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Republic Services (RSG) Beats Q1 Earnings by a Whisker

Waste management firm Republic Services, Inc. RSG reported relatively modest first-quarter 2016 results with GAAP earnings of $156.7 million or 45 cents per share compared with $172.4 million or 49 cents per share in the year-ago quarter. The year-over-year decrease, despite higher revenues, was primarily attributable to higher operating costs and restructuring charges.

Excluding non-recurring items, adjusted earnings for the reported quarter were $167.3 million or 48 cents per share compared with $172.4 million or 49 cents per share in the year-earlier quarter. Although adjusted earnings decreased year over year, it marginally beat the Zacks Consensus Estimate by a penny.

Top-Line Performance

Revenues improved 3.7% year over year in first-quarter 2016 to $2,248.6 million but missed the Zacks Consensus Estimate of $2,252.0 million. The year-over-year increase in revenues was driven by a 2% rise in average yield and a 2.5% increase in volume, partially offset by lower fuel recovery fees of 1.4% and lesser recycling commodity revenues of 0.1%. Core price increased revenues by 3.4% during the quarter.

Adjusted EBITDA for the reported quarter was $626.0 million (27.8% of revenues) compared with $625.9 million (28.8%) in the year-ago quarter. The lower EBITDA margin was largely due to higher selling, general and administrative expenses and an additional workday during the quarter.

Segment Details

Revenues from the Collection segment increased 2.8% year over year to $1,737.3 million as the Commercial and Industrial sub-segments fared relatively better in the reported quarter. The Transfer segment revenues improved 11.1% year over year to $103.7 million. Revenues from the Landfill segment were up 9.7% to $261.7 million, while sales from the Other segment increased 3.5% year over year to $127.2 million.

By the end of the reported quarter, about 16% of the total fleet was operating on natural gas. Approximately 73% of the residential fleet was automated and 81% was certified under the standardized maintenance program.

Realignment of Organizational Structure

During the reported quarter, Republic Services realigned its field support functions by combining two organizational layers into one. The company eliminated 3 Regions, consolidated 20 Areas into 10 and streamlined select roles at its Phoenix Headquarters.

Republic Services aims to reinvest and deploy resources into its Area levels through the creation of 10 Area Offices with an enhanced workforce. The company will also consolidate its call center operations. Republic Services intends to invest approximately $20 million in 2016 to design and implement its Customer Resource Centers and other customer-focused initiatives, and expects them to contribute approximately $10 million of annual cost savings from 2018.  In addition, the company anticipates annual cost savings of approximately $25 million from the organizational realignment.

As part of the realignment program, the company centralized the management structure for recycling operations. The new organizational structure is likely to ensure a clear ownership for the recycling and processing market vertical. Republic Services is also transitioning to a fee-based recycling processing model to cover processing costs and generate a healthy ROI.

Balance Sheet & Cash Flow

Cash and cash equivalents at the quarter end were $33.4 million, while long-term debt (net of current maturities) was $7,554.9 million.

Cash from operating activities totaled $431.5 million for the reported quarter compared with $496.1 million in the prior-year period. Adjusted free cash flow for the quarter was $159.9 million versus $240.8 million in the year-earlier period.

Share Repurchase

Republic Services has a share repurchase program in place since Nov 2010. During first-quarter 2016, the company repurchased 1.9 million shares under this program for $86.8 million at an average price of $44.87 per share. During the quarter, the company returned about $191 million to the shareholders through share repurchases and dividends.

Moving Forward

With diligent execution of operational plans and a realigned operational structure, Republic Services is likely to generate a healthy cash flow in the future. The company has strong underlying fundamentals and is set to achieve consistent earnings growth while creating significant shareholder value.

Republic Services currently has a Zacks Rank #2 (Buy). Some other better-ranked stocks in the industry include Nuverra Environmental Solutions, Inc. NESC, Quest Resource Holding Corporation QRHC and Waste Management, Inc. WM, each carrying the same Zacks Rank as Republic Services.

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WASTE MGMT-NEW (WM): Free Stock Analysis Report
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