Republic Services, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and energy services.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $2,517.8 | $2,526.7 | $4,945.2 | $4,919.5 |
| Operating income | $408.2 | $425.5 | $812.4 | $813.7 |
| Operating margin | 16.2% | 16.8% | 16.4% | 16.6% |
| Net income attributable to Republic | $234.9 | $202.9 | $472.6 | $390.7 |
| Diluted EPS | $0.71 | $0.60 | $1.43 | $1.15 |
| Cash from operations | Not provided for quarter | $1,191.0 | $879.2 |
- Revenue and comparability: Reported revenue was nearly flat in Q2 and up 0.5% for H1. The company adopted the new revenue recognition standard on January 1, 2018, without restating 2017. The adoption reduced reported H1 2018 revenue by 4.2%; excluding that effect, 2018 H1 revenue was $5,114.8 million. Management said the change had no material effect on operating or net income.
- Profit and margins: Q2 operating income fell about 4% year over year, while net income attributable to Republic rose about 16%, helped by a substantially lower effective tax rate. H1 operating income was essentially unchanged; attributable net income increased about 21%. The effective tax rate was 24.7% in Q2 and 24.1% in H1 2018, versus 39.1% and 37.9%, respectively, in 2017.
- Cash flow and investment: H1 operating cash flow increased to $1,191.0 million from $879.2 million. Capital expenditures were $542.1 million versus $497.5 million; acquisitions and investments used $69.3 million. Operating cash flow less capital expenditures was approximately $648.9 million, a derived measure rather than a company-reported metric.
- Liquidity and debt: At June 30, cash and equivalents were $61.3 million, restricted cash and marketable securities were $116.2 million, and total debt carrying value was approximately $8.26 billion. Availability under the new $2.25 billion revolving facility was $1.745 billion. The company reported covenant compliance; its debt-to-EBITDA ratio was 2.99 against a maximum of 3.50, and EBITDA-to-interest was 7.47 against a minimum of 3.00.
- Margins by segment: H1 Group 1 operating margin improved to 23.3% from 22.9%; Group 2 declined to 17.4% from 19.2%. Management cited labor, maintenance and fuel cost increases as pressures, particularly in Group 2.
Material changes and capital allocation
- Revenue growth drivers included average yield (+2.1%), H1 volume (+1.2%), fuel recovery fees (+0.6%) and acquisitions net of divestitures (+1.8%). Lower recycled commodity prices reduced H1 revenue growth by 1.3%.
- Old corrugated container prices averaged $97 per ton in H1 versus $170 in 2017; old newsprint averaged $62 versus $117. Management estimates a $10-per-ton change in recycled commodity prices would change annual revenue and operating income by approximately $20 million each, at current volumes and mix.
- Fuel expense increased to $185.8 million in H1 from $167.7 million. Management estimates a 20-cent-per-gallon diesel price change would alter annual fuel costs by approximately $25 million, with fuel recovery fees providing an offset that depends on customer participation.
- H1 share repurchases were $474.0 million, compared with $230.7 million in 2017; dividends paid were $227.7 million. The board increased the quarterly dividend 9% to $0.375 per share in July 2018.
- The company issued $800 million of 3.950% senior notes due 2028, used proceeds to repay $700 million of notes that matured in May, and entered a new revolving credit facility maturing in 2023.
Outlook, risks and unusual items
- 2018 outlook: Adjusted diluted EPS guidance was $3.05–$3.10; the corresponding anticipated GAAP diluted EPS range was $2.99–$3.04. Guidance assumes an effective tax rate of approximately 24%.
- Restructuring: H1 charges were $13.3 million. Republic expects another $5–$10 million of charges during the remainder of 2018 and estimates annual savings of $25–$30 million.
- Environmental exposure: Accrued landfill and environmental costs totaled $1.838 billion. The company said the reasonably possible high end of aggregate remediation estimates was approximately $466 million above recorded liabilities. Bridgeton Landfill’s recorded remediation liability was $169.6 million, with a possible high end approximately $177 million higher. For West Lake, the EPA’s proposed remedy estimated total site costs of $236 million, but Republic said it could not estimate its potential share; it believes its existing reserve reflects the 2008 decision and may need revision after a final decision.
- Resolved and pending matters: A June 2018 Bridgeton consent judgment requires total cash payments of $16 million and includes operating-plan and financial-assurance requirements. Legal proceedings were accrued at approximately $48 million; use of high-end loss estimates would raise that amount by approximately $51 million. Insurance reserves were $428.2 million, and management cautioned that actual claims may exceed estimates.
- Other risks: Exposure includes fuel and commodity price volatility, variable interest rates, regulation, severe weather, and landfill remediation and closure costs. A 100-basis-point change in rates on variable-rate debt was estimated to change annual interest expense and net cash interest by about $15 million. The company reported no off-balance-sheet debt or similar obligations other than operating leases and financial assurances.
Most important facts for investors to verify
- Compare revenue growth on a consistent basis given the 2018 revenue-recognition change and unrecast 2017 figures.
- Track whether pricing and volume gains offset higher labor, maintenance, transportation and fuel costs, and whether Group 2 margins recover.
- Assess the sensitivity of earnings and cash flow to recycled commodity prices, diesel costs and interest rates, including the effectiveness of recovery fees and hedges.
- Monitor debt levels, revolver availability, covenant headroom, and the company’s use of cash for repurchases, dividends, capital expenditures and acquisitions.
- Follow developments at Bridgeton and West Lake, including final remediation requirements, allocation of costs and changes to environmental reserves.
- Check progress against adjusted EPS guidance and the expected restructuring savings, while distinguishing company-defined adjusted results from GAAP results.