Republic Services, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Republic provides non-hazardous solid waste collection, transfer, recycling and disposal services across four geographic regions. Unless otherwise stated, financial amounts are in millions of dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $2,060.6 | $2,086.6 | $4,043.0 | $4,051.5 |
| Operating income | $387.0 | $401.2 | $713.9 | $777.4 |
| Operating margin | 18.8% | 19.2% | 17.7% | 19.2% |
| Net income attributable to Republic | $149.2 | $46.5 | $292.1 | $204.7 |
| Diluted EPS | $0.40 | $0.12 | $0.79 | $0.54 |
| Cash provided by operations | Not stated for quarter in the cash flow statement | Not stated for quarter in the cash flow statement | $695.0 | $795.6 |
| Capital expenditures | Not stated as a quarterly total here | Not stated as a quarterly total here | $462.5 | $481.7 |
| Free cash flow | $189.1 | $186.8 | $253.9 | $330.2 |
Quarterly revenue declined 1.2%, while first-half revenue was down 0.2%. First-half cash from operations fell about 13%; management attributed much of the comparison to working-capital movements, including synergy incentive plan payments, tax receivables and higher remediation spending. Free cash flow is a company-defined non-GAAP measure and excludes debt service and dividends.
Reported earnings benefited from a smaller debt-extinguishment loss: $110.3 in Q2 2012 versus $199.5 in Q2 2011; first-half losses were $110.3 and $201.3, respectively. The Q2 2012 tax provision was reduced by approximately $34 following resolution of Allied tax years 2004–2008, among other tax-related items. These items materially affect reported year-over-year earnings comparisons.
Debt and liquidity
- Total debt carrying value was $7,113.4 at June 30, 2012, compared with $6,921.8 at December 31, 2011. Cash and cash equivalents were $69.3; restricted cash and marketable securities were $138.9.
- Available capacity under committed credit facilities was $1,279.0, after $919.5 of letters of credit. The company reported compliance with its covenants; debt-to-EBITDA was 2.93 against a 3.50 maximum, and EBITDA-to-interest was 5.83 against a 3.00 minimum.
- In May, Republic issued $850 of 3.55% senior notes due 2022, using proceeds to redeem $750 of 6.875% notes due 2017 and for general corporate purposes. It also extended a $1.25 billion revolving facility maturity to May 2017.
- Quarter-end borrowings under the uncommitted $75 million facility were $68.7; this facility may be terminated by either party at any time.
Material changes and management commentary
- For the first half, management reported internal growth of negative 0.7%: core price rose 0.6%, volume declined 0.6%, and recycling commodity effects reduced revenue 0.9%; acquisitions net of divestitures added 0.5%.
- Lower volume reflected losses of a large national accounts contract and certain municipal disposal contracts, competitive pressures and nonrecurring special-waste work. Lower recycled-material prices also weighed on revenue: first-half average OCC prices fell 15.1% and ONP prices fell 25.9% year over year.
- Operating costs increased as a share of revenue. Labor and maintenance costs rose, while lower third-party disposal costs and fuel costs in Q2 partly offset pressure. First-half average fuel cost per gallon increased 3.9%.
- July 2012 full-year guidance was adjusted diluted EPS of $1.91–$1.93, excluding $0.18 per share for debt extinguishment, $0.01 for Central States negotiation costs and adding back a $0.01 per-share gain on asset dispositions and impairments. Corresponding reported diluted EPS guidance was $1.73–$1.75.
- The board approved a roughly 7% increase in the quarterly dividend to $0.235 per share, payable October 15, 2012.
Risks, contingencies and unusual items
- Environmental remediation liabilities totaled $520.0; management said use of the reasonably possible high ends of remediation estimates would increase the aggregate liability by approximately $198. Significant matters include Countywide ($54.3 recorded; estimated range $51–$73) and Congress Landfill ($83.9 recorded; range $53–$154). Changes in estimates could materially affect results, financial position or cash flows.
- Legal proceedings accruals were approximately $58; using the high ends of estimated ranges would increase aggregate potential liability by approximately $83. Litigation includes landfill-related claims at Countywide and Congress. The Luri judgment was reversed by the Ohio Supreme Court in July 2012 and remanded for further proceedings.
- Republic contributes to 27 multiemployer pension plans. It was negotiating Central States pension fund agreements and considering withdrawal; the fund estimated approximately $109 of liability for a complete withdrawal as of November 2011. Management said a loss was not then both probable and reasonably estimable, so no amount was accrued for that exposure.
- Substantial indebtedness, fuel and commodity-price volatility, labor costs, landfill regulation and permitting, severe weather, and litigation and environmental liabilities are identified risks. A 10-cent diesel price change was estimated to affect annual fuel costs by about $14, partly offset by about $9 in fuel recovery fees. A $10-per-ton recycling commodity price change was estimated to affect annual revenue by about $27 and operating income by about $18.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification checklist
- Reconcile reported EPS and net income to adjusted results, particularly the debt-extinguishment charges and the one-time tax benefit.
- Track whether volume, internal growth and recycling prices stabilize, and whether core pricing offsets cost inflation.
- Review cash generation, capital spending, share repurchases and dividend commitments alongside the increase in debt.
- Monitor remediation estimates and litigation outcomes, especially Countywide and Congress Landfill matters.
- Follow Central States negotiations and any multiemployer pension withdrawal exposure, and confirm ongoing covenant compliance and credit availability.