Republic Services, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling and disposal services, with an oilfield exploration and production (E&P) waste business. Unless stated otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2,344.0 | $2,267.9 | $6,824.8 | $6,574.2 |
| Operating income | $442.9 | $382.4 | $1,204.9 | $1,066.7 |
| Operating margin | 18.9% | 16.9% | 17.6% | 16.2% |
| Net income attributable to Republic | $215.0 | $185.8 | $577.7 | $497.3 |
| Diluted EPS | $0.61 | $0.52 | $1.64 | $1.39 |
| Operating cash flow | Not presented here | Not presented here | $1,324.5 | $1,101.6 |
| Free cash flow (non-GAAP) | $199.5 | $176.3 | $609.6 | $432.4 |
- Nine-month revenue increased 3.8%, reflecting average yield growth of 2.4%, volume growth of 1.2%, and acquisitions net of divestitures contributing 2.3%; lower fuel recovery fees and recycled commodity revenue partly offset growth.
- Nine-month reported diluted EPS rose to $1.64 from $1.39. Management’s adjusted diluted EPS, excluding Bridgeton-related items, was $1.55 versus $1.46.
- Q3 reported results included a $50.0 insurance recovery related to the Bridgeton Landfill, worth $0.08 per diluted share after tax. Excluding it, management reported adjusted Q3 diluted EPS of $0.53 versus $0.52.
- Cost of operations was 59.3% of revenue in Q3 versus 61.8%; the comparison benefited from the Bridgeton recovery and lower fuel costs. Labor and maintenance costs increased. Nine-month SG&A rose to $719.5 from $663.8.
- Nine-month capital expenditures were $732.0. Investing cash outflow was $1,243.2, including $535.9 of acquisition spending; financing cash outflow was $54.0. Cash and equivalents were $102.5 at quarter-end.
- Debt carrying value was $7,561.0, up from $7,061.2 at December 31, 2014. Long-term debt was $7,555.6. The company issued $500.0 of 3.20% notes due 2025, using proceeds to refinance debt associated with Tervita.
Liquidity, capital allocation and operating developments
- Revolving credit availability was $1,726.4, with no borrowings under the credit facilities; $504.6 of letters of credit was outstanding. Covenant ratios were within limits: debt-to-EBITDA of 3.12 versus a 3.75 maximum and EBITDA-to-interest of 6.68 versus a 3.00 minimum.
- Management stated that cash, operating cash flow and facility availability were sufficient for anticipated capital needs and maturing obligations. The company held investment-grade debt ratings.
- Nine-month dividends paid were $295.0; the quarterly dividend was $0.30 per share. Share repurchases totaled $293.3 for the nine months. In October, the board added $900.0 to the authorization, bringing the total to $967.0 through December 31, 2017.
- The Tervita acquisition and the Sonoma County waste-management contract contributed to growth, particularly in the West. West revenue increased 7.5% for the nine months, while its operating margin declined to 22.3% from 23.5%, reflecting recycling commodity pressures and E&P integration and operating costs.
Outlook, risks and contingencies
- 2015 reported diluted EPS guidance was $2.10–$2.13; excluding the $0.08 Bridgeton insurance benefit, adjusted guidance was $2.02–$2.05. Management described 2016 diluted EPS of $2.13–$2.17 as preliminary, including an expected $0.03 tax impact from an effective tax rate projected to rise to 39.5%. Formal 2016 guidance was expected in February 2016.
- Bridgeton remediation liability was $217.8; the reasonably possible high end was approximately $160 higher than the recorded amount. The company collected the $50.0 insurance recovery in October 2015. Congress Landfill liability was $86.5, with a reasonably possible high end approximately $70 higher.
- Total environmental remediation liabilities were $667.6. Across remediation matters, management estimated that using reasonably possible high-end ranges could increase recorded liabilities by approximately $360. Changes in remediation estimates could materially affect results or cash flows.
- The Central States multiemployer pension withdrawal liability was estimated at $141.6, payable over 20 years. Arbitration was pending, with a hearing not expected until 2016; an adverse outcome could require an additional $67 in payments. Progress payments were approximately $4 per quarter.
- Legal-proceeding accruals totaled approximately $61.3; using high-end estimated ranges would add approximately $63. The filing also describes Bridgeton regulatory litigation and 81 additional odor and emissions notices at Sunshine Canyon; no further payment demand had been received for those notices as of the filing.
- Other risks include fuel and recycled commodity price volatility, interest-rate exposure, labor and benefit costs, weather, regulatory and environmental requirements, landfill permitting and capacity, acquisition integration, and substantial indebtedness. A $10-per-ton recycled commodity price change was estimated to affect annual revenue by about $28 and operating income by about $16.
Important facts for investors to verify
- Whether underlying earnings growth remains sound after excluding the $50.0 Bridgeton insurance recovery, and how the company performs against 2015 guidance.
- Progress integrating Tervita, including E&P waste volumes, costs and West segment margins.
- Developments in Bridgeton and Congress remediation, insurance recoveries, and associated liability estimates.
- The outcome and potential financial effect of Central States arbitration and other legal or environmental proceedings.
- Debt, covenant headroom, acquisition spending, capital expenditures, and the sustainability of dividends and share repurchases relative to free cash flow.
- Whether the preliminary 2016 outlook and expected higher tax rate remain appropriate as the budget is finalized.