Republic Services, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
Republic Services, the second-largest U.S. provider of non-hazardous solid-waste services by revenue, reported the quarter and six months ended June 30, 2011. Its operations span collection, transfer, recycling and disposal across four geographic segments. The filing is unaudited.
Financial performance and liquidity
- Q2 revenue: $2.087 billion, up 1.0% from $2.066 billion. Operating income was $401.2 million, nearly unchanged year over year; operating margin was 19.2%, versus 19.4%.
- Q2 earnings: Net income attributable to Republic was $46.5 million, or $0.12 per diluted share, compared with $159.7 million, or $0.42, in Q2 2010. The decline principally reflects a $199.5 million debt-extinguishment loss and $19.4 million net loss on asset dispositions and impairments.
- First-half results: Revenue was $4.052 billion, up 0.7%. Operating income was $777.4 million versus $782.1 million, with margin of 19.2% versus 19.4%. Net income attributable to Republic was $204.7 million, or $0.54 per diluted share, compared with $224.7 million, or $0.59.
- Adjusted earnings: Management’s non-GAAP adjusted diluted EPS was $0.49 for Q2 versus $0.43, and $0.90 for the first half versus $0.84. Adjustments included debt-extinguishment losses and asset impairments; these measures may not be comparable to similarly titled measures from other companies.
- Cash flow and investment: First-half operating cash flow was $795.6 million, up from $594.8 million. Capital spending was $481.7 million, versus $385.4 million; free cash flow, as defined by the company, was $330.2 million versus $222.0 million. Cash dividends paid were $152.5 million and share repurchases were $262.9 million.
- Balance sheet and debt: At June 30, cash and cash equivalents were $320.5 million; current assets were $1.480 billion and current liabilities $2.204 billion. Total debt was $7.306 billion, up from $6.744 billion at year-end 2010. Total assets were $19.682 billion and stockholders’ equity $7.667 billion.
- Liquidity: The company reported $1.577 billion available under its credit facilities after letters of credit, no facility borrowings, and compliance with covenants. Covenant ratios were 4.86 for EBITDA to interest (3.00 minimum) and 3.19 for total debt to EBITDA (3.50 maximum).
Material changes versus prior comparable periods
- First-half revenue growth reflected 1.0% core price, 0.9% fuel surcharges and 1.2% commodity revenue growth, offset by 0.9% volume declines, 1.4% from the expiration of San Mateo County and Toronto contracts, and 0.1% from divestitures.
- Fuel and recycling input costs pressured margins: average diesel cost rose 29.6% for the first half, while cost of operations increased to 59.2% of revenue from 58.5%.
- First-half operating cash flow improved despite lower net income, aided in part by lower taxes paid and less adverse working-capital changes. Capital expenditures increased materially.
- Debt refinancing included issuance of $1.85 billion of senior notes at 3.800% to 5.700% and retirement or repayment of existing debt. The transactions generated a $201.3 million first-half extinguishment loss, including $87.8 million cash costs and $113.5 million non-cash costs.
Outlook, commentary, risks and unusual items
- Management expected 2011 capital expenditures to approximate $870 million. It stated that cash, operating cash flow and credit-facility availability should provide sufficient resources for anticipated capital needs and maturities, and expected covenant compliance through 2011. No earnings guidance is provided in the supplied filing text.
- The board approved a 10% increase in the quarterly dividend to $0.22 per share in July 2011. The company also expected to use remaining authorization under its $400 million repurchase program during the rest of 2011.
- Operating conditions included continuing collection and transfer-station volume declines, with positive landfill volume growth primarily from special waste. Fuel costs, commodity prices, economic conditions, pricing limits in customer contracts and weather could affect results.
- Unusual Q2 charges included a $28.5 million Southern Region landfill impairment following site closure and a $7.2 million Western Region impairment, partly offset by a $17.1 million gain on business dispositions.
- Environmental remediation liabilities totaled $555.4 million; management stated that using the reasonably possible high ends of remediation estimates would increase the aggregate liability by about $141 million. Landfill capping, closure and post-closure liabilities were $1.066 billion.
- Legal proceedings carried an aggregate accrual of approximately $111 million; using high-end loss estimates would increase potential liability by about $110 million. Significant matters include landfill-related claims, the Luri employment case, and a disclosed government-contracting compliance matter that could lead to restitution, damages, penalties or lost business.
- An IRS dispute over a 2002 partnership-interest exchange could involve $156.2 million of tax and approximately $78.0 million of interest, which the company said were fully reserved; asserted penalties and penalty-related interest of approximately $49.8 million were not reserved. The company also cited uncertainty in tax examinations and multi-employer pension obligations.
Important facts for investors to verify
- How much of the sharp reported earnings decline is attributable to refinancing and impairment charges, and whether adjusted earnings are a useful indicator of recurring performance.
- Whether pricing and fuel-recovery mechanisms can offset higher fuel and operating costs without further volume losses or margin pressure.
- The sustainability of operating cash flow and free cash flow after higher capital spending, dividends and share repurchases.
- Debt maturities, refinancing costs, floating-rate exposure and covenant headroom; a 100-basis-point rate change was estimated to affect annual interest expense and cash interest by about $11 million.
- Potential changes in landfill, remediation, litigation and tax liabilities, including the outcomes of the specifically disclosed proceedings and disputes.