Republic Services, Inc. — Q1 2010 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2010, compared with Q1 2009. Republic is a large U.S. provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating across four geographic regions. The results reflect the ongoing integration of Allied Waste, acquired in December 2008.
Key financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $1,957.7 | $2,060.5 |
| Operating income / margin | $381.3 / 19.5% | $353.0 / 17.1% |
| Net income attributable to Republic | $65.0 | $113.0 |
| Diluted EPS | $0.17 | $0.30 |
| Adjusted net income / diluted EPS, non-GAAP | $157.6 / $0.41 | $140.7 / $0.38 |
| Cash provided by operating activities | $299.1 | $512.4 |
| Capital expenditures paid | $208.4 | $193.4 |
| Free cash flow, company-defined non-GAAP | $96.6 | $323.9 |
Cost of operations fell to 58.1% of revenue from 58.7%. Operating margin improved despite lower sales, reflecting cost control, lower labor and maintenance costs, favorable insurance-reserve development and reduced restructuring charges. Average diesel cost rose 29.5% year over year, to $2.85 per gallon.
Revenue declined 5.0%. Management attributed 2.3 percentage points of the decline to DOJ-required divestitures; excluding these, core revenue decreased 2.7%. Core price rose 2.2%, commodity prices 1.8%, and fuel surcharges 0.3%, while core volume fell 7.0%. Collection revenue was $1,511.2, down from $1,594.8; transfer and disposal revenue, net of intercompany amounts, was $334.9, down from $386.5.
Balance sheet, debt and liquidity
- At March 31, 2010, cash and cash equivalents were $81.4, restricted cash and marketable securities were $221.8, total assets were $19,465.3 and total equity was $7,568.7. Restricted funds include amounts earmarked for capital spending and financial assurances.
- Total debt was $7,114.0, versus $6,962.6 at December 31, 2009; current maturities were $475.7 and long-term debt was $6,638.3.
- In March, Republic issued $850 million of 5.00% notes due 2020 and $650 million of 6.20% notes due 2040. Proceeds funded redemption of $1.025 billion principal of 2014 and 2015 notes, reduced revolver borrowings and supported general corporate purposes. The transactions generated a $132.3 debt-extinguishment loss.
- Republic repaid and terminated its $300 million receivables-backed borrowing program. Credit-facility availability was $0.9 billion at quarter-end, after $1.6 billion of letters of credit and $0.2 billion of borrowings. The company reported compliance with covenants: EBITDA-to-interest was 3.89 against a 3.00 minimum, and debt-to-EBITDA was 3.13 against a 4.00 maximum.
- Quarterly dividend remained $0.19 per share; cash dividends paid were $72.4.
Material changes, outlook and commentary
- GAAP net income fell year over year, chiefly because of the $132.3 debt-extinguishment charge. Excluding disclosed adjustments, adjusted diluted EPS was $0.41 versus $0.38; these are company-defined non-GAAP measures.
- Operating cash flow decreased by $213.3, and free cash flow by $227.3. Management cited cash-flow effects from changes in operating assets and liabilities, including a $60.1 tax-settlement payment, as well as timing of payments and higher cash interest.
- Management expected core pricing benefits to continue through 2010, but anticipated lower volumes until economic conditions improved. It forecast $185–$190 million of annual run-rate synergies by year-end 2010, approximately $8 million of additional restructuring charges to complete the plan, and a further $25.6 million of synergy-incentive costs in 2010.
- Management expected 2010 capital expenditures of approximately $870 million and property and equipment received of approximately $790 million, excluding $80.1 million received in 2009 but paid for in 2010. It expected an approximately 42% full-year effective tax rate and to remain in covenant compliance.
- Environmental and legal exposures remain significant. Recorded landfill and environmental liabilities totaled $1,640.2, including $553.7 of remediation liabilities; management stated that reasonably possible high-end remediation estimates could exceed recorded amounts by approximately $187. Recorded legal-proceeding accruals were approximately $122; use of high ends of estimated ranges would increase potential liability by approximately $133.
- Other disclosed matters include the Countywide and Congress landfill proceedings, Forward Landfill allegations, litigation concerning fuel and environmental fees, and a self-disclosed subcontracting compliance issue. The company said the subcontracting matter could materially affect results or cash flows in the period recognized or paid, though it did not expect a material adverse effect on consolidated financial position.
- Tax uncertainties include ongoing tax examinations and a disputed Allied partnership-interest exchange. The company disclosed a potential tax and interest exposure on that exchange, with the tax and interest (excluding penalties) reserved; it paid $60.1 in Q1 toward a separate BFI tax settlement and expected to pay approximately $67 more later in 2010.
Important facts for investors to verify
- Whether the 7.0% core-volume decline stabilizes and pricing continues to offset cost inflation.
- Whether operating cash flow and free cash flow recover, and how cash needs reconcile with projected capital spending, dividends and debt repayment.
- Progress on merger synergies and remaining integration, incentive and restructuring costs.
- Debt balances, refinancing costs, credit-facility availability and covenant headroom, particularly given the company’s substantial indebtedness.
- Changes in environmental remediation estimates, legal proceedings, tax exposures and the self-disclosed contracting matter.
- Whether landfill airspace, closure obligations and self-insurance reserves remain consistent with management estimates; these depend on significant assumptions and could change.