Republic Services, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited. Republic is a U.S. provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating through four geographic regions. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $2,066.4 | $2,066.1 | $4,024.1 | $4,126.6 |
| Operating income | $400.8 | $520.7 | $782.1 | $873.6 |
| Operating margin | 19.4% | 25.2% | 19.4% | 21.2% |
| Net income attributable to Republic | $159.7 | $225.9 | $224.7 | $338.9 |
| Diluted EPS | $0.42 | $0.59 | $0.59 | $0.89 |
| Interest expense | $130.5 | $150.5 | $265.0 | $304.1 |
- Q2 revenue was essentially flat year over year; first-half revenue declined 2.5%. For the first half, core price rose 1.9%, commodity price 1.7% and fuel charges 0.7%, while core volume fell 5.2%. Excluding divestitures, core revenue declined 0.9%.
- Reported operating income and margins were lower largely because 2009 included substantial gains on asset dispositions: $150.1 in Q2 and $145.2 for the first half. First-half 2010 also included a $132.3 debt-extinguishment loss. On the company’s non-GAAP adjusted basis, diluted EPS was $0.43 versus $0.39 for Q2 and $0.84 versus $0.76 for the first half.
- Cost of operations improved to 58.9% of revenue in Q2 and 58.5% for the first half, each 0.5 percentage point better than the prior-year period. Lower labor, disposal, transportation, maintenance and risk costs helped; higher fuel and commodity costs partly offset savings. Average diesel cost increased about 30% year over year in both periods.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $594.8 versus $687.6 in 2009. Capital expenditures were $385.4 versus $355.1; free cash flow, as defined by the company, was $222.0 versus $349.2. The comparison includes a $110.6 tax settlement payment in 2010 and $418.3 of divestiture proceeds in 2009 investing cash flow.
- At June 30, cash and cash equivalents were $56.0; restricted cash and marketable securities were $315.2, including $80.1 earmarked for capital expenditures. Total assets were $19,571.4 and stockholders’ equity was $7,685.9.
- Total debt was $7,117.5, including $692.5 current maturities, compared with $6,962.6 at December 31, 2009. The company had $934.2 of availability under its revolving credit facilities and reported compliance with covenants. Covenant ratios were 4.12 EBITDA to interest against a 3.00 minimum, and 3.07 debt to EBITDA against a 3.25 maximum.
- First-half capital expenditures were $385.4; management expected approximately $870 for full-year 2010. Cash dividends paid were $144.9. In July, the board approved a 5% increase in the quarterly dividend to $0.20 per share.
Material changes, outlook and key risks
- In March, Republic issued $1.5 billion of senior notes due 2020 and 2040, using proceeds in part to redeem higher-coupon notes due 2014 and 2015 and reduce revolver borrowings. It also repaid and terminated its $300 million receivables securitization program.
- Management expected approximately $185–$190 million of annual run-rate Allied merger synergies by year-end 2010, with $4.7 million of additional restructuring charges and $17.1 million of additional synergy-incentive-plan costs expected during 2010. The company expected a 2010 effective tax rate of about 41.5% and covenant compliance through year-end.
- Subsequent to quarter-end, Republic refinanced certain tax-exempt financings and expected further refinancing in 2010, with an approximately $19 million third-quarter debt-extinguishment loss expected.
- Environmental and legal exposures are significant. Recorded remediation liabilities were $549.3; management said the reasonably possible high end of remediation ranges could exceed recorded amounts by about $191. Recorded accruals for legal proceedings were approximately $112, with aggregate potential liability about $110 higher using the high ends of estimated ranges. Notable matters include Countywide and Congress landfill remediation and related claims, a former-employee judgment under appeal, landfill-related proceedings, and a disclosed government-contract subcontracting compliance matter.
- Tax uncertainties include an IRS dispute over a historical partnership-interest exchange: potential tax and interest were reserved, but an asserted penalty and related interest of approximately $47 were not stated as reserved. The filing also identifies multi-employer pension-plan funding risk, fuel and commodity price exposure, substantial capital needs, economic-driven volume weakness, weather, regulatory and permitting risks, and the possibility that price increases may not offset costs.
- Management described the business as performing well despite a challenging economy, citing the essential nature of services and cost controls. The filing provides no specific full-year revenue or EPS guidance.
Most important facts for investors to verify
- Whether waste volumes stabilize and price increases continue to offset volume declines and rising fuel, labor and other costs.
- Whether operating cash flow and free cash flow recover as capital spending rises, and whether debt ratios remain within covenant limits.
- Actual realization of the $185–$190 million synergy target and total remaining integration costs.
- Developments, cash requirements and potential exposure in environmental, legal, tax and government-contract matters, including amounts above recorded reserves.
- Costs and terms of the remaining tax-exempt debt refinancings and whether the expected third-quarter charge changes.