Republic Services, Inc. — Q1 2014 Form 10-Q
Business context and period: Republic Services is a U.S. provider of non-hazardous waste collection, transfer, recycling and disposal services, operating across East, Central and West regions. This unaudited filing covers the three months ended March 31, 2014; comparisons are with Q1 2013. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $2,073.7 | $1,998.6 |
| Operating income / margin | $306.1 / 14.8% | $274.2 / 13.7% |
| Income before taxes | $220.2 | $183.3 |
| Net income attributable to Republic | $132.5 | $124.6 |
| Diluted EPS | $0.37 | $0.34 |
| Operating cash flow | $396.4 | $419.8 |
| Capital expenditures, cash paid | $213.7 | $214.8 |
| Free cash flow (company-defined, non-GAAP) | $185.2 | $208.2 |
Reported revenue rose 3.8%; operating income rose 11.6%. Adjusted diluted EPS, a non-GAAP measure that excludes specified unusual items, was $0.43 versus $0.46. Cost of operations increased to $1,321.2 (63.7% of revenue) from $1,223.1 (61.2%), reflecting higher labor, maintenance, disposal, subcontracting and other costs, including a Bridgeton remediation charge.
At March 31, cash and cash equivalents were $175.8, restricted cash and marketable securities were $161.7, and total debt carrying value was $7,013.3. Current assets were $1,306.9 against current liabilities of $1,697.4. The company had no borrowings under its revolving credit facilities and reported $1,505.6 of availability after letters of credit. Debt covenant ratios were 6.40x EBITDA to interest (3.00x minimum) and 3.06x debt to EBITDA (3.75x maximum for this quarter). Dividends declared were $0.26 per share; $132.2 was spent on share repurchases during the quarter.
Material changes versus Q1 2013
- Revenue growth reflected 1.2% average yield, 1.5% volume, 0.4% recycled commodities and 0.6% net acquisitions/divestitures. Management cited stronger commercial and industrial activity and landfill special-waste volumes; residential and transfer volumes were weaker in some regions.
- Operating income benefited from the absence of Q1 2013’s $62.2 pension negotiation and withdrawal costs and $4.9 restructuring charge, but Q1 2014 included a $36.1 Bridgeton remediation charge. The company’s adjusted comparison showed net income of $154.3 versus $167.4 and diluted EPS of $0.43 versus $0.46.
- Cash from operations fell $23.4 and free cash flow fell $23.0. Cash used for financing increased to $223.8 from $135.6, including higher dividends and repurchases. Cash declined $37.5 during the quarter.
- The effective tax rate rose to 39.8% from 31.9%; the prior-year rate benefited from resolution of certain tax years.
- Regional performance diverged: West operating margin improved to 24.4% from 21.5%; East declined to 17.2% from 19.3%, and Central to 16.6% from 19.3%. Management attributed pressure in East and Central partly to unfavorable weather and operating costs.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management stated that cash, operating cash flow and available credit were expected to be sufficient for anticipated capital needs and maturities.
- Bridgeton Landfill remediation: Republic recorded a $36.1 charge in Q1 and had a $109.6 recorded liability at quarter-end; $46.1 was expected to be paid during the rest of 2014. The company said the remaining reasonably possible high end of its estimate was approximately $350. Management warned that remediation plans and liability estimates could change.
- Congress Landfill had an $83.1 recorded remediation liability; $7.9 was expected to be paid during the remainder of 2014, and the stated high end of the remaining range was approximately $150.
- Total environmental remediation liabilities were $567.1. The filing states that the aggregate potential remediation liability could be approximately $440 higher than recorded amounts if reasonably possible high-end estimates were used.
- Republic recorded a $165.3 estimated Central States pension withdrawal liability, generally payable over 20 years; changes in the estimate or payment timing could materially affect results or cash flows. Multiemployer plan withdrawal events remain a risk.
- Other significant exposures include landfill closure obligations, self-insurance claims, environmental regulation, severe weather, fuel and recycled-commodity price volatility, interest rates, substantial debt and pending litigation. A class settlement concerning some Bridgeton-area claimants for approximately $6.9 was reached after quarter-end, subject to court approval and other conditions; it did not settle all claims.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress and future cost estimates for Bridgeton and Congress remediation, including regulatory developments and settlement status.
- Whether operating-cost inflation and weather-related pressures ease, and whether pricing and volume growth sustain operating margins.
- Cash-flow and free-cash-flow trends after capital spending, dividends, repurchases and remediation payments.
- Debt covenant headroom, credit availability and the terms or estimates underlying the Central States withdrawal liability.
- Recycled-commodity and fuel price sensitivity, including the extent to which hedges and customer recovery fees offset price changes.