REPUBLIC SERVICES, INC. quarterly report, Q2 FY2019

Republic Services, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and energy services.

Financial performance and liquidity

• First-half operating cash flow was $1,135.6 million, versus $1,191.0 million. Capital expenditures were $588.7 million, versus $542.1 million; operating cash flow less capital expenditures was approximately $546.9 million, compared with $648.9 million.
• Cash and cash equivalents were $72.5 million; restricted cash and marketable securities were $119.2 million. Current assets were $1,474.1 million and current liabilities $3,571.0 million.
• Total debt carrying value was $8,445.2 million, compared with $8,337.5 million at year-end 2018; $1,561.3 million was classified as current. Revolver availability was $1,701.4 million. The company reported compliance with covenants and ratios of 7.43 for EBITDA to interest (3.00 minimum) and 2.96 for debt to EBITDA (3.50 maximum).
• First-half dividends paid were $241.7 million; share repurchases were $202.5 million. The quarterly dividend was raised 8% to $0.405 per share in July.

Changes and management commentary

• First-half revenue increased 2.6%. Average yield contributed 2.9% and acquisitions net of divestitures 0.5%; volume declined 0.7%, including the effect of one fewer workday, while energy services reduced growth by 0.2%.
• First-half operating margin improved to 17.0% from 16.4%, supported by pricing and lower cost of operations as a percentage of revenue. Group 1 margin rose to 24.3% from 23.3%; Group 2 rose to 17.8% from 17.4%.
• First-half interest expense increased to $198.9 million from $191.3 million, primarily due to higher debt outstanding and floating-rate borrowing costs. A $23.1 million first-half loss from an unconsolidated equity-method investment also weighed on results.
• Management’s 2019 diluted EPS guidance was $3.20–$3.25 GAAP and $3.23–$3.28 adjusted. Adjustments included restructuring and acquisition deal costs. Management expected approximately $5 million of additional 2019 restructuring charges, mainly for back-office software upgrades.

Risks, contingencies and unusual items

• Environmental liabilities totaled $1,852.1 million, including $1,330.4 million for landfill closure and post-closure obligations and $521.7 million for remediation. Management said the reasonably possible high end of remediation estimates could exceed recorded amounts by approximately $369 million.
• For the Bridgeton Landfill, the recorded remediation liability was $154.2 million; the reasonably possible high end was approximately $171 million above the recorded amount. For the West Lake Superfund site, the EPA’s remedy estimate was $229 million, but Republic said it could not predict its subsidiary’s eventual share and was contesting liability for certain materials.
• Recorded legal-proceeding accruals were approximately $19 million; using the high ends of estimated ranges would add about $14 million. Management did not expect pending legal proceedings, overall, to materially adversely affect results, though outcomes remain uncertain.
• There were $1,331.4 million of floating-rate debt and $300 million of floating-rate swaps. A 100-basis-point rate change was estimated to change annualized interest expense and net interest cash payments by about $16 million. No fuel or recycling commodity hedges were in place; management estimated a $10-per-ton commodity-price change could affect annual revenue and operating income by about $18 million.
• Variable-rate tax-exempt bonds may be put back to remarketing agents at interest-period end. The company reported that agents had so far remarketed all such bonds. The September 2019 $650 million and March 2020 $850 million senior notes were among near-term maturities reflected in current debt.
• Lease accounting adoption added a $233.1 million operating right-of-use asset and operating lease liabilities. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Key facts for investors to verify

• Track whether pricing continues to offset collection-volume declines and weaker energy-services revenue.
• Compare cash generation with elevated capital spending, acquisitions, dividends and repurchases.
• Review refinancing and repayment plans for near-term debt maturities, and monitor variable-rate exposure and covenant headroom.
• Assess developments in West Lake, