Republic Services, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling and disposal services, operating across three reportable regions: East, Central and West. Unless otherwise noted, amounts are in millions.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $2,111.7 | $2,060.6 | $4,110.3 | $4,043.0 |
| Operating income | $181.2 | $387.0 | $455.4 | $713.9 |
| Operating margin | 8.6% | 18.8% | 11.1% | 17.7% |
| Net income attributable to Republic | $56.3 | $149.2 | $180.9 | $292.1 |
| Diluted EPS | $0.15 | $0.40 | $0.50 | $0.79 |
- Revenue grew 2.5% in Q2 and 1.7% for the first half. For the six-month period, average yield contributed 1.3% growth, fuel recovery fees 0.3%, and net acquisitions 0.5%; volume and recycling commodity prices each reduced growth by 0.1% and 0.3%, respectively.
- Reported results included a $108.7 environmental remediation charge for the Bridgeton Landfill and $42.0 of Central States Pension Fund withdrawal liability charges in Q2. Six-month charges were $108.7 and $99.9, respectively. Company-reported adjusted diluted EPS was $0.43 for Q2 versus $0.59 and $0.89 for six months versus $0.97.
- Six-month operating cash flow was $761.5, versus $695.0. Capital expenditures were $461.8; company-defined free cash flow was $307.1, versus $253.9. Q2 free cash flow was $98.9, versus $189.1.
- Cash and equivalents were $96.7 at June 30. Total debt carrying value was $7,028.6, including $7,013.3 long-term debt. Revolving credit facilities had no borrowings and $1,548.3 of availability after letters of credit. Restricted cash and marketable securities totaled $183.8.
- At June 30, the company reported a debt-to-EBITDA covenant ratio of 3.30 against a 3.75 maximum, and EBITDA-to-interest of 5.81 against a 3.00 minimum. July amendments maintained the 3.75 debt-ratio cap through Q1 2014, with a 3.50 cap thereafter.
- Cash dividends declared were $0.47 per share for the first half. In July, the board approved a 10.6% increase in the quarterly dividend to $0.26 per share.
Material changes and management commentary
- Revenue gains reflected pricing, fuel recovery and Q2 volume improvement, particularly in commercial and industrial collection, transfer and National Accounts. Recycling commodity prices remained a headwind; first-half collection revenue rose while landfill revenue declined.
- Cost of operations increased to 66.8% of revenue in Q2 from 60.2% a year earlier, including the Bridgeton charge. Excluding that charge, operating costs still rose as a share of revenue, with labor, maintenance, disposal, subcontracting and landfill costs among the pressures. Lower fuel costs partly offset increases.
- Regional performance varied: West operating margin rose to 22.9% in Q2, while East and Central margins declined to 18.3% and 17.8%. Corporate results absorbed the Bridgeton and pension charges and higher legal settlement expenses.
- Management reaffirmed 2013 adjusted diluted EPS guidance of $1.86–$1.91. This non-GAAP outlook excludes specified charges, including Central States costs, restructuring and Bridgeton remediation; reported diluted EPS guidance was $1.39–$1.44.
Risks, contingencies and unusual items
- Environmental exposure: Bridgeton’s recorded remediation liability was $143.4, with $64.5 expected to be paid in the next 12 months; the disclosed remaining reasonably possible loss range was $112–$392. Across remediation liabilities, management said use of the reasonably possible high ends could add about $561 to recorded amounts. Changes in estimates could materially affect results and cash flows.
- Pensions: Central States withdrawal charges arose from collective bargaining changes. After quarter-end, one further withdrawal event was ratified, with an estimated $12 charge expected in Q3; the company estimated a further $21 for remaining bargaining units and said complete 2013 withdrawal remained reasonably possible.
- Legal matters: Legal proceedings accrued were approximately $80; using the high ends of estimated loss ranges would add approximately $131. The Countywide matter was settled July 11, 2013. Congress Landfill litigation involving approximately 3,000 plaintiffs remained ongoing, with damages unspecified.
- Other notable matters: Missouri authorities sued over Bridgeton conditions, and a preliminary injunction required continued remedial work and reporting. The company also disclosed preliminary discussions with authorities concerning potentially inaccurate or incomplete information provided by a landfill subsidiary; based on information then available, it did not expect a material impact.
- Other stated risks include substantial indebtedness, labor and multiemployer pension obligations, fuel and recycling commodity price volatility, environmental and regulatory requirements, litigation, severe weather and capital-intensive operations. The company reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Progress and actual costs at Bridgeton, including whether remediation estimates or the possible-loss range change.
- Central States negotiations, any additional withdrawal events, and the resulting charges and payment schedule.
- Whether operating margins and cash generation improve after the unusual charges, and how adjusted results reconcile to GAAP results.
- Debt covenant headroom, facility availability and the effect of the amended covenant limits.
- Developments in the Congress Landfill, EPA-information and other legal matters, including any settlement or additional recorded liability.
- Delivery of the reaffirmed adjusted EPS outlook and the assumptions and exclusions underlying that non-GAAP guidance.