.0 $ 164.8
Basic and diluted earnings per share ............ $ .96 $ .94
Weighted average common and common equivalent
shares outstanding ............................. 171.4 175.7
The unaudited pro forma results of operations are presented for
informational purposes only and may not necessarily reflect the future results
of operations of the Company or what the results of operations would have been
had the Company owned and operated these businesses as of the beginning of each
period presented.
3. LANDFILL AND ACCRUED ENVIRONMENTAL COSTS
LIFE CYCLE ACCOUNTING
The Company uses life cycle accounting and the units-of-consumption method
to recognize certain landfill costs. In life cycle accounting, all costs to
acquire, construct, close and maintain a site during the post-closure period are
capitalized or accrued and charged to expense based upon the consumption of
cubic
8
yards of available airspace. Costs and airspace estimates are developed annually
by independent engineers together with the Company's engineers. These estimates
are used by the Company's operating and accounting personnel to annually adjust
the Company's rates used to expense capitalized costs and accrue closure and
post-closure costs. Changes in these estimates primarily relate to changes in
available airspace, inflation rates and applicable regulations. Changes in
available airspace include changes due to the addition of airspace lying in
expansion areas deemed likely to be permitted.
TOTAL AVAILABLE DISPOSAL CAPACITY
As of September 30, 2001, the Company owned or operated 54 solid waste
landfills with total available disposal capacity of approximately 1.8 billion
in-place cubic yards. Total available disposal capacity represents the sum of
estimated permitted airspace plus an estimate of airspace which is likely to be
permitted.
LIKELY TO BE PERMITTED EXPANSION AIRSPACE
Before airspace included in an expansion area is determined as likely to be
permitted and, therefore, included in the Company's calculation of total
available disposal capacity, the following criteria must be met:
1. The land associated with the expansion airspace is either owned by the
Company or is controlled by the Company pursuant to an option agreement;
2. The Company is committed to supporting the expansion project financially
and with appropriate resources;
3. There are no identified fatal flaws or impediments associated with the
project, including political impediments;
4. Progress is being made on the project;
5. The expansion is attainable within a reasonable time frame; and
6. The Company believes it is likely the expansion permit will be received.
Upon meeting the Company's expansion criteria, the rates used at each
applicable landfill to expense costs to acquire, construct, close and maintain a
site during the post-closure period are adjusted to include likely to be
permitted airspace and all additional costs to be capitalized or accrued
associated with the expansion airspace.
The Company has identified three sequential steps that landfills generally
follow to obtain expansion permits. These steps are as follows:
1. Obtaining approval from local authorities;
2. Submitting a permit application with state authorities; and
3. Obtaining permit approval from state authorities.
Once a landfill meets the Company's expansion criteria, management
continuously monitors each site's progress in obtaining the expansion permit. If
at any point it is determined that an expansion area no longer meets the
required criteria, the likely to be permitted airspace is removed from the
landfill's total available capacity and the rates used at the landfill to
expense costs to acquire, construct, close and maintain a site during the
post-closure period are adjusted accordingly. The Company has never been denied
an expansion permit for a landfill that included likely to be permitted airspace
in its total available disposal capacity, although no assurances can be made
that all future expansions will be permitted as designed.
9
CAPITALIZED LANDFILL COSTS
Capitalized landfill costs include expenditures for land, permitting costs,
cell construction costs and environmental structures. Capitalized permitting and
cell construction costs are limited to direct costs relating to these
activities, including legal, engineering and construction associated with
excavation, liners and site berms. Interest is capitalized on landfill
construction projects while the assets are undergoing activities to ready them
for their intended use.
Costs related to acquiring land, excluding the estimated residual value of
unpermitted land, and costs related to permitting and cell construction are
depleted as airspace is consumed using the units-of-consumption method.
Environmental structures, which include leachate and methane collection systems,
and groundwater monitoring wells, are charged to expense over the shorter of
their useful life or the life of the landfill.
Capitalized landfill costs may also include an allocation of purchase price
paid for landfills. For landfills purchased as part of a group of several
assets, the purchase price assigned to the landfill is determined based upon the
discounted future expected cash flows of the landfill relative to the other
assets within the group. If the landfill meets the Company's expansion criteria,
the purchase price is further allocated between permitted airspace and expansion
airspace based upon the ratio of permitted versus likely to be permitted
airspace to total available airspace. Landfill purchase price is amortized using
the units-of-consumption method over the total available airspace including
likely to be permitted airspace where appropriate.
CLOSURE AND POST-CLOSURE COSTS
Landfill site closure and post-closure costs include estimated costs to be
incurred for final closure of the landfills and estimated costs for providing
required post-closure monitoring and maintenance of landfills. These costs are
accrued and charged to cost of operations based upon consumed airspace in
relation to total available disposal capacity using the units-of-consumption
method of amortization. The Company estimates future cost requirements for
closure and post-closure monitoring and maintenance for its solid waste
facilities based on the technical standards of the Environmental Protection
Agency's Subtitle D regulations and applicable state and local regulations.
These estimates do not take into account discounts for the present value of
total estimated costs. Accruals for closure and post-closure costs totaled
approximately $15.4 million and $18.0 million during the nine months ended
September 30, 2001 and 2000, respectively.
A number of the Company's landfills were acquired from other
entities and recorded using the purchase method of accounting. Accordingly, the
Company assessed and recorded a closure and post-closure liability as of the
date the landfill was acquired based upon the estimated total closure and
post-closure costs and the percentage of total available disposal capacity
utilized as of such date. Thereafter, the difference between the closure and
post-closure costs accrued and the total estimated closure and post-closure
costs to be incurred are accrued and charged to expense as airspace is consumed.
Estimated aggregate closure and post-closure costs will be fully accrued for the
Company's landfills at the time such facilities cease to accept waste and are
closed. As of September 30, 2001, assuming that all available landfill capacity
is used, the Company expects to expense approximately $542.5 million of such
costs over the remaining lives of these facilities.
ENVIRONMENTAL COSTS
In the normal course of business, the Company is subject to ongoing
environmental monitoring and reporting to certain regulatory agencies.
Environmental costs are accrued by the Company through a charge to income in the
period such liabilities become probable and can be reasonably estimated. No
material amounts were charged to expense during the nine months ended September
30, 2001 and 2000.
4. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, while maintenance and repairs are
charged to expense as incurred. When property is retired or
10
otherwise disposed of, the related cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in the Unaudited
Condensed Consolidated Statements of Operations.
The Company revises the estimated useful lives of property and equipment
acquired through business acquisitions to conform with its policies regarding
property and equipment. Depreciation is provided over the estimated useful lives
of the assets involved using the straight-line method. The estimated useful
lives are twenty to forty years for buildings and improvements, three to fifteen
years for trucks and equipment, and five to ten years for furniture and
fixtures.
