Republic Services, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2016, compared with Q1 2015. Republic is a U.S. provider of non-hazardous solid-waste collection, transfer, recycling, disposal and energy services. It reorganized operations into two reportable field groups, Group 1 and Group 2.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2,248.6 million | $2,169.4 million |
| Operating income | $345.5 million | $372.8 million |
| Operating margin | 15.5% | 17.2% |
| Net income attributable to Republic | $156.7 million | $172.4 million |
| Diluted EPS | $0.45 | $0.49 |
| Cash provided by operating activities | $431.5 million | $496.1 million |
| Free cash flow | $162.9 million | $229.7 million |
Revenue increased 3.6%, reflecting average yield growth of 2.0%, volume growth of 2.5%, and 1.2% contribution from acquisitions net of divestitures. Lower fuel recovery fees (1.4%), energy services (0.6%) and recycled commodities (0.1%) partly offset growth. Reported operating income declined 7.3%; operating margin fell to 15.5% from 17.2%. Management’s adjusted diluted EPS, excluding $5.6 million of multiemployer pension withdrawal costs and $11.9 million of restructuring charges, was $0.48 versus $0.49.
Cost of operations rose to $1,381.4 million from $1,304.3 million and increased to 61.4% of revenue from 60.1%. Lower diesel costs partly offset increases in labor, maintenance, transfer and disposal, landfill operating and risk-management costs. Interest expense increased to $92.7 million from $88.6 million. The effective tax rate was 37.9%, compared with 39.4%, favorably affected by resolution of a state tax matter.
Balance sheet, debt and liquidity
At March 31, 2016, cash was $33.4 million and restricted cash and marketable securities were $95.7 million. Total debt carrying value was approximately $7.6 billion, including $7,554.9 million of long-term debt net of current maturities. Shareholders’ equity was $7,765.9 million. Available revolving credit capacity was $1,745.4 million; there were no borrowings under the revolving credit facilities, though $485.6 million of letters of credit were outstanding. The company reported covenant compliance, with a 7.05 EBITDA-to-interest ratio against a 3.00 minimum and total debt-to-EBITDA of 2.91 against a 3.50 maximum.
Operating cash flow declined by $64.6 million year over year. Capital expenditures were $271.5 million, leaving company-defined free cash flow of $162.9 million. Cash used for dividends was $103.7 million and share repurchases were $85.8 million. Cash and cash equivalents increased $1.0 million during the quarter.
Material changes, outlook and risks
- Revenue growth was led by industrial collection and landfill volumes; one additional workday contributed 0.5% to volume growth. Lower fuel prices reduced fuel expense but also lowered fuel-recovery-fee revenue.
- Republic recorded $11.9 million of restructuring charges and paid $5.3 million during the quarter. It expects approximately $25 million in total charges for field realignment and $10 million for consolidating more than 100 customer-service locations into three centers over two years; most field-realignment charges were expected in the rest of 2016. Expected savings are to be reinvested in customer programs. The filing provides no formal earnings or revenue guidance.
- Environmental and landfill obligations are significant: accrued landfill and environmental costs totaled $1,835.8 million, including $638.5 million for remediation. Management stated that using the reasonably possible high ends of remediation estimates would add approximately $350 million to recorded liabilities.
- For the Bridgeton Landfill, the recorded remediation liability was $212.5 million, with approximately $20 million expected to be paid during the remainder of 2016. A post-quarter April 28, 2016 agreement with the EPA formalized remedial work already contemplated in the liability; the reasonably possible high end for this site was approximately $164 million above the recorded amount.
- Recorded legal-proceeding accruals were approximately $63 million; use of the high ends of estimated loss ranges would increase the aggregate potential liability by approximately $51 million. The filing describes ongoing Bridgeton, Sunshine Canyon and Hunt County matters. Management did not believe pending legal proceedings would materially adversely affect consolidated results, but outcomes remain uncertain.
- Other disclosed exposures include fuel and commodity-price volatility, variable-rate debt, severe weather, environmental regulation and remediation, multiemployer pension withdrawal obligations, and the possibility that estimates for claims, landfill costs and other liabilities may differ from actual outcomes. A 100-basis-point change in rates was estimated to change annualized interest expense and net cash interest payments by approximately $13 million.
Most important facts for investors to verify
- Whether revenue growth and pricing can offset higher operating costs and restore operating margins.
- Whether lower operating cash flow and free cash flow persist, given capital spending, dividends and repurchases.
- Debt, covenant headroom, variable-rate exposure and access to revolving credit as obligations mature.
- Developments at Bridgeton and other environmental sites, including remediation costs beyond recorded liabilities, and resolution of material legal matters.
- Actual restructuring costs, timing of expected savings and whether customer-service consolidation improves service and efficiency.
- Assumptions underlying adjusted, non-GAAP measures and company-defined free cash flow, which may not be comparable with other companies’ measures.