Republic Services, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2014. Republic is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services, operating across East, Central and West regions.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $2,264.1 million | $2,165.4 million | $6,563.1 million | $6,275.7 million |
| Operating income | $382.4 million | $352.3 million | $1,066.7 million | $807.7 million |
| Operating margin | 16.9% | 16.3% | 16.3% | 12.9% |
| Net income attributable to Republic | $185.8 million | $171.4 million | $497.3 million | $352.3 million |
| Diluted EPS | $0.52 | $0.47 | $1.39 | $0.97 |
| Cash from operations | Not separately shown for the quarter | Not separately shown for the quarter | $1,101.6 million | $1,137.2 million |
| Free cash flow (company-defined, non-GAAP) | $176.3 million | $153.4 million | $432.4 million | $460.5 million |
- Revenue increased 4.6% in both the quarter and year-to-date period. Nine-month growth reflected average yield of 1.3%, volume of 2.1%, fuel recovery fees of 0.2%, recycled commodities of 0.4%, and acquisitions net of divestitures of 0.6%.
- Nine-month cost of operations was 62.3% of revenue, down from 62.9%; Q3 cost of operations was 61.7%, up from 60.9%. SG&A was 10.1% of revenue year to date, versus 10.3%.
- Cash from operations decreased $35.6 million year over year; free cash flow decreased $28.1 million. Capital expenditures were $683.1 million in the nine-month period.
- At September 30, cash and cash equivalents were $113.0 million; restricted cash and marketable securities were $133.5 million. Total debt carrying value was $7,030.5 million, including $10.5 million current and $7,020.0 million long-term. Current assets of $1,360.9 million were below current liabilities of $1,725.0 million.
- Revolving credit facilities had no borrowings and $1,639.7 million of remaining availability after letters of credit. Covenant ratios were within limits: EBITDA to interest was 6.99 versus a 3.00 minimum; total debt to EBITDA was 2.85 versus a 3.75 maximum then in effect.
Changes, outlook and management commentary
- Reported nine-month operating income and EPS increased substantially, but comparisons include significant prior-year charges: 2013 Central States pension negotiation and withdrawal costs of $157.7 million and Bridgeton remediation charges of $108.7 million, versus $1.8 million and $36.1 million, respectively, in 2014. On the company’s non-GAAP adjusted basis, nine-month diluted EPS was $1.46 versus $1.44; Q3 adjusted diluted EPS was $0.52 versus $0.55.
- Management cited improving commercial and industrial collection and landfill volumes, positive pricing, and new National Accounts contracts. Residential and transfer volumes were weaker in some areas. West had the strongest nine-month regional operating margin at 23.6%; East and Central margins were 17.3% and 18.5%.
- October 2014 guidance for full-year 2014 adjusted diluted EPS was $1.93–$1.94. Preliminary 2015 diluted EPS outlook was $2.02–$2.06. These are forward-looking estimates; the filing does not provide a detailed bridge for the 2015 outlook.
- In October 2014, after quarter-end, Republic acquired Rainbow Disposal for $112 million cash and assumed capital lease arrangements.
- Environmental and other estimates remain uncertain. Accrued landfill and environmental costs totaled $1,660.2 million. Management said reasonably possible remediation exposure could exceed recorded amounts by about $440 million in aggregate, including approximately $240 million at Bridgeton and $67 million at Congress Landfill. Bridgeton’s leachate facility was still being tested; full capacity was expected late in Q4 2014 or early 2015.
- The estimated Central States pension withdrawal liability was $157.4 million, payable over 20 years. Republic disputed the assessment and sought arbitration; if the Fund’s assessment is upheld, the company said it could owe an additional $67 million over that payment period. Progress payments continue during the dispute.
- Other identified risks include fuel and recycled-commodity price volatility, interest-rate exposure, severe weather, regulatory and legal matters, and the capital intensity of the business. A 100-basis-point interest-rate change was estimated to affect annual interest expense and cash payments by approximately $12.7 million. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Reconcile GAAP earnings growth with the prior-year pension and remediation charges, and assess the company’s non-GAAP adjustments.
- Track operating cash flow and free cash flow against capital expenditures, dividends, repurchases and debt service.
- Monitor Bridgeton and Congress remediation costs, regulatory requirements and the adequacy of recorded environmental liabilities.
- Follow the Central States withdrawal-liability arbitration, payment schedule and potential additional obligation.
- Assess debt levels, available revolving capacity and covenant headroom alongside the 2014 guidance and preliminary 2015 outlook.