Landfills and landfill improvements are stated at cost and include direct
costs incurred to obtain a landfill permit and direct costs incurred to
construct and develop the site. These costs are depleted based on consumed
airspace. All indirect landfill development costs are expensed as incurred. (For
further information, see Note 3, Landfill and Accrued Environmental Costs.)
The Company capitalizes interest on landfill cell construction and other
construction projects in accordance with Statement of Financial Accounting
Standards No. 34, "Capitalization of Interest Cost." Construction projects must
meet the following criteria before interest is capitalized:
1. Total construction costs are $50,000 or greater,
2. The construction phase is one month or longer, and
3. The assets have a useful life of one year or longer.
Interest is capitalized on qualified assets while they undergo activities to
ready them for their intended use. Capitalization of interest ceases once an
asset is placed into service or if construction activity is suspended for more
than a brief period of time. The interest capitalization rate is based upon the
Company's weighted average cost of indebtedness. Interest capitalized was $2.2
million and $2.4 million for the nine months ended September 30, 2001 and 2000,
respectively.
A summary of property and equipment is as follows:
September 30, December 31,
2001 2000
------------- ------------
Other land .................................. $ 96.8 $ 91.5
Non-depletable landfill land ................ 50.6 47.2
Landfill development costs .................. 951.3 865.5
Vehicles and equipment ...................... 1,124.6 1,018.9
Buildings and improvements .................. 246.3 227.1
Construction-in-progress-landfill ........... 38.0 46.6
Construction-in-progress-other .............. 26.5 18.0
---------- ----------
2,534.1 2,314.8
---------- ----------
Less: Accumulated depreciation, depletion and
amortization--
Landfill development costs ................ (221.9) (179.5)
Vehicles and equipment .................... (480.7) (428.9)
Building and improvements ................. (44.6) (38.6)
---------- ----------
(747.2) (647.0)
---------- ----------
Property and equipment, net ................. $ 1,786.9 $ 1,667.8
========== ==========
The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of property and
equipment or whether the remaining balance of property and equipment should be
evaluated for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the property and equipment in
assessing their recoverability. The Company measures impairment loss as the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.
11
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of the cost of acquired
businesses in excess of the fair value of net assets acquired and other
intangible assets. The cost in excess of the fair value of net assets is
amortized over a period of forty years or less on a straight-line basis. Other
intangible assets include values assigned to long-term contracts and covenants
not to compete and are amortized generally over periods ranging from 5 to 25
years. Accumulated amortization of intangible assets was $155.5 million and
$129.9 million at September 30, 2001 and December 31, 2000, respectively.
The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of intangible
assets or whether the remaining balance of intangible assets should be evaluated
for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the intangible assets in
assessing their recoverability. The Company measures impairment loss as the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
September 30, December 31,
2001 2000
------------- ------------
$225.0 million unsecured notes, net of unamortized discount of $.6 million
and including a $1.3 million adjustment to fair market value as of
September 30, 2001; interest payable semi-annually in May and November at
6 5/8%; principal due at maturity in 2004 ............................... $ 225.7 $ 224.3
$375.0 million unsecured notes, net of unamortized discount
of $.5 million; interest payable semi-annually in May and
November at 7 1/8%; principal due at maturity in 2009 ................... 374.5 374.5
$450.0 million unsecured notes, net of unamortized discount
of $2.6 million; interest payable semi-annually in February
and August at 6 3/4%; principal due at maturity in 2011 ................. 447.4 --
$1.0 billion unsecured revolving credit facility; interest
payable using LIBOR-based rates; $500.0 million matures
July 2002 and $500.0 million matures 2003 .............................. 25.0 465.0
Tax-exempt bonds; interest rates that float based on
prevailing market rates ................................................. 195.7 99.5
Other debt; unsecured and secured by real property,
equipment and other assets .............................................. 63.4 93.4
---------- ----------
1,331.7 1,256.7
Less: Current portion ..................................................... (30.1) (56.5)
---------- ----------
$ 1,301.6 $ 1,200.2
========== ==========
As of September 30, 2001, the Company had $736.2 million of availability
under the revolving credit facility.
As of September 30, 2001, the Company had $99.7 million of restricted cash,
of which $76.6 million were proceeds from the issuance of tax-exempt bonds and
other tax-exempt financing that will be used to fund capital expenditures.
Interest expense paid was $51.3 million (net of $2.2 million of capitalized
interest) and $52.7 million (net of $2.4 million of capitalized interest) for
the nine months ended September 30, 2001 and 2000, respectively.
The Company's ability to obtain financing through the capital markets is a
key component of its financial strategy. Historically, the Company has managed
risk associated with executing this strategy, particularly as it relates to
fluctuations in interest rates, by using a combination of fixed and floating
rate debt.
12
In August 2001, the Company sold $450.0 million of public notes, which have
a fixed coupon rate of 6 3/4% and mature in 2011. Proceeds from these notes were
used to repay the Company's revolving credit facility.
In order to manage risk associated with fluctuations in interest rates and
to take advantage of favorable floating interest rates, the Company entered into
interest rate swap agreements with investment grade rated financial
institutions. The swap agreements have a total notional value of $225.0 million
and mature in 2004, which is identical to the Company's public notes that were
sold in 1999. Under the swap agreements, the Company pays interest at floating
rates based on changes in LIBOR and receives interest at a fixed rate of 6 5/8%.
The Company has designated these agreements as hedges in changes in the fair
value of the Company's fixed-rate debt and accounts for them in accordance with
SFAS 133.
As of September 30, 2001, interest rate swap agreements are reflected at
fair market value of $1.3 million and are included in other assets and as an
adjustment to long-term debt in the accompanying Unaudited Condensed
Consolidated Balance Sheets.
7. INCOME TAXES
Income taxes have been provided for based upon the Company's anticipated
annual effective income tax rate for the three and nine months ended September
30, of 38.0% for 2001 and 38.5% for 2000. During the three months ended December
31, 2000, the Company lowered its anticipated annual effective tax rate for 2000
from 38.5% to 38.0%. Income taxes paid were $19.0 million and $61.8 million for
the nine months ended September 30, 2001 and 2000, respectively.
