Republic Services, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and environmental services. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,572.1 | $2,646.9 | $7,580.4 | $7,722.7 |
| Operating income | $447.9 | $467.8 | $1,276.4 | $1,328.0 |
| Operating margin | 17.4% | 17.7% | 16.8% | 17.2% |
| Net income attributable to Republic | $260.0 | $298.3 | $731.8 | $784.0 |
| Diluted EPS | $0.81 | $0.93 | $2.29 | $2.43 |
| Operating cash flow | — | $1,909.0 | $1,786.9 |
- Q3 revenue fell 2.8% year over year; nine-month revenue declined 1.8%. The nine-month decline reflected lower volumes (3.6%) and environmental-services revenue (0.9%), partly offset by average yield growth of 2.7% and net acquisition growth of 0.5%.
- Cost of operations decreased to 59.7% of revenue in Q3 from 61.6% a year earlier, helping offset weaker revenue. Lower service activity, fuel prices and operating costs contributed; reported operating margin nevertheless eased year over year.
- Nine-month investing cash outflow was $1,032.9, including $889.0 of capital expenditures and $189.9 for acquisitions and investments. Financing cash outflow was $564.3. Cash and cash equivalents were $406.4 at September 30, versus $47.1 at year-end 2019.
- Total debt carrying value was $8,778.8, including $184.3 current and $8,594.5 long-term. The company reported $1.0 billion available under its new 364-day facility and $1,857.8 million available under its main revolver; it had no borrowings under either at quarter-end. The main facility had $376.5 million of letters of credit outstanding.
- Dividends paid in the first nine months were $387.1; share repurchases were $98.8, down from $353.8 in the comparable 2019 period. The quarterly dividend was raised to $0.425 per share.
Material changes and unusual items
- COVID-19 reduced pickup frequency or paused service for some small- and large-container customers and lowered disposal volumes. Management said activity declines peaked in early April and gradually improved as local economies reopened.
- Q3 included a $34.5 debt-extinguishment loss after redeeming $600.0 of 5.250% notes due 2021, including a $34.0 cash premium. The redemption was funded principally with $650.0 of 1.450% notes due 2031.
- In February, Republic issued $600.0 of 2.300% notes due 2030 and $400.0 of 3.050% notes due 2050, principally refinancing $850.0 of 5.000% notes that matured in March.
- Nine-month results included $35.9 of multiemployer pension withdrawal costs, $32.9 of net divestiture and impairment losses, and a favorable $10.8 Bridgeton insurance recovery. Q3 restructuring charges were $9.8.
Outlook, management commentary and risks
- Updated full-year 2020 guidance was diluted EPS of $3.09–$3.12 and adjusted diluted EPS of $3.37–$3.40. The adjusted figure excludes specified debt-extinguishment, restructuring, divestiture/impairment, pension withdrawal and Bridgeton recovery items; it is a non-GAAP measure.
- Management expected another $3–$5 of restructuring charges during the remainder of 2020 and said pandemic-related costs could continue through 2020 and potentially into future years. The company reported $45.1 of direct, incremental COVID-19 costs for the first nine months.
- The company warned that renewed outbreaks or prolonged economic disruption could further reduce service demand and collections, increase costs, and impair liquidity. Environmental-services demand is also exposed to oil and gas drilling activity; sustained weakness could lead to asset impairment.
- Environmental and legal exposures remain uncertain. Recorded remediation liabilities were $476.0; the reasonably possible high end of aggregate remediation estimates was approximately $365 higher than recorded. For Bridgeton, the recorded liability was $124.7, with a reasonably possible high end approximately $163 higher. The company could not estimate its potential share of future West Lake Superfund response costs.
- Management stated that it believed liquidity was sufficient for anticipated capital requirements and maturities, and expected covenant compliance through year-end. The main revolver’s debt-to-EBITDA covenant was 3.75 maximum (up to 4.25 during qualifying elevated-ratio periods); the reported ratio was 3.06 at quarter-end.
- The filing also cites exposure to fuel, recycled-commodity and interest-rate fluctuations, landfill obligations, multiemployer pension plans, severe weather and regulatory matters. No fuel or recycling commodity hedges were in place at September 30.
Most important facts for investors to verify
- Whether the recovery in collection and disposal volumes continued, particularly in small- and large-container services, and how that affected pricing and margins.
- Progress against full-year EPS guidance, including the distinction between GAAP and adjusted results and the treatment of unusual items.
- Debt levels, refinancing benefits, revolver availability, covenant headroom and the company’s capital allocation across dividends, repurchases and acquisitions.
- Changes in remediation estimates and outcomes at Bridgeton and West Lake, plus multiemployer pension withdrawal obligations.
- Further pandemic-related costs, environmental-services exposure to oil and gas activity, and sensitivity to fuel, commodity and interest-rate movements.