Republic Services, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Republic is a U.S. provider of non-hazardous solid waste collection, transfer, recycling, disposal and energy services.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $2,392.8 | $2,248.6 |
| Operating income | $388.1 | $345.5 |
| Operating margin | 16.2% | 15.5% |
| Net income attributable to Republic | $187.8 | $156.7 |
| Diluted EPS | $0.55 | $0.45 |
| Cash from operations | $444.3 | $431.5 |
| Capital expenditures | $223.9 | $271.5 |
| Free cash flow (company-defined, non-GAAP) | $221.7 | $162.9 |
- Revenue rose 6.4%; management attributed growth to average yield (+2.3%), recycled commodities (+2.1%), volume (+1.0%), fuel recovery fees (+0.4%), energy services (+0.4%) and net acquisitions/divestitures (+0.2%).
- Cost of operations increased to $1,484.1 million, or 62.0% of revenue, from $1,381.4 million, or 61.4%. Higher labor, fuel, landfill operating and recycling costs offset revenue growth. Diesel averaged $2.57 per gallon versus $2.07.
- Interest expense decreased to $89.4 million from $92.7 million, primarily reflecting refinancing with lower-coupon notes issued in 2016. Effective tax rate was 36.6%, compared with 37.9%; Q1 2017 tax expense benefited by $8.9 million from the accounting treatment of share-based award settlements.
- Cash used in investing was $292.2 million, including $54.7 million for acquisitions; cash used in financing was $186.7 million, including $98.9 million of repurchases and $108.6 million of dividends paid. Cash declined $34.6 million to $33.2 million.
Balance sheet and liquidity
- Total debt carrying value was approximately $7.67 billion at March 31, 2017, versus $7.66 billion at December 31, 2016. Cash was $33.2 million; restricted cash and marketable securities were $90.8 million.
- Credit-facility availability was $1.63 billion, with $160 million drawn under committed facilities and $444 million of letters of credit outstanding. The company also had $62 million drawn on its uncommitted facility.
- Republic reported compliance with debt covenants: debt-to-EBITDA was 2.91 against a 3.50 maximum, and EBITDA-to-interest was 7.23 against a 3.00 minimum. Management expected covenant compliance through 2017.
- Current liabilities were $1.78 billion and current assets were $1.23 billion. Long-term debt was $7.66 billion. The company reported investment-grade credit ratings.
Material changes and operating developments
- Net income rose 20% and diluted EPS increased from $0.45 to $0.55; weighted-average diluted shares declined to 341.9 million from 346.7 million.
- Segment operating income increased to $213.8 million in Group 1 from $209.7 million and to $272.9 million in Group 2 from $235.1 million. Group 1 margin declined to 20.1% from 21.0%; Group 2 margin improved to 21.3% from 19.5%.
- Recycled-commodity revenue increased to $133.9 million from $86.8 million, supported by higher prices; processed volume was approximately unchanged. The average OCC price was $165 per ton versus $97, and old newsprint averaged $135 versus $73.
- Q1 acquisitions had a purchase price of $56.2 million, including holdbacks; management said the acquisitions were not material individually or collectively. Capital returned included $98.9 million of share repurchases and a declared quarterly dividend of $0.32 per share, up from $0.30.
- Free cash flow is a company-defined non-GAAP measure and excludes items such as debt service and dividends; it is not cash available solely for discretionary use.
Outlook, risks and unusual items
- No formal revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management expected restructuring and consolidation work to continue through 2017, with approximately $10 million of additional charges expected during the year.
- Q1 included a net $8.3 million gain on asset dispositions and impairments, $4.4 million of restructuring charges and $1.1 million of multiemployer pension withdrawal costs. Excluding these and related tax effects, company-adjusted diluted EPS was $0.55 versus $0.48 in 2016; this is a non-GAAP measure.
- Environmental obligations are significant: accrued landfill and environmental costs totaled $1.81 billion, including $590.6 million of remediation liabilities. The company stated that reasonably possible remediation liability across sites could be about $377 million above recorded amounts.
- At the Bridgeton Landfill, the recorded remediation liability was $192.9 million; the reasonably possible high end was approximately $156 million above that amount. Remediation is ongoing with regulatory agencies, and the filing notes that future requirements could change costs and timing.
- Legal proceedings accrued were approximately $43 million; using high ends of estimated loss ranges would add about $27 million. The Bridgeton matter includes a state claim seeking approximately $37 million in civil penalties and other relief; the Sunshine Canyon matter includes a $2.2 million penalty demand that the company expects to contest.
- Principal identified risks include fuel and commodity-price volatility, labor and other cost inflation, environmental regulation and remediation, landfill permits and capacity, substantial indebtedness and interest rates, legal proceedings, multiemployer pension exposure, severe weather, and execution of acquisitions and restructuring. The company reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether revenue growth and segment profitability persist as recycled-commodity prices and energy-services activity fluctuate, and whether pricing offsets rising operating costs.
- Whether the $8.9 million share-based-compensation tax benefit materially affects comparisons of reported earnings and the sustainability of the effective tax rate.
- Future cash generation after capital spending, acquisitions, dividends and buybacks, alongside the company’s substantial debt and covenant headroom.
- Updates to Bridgeton and other remediation estimates, including potential costs above recorded environmental liabilities, and outcomes of material environmental and legal proceedings.
- Progress and realized savings from restructuring, including the expected additional 2017 charges, and the effect of continuing capital returns on liquidity.