Republic Services, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Dollar amounts are in millions except per-share data. Republic is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling, disposal and energy services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2,350.7 | $2,311.4 | $4,599.2 | $4,480.8 |
| Operating income | $382.1 | $389.2 | $727.6 | $762.0 |
| Net income attributable to Republic | $180.8 | $190.3 | $337.4 | $362.7 |
| Diluted EPS | $0.52 | $0.54 | $0.98 | $1.03 |
| Operating margin, as reported in MD&A | 16.2% | 16.7% | 15.8% | 17.0% |
- Q2 revenue increased 1.7% year over year; six-month revenue increased 2.6%. For the first half, growth reflected average yield of 2.0%, volume of 1.5%, acquisitions net of divestitures of 0.8%, and recycled commodities of 0.1%, partly offset by lower fuel recovery fees of 1.2% and energy-services revenue of 0.6%.
- Q2 operating income declined 1.8% and Republic-attributable net income declined 5.0%; first-half operating income fell 4.5% and attributable net income fell 7.0%. Cost of operations rose to 61.4% of revenue for the first half from 60.8%.
- Reported diluted EPS includes restructuring charges: adjusted diluted EPS was $0.55 for Q2 versus $0.54 in Q2 2015, and $1.03 for the first half versus $1.03. First-half adjustments also included $5.6 of multiemployer-pension withdrawal costs; adjusted figures are non-GAAP.
- Cash provided by operations was $412.8 in Q2 and $844.3 for the first half, versus $405.1 and $901.2, respectively, in 2015. First-half free cash flow, as defined by the company, was $337.8 versus $410.1; capital expenditures were $512.0 versus $499.2.
- At June 30, cash and cash equivalents were $42.0; restricted cash and marketable securities were $96.8. Total current assets were $1,259.4 and current liabilities $1,847.7.
- Debt carrying value was approximately $7.6 billion, including $7,608.4 of long-term debt and $5.6 of current maturities. Revolving-credit availability was $1,745.7; there were no borrowings under the committed credit facilities at quarter-end, and $84.5 was drawn on the uncommitted facility. The company reported covenant ratios of 7.05 for EBITDA to interest (3.00 minimum) and 2.96 for debt to EBITDA (3.50 maximum).
- Quarterly cash dividends were $0.30 per share, up from $0.28 a year earlier. The company repurchased $196.1 of shares in the first half.
Material changes and management commentary
- Revenue growth was supported by pricing and industrial collection and landfill volumes. Lower diesel prices reduced fuel expense, but also reduced fuel-recovery-fee revenue. Energy-services revenue weakened amid lower oil prices and reduced drilling activity.
- Operating results faced higher labor, maintenance, transfer and disposal, risk-management and landfill costs. The company attributed some year-over-year comparisons to favorable legal and workers’ compensation developments in 2015 that did not recur.
- Republic reorganized its field operations into two groups and began streamlining support functions and accounts-payable processing. It incurred restructuring charges of $14.5 in Q2 and $26.4 in the first half, paid $14.5 through June, and expects approximately $25 of additional charges over the next two years. Planned customer-service consolidation will combine more than 100 locations into three Customer Resource Centers over two years; savings are intended for customer-focused initiatives.
- In May, Republic replaced its $1.0 billion revolving facility due in 2017 with a new $1.0 billion facility maturing in 2021. Subsequent to quarter-end, the company issued $500 of 2.90% notes due 2026 and used proceeds plus borrowings to tender for $575.4 of older notes and debentures. It expects approximately $200 of debt-extinguishment losses and related costs in Q3 2016.
- No formal revenue or earnings guidance is provided in the supplied filing text. Management said it expected to remain in compliance with credit covenants throughout 2016 and considered cash, operating cash flow and credit availability sufficient for anticipated capital needs and maturities.
Risks, contingencies and unusual items
- Environmental exposure: Accrued landfill and environmental costs totaled $1,830.4, including $626.7 for remediation. Management said the reasonably possible high end of aggregate remediation estimates could exceed recorded liabilities by approximately $350. At the Bridgeton Landfill, the recorded remediation liability was $205.7; the reasonably possible high end for that site was approximately $164 above the accrual. New information or changes in required work could materially affect costs, results or cash flows.
- Legal matters: The company recorded approximately $56 of legal-proceeding accruals; using the high ends of estimated loss ranges would add approximately $45. Bridgeton proceedings include a Missouri state case seeking, among other relief, approximately $37 in civil penalties. Sunshine Canyon received 102 additional notices of violation and a $2.2 million penalty demand; the company plans to contest the demand and proposed abatement terms. A Hunt County, Texas case remained in discovery.
- Other exposures: Insurance reserves were $415.4 and are subject to estimation uncertainty. Republic contributes to 26 multiemployer pension plans and may face additional costs from withdrawal events. It disclosed no material changes to previously reported risk factors.
- Market sensitivity: Management estimated that a 20-cent-per-gallon diesel-price change would alter annual fuel costs by approximately $22 and fuel-recovery fees by approximately $22 at current participation. A $10-per-ton change in recycled-commodity prices could change annual revenue by about $27 and operating income by about $18. A 100-basis-point interest-rate move was estimated to change annualized interest expense and net cash interest payments by approximately $13.5.
Important facts for investors to verify
- Whether core pricing and volume gains can offset higher labor, maintenance, disposal and risk-management costs, and continued weakness in energy services.
- The timing and ultimate cost of the restructuring program, including the expected additional $25 of charges and whether planned savings materialize.
- The Q3 accounting and cash effects of the debt tender, including the approximately $200 expected charge, and the company’s post-quarter borrowings and liquidity.
- Updates to Bridgeton and other environmental remediation estimates, legal proceedings and multiemployer-pension liabilities.
- Cash conversion and capital allocation: first-half operating cash flow and free cash flow declined year over year while capital expenditures, dividends and repurchases remained substantial.
- Compliance with credit covenants and access to financing, especially given substantial debt and sensitivity to interest rates.