Republic Services, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet figures are as of March 31, 2011. Republic is a U.S. provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating through four geographic segments.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $1,964.9 million | $1,957.7 million |
| Operating income | $376.2 million | $381.3 million |
| Operating margin | 19.1% | 19.5% |
| Net income attributable to Republic | $158.2 million | $65.0 million |
| Diluted EPS | $0.41 | $0.17 |
| Cash provided by operating activities | $433.7 million | $299.1 million |
| Free cash flow (company-defined, non-GAAP) | $143.4 million | $96.6 million |
- Revenue increased 0.4%. Core price, fuel surcharges and commodity revenue added 2.6%, offset by 0.7% lower volume, 1.4% from the San Mateo and Toronto contract expirations, and 0.1% from net divestitures.
- Cost of operations rose to $1,159.7 million, or 59.0% of revenue, from $1,136.8 million, or 58.1%. Management cited higher fuel, risk-management and recycling-related costs; average diesel cost increased 27% year over year.
- Reported earnings rose sharply, but comparison is affected by the $132.3 million 2010 debt-extinguishment loss, versus $1.8 million in Q1 2011. The company’s non-GAAP adjusted diluted EPS was $0.42 in 2011 versus $0.41 in 2010.
- Interest expense declined to $115.7 million from $134.5 million, primarily reflecting prior refinancing. The effective tax rate was 39.2%, compared with 44.0%.
Cash, debt and liquidity
- Cash and cash equivalents were $67.9 million, down from $88.3 million at year-end 2010. Total debt was $6,808.0 million, up from $6,743.6 million; current maturities and notes payable were $615.7 million.
- Current assets were $1,210.3 million and current liabilities $2,370.8 million. Restricted cash and marketable securities totaled $164.9 million and are not all available for general use.
- Credit-facility availability was $1,357.4 million after borrowings and letters of credit. The company reported covenant compliance; its covenant EBITDA-to-interest ratio was 4.86 against a 3.00 minimum, and debt-to-EBITDA was 2.85 against a 3.25 maximum.
- Capital expenditures paid were $297.2 million, compared with $208.4 million. Republic expected 2011 capital expenditures to approximate $870 million; it separately expected property and equipment received during 2011 of approximately $750 million, excluding $120 million received in 2010 but paid for in 2011.
- Financing cash use included $147.9 million of share repurchases and $76.7 million of dividends paid. The quarterly dividend was $0.20 per share.
Changes, outlook and notable items
- Operating income and operating margin declined modestly despite higher revenue. Segment operating margins decreased year over year in all four regions, with higher fuel and risk-management costs among the cited pressures.
- Operating cash flow improved year over year, including the effect of a $49.8 million net income-tax refund in Q1 2011. Management said cash, operating cash flow and revolving credit facilities should provide sufficient resources for anticipated capital needs and maturities.
- No formal earnings or revenue guidance is provided in the supplied filing text. Management expected to use remaining authorization under its $400 million share-repurchase program during 2011.
- Subsequent to quarter-end, Republic announced redemption of $600 million of 7.125% notes due 2016, with an expected extinguishment charge of $82.7 million, including a $21.4 million cash premium. It also amended credit facilities and launched tender offers for specified debentures; it expected to fund these actions with cash and incremental revolving-credit borrowings, with capital markets as a possible alternative.
- Environmental and landfill obligations were significant: accrued landfill and environmental costs totaled $1,613.6 million. Management said the reasonably possible high end of remediation estimates could be about $147 million above recorded amounts. Legal-proceeding accruals were approximately $115 million; using high ends of estimated loss ranges would raise aggregate potential liability by about $119 million.
- Other disclosed exposures include a disputed IRS matter with potential tax and interest fully reserved but asserted penalties and related interest not fully reserved; a former-employee jury verdict under appeal; landfill-related litigation and regulatory proceedings; and possible multi-employer pension-plan withdrawal liabilities. A government-contracting compliance matter could materially affect results or cash flows when resolved, although management did not expect a material adverse effect on financial position.
- Management reported no material change in previously disclosed risk factors, effective disclosure controls, and no identified material change in internal control over financial reporting. The filing cautions that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether price increases and fuel surcharges can offset cost inflation and continuing volume pressure, including the effects of the San Mateo and Toronto contract losses.
- Cash generation relative to planned capital spending, dividends, repurchases and the announced debt redemptions and tenders.
- Debt maturities, covenant headroom, facility availability and the cost and execution of the post-quarter refinancing transactions.
- Potential changes in environmental, legal, tax and self-insurance reserves, particularly the disclosed remediation and litigation exposure ranges.
- How much of the reported earnings increase reflects the prior-year debt-extinguishment charge rather than improvement in ongoing operating performance.