Business context and reporting period
Republic Services, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It is the second-largest U.S. provider of non-hazardous solid-waste collection, transfer, recycling, disposal and energy services, operating through two reportable field groups.
Financial performance and position
- Revenue: Q3 revenue was $2.562 billion, up 6.3% year over year; nine-month revenue was $7.482 billion, up 6.7%. Nine-month growth reflected average yield (+2.5%), volume (+1.5%), recycled commodities (+1.4%), energy services (+0.6%), fuel recovery fees (+0.4%) and net acquisitions/divestitures (+0.3%).
- Profit and margins: Q3 operating income was $448.1 million (17.5% margin), versus $417.9 million (17.4%). Nine-month operating income was $1.262 billion (16.8% margin), versus $1.146 billion (16.3%). Net income attributable to Republic was $223.2 million in Q3 and $614.0 million for nine months; diluted EPS was $0.66 and $1.81, respectively, versus $0.25 and $1.23. Adjusted diluted EPS was $0.67 for Q3 and $1.82 for nine months, compared with $0.62 and $1.65.
- Cash flow and investment: Nine-month operating cash flow was $1.382 billion, versus $1.360 billion. Capital expenditures were $769.0 million, implying operating cash flow less capital expenditures of approximately $612.5 million, versus $620.9 million. Acquisitions used $136.0 million. Financing cash outflow was $467.5 million, including $353.3 million of share repurchases and $324.8 million of dividends.
- Debt and liquidity: Total debt carrying value was $7.858 billion, versus $7.659 billion at year-end 2016; $705.7 million was classified current, including $700 million of senior notes due May 2018. Cash was $63.9 million, with $96.4 million of restricted cash and marketable securities. Credit-facility availability was $1.405 billion. The company reported covenant compliance, with debt/EBITDA of 2.89 against a 3.50 maximum and EBITDA/interest of 7.66 against a 3.00 minimum.
- Other metrics: Cost of operations was 61.7% of revenue in Q3 and 61.8% for nine months, versus 61.3% in both comparable periods. The quarterly dividend was $0.345 per share. Accounts receivable days sales outstanding were 40.0, or 28.3 days net of deferred revenue.
Material changes, outlook and commentary
- Reported earnings benefited from the absence of the $196.2 million debt-extinguishment loss recorded in the 2016 comparison period. 2017 results also included gains on asset dispositions and impairments of $17.4 million in Q3 and $27.2 million for nine months, restructuring charges of $3.7 million and $12.2 million, and large municipal-contract startup costs of $2.7 million and $5.0 million, respectively.
- Management’s preliminary FY2018 outlook was diluted EPS of $2.52–$2.57 and adjusted diluted EPS of $2.53–$2.58, excluding $0.01 per share of restructuring charges. Formal guidance was expected in February 2018; this preliminary outlook was not full detailed guidance.
- Hurricanes and storms in Texas, Puerto Rico and Florida produced an estimated Q3 revenue benefit of approximately $5 million, more than offset by approximately $12 million of higher operating and SG&A costs. Further fourth-quarter costs, remediation or impairments remained possible, partly offset by potential higher landfill and large-container revenue.
- In October 2017, Republic acquired ReCommunity for approximately $165 million net of cash acquired, plus certain capital leases; management expected it to add about 1 million tons to recycling volumes. The board also increased the share-repurchase authorization by $2.0 billion, bringing total authorization to $2.1 billion through December 31, 2020.
- Key exposures include landfill and environmental obligations, severe weather, fuel and recycled-commodity prices, interest rates, insurance claims, legal proceedings and multiemployer pension withdrawal liabilities. The company recorded $1.827 billion of landfill and environmental liabilities; reasonably possible remediation exposure was estimated to be about $377 million above the recorded amount. For Bridgeton Landfill, the recorded remediation liability was $183.3 million, with a reasonably possible high end about $156 million higher. The Bridgeton regulatory case was set for trial beginning March 5, 2018.
- Management said pending legal proceedings were not expected to materially adversely affect consolidated results, but recorded approximately $44 million of legal accruals; aggregate potential liability using the high ends of estimated ranges was approximately $44 million higher. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Assess the quality and durability of growth, particularly pricing, landfill and collection volumes, commodity prices, energy services and acquisitions.
- Reconcile reported and adjusted earnings, including the 2016 debt-extinguishment loss, 2017 disposition gains, restructuring and contract-startup costs, and the tax effects of adopted stock-compensation accounting.
- Monitor cash conversion, receivables and capital needs alongside dividends, buybacks, acquisitions and the May 2018 note maturity.
- Track storm-related costs and the ReCommunity integration, as well as landfill remediation estimates, Bridgeton proceedings and other environmental and legal exposures.
- Consider sensitivity to fuel, recycled-commodity and interest-rate changes, and confirm covenant headroom and committed credit availability.