Republic Services, Inc. — Q1 2013 Form 10-Q
Business and period. Republic Services is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services. This unaudited filing covers the three months ended March 31, 2013, compared with Q1 2012; balance-sheet amounts are compared with December 31, 2012.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparator |
|---|---|---|
| Revenue | $1,998.6 million | $1,982.4 million; up 0.8% |
| Operating income and margin | $274.2 million; 13.7% | $326.9 million; 16.5% |
| Net income attributable to Republic | $124.6 million | $142.9 million |
| Diluted EPS | $0.34 | $0.38 |
| Operating cash flow | $419.8 million | $334.2 million |
| Capital expenditures | $214.8 million | $274.2 million |
| Company-defined free cash flow | $208.2 million | $64.8 million |
Revenue growth reflected core price increases of 1.2%, fuel recovery fees of 0.3%, and net acquisitions of 0.5%, partly offset by a 1.0% volume decline and a 0.2% decrease in recycling commodity revenue. Collection revenue rose; net landfill revenue and recyclable-material sales declined.
Operating margin contracted as cost of operations rose to 61.2% of revenue from 60.7%, while the company recorded $62.2 million of Central States pension negotiation and withdrawal costs and $4.9 million of restructuring charges. Lower SG&A and interest expense and a lower effective tax rate provided offsets. The 2013 effective tax rate was 31.9%, versus 36.0%.
Management also presented adjusted diluted EPS of $0.46 versus $0.38 in Q1 2012, excluding specified items. This is a company-defined non-GAAP measure; the filing cautions that its definition may not be comparable with other companies’ measures.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $130.1 million at March 31, up from $67.6 million at year-end. Current assets were $1,223.3 million and current liabilities $1,675.3 million.
- Total debt carrying value was approximately $7.03 billion, down from $7.07 billion at December 31. Long-term debt was $7.008 billion; current maturities were $25.1 million.
- No borrowings were outstanding under the credit facilities; availability was $1.519 billion after letters of credit. The company reported covenant ratios of 6.11 for EBITDA to interest (3.00 minimum) and 3.07 for debt to EBITDA (3.50 maximum).
- Cash dividends paid were $84.9 million. The quarterly dividend declared was $0.235 per share. The company repurchased 2.1 million shares for approximately $67 million during the quarter.
- Free cash flow is a non-GAAP measure and excludes items including debt service and dividends. Q1 operating cash flow included a $57.9 million noncash add-back related to the Central States withdrawal liability; interpret its increase alongside this item and lower cash capital expenditures.
Material changes and management outlook
- Central States: Republic recorded $57.9 million for estimated partial-withdrawal liability following three Michigan bargaining-unit agreements, plus $4.3 million of negotiation costs. Management estimated an additional approximately $75 million liability if it fully withdraws from the Fund; any such liability would ordinarily be paid over 20 years. More negotiations were expected during 2013.
- Restructuring: The company expected approximately $10 million of additional expense during the remainder of 2013 and estimated annual SG&A savings of approximately $23 million from the restructuring.
- Operations: Management cited positive pricing, but lower municipal post-collection volumes and contract losses weighed on results. Volume was also reduced by one fewer workday. Recycling prices were lower year over year; the company estimated a $10-per-ton change in recyclable-material prices could affect annual revenue by about $29 million and operating income by about $20 million.
- Capital and landfill obligations: Management expected to spend a further $7.2 billion on existing landfills over their remaining lives, principally for cell construction and environmental structures. Accrued landfill and environmental costs totaled $1.611 billion.
Risks, contingencies and unusual items
- Environmental remediation: Recorded remediation liabilities were $557.3 million. Using the high ends of reasonably possible cost ranges would increase aggregate remediation exposure by approximately $374 million. The filing describes material site-specific matters at Bridgeton, Countywide and Congress landfills. The Bridgeton discussion gives a $59 million liability “as of March 31, 2012” in this 2013 filing, so the current-period value is unclear from the text.
- Bridgeton: Missouri authorities sued Republic and subsidiaries in March 2013 concerning alleged odors, a subsurface smoldering event and leachate handling, seeking injunctive relief, penalties and other remedies. The company said it was discussing resolution with the State.
- Legal proceedings: The company accrued approximately $63 million for outstanding legal matters; using the high ends of estimated loss ranges would increase this by about $112 million. A Countywide landfill case was subject to a binding settlement memorandum, with completion conditional on further requirements. The Congress landfill litigation involving approximately 2,950 plaintiffs remained ongoing.
- Central States and other multiemployer plans: Additional withdrawal events could produce further expense and liabilities. The company participates in 27 multiemployer plans and said the Central States exposure is substantially greater than exposure to the other plans.
- Other exposures include fuel and commodity price volatility, interest rates, severe weather, regulatory and landfill-permitting requirements, labor negotiations, and substantial indebtedness. A 100-basis-point change in rates on approximately $932 million of floating-rate debt would change annual interest expense by about $9 million.
- The filing disclosed that a landfill subsidiary may have given the EPA inaccurate or incomplete information; Republic said it believed resolution would not materially affect its financial position, results or cash flows, based on information then available. It also reported additional odor and emissions notices at Sunshine Canyon after a prior settlement.
Most important facts for investors to verify
- How much of the quarter’s operating cash flow and free-cash-flow improvement is sustainable, given the pension-liability add-back and lower cash capital expenditures?
- What are the final Central States withdrawal liabilities and negotiation costs, and how will further bargaining-unit outcomes affect earnings and cash needs?
- What are the current estimated costs, timing and potential range of loss for Bridgeton and other environmental matters? Clarify the Bridgeton liability date discrepancy in the filing text.
- What settlement terms and remaining conditions apply to the Countywide case, and how might the Congress litigation and EPA matter develop?
- Can pricing and restructuring savings offset volume weakness, rising labor and maintenance costs, and recycling-commodity volatility while preserving debt-covenant headroom?