Republic Services, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Republic Services is a U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and oilfield exploration and production waste services. Results are unaudited; interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $2,169.4 million | $2,077.2 million |
| Operating income / margin | $372.8 million / 17.2% | $306.1 million / 14.7% |
| Net income attributable to Republic | $172.4 million | $132.5 million |
| Diluted EPS | $0.49 | $0.37 |
| Cash from operating activities | $496.1 million | $396.4 million |
| Free cash flow, company-defined | $229.7 million | $185.2 million |
- Revenue increased 4.4%: average yield contributed 2.1%, volume 1.9%, and acquisitions net of divestitures 2.1%; lower fuel recovery fees and recycled commodity prices offset growth. Internal growth was 2.3%, versus 3.2% a year earlier.
- Cost of operations fell to 60.1% of revenue from 63.8%, helped by lower fuel costs and the absence of a 2014 Bridgeton remediation charge. SG&A rose to 11.0% of revenue from 10.3%, partly reflecting growth initiatives and Tervita acquisition and integration costs.
- Reported EPS compares with $0.37 in Q1 2014, which included a $36.1 million pretax Bridgeton remediation charge. Excluding that item, the company reported 2014 adjusted net income of $154.3 million and adjusted diluted EPS of $0.43; these are non-GAAP measures.
- Operating cash flow rose to $496.1 million; capital expenditures were $269.6 million. Investing cash outflow was $773.4 million, including $509.4 million for acquisitions, principally Tervita. Financing provided $336.4 million; cash ended the quarter at $134.3 million.
- Debt carrying value was $7,564.6 million at March 31, versus $7,061.2 million at year-end. The company issued $500 million of 3.20% notes due 2025; proceeds refinanced debt incurred for Tervita. Long-term debt on the balance sheet was $7,554.5 million.
- Credit-facility availability was $1,677.5 million, with no borrowings and $553.0 million of letters of credit outstanding. Covenant ratios were within limits: EBITDA-to-interest of 6.58 against a 3.00 minimum, and debt-to-EBITDA of 3.22 against a 3.75 maximum for the applicable 2015 quarters.
- Quarterly dividend was $0.28 per share. Republic repurchased 2.1 million shares for $86.1 million during the quarter.
Material changes and operating trends
- Republic acquired Tervita, LLC in February for $479.6 million in cash. The acquisition expands its oilfield waste services; purchase accounting remains preliminary. Tervita contributed less than 1% of quarterly revenue.
- Fuel expense declined to $93.0 million from $129.3 million as the average national diesel price fell about 26%. Fuel recovery fees covered approximately 86% of direct fuel expense, or 71% excluding a timing benefit.
- Recycled commodity sales fell to $85.7 million from $99.0 million. Lower commodity prices were partly offset by higher volume; management estimated that a $10-per-ton commodity price change would affect annual revenue by about $28 million and operating income by about $16 million.
- Segment operating income increased in East ($122.2 million versus $102.0 million), Central ($125.3 million versus $99.8 million) and West ($209.7 million versus $203.3 million). West margin declined to 23.4% from 24.4%; East and Central margins improved.
Outlook, risks and contingencies
- The filing provides no specific quarterly or full-year earnings or revenue guidance. Management said existing cash, operating cash flow and credit-facility availability were expected to provide sufficient resources for anticipated capital requirements and maturities.
- Environmental liabilities totaled $1,861.4 million, including $689.9 million for remediation. The recorded Bridgeton liability was $232.5 million and Congress Landfill liability was $84.7 million. Estimated reasonably possible high-end exposure was about $160 million above the recorded Bridgeton amount, $70 million above Congress, and $360 million above recorded remediation liabilities in aggregate.
- Republic had approximately $62 million accrued for legal proceedings; using the high ends of estimated loss ranges would add approximately $75 million. It recorded a $149.5 million Central States multiemployer pension withdrawal liability, payable over 20 years; an adverse arbitration outcome could add $67 million, and quarterly progress payments are approximately $4 million.
- Other principal risks include fuel and commodity price volatility, substantial debt and covenant compliance, environmental regulation and remediation estimates, labor and multiemployer pension obligations, severe weather, landfill permitting and capacity, litigation, and acquisition integration. The filing reported no material change in previously disclosed risk factors.
- Management concluded disclosure controls were effective. Tervita was excluded from the period-end internal-control assessment as permitted for a newly acquired business; implementation of controls was ongoing.
Important facts for investors to verify
- How Tervita integration, purchase-price allocation and oilfield waste performance affect future revenue, margins and cash generation.
- Whether operating cash flow and free cash flow remain strong after elevated acquisition spending and capital expenditures; free cash flow is a non-GAAP measure and excludes debt service and dividends.
- Updates to Bridgeton, Congress Landfill and other remediation estimates, regulatory requirements, and related cash payments.
- Progress and potential additional exposure in the Central States pension withdrawal arbitration, as well as legal contingencies.
- Debt, covenant headroom and liquidity, including the maturity and remarketing risks associated with variable-rate tax-exempt financings.
- Pricing, volume, fuel recovery and recycled commodity trends, including how lower fuel costs and commodity prices affect revenue and margins.