8. STOCK OPTIONS
In July 1998, the Company adopted the 1998 Stock Incentive Plan ("Stock
Incentive Plan") to provide for grants of options to purchase shares of common
stock to employees, non-employee directors and independent contractors of the
Company who are eligible to participate in the Stock Incentive Plan. Options
granted under the Stock Incentive Plan are non-qualified and are granted at a
price equal to the fair market value of the Company's common stock at the date
of grant. Generally, options granted have a term of ten years from the date of
grant, and vest in increments of 25% per year over a four year period beginning
on the first anniversary date of the grant. Options granted to non-employee
directors have a term of ten years and are fully vested at the grant date. The
Company has reserved 20.0 million shares of common stock for issuance pursuant
to options granted under the Stock Incentive Plan. As of September 30, 2001, 4.4
million options remain available for future grants.
A summary of stock option transactions for the nine months ended September
30, 2001 is as follows:
Weighted-Average
Shares Exercise Price
------ ----------------
Options outstanding at beginning of year..... 14.1 $ 16.54
Granted ..................................... 2.1 14.61
Exercised ................................... (2.3) 16.54
Cancelled ................................... (.7) 16.75
------ ---------
Options outstanding at September 30, 2001.... 13.2 $ 16.23
====== =========
Options exercisable at September 30, 2001.... 7.8 $ 16.94
====== =========
9. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
During 2000, the Company announced that its Board of Directors authorized the
repurchase of up to $150.0 million of its common stock. As of September 30,
2001, the Company had repurchased 8.9 million shares of its stock for $144.1
million. In October 2001, the Company announced that its Board of Directors
authorized the repurchase of up to an additional $125.0 million of its common
stock.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is based on the combined weighted average number of common shares and
common share equivalents outstanding which include, where
13
appropriate, the assumed exercise of employee stock options. In computing
diluted earnings per share, the Company utilizes the treasury stock method.
Earnings per share for the three and nine months ended September 30, 2001
and 2000 is calculated as follows (in thousands, except per share data):
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net income ................................ $ 56,700 $ 55,000 $164,400 $164,500
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share .. 169,724 175,254 170,405 175,431
Effect of dilutive securities-- Options to
purchase common stock..................... 1,333 452 1,039 253
-------- -------- -------- --------
Denominator for diluted earnings per share 171,057 175,706 171,444 175,684
======== ======== ======== ========
Basic and diluted earnings per share ..... $ .33 $ .31 $ .96 $ .94
======== ======== ======== ========
Antidilutive securities not included in the
diluted earnings per share calculation:
Options to purchase common stock ......... 208 11,094 3,475 12,624
Weighted average exercise price .......... $ 23.81 $ 17.81 $ 18.12 $ 17.32
10. FUEL HEDGE
The Company's results of operations are impacted by changes in the price of
diesel fuel. Because the market for derivatives in diesel fuel is limited, the
Company has entered into heating oil option agreements to manage a portion of
its exposure to fluctuations in diesel prices. The Company has minimized its
credit risk by entering into derivatives with a group of financial institutions
having investment grade ratings. The Company's derivative instruments qualify
for hedge accounting treatment under SFAS 133. In order to qualify for hedge
accounting, certain criteria must be met including a requirement that both at
inception of the hedge, and on an ongoing basis, the hedging relationship is
expected to be highly effective in offsetting cash flows attributable to the
hedged risk during the term of the hedge.
Under these option agreements, the Company receives or makes payments based
on the difference between actual average heating oil prices and predetermined
fixed prices. These option agreements provide the Company protection from fuel
prices rising above a predetermined fixed price in the option agreements but
also limit the Company's ability to benefit from price decreases below the
predetermined fixed price in the option agreements.
In accordance with SFAS 133, to the extent the option agreements are
effective in hedging changes in diesel fuel prices, unrealized gains and losses
on these option agreements are recorded, net of tax, in stockholders' equity as
a component of accumulated other comprehensive income. To the extent the change
in the option agreements does not perfectly offset the change in value of diesel
fuel purchases being hedged, SFAS 133 requires the ineffective portion of the
hedge to immediately be recognized as other income or expense. The effectiveness
of these option agreements as a hedge against future purchases of diesel fuel is
periodically evaluated. If the option agreements were to become other than
highly effective, the unrealized accumulated gains and or losses would be
immediately recognized in income. Realized gains and losses on these option
agreements are recognized as a component of fuel expense in the period in which
the corresponding fuel is purchased.
During June 2001, the Company entered into option agreements for
approximately 14.3 million gallons of heating oil. These option agreements
settle each month in equal notional amounts through December 2002. The option
agreements were structured as zero-cost collars indexed to the price of heating
oil. The fair value of these option agreements at September 30, 2001 was
determined by third parties to be a loss of approximately $1.8 million ($1.1
million net of tax). In accordance with SFAS 133, $1.1 million, representing the
effective portion of the change in fair value during the period net of tax, has
been recorded
14
in stockholders' equity as a component of accumulated other comprehensive loss,
net of tax. The ineffective portion of the change in fair value was a loss of
approximately $106,000 and $72,000 for the three and nine months ended September
30, 2001, respectively, and has been included in other income (expense), net in
the accompanying consolidated statements of operations. No realized gains or
losses were recorded relating to these option agreements during the periods
presented.
11. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is a party to various general legal proceedings which have
arisen in the ordinary course of business. While the results of these matters
cannot be predicted with certainty, the Company believes that losses, if any,
resulting from the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows. However, unfavorable resolution could affect the
consolidated financial position, results of operations or cash flows for the
quarterly periods in which they are resolved.
In September 1999, several lawsuits were filed by certain shareholders
against the Company and certain of its officers and directors in the United
States District Court for the Southern District of Florida. The plaintiffs in
these lawsuits claim, on behalf of a purported class of purchasers of the
Company's common stock between January 28, 1999 and August 28, 1999, that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 by, among other things, allegedly making materially false and misleading
statements regarding the Company's growth and the assets acquired from Waste
Management. In 1999, the Court consolidated these lawsuits and the consolidated
action has been named In Re: Republic Services, Inc. Securities Litigation. The
plaintiffs filed a consolidated complaint in February 2000 and the defendants
filed a motion to dismiss the consolidated complaint in April 2000. In February
2001, the Court granted the defendants' motion to dismiss the consolidated
complaint. On September 24, 2001, the Court denied the plaintiffs' motion
requesting reconsideration of the Court's order dismissing the consolidated
complaint.
LEASE COMMITMENTS
The Company and its subsidiaries lease real property, equipment and software
under various other operating leases with terms from one to twenty-five years.
In December 1999, the Company entered into an operating lease facility
established to finance the acquisition of operating equipment. As of September
30, 2001, $81.6 million was outstanding under this facility.
LIABILITY INSURANCE
The Company carries general liability, vehicle liability, employment
practices liability, pollution liability, directors and officers liability,
workers compensation and employer's liability coverage, as well as umbrella
liability policies to provide excess coverage over the underlying limits
contained in these primary policies. The Company also carries property
insurance.
The Company's insurance programs for worker's compensation, general
liability, vehicle liability and employee related health care benefits are
effectively self-insured. Claims in excess of self-insurance levels are fully
insured. Accruals are based on claims filed and estimates of claims incurred but
not reported.
The Company's liabilities for unpaid and incurred but not reported claims at
September 30, 2001 were $44.8 million and are included in other current and
other liabilities in the accompanying Unaudited Condensed Consolidated Balance
Sheets. While the ultimate amount of claims incurred is dependent on future
developments, in management's opinion, recorded reserves are adequate to cover
the future
15
payment of claims. However, it is reasonably possible that recorded reserves may
not be adequate to cover the future payment of claims. Adjustments, if any, to
estimates recorded resulting from ultimate claim payments will be reflected in
operations in the periods in which such adjustments are known.
OTHER MATTERS
In the normal course of business, the Company is required by regulatory
agencies and municipalities to post performance bonds, letters of credit and/or
cash deposits as a financial guarantee of the Company's performance. At
September 30, 2001, surety bonds and letters of credit totaling $865.9 million
were outstanding and will expire on various dates through 2007. In addition, at
September 30, 2001, the Company had $99.7 million of restricted cash deposits
held as financial guarantees as well as funds restricted for capital
expenditures under certain debt facilities.
The Company's business activities are conducted in the context of a
developing and changing statutory and regulatory framework. Governmental
regulation of the waste management industry requires the Company to obtain and
retain numerous governmental permits to conduct various aspects of its
operations. These permits are subject to revocation, modification or denial. The
costs and other capital expenditures which may be required to obtain or retain
the applicable permits or comply with applicable regulations could be
significant. Any revocation, modification or denial of permits could have a
material adverse effect on the Company.
Through the date of the Company's initial public offering in July 1998, the
Company filed consolidated federal income tax returns with AutoNation, Inc. The
Internal Revenue Service is auditing AutoNation's consolidated tax returns for
fiscal years 1995 and 1996. In accordance with the Company's tax sharing
agreement with AutoNation, the Company may be liable for certain assessments
imposed by the Internal Revenue Service resulting from this audit. Management
believes that the tax liabilities recorded are adequate. However, a significant
assessment in excess of liabilities recorded against the Company could have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Form
10-K for the year ended December 31, 2000.
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
148 collection companies in 22 states. We also own or operate 88 transfer
stations and 54 solid waste landfills.
We generate revenue primarily from our solid waste collection operations.
Our remaining revenue is obtained from landfill disposal services and other
services, including recycling and composting operations.
The following table reflects our total revenue by source for the three and
nine months ended September 30, 2001 and 2000 (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------- -----------------------------------------------
2001 2000 2001 2000
-------------------- -------------------- --------------------- ---------------------
Collection:
Residential ......... $ 124.9 21.4% $ 110.3 20.4% $ 355.8 21.0% 319.6 20.3%
173.0 29.7 160.1 29.7 513.8 30.3 464.6 29.5
Industrial .......... 131.5 22.6 127.2 23.6 385.9 22.8 365.6 23.2
Other ............... 12.0 2.1 11.9 2.2 35.0 2.1 37.2 2.4
-------- ------- -------- ------- ---------- ------- ---------- -------
Total
collection . 441.4 75.8 409.5 75.9 1,290.5 76.2 1,187.0 75.4
Transfer and disposal . 206.3 186.8 582.2 537.5
Less: Intercompany .... (104.0) (95.3) (302.2) (270.2)
-------- -------- ---------- -------
Transfer and
disposal, net ...... 102.3 17.5 91.5 17.0 280.0 16.5 267.3 17.0
Other ................. 38.9 6.7 38.1 7.1 123.5 7.3 119.9 7.6
-------- ------- -------- ------- ---------- ------- ---------- -------
Total revenue $ 582.6 100.0% $ 539.1 100.0% $ 1,694.0 100.0% $ 1,574.2 100.0%
======== ===== ======== ===== ========== ===== ========== =====
Certain amounts for 2000 in the table above have been reclassified to
conform to the 2001 presentation.
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 in any of the periods presented.
The cost of our collection operations is primarily variable and includes
disposal, labor, fuel and equipment maintenance costs. We seek operating
efficiencies by controlling the movement of waste streams from the point of
collection through disposal. During the nine months ended September 30, 2001 and
2000, approximately 53% and 51%, respectively, of the total volume of waste we
collected was disposed of at our landfills.
17
Our landfill cost of operations includes daily operating expenses, costs of
capital for cell development, accruals for closure and post-closure costs, and
the legal and administrative costs of ongoing environmental compliance. 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. In life cycle accounting, certain direct costs are
capitalized or accrued and charged to expense based upon the consumption of
cubic yards of available airspace. These costs include all costs to acquire,
construct, close and maintain a site during the post-closure period.
Cost and airspace estimates are developed annually by independent engineers
together with our engineers. These estimates are used by our operating and
accounting personnel to annually adjust the rates used to expense capitalized
costs and accrue closure and post-closure costs. Changes in these estimates
primarily relate to changes in available airspace, inflation rates and
applicable regulations. Changes in available airspace include changes due to the
addition of airspace lying in expansion areas deemed likely to be permitted.
BUSINESS COMBINATIONS
We make decisions to acquire or invest in businesses based on financial and
strategic considerations. Businesses acquired are accounted for using the
purchase method of accounting and are included in the Unaudited Condensed
Consolidated Financial Statements from the date of acquisition.
We acquired various solid waste businesses during the nine months ended
September 30, 2001. The aggregate purchase price we paid in these transactions
was $266.4 million in cash. The aggregate purchase price paid, less cash and
restricted cash acquired plus debt assumed, was $226.6 million.
In July 1999, we entered into a definitive agreement with Allied Waste
Industries, Inc. to acquire certain solid waste assets. By September 30, 2000,
we had completed the purchase of these assets for approximately $105.5 million
in cash, $85.8 million of which were acquired during the nine months ended
September 30, 2000. In October 1999, we entered into a definitive agreement with
Allied for the simultaneous purchase and sale of certain other solid waste
assets. By September 30, 2000, we and Allied completed the purchase and sale of
these assets. Our net proceeds from the cash portion of the exchange of assets
were $30.7 million. All of these transactions have been accounted for under the
purchase method of accounting.
In addition to the acquisitions from Allied, we also acquired various other
solid waste businesses during the nine months ended September 30, 2000. The
aggregate purchase price paid by us in these transactions was $50.3 million in
cash.
During the nine months ended September 30, 2001 and 2000, $65.7 million and
$31.1 million, respectively, of the total purchase price paid for acquisitions
and contingent payments to former owners was allocated to landfill airspace.
