Republic Services, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Republic Services provides integrated environmental services, including waste collection, transfer, recycling, disposal, and environmental solutions. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $2,968.8 | $2,595.9 |
| Operating income | $560.6 | $492.4 |
| Operating margin | 18.9% | 19.0% |
| Net income attributable to Republic | $352.0 | $295.9 |
| Diluted EPS | $1.11 | $0.93 |
| Cash provided by operating activities | $705.6 | $661.0 |
| Capital expenditures | $334.1 | $331.0 |
| Cash from operations less capital expenditures | $371.5 | $330.0 |
| Interest expense | $83.5 | $78.4 |
Revenue rose 14.4%, comprising 10.5% internal growth and 3.9% growth from acquisitions net of divestitures. Internal growth reflected 6.1% total price, 3.6% volume, and 0.8% combined growth from recycling commodity sales and environmental solutions. Operating income increased, but margin edged down as operating costs grew slightly faster than revenue. Higher diesel prices contributed to fuel expense of $129.3 million, up from $78.9 million.
Financial position and liquidity
- At March 31, 2022, total debt carrying value was $9,617.7 million, including $9,608.9 million of long-term debt; cash and cash equivalents were $39.0 million. Total debt was approximately unchanged from year-end 2021.
- Availability under the $3.0 billion revolving credit facility was $2,661.1 million at quarter-end. The company also had $80.4 million drawn under its $200 million uncommitted facility.
- The debt-to-EBITDA covenant ratio was 2.84x against a 3.75x limit; the company reported compliance at quarter-end.
- Financing cash outflows included $203.5 million of share repurchases and $145.9 million of dividends paid. The quarterly dividend was $0.46 per share.
Material changes and significant events
- Revenue growth reflected improved pricing and volumes, recovery in service activity from pandemic-affected levels, fuel recovery fees, acquisitions, and higher recycling commodity prices. The average price for recycled commodities, excluding glass and organics, was $201 per ton versus $133.
- Cost of operations increased to $1,762.3 million from $1,533.8 million. Fuel, transportation and subcontracting, labor, and maintenance costs rose; cost of operations was 59.4% of revenue versus 59.1%.
- Group 1 revenue increased 10.9%, while operating margin declined to 25.9% from 27.1%, partly due to higher disposal and transportation costs. Group 2 revenue increased 12.9%, and operating margin improved to 23.1% from 21.4%.
- On May 2, 2022, after quarter-end, Republic acquired US Ecology for a transaction value of $2.2 billion. It funded the purchase with a $1.0 billion term loan and borrowings under its revolving facility. After the acquisition, revolving-facility borrowings were $1.2 billion and availability was $1,461.1 million.
- Q1 share repurchases were 1.6 million shares for $203.5 million, compared with 0.1 million shares for $12.7 million in Q1 2021.
Outlook, risks and contingencies
- Management said existing cash, operating cash flows, and financing sources should fund operations and expected cash commitments for at least the next 12 months and thereafter for the foreseeable future. It expected to invest at least $500 million in additional acquisitions during 2022.
- Republic expected an additional $10–$15 million of restructuring charges during the remainder of 2022, primarily for back-office software redesign.
- Management identified integration, unexpected costs, and failure to realize expected synergies from the US Ecology acquisition as risks. The acquired hazardous and radioactive waste operations also add operational, regulatory, and litigation risks.
- Accrued landfill and environmental costs totaled $1,979.6 million. The reasonably possible high end of aggregate remediation estimates was approximately $342 million above the recorded amount. The recorded Bridgeton Landfill liability was $98.9 million; the reasonably possible high end for that site was approximately $140 million above the recorded amount. The company could not estimate its ultimate share of future West Lake Superfund site response costs.
- Accrued legal proceedings were approximately $12 million; using the high ends of estimated loss ranges would add approximately $5 million. The company stated that pending legal proceedings were not expected to have a material adverse effect.
- Fuel and interest rates remain exposures. Republic had no fuel hedges in place; a $0.20-per-gallon diesel price change was estimated to change annual fuel costs by about $26 million, with a similar estimated change in fuel recovery fees at current participation rates. A 100-basis-point change in interest rates was estimated to change annualized interest expense and net cash interest payments by about $16 million.
Investor verification priorities
- Review post-acquisition debt, leverage, financing costs, and liquidity following the US Ecology purchase, and track integration costs and realized synergies.
- Assess whether pricing and fuel recovery fees continue to offset inflation in fuel, labor, disposal, and transportation costs, particularly given the slight decline in consolidated operating margin.
- Monitor remediation estimates and developments at Bridgeton and West Lake, including potential costs beyond recorded reserves.
- Compare reported cash generation with capital spending, acquisitions, dividends, and buybacks; confirm covenant headroom after acquisition financing.
- Evaluate the assumptions behind management’s acquisition and liquidity outlook, including the expected 2022 acquisition investment and restructuring charges.