Republic Services, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Republic Services is a U.S. provider of non-hazardous waste collection, transfer, recycling and disposal services, including oilfield exploration and production waste services. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2,311.4 | $2,229.2 | $4,480.8 | $4,306.3 |
| Operating income | $389.2 | $378.3 | $762.0 | $684.4 |
| Operating margin | 16.8% | 17.0% | 17.0% | 15.9% |
| Net income attributable to Republic | $190.3 | $179.0 | $362.7 | $311.5 |
| Diluted EPS | $0.54 | $0.50 | $1.03 | $0.87 |
| Cash provided by operating activities | $405.1 | $325.9 | $901.2 | $722.3 |
| Free cash flow | $180.4 | $70.9 | $410.1 | $256.1 |
Revenue rose 3.7% in Q2 and 4.1% in the first half. Six-month growth reflected average yield (+2.3%), volume (+1.4%) and acquisitions net of divestitures (+2.5%), partly offset by lower fuel recovery fees and recycled commodity prices. Q2 diluted EPS increased 8%; first-half diluted EPS increased 18%. First-half free cash flow is a company-defined non-GAAP measure: operating cash flow less property and equipment purchases, plus asset-sale proceeds.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $99.9; restricted cash and marketable securities were $110.6. Total debt carrying value was $7,552.6, versus $7,061.2 at December 31, 2014.
- Revolving credit facilities had $1,654.9 available, no borrowings and $575.5 of outstanding letters of credit. The company reported covenant ratios of 6.57 for EBITDA to interest (minimum 3.00) and 3.19 for debt to EBITDA (maximum 3.75 through year-end 2015).
- Operating cash flow funded $499.2 of capital expenditures, $512.6 of cash acquisitions, $199.5 of share repurchases and $197.2 of dividends during the first half. Republic issued $500.0 of 3.20% notes due 2025.
- Quarterly dividends were $0.28 per share during the period. In July, the board approved a 7.1% increase to $0.30 per share.
Material changes and management commentary
- Republic acquired Tervita, LLC in February for $479.6 cash, expanding its E&P waste services business. Acquisitions across the three regions used $512.6 cash in the first half. The West region’s revenue grew 7.7% for the half, while its operating margin declined to 22.5%, partly due to integration, transition and operating costs in acquired E&P operations.
- In April, Republic obtained contractual control of Sonoma County waste facilities, including a landfill, transfer stations and a gas-to-energy plant. The arrangement includes contingent payments estimated at $100–$214 undiscounted; contingent consideration was recorded at $75.3.
- Lower diesel costs reduced first-half fuel expense to $194.1 from $263.7 a year earlier. However, lower fuel recovery fees reduced revenue. Recycled commodity revenue fell to $178.3 from $206.1, primarily due to lower prices.
- First-half operating margin improved year over year, but Q2 margin edged lower. Cost pressures included labor, maintenance, depreciation and SG&A; the prior-year period included a $36.1 Bridgeton remediation charge that did not recur.
Outlook, risks and contingencies
- In July 2015, Republic raised full-year 2015 diluted EPS guidance to $2.02–$2.05 from $1.98–$2.04. This is post-quarter guidance, not a June 30 result.
- Recorded landfill and environmental liabilities totaled $1,863.4. Management said the reasonably possible high end of aggregate remediation estimates could be about $360 higher than recorded. Bridgeton’s recorded remediation liability was $225.4, with a possible high end about $160 higher; Congress Landfill’s liability was $85.4, with a possible high end about $70 higher.
- Republic recorded $52.9 of legal-proceeding accruals; using the high ends of estimated loss ranges would increase aggregate potential liability by about $71. The company reported no belief that pending proceedings would materially adversely affect its financial position, results or cash flows.
- Estimated Central States pension withdrawal liability was $145.5, payable over 20 years. Arbitration was pending, with a hearing not expected until 2016; an adverse outcome could add $67 in cash payments over that period. Progress payments were about $4 per quarter.
- Key exposures include environmental regulation and remediation, landfill permitting and airspace estimates, fuel and recycled commodity prices, labor and pension costs, acquisition integration, interest rates, severe weather, litigation and substantial indebtedness. A 100-basis-point rate change was estimated to affect annual interest expense and net cash interest by about $12.7.
Most important facts for investors to verify
- Whether the raised 2015 EPS guidance is achieved, and how much earnings growth comes from recurring operations versus tax benefits and acquisition effects.
- Tervita and Sonoma integration, acquired-business margins, and the assumptions behind Sonoma’s contingent consideration.
- Actual environmental remediation costs and timing, particularly at Bridgeton and Congress Landfill, compared with recorded liabilities and disclosed high-end exposures.
- Progress and ultimate outcome of Central States withdrawal-liability arbitration, including the potential additional $67 obligation.
- Debt and liquidity trends, covenant headroom, and the sustainability of capital spending, dividends and share repurchases relative to free cash flow.