These allocations were based on the discounted expected future cash flow of each
landfill relative to other assets within the acquired group, if applicable, and
were adjusted for other non-depletable landfill assets and liabilities acquired
(primarily closure and post-closure liabilities). Landfill purchase price is
amortized using the units-of-consumption method over total available airspace,
which includes likely to be permitted airspace where appropriate.
See Note 2, Business Combinations, of the Notes to the Unaudited Condensed
Consolidated Financial Statements, for further discussion of business
combinations.
18
CONSOLIDATED RESULTS OF OPERATIONS
Net income was $56.7 million for the three months ended September 30, 2001,
or $.33 per share, as compared to $55.0 million, or $.31 per share, for the
three months ended September 30, 2000. Net income was $164.4 million for the
nine months ended September 30, 2001, or $.96 per share, as compared to $164.5
million, or $.94 per share, for the nine months ended September 30, 2000.
The following table summarizes our costs and expenses in millions of dollars
and as a percentage of our revenue for the three and nine months ended September
30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -----------------------------------------
2001 2000 2001 2000
----------------- ----------------- ------------------- -------------------
Revenue .............................. $ 582.6 100.0% $ 539.1 100.0% $ 1,694.0 100.0% $ 1,574.2 100.0%
Expenses:
Cost of operations ................. 358.2 61.5 324.9 60.3 1,042.4 61.5 951.6 60.4
Depreciation, amortization and
depletion of property and equipment 44.3 7.6 40.2 7.5 126.1 7.4 116.3 7.4
Amortization of intangible assets .. 12.3 2.1 10.4 1.9 34.7 2.1 29.8 1.9
Selling, general and administrative
expenses .......................... 57.4 9.9 49.4 9.2 169.7 10.0 144.7 9.2
Other charges ...................... -- -- 6.7 1.2 -- -- 6.7 .4
-------- ---- -------- ---- ---------- ---- ---------- ----
Operating income ..................... $ 110.4 18.9% $ 107.5 19.9% $ 321.1 19.0% $ 325.1 20.7%
======== ==== ======== ==== ========== ==== ========== ====
Revenue was $582.6 million and $539.1 million for the three months ended
September 30, 2001 and 2000, respectively, an increase of 8.1%. Revenue was
$1,694.0 million and $1,574.2 million for the nine months ended September 30,
2001 and 2000, respectively, an increase of 7.6%. The following table reflects
the components of our revenue growth for the three and nine months ended
September 30, 2001 and 2000:
Three Months None Months
Ended September 30, Ended September 30,
-------------------- -------------------
2001 2000 2001 2000
----- ----- ----- ------
Price ..................... .4% 2.5% .7% 2.5%
Volume .................... 1.5 3.3 2.5 4.7
----- ----- ----- ------
Total internal
growth ........... 1.9 5.8 3.2 7.2
Acquisitions .............. 6.2 2.0 4.4 7.6
----- ----- ----- ------
Total revenue growth 8.1% 7.8% 7.6% 14.8%
===== ===== ===== ======
Price growth for the three and nine months ended September 30, 2001 was
negatively impacted by commodity prices. Excluding the effect of commodity
prices, price growth was 1.6% and 1.9% for the three and nine months ended
September 30, 2001, respectively. Volume growth was positively impacted by 1.0%
and .7% from non-core operations during the three and nine months ended
September 30, 2001. As such, adjusted internal growth for the three and nine
months ended September 30, 2001 was 2.1% and 3.7%, respectively.
During the third quarter, we began to see a decline in our price and volume
growth resulting from the slowdown in the U.S. economy. Specifically, industrial
waste volumes from the manufacturing sector continued to weaken during the third
quarter. In addition, we began to see a slowdown in commercial construction and
special waste activity, which has resulted in volume decreases and price
sensitivity for these services. We believe price and volume growth may diminish
further in the fourth quarter of 2001 and into 2002 depending on the severity
and duration of the economic slowdown.
Cost of operations was $358.2 million and $1,042.4 million for the three and
nine months ended September 30, 2001 versus $324.9 million and $951.6 million
for the comparable 2000 periods. The increase in aggregate dollars is primarily
a result of the expansion of our operations through acquisitions and internal
growth. Cost of operations as a percentage of revenue was 61.5% for the three
and nine months ended September 30, 2001 versus 60.3% and 60.4% for the
comparable 2000 periods. The increase in cost of operations as a percentage of
revenue for the three and nine months ended September 30, 2001 versus the
comparable period last year is primarily a result of lower commodity prices and
higher labor costs offset by improved operating efficiencies and revenue mix.
19
The economic slowdown was also responsible for the increase in cost of
operations as a percentage of revenue. We believe that cost of operations as a
percentage of revenue in the fourth quarter of 2001 and into 2002 may increase
depending upon the severity and duration of the economic slowdown.
Expenses for depreciation, amortization and depletion of property and
equipment were $44.3 million and $126.1 million for the three and nine months
ended September 30, 2001 versus $40.2 million and $116.3 million for the
comparable 2000 periods. Expenses for depreciation, amortization and depletion
of property and equipment as a percentage of revenue were 7.6% and 7.4% for the
three and nine months ended September 30, 2001 versus 7.5% and 7.4% for the
comparable 2000 periods. The increase in such expenses in aggregate dollars
versus the comparable periods last year is primarily due to acquisitions and
capital expenditures.
Expenses for amortization of intangible assets were $12.3 million and $34.7
million for the three and nine months ended September 30, 2001 versus $10.4
million and $29.8 million for the comparable 2000 periods. Amortization of
intangible assets as a percentage of revenue was 2.1% for the three and nine
months ended September 30, 2001 versus 1.9% for the comparable 2000 periods. The
increase in such expenses in aggregate dollars and as a percentage of revenue
versus the comparable periods last year is primarily due to acquisitions
accounted for using the purchase method of accounting.
Selling, general and administrative expenses were $57.4 million and $169.7
million for the three and nine months ended September 30, 2001 versus $49.4
million and $144.7 million for the comparable 2000 periods. Selling, general and
administrative expenses as a percentage of revenue were 9.9% and 10.0% for the
three and nine months ended September 30, 2001 versus 9.2% for the comparable
2000 periods. The increase in such expenses in aggregate dollars and as a
percentage of revenue versus the comparable periods last year is primarily due
to the addition of area and regional management, various training and systems
initiatives, and an increase in bad debt expense resulting from the economic
slowdown.
Other charges of $6.7 million for the three and nine months ended September
30, 2000 relate primarily to the early closure of a landfill in South Texas.
