Republic Services, Inc. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Republic provides non-hazardous solid-waste collection, transfer, recycling and disposal services. The results include Allied Waste from its December 5, 2008 acquisition; reported comparisons with 2008 therefore are not like-for-like.
Financial results and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $2,066.1 million | $827.5 million | $4,126.6 million | $1,606.7 million |
| Operating income | $520.7 million | $85.6 million | $873.6 million | $227.8 million |
| Operating margin | 25.2% | 10.4% | 21.2% | 14.2% |
| Net income attributable to Republic | $225.9 million | $40.7 million | $338.9 million | $116.8 million |
| Diluted EPS | $0.59 | $0.22 | $0.89 | $0.63 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $680.7 million | $311.5 million |
| Free cash flow (company-defined) | $18.4 million | $82.0 million | $342.3 million | $149.4 million |
For the six months, capital expenditures were $355.1 million, cash proceeds from divestitures were $424.2 million, and cash used in financing was $790.2 million. Cash and cash equivalents were $67.6 million at June 30. Total debt was $7,095.8 million, including $327.3 million current; long-term debt was $6,768.5 million. Credit Facilities availability was $730.1 million. Restricted cash and marketable securities totaled $259.3 million and are not equivalent to unrestricted cash.
Management reported covenant ratios of 3.80 for EBITDA to interest (minimum 3.00) and 2.88 for debt to EBITDA (maximum 4.00); the company was compliant. Current quarterly dividend was $0.19 per share. Share repurchases were expected to remain suspended until approximately 2011.
Changes versus prior comparable periods
- Reported revenue growth chiefly reflects Allied’s inclusion, not organic expansion. On a pro forma basis, with divested assets removed, internal revenue growth declined 12.5% in Q2 and 10.6% in the first half of 2009.
- For the first half, core price increased 3.4%, while core volume fell 9.1%; lower fuel surcharges and recycling commodity prices reduced revenue by 2.2% and 2.7%, respectively.
- Reported Q2 and first-half earnings included net divestiture gains of $150.1 million and $145.2 million, respectively. First-half results also included $43.6 million of restructuring charges and $22.9 million of synergy-achievement costs. Company-adjusted diluted EPS was $0.39 for Q2 and $0.76 for the first half, versus $0.46 and $0.87 in 2008; these non-GAAP figures exclude specified gains and charges.
- Operating cash flow rose year over year, but first-half capital expenditures more than doubled, to $355.1 million from $165.4 million. First-half free cash flow increased to $342.3 million, although Q2 free cash flow declined to $18.4 million from $82.0 million.
Outlook, commentary and key risks
- Management expected economic weakness and volume declines across business lines to continue through the rest of 2009, with recycling commodity prices remaining low. It cited pricing and cost-control actions as offsets and said slower growth could help moderate capital spending.
- Merger synergy targets were raised to $125 million annual run-rate by year-end 2009, from prior guidance of $100 million, and $165–$175 million by year-end 2010. Management expected about $22.7 million of additional restructuring charges, with the plan substantially complete by Q4 2009. Expected full-year effective tax rate for the remainder of 2009 was approximately 43.5%.
- DOJ-required divestitures involved 87 commercial routes, nine landfills and ten transfer stations. Remaining divestitures were expected to close in Q3 2009; proceeds were used to repay Credit Facility borrowings. Purchase-price allocation for Allied remained preliminary, including significant acquired asset and liability valuations; about $9.0 billion of acquisition goodwill was expected to be substantially non-deductible for tax purposes.
- Environmental and legal exposures include landfill remediation and closure obligations; the Countywide and Sunrise landfill matters; a Countywide lawsuit involving approximately 700 plaintiffs; and other regulatory proceedings. The company stated that future changes to remediation estimates could materially affect financial position, results or cash flows.
- Tax disputes are significant. The company had fully accrued the estimated exposure in the risk-management-company capital-loss dispute, which could involve approximately $451 million of taxes and interest plus $168 million of penalties and penalty-related interest in total, including amounts already paid. A separate partnership-interest tax dispute had approximately $156 million of potential tax plus $54 million accrued interest reserved; additional penalties could have a material impact.
- Other risks include substantial post-merger debt, refinancing of the $300 million receivables facility maturing in May 2010, interest-rate and fuel-price sensitivity, underfunded multi-employer pension plans, integration and synergy execution, and permitting or regulatory changes. A 100-basis-point interest-rate change was estimated to affect annualized interest expense and cash interest by about $16 million.
Investor verification priorities
- Separate Allied’s acquisition contribution and divestitures from underlying revenue trends, volume, pricing and margins.
- Assess earnings excluding the divestiture gain and including ongoing integration, restructuring and synergy costs.
- Track cash conversion, capital spending, free cash flow, debt reduction and unrestricted liquidity; review Credit Facility covenant headroom.
- Monitor completion and proceeds of DOJ divestitures, final Allied purchase-price allocation, and delivery of stated synergy targets.
- Review developments in environmental remediation, landfill litigation and tax disputes, including potential cash payments beyond amounts already paid.