Republic Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Republic is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling and disposal services, reporting East, Central and West segments.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $2,225.3 million | $2,111.7 million | $4,299.0 million | $4,110.3 million |
| Operating income | $378.3 million | $181.2 million | $684.4 million | $455.4 million |
| Operating margin | 17.0% | 8.6% | 15.9% | 11.1% |
| Net income attributable to Republic | $179.0 million | $56.3 million | $311.5 million | $180.9 million |
| Diluted EPS | $0.50 | $0.15 | $0.87 | $0.50 |
- Revenue rose 5.4% in Q2 and 4.6% in the first half. First-half growth reflected average yield (+1.3%), volume (+2.1%), recycled commodities (+0.5%), fuel recovery fees (+0.1%) and acquisitions net of divestitures (+0.6%).
- Reported earnings comparisons were substantially affected by unusual prior-year charges: 2013 included $108.7 million of Bridgeton remediation charges and $53.9 million of Q2 Central States pension negotiation and withdrawal costs. Q2 2014 included no Bridgeton charge; first-half 2014 included a $36.1 million Bridgeton charge.
- Management’s non-GAAP adjusted diluted EPS was $0.51 for Q2 2014 versus $0.43 in Q2 2013, and $0.94 for the first half versus $0.89. These measures exclude specified items and may not be comparable with similarly named measures from other companies.
- For the first half, cash from operations was $722.3 million, down from $761.5 million. Capital expenditures were $472.9 million; company-defined free cash flow was $256.1 million, versus $307.1 million. Net income increased, but working-capital changes and higher cash taxes contributed to lower operating cash flow.
- At June 30, cash and equivalents were $49.5 million, versus $213.3 million at year-end 2013. Restricted cash and marketable securities were $178.1 million and are not all freely available. Total debt carrying value was $7,052.2 million; long-term debt on the balance sheet was $7,042.1 million.
- Republic had no borrowings under its revolving credit facilities and $1,603.9 million of availability after letters of credit; it also had $26.4 million outstanding under an uncommitted facility. First-half share repurchases were $255.9 million and dividends paid were $186.6 million.
Changes, outlook and management commentary
- Management attributed growth to pricing across business lines, stronger commercial and industrial collection and landfill volumes, and acquisitions. Residential collection and transfer volumes declined in some periods; recycling prices remained variable.
- West was the strongest reported region in first-half operating performance: revenue increased 5.3% and operating margin was 23.7%, compared with 22.2% a year earlier. East first-half margin decreased to 17.4% from 18.8%; Central margin was 17.9% versus 18.5%.
- In July, the company reaffirmed 2014 adjusted diluted EPS guidance of $1.93–$1.98. The filing presents corresponding diluted EPS of $1.86–$1.91 before the listed adjustments. The board also approved a 7.7% increase in the quarterly dividend to $0.28 per share, payable October 15, 2014.
- In June, Republic replaced a $1.0 billion revolving facility with a $1.25 billion facility maturing in June 2019 and amended its existing facility, which matures in May 2017. At June 30, covenant ratios were 6.94 for EBITDA to interest (3.00 minimum) and 2.86 for debt to EBITDA (3.75 maximum through 2015).
- Operating risks include substantial debt and capital requirements; fuel, interest-rate, labor and recycled-commodity price changes; weather; regulatory and landfill-permitting requirements; and legal, environmental and multiemployer pension liabilities. The company estimates a $20-cent-per-gallon diesel price change would affect annual fuel costs by about $25 million, partly offset by about $20 million in fuel recovery fees. A $10-per-ton recycled-commodity price change would affect annual revenue and operating income by about $31 million and $19 million, respectively.
Contingencies and other notable items
- Bridgeton Landfill remediation liability was $95.0 million at June 30; $31.5 million was expected to be paid in the remainder of 2014. The estimated reasonably possible high end of the remaining range was approximately $335 million. Republic is working with regulators, and required remediation plans or timing may change.
- Congress Landfill remediation liability was $83.0 million, with an estimated reasonably possible high end of approximately $150 million. For recorded remediation liabilities overall, the filing says reasonably possible high-end estimates could be about $440 million above amounts recorded.
- Accrued legal-proceeding liabilities were approximately $53.2 million; using high ends of estimated ranges would increase aggregate potential liability by about $66.5 million. The Bridgeton resident-class settlement of approximately $6.9 million remained subject to court approval and opt-out conditions. Other landfill-related claims and regulatory proceedings remain pending.
- Republic recorded a $161.4 million estimated Central States pension withdrawal liability, expected to be paid over 20 years; changes in the estimate or payment timing could be material. Self-insurance reserves were $425.1 million, and management cautioned that actual claim costs could exceed recorded estimates.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It was assessing the impact and adoption method for the new revenue-recognition standard effective for Republic beginning January 1, 2017.
Important facts for investors to verify
- How much of earnings growth reflects underlying operating performance versus prior-year unusual charges, and how non-GAAP EPS adjustments reconcile to GAAP results.
- Whether operating cash flow and free cash flow recover, given lower first-half cash generation, substantial capital spending, dividends and repurchases.
- Updated cost, timing and regulatory assumptions for Bridgeton and Congress remediation, and potential exposure beyond recorded liabilities.
- Debt, covenant headroom, refinancing needs and the availability of credit facilities after letters of credit and other liquidity requirements.
- Whether volume, pricing, fuel-recovery and recycling-market trends support the reaffirmed full-year adjusted EPS guidance.