INTEREST EXPENSE
Interest expense was $20.7 million and $61.2 million for the three and nine
months ended September 30, 2001 versus $19.7 million and $60.3 million for the
comparable 2000 periods. Interest expense relates primarily to borrowings under
our unsecured notes and revolving credit facility. Proceeds from the sale of
unsecured notes were used to repay the revolving credit facility. Borrowings
under the revolving credit facility were used primarily to fund capital
expenditures and acquisitions.
Capitalized interest was $1.1 million and $2.2 million for the three and
nine months ended September 30, 2001 versus $.9 million and $2.4 million for the
comparable 2000 periods.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income, net of other expense, was $1.8 million and $5.3
million for the three and nine months ended September 30, 2001 versus $1.7
million and $2.7 million for the comparable 2000 periods.
INCOME TAXES
The provision for income taxes was $34.8 million and $100.8 million for the
three and nine months ended September 30, 2001 versus $34.5 million and $103.0
million for the comparable 2000 periods. During the three months ended December
31, 2000, the Company lowered its anticipated annual effective tax rate for 2000
from 38.5% to 38.0%. The effective income tax rate was 38.0% for the three and
nine months ended September 30, 2001 and 38.5% for the three and nine months
ended September 30, 2000. Income taxes have been provided based upon our
anticipated annual effective tax rate.
20
LANDFILL AND ENVIRONMENTAL MATTERS
AVAILABLE AIRSPACE
The following table reflects landfill airspace activity for landfills owned
or operated by us for the nine months ended September 30, 2001:
Landfills
Balance as of New Acquired, Changes in Balance as of
December 31, Expansions Net of Airspace Engineering September 30,
2000 Undertaken Divestitures Consumed Estimates 2001
------------- ---------- ------------ -------- ----------- -------------
Permitted airspace:
Cubic yards (in
millions) ...... 1,355.1 -- 14.0 (24.4) (1.8) 1,342.9
Number of sites . 53 1 54
Expansion airspace:
Cubic yards (in
millions) ...... 299.4 34.7 28.4 -- 52.1 414.6
Number of sites . 17 4 -- -- -- 21
--------- ---- ------ ------ ---- -------
Total available
airspace:
Cubic yards (in
millions) ...... 1,654.5 34.7 42.4 (24.4) 50.3 1,757.5
========= ==== ==== ==== ==== =======
Number of sites . 53 1 54
========= ==== =======
As of September 30, 2001, we owned or operated 54 solid waste landfills with
total available disposal capacity estimated to be 1.8 billion in-place cubic
yards. Total available disposal capacity represents the sum of estimated
permitted airspace plus an estimate of airspace we have deemed likely to be
permitted. These estimates are developed annually by independent engineers
together with our engineers utilizing information provided by annual aerial
surveys. As of September 30, 2001, total available disposal capacity is
estimated to be 1.4 billion in-place cubic yards of permitted airspace plus .4
billion in-place cubic yards of expansion airspace which we have deemed likely
to be permitted. Before airspace included in an expansion area is determined as
likely to be permitted and, therefore, included in our calculation of total
available disposal capacity, it must meet our expansion criteria. See Note 3,
Landfill and Accrued Environmental Costs, of the Notes to our Unaudited
Condensed Consolidated Financial Statements for further information.
As of September 30, 2001, 21 of our landfills meet the criteria for
including expansion airspace in their total available disposal capacity. At
projected annual volumes, these 21 landfills have an estimated remaining average
site life of 34 years, including the expansion airspace. The average estimated
remaining life of all of our landfills is 36 years.
As of September 30, 2001, seven of our landfills that meet the criteria for
including expansion airspace had obtained approval from local authorities and
are proceeding into the state permitting process. Also, as of September 30,
2001, five of our 21 landfills that meet the criteria for including expansion
airspace had submitted permit applications to state authorities. The remaining
nine landfills that meet the criteria for including expansion airspace are in
the process of obtaining approval from local authorities and have not identified
any fatal flaws or impediments associated with the expansions at either the
local or state level.
We have never been denied an expansion permit for a landfill that included
likely to be permitted airspace in its total available disposal capacity,
although no assurance can be made that all future expansions will be permitted
as designed.
21
CLOSURE AND POST-CLOSURE COSTS
During the nine months ended September 30, 2001, we consumed approximately
24.4 million cubic yards of airspace. During this same period, charges to
expense for closure and post-closure were $15.4 million, or $.63 per cubic yard.
As of September 30, 2001, accrued closure and post-closure costs were $226.8
million. The current portion of these costs of $25.0 million is reflected in our
Unaudited Condensed Consolidated Balance Sheet in other current liabilities. The
long-term portion of these costs of $201.8 million is reflected in our Unaudited
Condensed Consolidated Balance Sheet in accrued environmental and landfill
costs. As of September 30, 2001, assuming that all available landfill capacity
is used, we expect to expense approximately $542.5 million of additional closure
and post-closure costs over the remaining lives of our facilities.
Our estimates for closure and post-closure costs do not take into account
discounts for the present value of total estimated costs. If total estimated
costs were discounted to present value, they would be lower.
INVESTMENT IN LANDFILLS
The following table reflects changes in our investments in landfills for the
nine months ended September 30, 2001 and the future expected investment as of
September 30, 2001 (in millions):
Trans- Balance
Landfills fers Additions as of Expected Total
Balance as of Acquired, and Charged Septem- Future Expected
December 31, Capital Retire- Net of Adjust- to ber, 30 Invest- Invest-
2000 Additions ments Divestitures ments Expense 2001 ment ment
------------- --------- ------- ------------ ------- --------- ------- ------- --------
Non-depletable landfill
land................. $ 47.2 $ 2.3 $(1.0) $ 2.3 $ (.2) $ -- $ 50.6 $ -- $ 50.6
Landfill development
costs............... 865.5 2.9 -- 33.3 49.6 -- 951.3 988.0 1,939.3
Construction in
progress -- landfill 46.6 41.2 -- (.4) (49.4) -- 38.0 -- 38.0
Accumulated depletion
and amortization..... (179.5) -- -- 3.9 -- (46.3) (221.9) -- (221.9)
-------- ----- ----- ----- ------ ------ ------- ------- --------
Net investment in
landfill and land
development costs... $ 779.8 $46.4 $(1.0) $39.1 $ -- $(46.3) $ 818.0 $ 988.0 $1,806.0
======== ===== ===== ===== ======= ====== ======= ======= ========
As of December 31, 2000, we owned or operated 53 solid waste landfills with
total available disposal capacity estimated to be 1.7 billion in-place cubic
yards. Our net investment in these landfills, excluding non-depletable land, was
$732.6 million, or approximately $.44 per cubic yard.
