REPUBLIC SERVICES, INC. quarterly report, Q1 FY2018

Republic Services, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Unaudited results; dollar amounts are in millions unless stated otherwise. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and energy services, operating through two reportable field groups.

Financial performance and position

Current liabilities were $2,560.2 and current assets were $1,354.0 at March 31. Credit-facility availability was $1,725.5, with $100.0 borrowed under the facilities; a further $53.9 was borrowed under the uncommitted facility. The company reported compliance with debt covenants, including a 7.66 EBITDA-to-interest ratio against a 3.00 minimum and 2.94 total-debt-to-EBITDA against a 3.50 maximum. The quarterly dividend was $0.345 per share.

Changes versus the prior comparable period

• Reported revenue rose 1.4%, while management attributed growth to average yield (+2.2%), volume (+2.0%), fuel recovery fees (+0.5%), energy services (+0.4%) and acquisitions net of divestitures (+1.8%), partly offset by the revenue-standard presentation change (-4.2%). Excluding that accounting change, Q1 2018 revenue would have been $2,514.2; the filing says the timing and pattern of revenue recognition did not significantly change.
• Comparative 2017 figures were not restated for the January 2018 adoption of ASC 606. Certain customer payments and recycled-commodity supplier costs moved from expenses to reductions of revenue, so reported revenue and expense line comparisons are affected. Management states the standard’s adoption did not materially change operating or net income.
• Net income attributable to Republic increased to $237.7 from $187.8, with the lower effective tax rate (23.4% versus 36.6%) benefiting Q1 2018 following the Tax Cuts and Jobs Act.
• Operating cash flow increased to $581.4 from $444.4. Capital expenditures rose to $263.3 from $223.9; cash used in financing increased to $349.6 from $187.0, including $254.5 of share repurchases versus $98.9 a year earlier.
• Segment results diverged: Group 1 revenue was $1,063.6 and operating income $221.1 (20.8% margin), versus $1,062.3 and $213.8 (20.1%). Group 2 revenue was $1,324.2 and operating income $266.4 (20.1%), versus $1,278.5 and $272.9 (21.3%).
• Recycled-commodity revenue fell to $76.0 from $133.9; collection revenue was $1,823.0 versus $1,802.9, and landfill revenue net of intercompany amounts rose to $306.5 from $272.3.

Outlook, commentary, risks and unusual items

• No company-wide earnings or revenue guidance is stated in the supplied filing text. Management expects $10–$15 of additional restructuring charges during the rest of 2018 and estimates annual savings of approximately $25–$30. Q1 restructuring charges were $9.5. A large municipal contract generated $2.9 in startup costs; management expects such costs to continue through the remainder of 2018.
• Recycling prices are a significant risk: average old corrugated container prices were $112 per ton versus $165, and old newsprint prices were $67 versus $135. Management estimates a $10-per-ton change in recycled-commodity prices could change annual revenue and operating income by approximately $20 each. The filing cites tighter Chinese import restrictions as a potential market-demand and pricing risk.
• Fuel exposure remains material. Diesel averaged $3.02 per gallon versus $2.57; fuel expense was $81.5, partly offset by CNG tax credits. Management estimates a $0.20-per-gallon change could alter annual fuel costs by about $25, with fuel recovery fees providing an offset subject to customer participation.
• Environmental liabilities totaled $1,840.8, including $1,281.5 for landfill capping, closure and post-closure and $559.3 for remediation. Management says the reasonably possible high end of aggregate remediation estimates was approximately $466 above recorded amounts. At Bridgeton, the recorded liability was $173.2, with a possible high end approximately $177 higher. The EPA’s proposed West Lake remedy estimated total site costs of $236 over five years; Republic says it cannot yet estimate its share and may need to revise its liability after the final remedy and allocation are determined.
• Other contingencies include approximately $47 of accrued legal proceedings; using high ends of estimated ranges would increase potential liability by approximately $49. The company also disclosed an EPA proposed $0.9 penalty concerning Arbor Hills, and a Pine Avenue penalty demand of $0.6 or $2.5 depending on sampling results.
• Interest expense increased to $94.8 from $89.4. The company had $1,171.3 of floating-rate debt and $300.0 of floating-rate swaps; a 100-basis-point rate change was estimated to affect annualized interest expense and net cash interest by approximately $15.
• In April 2018, after quarter-end, Republic acquired Montana Waste Systems and affiliates for approximately $50. Management stated it believed liquidity was sufficient for anticipated capital needs and maturing obligations and expected covenant compliance through the rest of 2018.

Important facts for investors to verify

• Assess underlying revenue and margin trends using the ASC 606 reconciliation, rather than relying only on reported year-over-year revenue growth.
• Monitor recycling-market prices, the effectiveness and duration of commodity hedges, and resulting revenue and operating-income sensitivity.
• Track environmental developments at Bridgeton and West Lake, including final remedy selection, cost allocation and potential reserve changes.
• Review debt maturities, variable-rate exposure, credit-facility availability and covenant headroom; $700 of senior notes were due in May 2018.
• Compare expected restructuring savings and remaining charges, as well as municipal-contract startup costs, with subsequent results.
• Confirm that operating cash flow, capital spending, acquisitions, dividends and buybacks remain consistent with liquidity and leverage objectives.