Republic Services, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Republic Services is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling, disposal and energy services. This unaudited filing covers the three and six months ended June 30, 2017; comparisons are with the same 2016 periods. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2,526.7 million | $2,350.7 million | $4,919.5 million | $4,599.2 million |
| Operating income | $425.5 million | $382.1 million | $813.7 million | $727.6 million |
| Operating margin | 16.8% | 16.2% | 16.6% | 15.8% |
| Net income attributable to Republic | $202.9 million | $180.8 million | $390.7 million | $337.4 million |
| Diluted EPS | $0.60 | $0.52 | $1.15 | $0.98 |
- Revenue and growth: Revenue rose 7.5% in Q2 and 7.0% year to date. Management attributed first-half growth principally to average yield (+2.4%), recycled commodities (+1.8%), volume (+1.5%), fuel recovery fees (+0.5%), energy services (+0.5%) and acquisitions, net of divestitures (+0.3%).
- Margins and costs: First-half operating margin improved 0.8 percentage points. Cost of operations rose to 61.8% of revenue from 61.4%; higher labor, fuel, landfill operating costs and recycling rebates were among the pressures. Group 2’s first-half operating margin improved to 21.4% from 19.6%, while Group 1’s declined to 20.6% from 21.4%.
- Cash flow: First-half operating cash flow was $878.8 million, versus $844.3 million. Capital expenditures were $497.5 million, versus $512.0 million; operating cash flow less capital expenditures was $381.3 million. Cash used in investing activities was $593.7 million and cash used in financing activities was $316.9 million. Cash and cash equivalents ended at $36.0 million, down from $67.8 million at year-end 2016.
- Debt and liquidity: Debt carrying value was $7.8 billion at June 30, versus $7.7 billion at December 31, 2016; $705.4 million was classified as current, largely reflecting notes due in May 2018. The company reported $1.518 billion of availability under its credit facilities. It was covenant-compliant; reported ratios were 7.43x EBITDA-to-interest against a 3.00x minimum and 2.90x debt-to-EBITDA against a 3.50x maximum.
- Shareholder returns: First-half share repurchases were $230.7 million and dividends paid were $217.0 million. The quarterly dividend was $0.32 per share during the period; in July, the board approved a 7.8% increase to $0.345 per share.
Material changes versus the prior comparable period
- Q2 revenue increased $176.0 million and operating income increased $43.4 million year over year; diluted EPS rose from $0.52 to $0.60. For the first half, revenue increased $320.3 million, operating income increased $86.1 million and diluted EPS rose from $0.98 to $1.15.
- Recycled-commodity revenue increased to $269.9 million for the first half from $188.2 million, reflecting higher prices. Energy-services revenue increased to $63.3 million from $35.8 million, primarily with increased drilling activity.
- Interest expense declined to $179.0 million for the first half from $185.0 million, primarily following the 2016 issuance of lower-coupon 2.90% notes used to refinance higher-coupon debt.
- First-half cash taxes increased to $170.0 million from $99.4 million. The company said the 2016 comparison benefited from tax effects related to its July 2016 debt refinancing.
Outlook, commentary and risks
- Guidance: Republic raised 2017 adjusted diluted EPS guidance to $2.36–$2.39, compared with reported diluted EPS guidance of $2.32–$2.35 before listed adjustments. Adjusted EPS is a non-GAAP measure. Management expected incremental startup costs for a large municipal contract to continue through the remainder of 2017 and approximately $6 million of additional restructuring charges through year-end.
- Environmental exposure: Recorded landfill and environmental liabilities totaled $1.817 billion, including $583.6 million of remediation liabilities. The company estimated aggregate remediation exposure could be about $377 million above recorded amounts using reasonably possible high-end estimates. At the Bridgeton Landfill, the recorded remediation liability was $188.1 million, with a reasonably possible high end about $156 million higher; regulatory work and monitoring could affect costs and timing.
- Legal matters: The company recorded approximately $46 million for outstanding legal proceedings and estimated aggregate potential liability could be about $46 million higher using the high ends of loss ranges. The Bridgeton matter includes a pending Missouri regulatory case set for trial in March 2018. Republic stated it did not believe pending proceedings would materially adversely affect its consolidated financial position, results or cash flows.
- Other risks: Commodity prices, fuel, interest rates, labor and other costs; environmental regulations and permits; severe weather; multiemployer pension obligations; and substantial indebtedness may affect results. A 100-basis-point change in interest rates was estimated to change annualized interest expense and net cash interest payments by about $16 million. The company reported no material change in previously disclosed risk factors.
- Accounting change: Republic planned to adopt the new revenue-recognition standard in 2018 using the modified retrospective method. It did not anticipate a significant change in revenue timing or pattern, but identified $30–$40 million per quarter of customer consideration that may be reclassified from cost of operations to a reduction of revenue.
Important facts for investors to verify
- Whether the raised adjusted EPS guidance is achieved, and how its non-GAAP adjustments compare with GAAP results.
- Trends in recycled-commodity prices, fuel recovery fees, service volumes and operating costs, including the stated sensitivity of annual revenue and operating income to a $10-per-ton change in recycled-commodity prices: approximately $27 million and $18 million, respectively.
- Progress and ultimate costs at Bridgeton and other remediation sites, including any changes to recorded environmental reserves or regulatory requirements.
- The 2018 debt maturity, refinancing plans, revolver availability and continued compliance with credit-facility covenants.
- The effects of the 2018 revenue-recognition adoption, including the anticipated presentation reclassification and any contract-cost accounting changes.