As of September 30, 2001, we owned or operated 54 solid waste landfills with
total available disposal capacity estimated to be 1.8 billion in-place cubic
yards. Our net investment in these landfills, excluding non-depletable land, was
$767.4 million, or $.44 per cubic yard. During the nine months ended September
30, 2001, our depletion and amortization expense relating to landfills was $46.3
million, or $1.90 per cubic yard.
As of September 30, 2001, we expect to spend an estimated additional $1.0
billion on existing landfills, primarily related to cell construction and
environmental structures, over their expected remaining lives. Our total
expected gross investment, excluding non-depletable land, estimated to be
$1,755.4 billion, or $1.00 per cubic yard, is used in determining our depletion
and amortization expense based upon airspace consumed using the
units-of-consumption method. Our estimates for expected future investment in
landfills do not take into account discounts for the present value of total
estimated costs. For further information, see "Closure and Post-Closure Costs."
We accrue costs related to environmental remediation activities through a
charge to income in the period such liabilities become probable and can be
reasonably estimated. No material amounts were charged to expense during the
nine months ended September 30, 2001 and 2000, respectively.
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FINANCIAL CONDITION
At September 30, 2001, we had $99.7 million of restricted cash, of which
$76.6 million related to proceeds from tax-exempt bonds and other tax-exempt
financing that will be used to fund capital expenditures. At September 30, 2001,
we had $195.7 million of tax-exempt bonds outstanding at favorable interest
rates.
In July 1998, we entered into a $1.0 billion unsecured revolving credit
facility with a group of banks. $500.0 million of the credit facility expires in
July 2002 and the remaining $500.0 million expires in July 2003. Borrowings
under the credit facility bear interest at LIBOR-based rates. We use our
operating cash flow and proceeds from our credit facilities to finance our
working capital, capital expenditures, acquisitions, share repurchases and other
requirements. As of September 30, 2001, we had $736.2 million available under
the credit facility.
In May 1999, we sold $600.0 million of unsecured notes in the public market.
$225.0 million of these notes bear interest at 6 5/8% per annum and mature in
2004. The remaining $375.0 million bear interest at 7 1/8% per annum and mature
in 2009. Interest on these notes is payable semi-annually in May and November.
The $225.0 million and $375.0 million in notes were offered at a discount of
$1.0 million and $.5 million, respectively. Proceeds from the notes were used to
repay our revolving credit facility.
In December 1999, we entered into an operating lease facility established
to finance the acquisition of operating equipment. As of September 30, 2001,
$81.6 million was outstanding under this facility.
In August 2001, we sold $450.0 million of unsecured notes in the public
market. The notes bear interest at 6 3/4% and mature in 2011. Interest on these
notes is payable semi-annually in February and August. The notes were offered at
a discount of $2.6 million. Proceeds from the notes were used to repay our
revolving credit facility.
In order to manage risk associated with fluctuations in interest rates and
to take advantage of favorable floating interest rates, in September 2001, we
entered into interest rate swap agreements with investment grade rated financial
institutions. The swap agreements have a total notional value of $225.0 million
and require the Company to pay interest at floating rates based upon changes in
LIBOR and receive interest at a fixed rate of 6 5/8%. The swap agreements
terminate in May 2004.
We believe that we currently have sufficient resources to meet our
anticipated capital requirements and obligations as they come due. We also
believe that we would be able to raise additional debt or equity financing, if
necessary, to fund special corporate needs or to complete acquisitions.
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SELECTED BALANCE SHEET ACCOUNTS
The following table reflects the activity in our allowance for doubtful
accounts, accrued closure and post-closure, accrued self-insurance and amounts
due to former owners during the nine months ended September 30, 2001 (in
millions):
Allowance for Closure and Amounts Due to
Doubtful Post- Self- Former
Accounts Closure Insurance Owners
------------- ----------- --------- ---------------
Balance, December 31, 2000......... $ 13.2 $ 167.6 $ 41.1 $ 15.3
Additions charged to expense....... 12.7 15.4 84.3 --
Additions due to acquisitions,
net of divestitures............... 1.6 55.4 -- 18.7
Usage.............................. (12.3) (11.6) (80.6) (29.3)
------ ------- -------- ------
Balance, September 30, 2001........ 15.2 226.8 44.8 4.7
Current portion.................... 15.2 25.0 25.9 4.7
------ ------- -------- ------
Long-term portion............ $ -- $ 201.8 $ 18.9 $ --
====== ======= ======== ======
Additions to accrued liabilities related to acquisitions are periodically
reviewed during the year subsequent to the acquisition. During such reviews,
accrued liabilities, which are considered to be in excess of amounts required
for a specific acquisition, are reversed and charged against goodwill (cost in
excess of net fair value of assets acquired).
As of September 30, 2001, accounts receivable were $271.5 million, net of
allowance for doubtful accounts of $15.2 million, resulting in days sales
outstanding of 42, or 30 days net of deferred revenue.
PROPERTY AND EQUIPMENT
The following tables reflect the activity in our property and equipment
accounts for the nine months ended September 30, 2001 (in millions):
Gross Property and Equipment
---------------------------------------------------------------------------------
Trans-
fers
Balance as of Acquisitions, and Balance as of
December 31, Capital Net of Adjust- September 30,
2000 Additions Retirement Divestitures ments 2001
------------- --------- ---------- ------------- -------- -------------
Other land..................... $ 91.5 $ 1.3 $ (1.6) $ 5.0 $ .6 $ 96.8
Non-depletable landfill land... 47.2 2.3 (1.0) 2.3 (.2) 50.6
Landfill development costs..... 865.5 2.9 -- 33.3 49.6 951.3
Vehicles and equipment......... 1,018.9 83.3 (21.4) 18.2 25.6 1,124.6
Buildings and improvements..... 227.1 5.8 (1.8) 8.5 6.7 246.3
Construction in progress--
landfill.............. 46.6 41.2 -- (.4) (49.4) 38.0
Construction in
progress-- other....... 18.0 42.2 -- -- (33.7) 26.5
--------- ------- -------- ------- -------- ---------
Total........... $ 2,314.8 $ 179.0 $ (25.8) $ 66.9 $ (.8) $ 2,534.1
========= ======= ======== ======= ======== =========
Accumulated Depreciation, Amortization and Depletion
-------------------------------------------------------------------------------------
Trans-
Additions fers
Balance as of Charged and Balance as of
December 31, to Adjust- September 30,
2000 Expense Retirements Divestitures ments 2001
----------- --------- ----------- ------------ ----- -------------
Landfill development costs........... $ (179.5) $ (46.3) $ -- $ 3.9 $ -- $(221.9)
Vehicles and equipment............... (428.9) (73.3) 17.8 3.0 .7 (480.7)
Buildings and improvements.......... (38.6) (6.5) .4 .1 -- (44.6)
-------- ------- ----- ------ ----- -------
Total....................... $ (647.0) $(126.1) $18.2 $ 7.0 $ .7 $(747.2)
======== ======= ====== ====== ===== =======
LIQUIDITY AND CAPITAL RESOURCES
The major components of changes in cash flows for the nine months ended
September 30, 2001 and 2000 are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash provided by operating activities
was $381.1 million and $315.2 million for the nine months ended September 30,
2001 and 2000, respectively. The changes in cash provided by operating
activities during the periods are due to expansion of our business and timing of
payments from accounts payable.
