Republic Services, Inc. — FY 2018 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2018, filed February 7, 2019. Republic is the second-largest U.S. provider of non-hazardous waste collection, transfer, disposal, recycling and energy services. It operated in 41 states and Puerto Rico, with 190 active landfills and 349 collection operations.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $10.041 billion | $10.042 billion |
| Operating income | $1.736 billion; 17.3% margin | $1.669 billion; 16.6% margin |
| Net income attributable to Republic | $1.037 billion | $1.278 billion |
| Diluted EPS | $3.16 | $3.77 |
| Adjusted diluted EPS (non-GAAP) | $3.09 | $2.43 |
| Cash from operations | $2.243 billion | $1.911 billion |
| Capital expenditures | $1.072 billion | $0.990 billion |
| Debt, carrying value | $8.338 billion | $8.187 billion |
| Cash and cash equivalents | $70.5 million | $83.3 million |
Operating cash flow less property-and-equipment purchases was approximately $1.171 billion in 2018, versus $0.921 billion in 2017. At year-end, total current assets were $1.564 billion and current liabilities were $2.719 billion. The company reported $1.694 billion available under its revolving facility. Debt covenants were met: debt/EBITDA was 2.96 against a 3.50 maximum, and EBITDA/interest was 7.44 against a 3.00 minimum.
Material changes versus prior periods
- Reported annual revenue was essentially flat, but the company said revenue increased 4.0% excluding the presentation impact of adopting ASC 606. The new standard reduced reported revenue by $342.9 million and costs by a broadly similar amount; management said the effect on operating income was immaterial.
- Underlying growth reflected 3.0% total price, 0.4% volume, 1.5% net acquisitions and 0.2% energy services, offset by a 1.1% decline from recycling commodities. Lower commodity prices were significant: average OCC prices fell to $97 per ton from $159, and ONP to $59 from $100.
- Operating income and margin improved despite cost pressure, while attributable net income and reported EPS declined. The comparison is distorted by the 2017 Tax Act benefit of approximately $464 million, which sharply reduced 2017 tax expense. The 2018 effective tax rate was 21.5%, versus 0.2% in 2017.
- Quarter-four 2018 revenue was $2.530 billion, operating income $483.3 million, net income attributable to Republic $301.0 million and diluted EPS $0.92. Q4 2017 revenue was $2.560 billion, operating income $406.8 million, net income $664.4 million and diluted EPS $1.98; the prior-year quarter included the large Tax Act benefit.
- Fuel expense increased to $391.4 million from $349.8 million as average diesel prices rose about 20%. A $40 million Bridgeton insurance recovery reduced remediation expense, offset by $12 million of related costs. Restructuring charges were $26.4 million, with expected annual savings of $25–$30 million.
Guidance, risks and unusual items
- 2019 outlook: Revenue growth of 4.25%–4.75%; adjusted diluted EPS of $3.23–$3.28. Guidance assumes no significant change in the overall economy. The EPS outlook includes an assumed effective tax rate of about 24% and an approximately $60 million charge related to solar-energy investments.
- Management emphasized pricing, profitable growth, cost reduction, free-cash-flow growth, maintaining investment-grade ratings and shareholder returns. The quarterly dividend was raised to $0.375 per share in 2018; the company repurchased $736.9 million of shares and had $1.1 billion remaining under its authorization.
- Material risks include environmental and landfill liabilities, permit and capacity constraints, fuel and recycled-commodity price volatility, weather, competition, labor costs and union/pension exposure, cybersecurity, and substantial debt. Approximately $1.832 billion of landfill and environmental liabilities was recorded, including $540.2 million for remediation. Management said reasonably possible high-end remediation estimates could exceed recorded amounts by approximately $372 million.
- For Bridgeton, the recorded remediation liability was $161.1 million; the reasonably possible high end was about $171 million above that amount. For West Lake, Republic could not estimate its subsidiary’s share of the EPA’s $229 million estimated remedy cost and said future design or allocation decisions could change its reserve.
- Legal-proceeding accruals were approximately $23 million; using the high ends of estimated ranges would increase the aggregate amount by about $14 million. The company reported no pending legal proceeding expected to materially affect consolidated results, but outcomes remain uncertain.
Important facts for investors to verify
- Reconcile ASC 606 presentation changes when comparing revenue, costs and service-line trends across periods.
- Assess the sustainability of pricing and margin improvement against wage, fuel, disposal and maintenance cost inflation, as well as weaker recycling prices.
- Review updates to Bridgeton and West Lake remediation estimates, other environmental exposures, landfill permits and available disposal capacity.
- Track debt maturities, interest-rate exposure, covenant headroom and the company’s ability to fund capital spending, dividends and repurchases while maintaining investment-grade ratings.
- Compare 2019 guidance with actual performance, particularly revenue growth, adjusted EPS, solar-investment charges and the stated restructuring savings.