Republic Services, Inc. — Q1 2012 Form 10-Q
Business context and period. Republic Services is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services, operating through four geographic segments. This unaudited filing covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless stated otherwise. Dollar amounts are in millions, except per-share data.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $1,982.4 | $1,964.9; up 0.9% |
| Operating income / margin | $326.9 / 16.5% | $376.2 / 19.1% |
| Net income attributable to Republic | $142.9 | $158.2 |
| Diluted EPS | $0.38 | $0.41 |
| Operating cash flow | $334.2 | $433.7 |
| Capital expenditures; free cash flow | $274.2; $64.8 | $297.2; $143.4 |
| Cash and cash equivalents | $73.5 | $66.3 at Dec. 31, 2011 |
| Total debt, carrying value | $6,904.5 | $6,921.8 at Dec. 31, 2011 |
| Current assets / current liabilities | $1,179.2 / $1,715.8 | $1,265.7 / $1,897.5 at Dec. 31, 2011 |
Revenue growth reflected core price of 0.6%, fuel surcharges of 0.5%, volume of 0.2% and net acquisitions of 0.4%, partly offset by a 0.8% decline from recycling commodity prices. Cost of operations rose to 60.7% of revenue from 59.0%; SG&A rose to 11.2% from 10.4%. Interest expense declined to $104.3 from $115.7, mainly due to refinancing higher-rate debt. The effective tax rate was 36.0%, versus 39.2%.
Cash generation weakened: operating cash flow fell by $99.5, including higher restructuring and synergy-related expenditures ($68.1 versus $2.0) and other working-capital effects. Free cash flow, a company-defined non-GAAP measure, was $64.8. Cash dividends paid were $81.4. Credit-facility availability was $1,552.6, after letters of credit; the company reported compliance with covenants and expected continued compliance in 2012. Covenant ratios were 5.29 for EBITDA to interest (3.00 minimum) and 3.04 for debt to EBITDA (3.50 maximum).
Material changes and management commentary
- Operating income fell 13.1%, net income attributable to Republic fell 9.7%, and diluted EPS declined from $0.41 to $0.38, despite modest revenue growth. Management cited higher labor costs and an additional workday, fleet maintenance and repair costs, fuel, and selling expenses. Segment operating margins declined in all four regions.
- Average diesel cost rose 9.4% to $3.97 per gallon. Recycling commodity revenue declined amid lower OCC and ONP prices. Management estimated that a $10-per-ton change in recyclable-material prices would affect annual revenue by about $27 and operating income by about $18 at current volumes and mix.
- In April 2012, management lowered full-year adjusted diluted EPS guidance to $1.86–$1.90 from $1.98–$2.02, citing higher costs and current business conditions. Updated revenue expectations were 1.0% growth from core price and no volume growth; the prior outlook was 1.0%–1.5% core price growth and 0.5% volume growth. Expected tax rate was revised to approximately 37% from 39%.
- Republic expected to call and refinance $750 of 6.875% senior notes due 2017 during 2012. It anticipated an extinguishment charge of about $97, including a $26 cash premium and $71 of unamortized discount.
- The company reported $7.1 billion of principal debt, including about $867 of floating-rate debt. A 100-basis-point rate change would affect annualized interest expense and cash interest by about $9. Approximately 75% of tax-exempt financings were variable-rate and subject to remarketing.
Risks, contingencies and unusual items
- Recorded landfill and environmental liabilities totaled $1,585.2, including $1,055.2 for landfill closure and post-closure and $530.0 for remediation. The company said the high end of reasonably possible remediation ranges could exceed recorded remediation liabilities by approximately $197.
- Recorded legal accruals were approximately $75; using the high ends of estimated loss ranges would increase potential liability by about $107. Significant matters include Countywide and Congress landfill litigation and the Luri employment case, which remained subject to appeal.
- The Chicago contracting settlement included an $11 payment and conversion of 79 temporary positions to full-time; investigations by other authorities remained ongoing. The Livingston class-action settlement became final and Republic paid $29.5 in February 2012.
- Potential withdrawal from the Central States multiemployer pension fund could create a material liability. The fund estimated about $109 for a complete withdrawal across the relevant bargaining units; Republic said withdrawal was not currently probable and loss could not be reasonably estimated.
- Other exposures include fuel and recycling-price volatility, environmental regulation and landfill expansion approvals, severe weather, labor costs, substantial indebtedness, and estimates for self-insurance, litigation, remediation and landfill capacity. Management cautioned that interim results may not indicate full-year performance.
Key facts for investors to verify
- Whether cost pressures, especially labor, fuel and maintenance, continue to compress operating margins and cash generation.
- Progress against the reduced 2012 guidance, including core pricing, volume and adjusted EPS; adjusted EPS is non-GAAP.
- Execution and cash cost of the planned $750 note refinancing and approximately $97 extinguishment charge.
- Developments in landfill remediation and litigation exposures, Chicago investigations, and multiemployer pension negotiations.
- Liquidity and covenant headroom, including the availability and terms of credit facilities and refinancing exposure for variable-rate tax-exempt debt.