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CASH FLOWS USED IN INVESTING ACTIVITIES. Cash used in investing activities
consists primarily of cash used for business acquisitions, including amounts due
and contingent payments to former owners, and capital additions. Cash used to
acquire businesses, net of cash acquired, was $261.1 million and $137.7 million
during the nine months ended September 30, 2001 and 2000, respectively.
We intend to finance capital expenditures and acquisitions through cash on
hand, cash flow from operations, our revolving credit facility and other
financings.
CASH FLOWS USED IN FINANCING ACTIVITIES. Cash used in financing activities
for the nine months ended September 30, 2001 and 2000 was $9.7 million and
$18.3 million for the nine months ended September 30, 2001 and 2000,
respectively. In August 2001, we sold unsecured notes with a face value of
$450.0 million at a discounted price of $447.4 million. Proceeds from the notes
were used to repay our revolving credit facility.
In 2000, we announced that our Board of Directors authorized the repurchase
of up to $150.0 million of our common stock. As of September 30, 2001, we had
repurchased 8.9 million shares of our stock for $144.1 million, of which 5.3
million shares were acquired during the nine months ended September 30, 2001,
for $93.2 million. In October 2001, we announced that our Board of Directors
authorized the repurchase of up to an additional $125.0 million of our common
stock. We intend to finance share repurchases from cash on hand, cash flow from
operations, our revolving credit facility and other financings.
In December 1999, we entered into an operating lease facility established to
finance the acquisition of operating equipment consisting primarily of
revenue-producing vehicles. At September 30, 2001, $81.6 million was outstanding
under this facility.
We used proceeds from bank facilities and tax-exempt bonds to fund
acquisitions and capital additions.
We received an investment grade rating from the nation's largest credit
rating agencies. As of September 30, 2001, our senior debt was rated Baa3 by
Moody's, BBB by Standard & Poor's and BBB+ by Fitch.
SEASONALITY
Our operations can be adversely affected by periods of inclement weather
which could delay the collection and disposal of waste, reduce the volume of
waste generated, or delay the construction or expansion of our landfill sites
and other facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement no.
141, "Business Combinations" ("SFAS 141"), and Statement no. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). Under SFAS 141, the use of the
poolings-of-interests method of accounting for business combinations initiated
after June 30, 2001 is prohibited. This statement also changes the criteria for
the recognition of acquired intangible assets. The provisions of SFAS 141 apply
to all business combinations accounted for using the purchase method of
accounting completed after June 30, 2001. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Under the provisions of SFAS 142, most of our
intangible assets will no longer be subject to amortization. However, we will be
required to change our methodology for evaluating impairments to intangible
assets that are not subject to amortization. We are currently evaluating the
provisions of SFAS 141 and 142 and have not yet determined the effects of these
changes on our financial position and results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement no.
143, "Accounting for Asset Retirement Obligations". This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002,
and will require our company to change the accounting methodology we currently
use to record closure and post-closure liabilities related to our landfills. The
more significant of these changes includes measuring all future obligations at
fair value and discounting obligations to reflect today's dollars.
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This statement requires a cumulative effect approach to recognizing transition
amounts for existing retirement obligations. We are currently evaluating the
effect of adoption of this statement, and have not determined whether the impact
of adoption will be material to our consolidated financial position or results
of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
no. 144, "Accounting for the Impairment of Long-Lived Assets". This statement
supersedes Statement no. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion no. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement establishes a single accounting model
for assets to be disposed of by sale and resolves certain SFAS 121
implementation issues. SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and is generally to be applied
prospectively. We do not expect the adoption of this statement to have a
material effect on our consolidated financial position or results of operations.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements and information included herein constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied, in or by such forward-looking statements. Such factors include, among
other things, whether the Company's estimates and assumptions concerning its
selected balance sheet accounts, closure and post-closure costs, available
airspace, and projected costs and expenses related to the Company's landfills
and property, plant and equipment, and labor, fuel rates and economic and
inflationary trends, turn out to be correct or appropriate, and various factors
that will impact the actual business and financial performance of the Company
such as competition and demand for services in the solid waste industry;
dependence on acquisitions for growth; the Company's ability to manage growth;
compliance with, and future changes in, environmental regulations; the Company's
ability to obtain approval from regulatory agencies in connection with
expansions at the Company's landfills; the ability to obtain financing on
acceptable terms to finance the Company's operations and growth strategy and for
the Company to operate within the limitations imposed by financing arrangements;
the ability of the Company to repurchase common stock at prices that are
accretive to earnings per share; the Company's dependence on key personnel;
general economic and market conditions including, but not limited to, inflation
and changes in commodity pricing, fuel, labor and other variable costs that are
generally not within the control of the Company; dependence on large, long-term
collection contracts; risks associated with undisclosed liabilities of acquired
businesses; risks associated with pending legal proceedings; and other factors
contained in the Company's filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market sensitive financial instruments consist primarily of variable
rate debt. Therefore, the Company's market risk exposure is with changing
interest rates in the United States and fluctuations in LIBOR. We manage
interest rate risk through a combination of fixed and floating rate debt as well
as interest rate swap agreements.
26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1* Employment Agreement dated July 31, 2001, by and between Harris
W. Hudson and the Company.
(b) Reports on Form 8-K:
(1) Form 8-K, dated and filed July 30, 2001, including a press release
announcing the Company's operating results for the three and six months
ended June 30, 2001.
(2) Form 8-K, dated August 9, 2001 and filed August 16, 2001, announcing the
Company's sale of $450.0 million of public debt in a registered offering
as of August 15, 2001.
- --------
*Filed herewith
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Republic Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REPUBLIC SERVICES, INC.
By: /s/ TOD C. HOLMES
--------------------------
Tod C. Holmes
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ CHARLES F. SERIANNI
-------------------------------
Charles F. Serianni
Chief Accounting Officer
(Principal Accounting Officer)
Date: November 9, 2001
28