Republic Services, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. Republic is a U.S. provider of non-hazardous solid waste collection, transfer, recycling, disposal and energy services, reporting through two field groups.
Financial performance
Amounts are in millions, except per-share data. Changes are year over year.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2,409.3 | $2,344.0 | $7,008.5 | $6,824.8 |
| Operating income | $417.9 | $442.9 | $1,145.6 | $1,204.9 |
| Operating margin | 17.4% | 18.9% | 16.3% | 17.6% |
| Net income attributable to Republic | $85.6 | $215.0 | $423.1 | $577.7 |
| Diluted EPS | $0.25 | $0.61 | $1.23 | $1.64 |
| Cash dividends per share | $0.32 | $0.30 | $0.92 | $0.86 |
Cash flow: Nine-month operating cash flow was $1,359.6, versus $1,324.5. Capital expenditures were $738.7, versus $732.0. Company-defined free cash flow was $628.3, versus $609.6; this non-GAAP measure excludes debt service and dividends. Cash and cash equivalents were $55.0 at quarter-end, compared with $32.4 at year-end 2015.
Debt and liquidity: Total debt carrying value was approximately $7,745.3, up from $7,532.9 at year-end 2015. Long-term debt, net of current maturities, was $7,739.6. Revolving credit availability was $1,513.5, with $210.0 drawn and $508.0 of letters of credit outstanding. The company reported compliance with its credit covenants; covenant debt/EBITDA was 3.03 against a 3.50 maximum, and EBITDA/interest was 6.90 against a 3.00 minimum.
Material changes and drivers
- Revenue grew 2.8% in Q3 and 2.7% for the nine-month period. Nine-month growth reflected average yield of 2.0%, volume of 1.2%, acquisitions net of divestitures of 0.7%, and recycled commodities of 0.3%, partly offset by lower fuel recovery fees of 1.0% and energy services revenue of 0.5%.
- Operating income and reported EPS declined, principally reflecting the 2016 debt-extinguishment charge and restructuring costs, as well as the absence of a $50.0 Bridgeton insurance recovery recorded in 2015. Q3 included a $196.2 loss on extinguishment of debt; the company’s adjusted-results reconciliation includes $203.4 of debt-extinguishment and related costs.
- On a company-adjusted, non-GAAP basis, diluted EPS was $0.62 for Q3 versus $0.53, and $1.65 for nine months versus $1.55. Adjustments include debt-extinguishment costs and restructuring; nine-month 2016 adjustments also include multiemployer pension withdrawal costs.
- Cost of operations increased to 61.3% of revenue for Q3 from 59.3%, and was 61.3% for nine months versus 60.3%. Lower diesel costs helped, but labor, maintenance, landfill operating and risk-management costs were among the pressures.
- Group 1 and Group 2 operating margins improved for the nine-month period to 21.4% and 20.0%, respectively, from 21.4% and 19.4%. Corporate operating losses widened, including restructuring costs and the prior-year Bridgeton recovery comparison.
Outlook, commentary and risks
- 2016 guidance: Adjusted diluted EPS of $2.19–$2.20; the company also presented GAAP diluted EPS guidance of $1.75–$1.76. Reconciliation items include $0.36 per share for debt-extinguishment and related costs, $0.07 for restructuring, and $0.01 for multiemployer pension withdrawal costs.
- Preliminary 2017 outlook: Diluted EPS of $2.29–$2.34 and adjusted diluted EPS of $2.31–$2.36, both assuming a 39.5% effective tax rate. This was preliminary, not formal guidance; formal guidance was expected in February 2017. Adjusted EPS excludes restructuring charges.
- The company expected approximately $20 of additional restructuring charges over the next two years. The program includes field-support realignment, accounts-payable redesign and consolidating more than 100 customer-service locations into three centers.
- Environmental exposures include $1,827.0 of accrued landfill and environmental liabilities. Management said the aggregate reasonably possible high end of remediation estimates could be approximately $350 higher than recorded. The Bridgeton site liability was $199.6, with a reasonably possible high end approximately $164 above that amount; future remediation requirements or changed estimates could materially affect results or cash flows.
- Legal proceedings accrued were approximately $55; using the high ends of estimated loss ranges would increase potential liability by approximately $51. The filing discusses Bridgeton regulatory litigation and remediation, a $2.2 civil-penalty demand and proposed abatement order at Sunshine Canyon, and environmental notices involving Arbor Hills. Management stated it did not expect pending legal proceedings overall to have a material adverse impact, while noting uncertainty.
- Other sensitivities include recycled commodity prices (a $10-per-ton change estimated to affect annual revenue by $27 and operating income by $18), fuel prices, interest rates, severe weather, labor and healthcare costs, environmental regulation, multiemployer pension obligations, and substantial indebtedness. A 100-basis-point rate change was estimated to alter annualized interest expense and net interest cash payments by about $15.5.
Important facts for investors to verify
- Reconcile the sharp decline in reported earnings with adjusted EPS, including the full cash and non-cash costs of the July debt refinancing.
- Track whether revenue growth, pricing and segment margins can offset rising operating costs and weakening residential or energy-services volumes.
- Monitor free cash flow after dividends, capital spending, share repurchases and debt service; assess the sustainability of the company’s capital-return plans.
- Review debt levels, available revolving capacity, covenant headroom and exposure to variable rates and remarketing of tax-exempt bonds.
- Follow Bridgeton and other environmental matters, legal proceedings, landfill liability estimates and the potential for additional remediation costs.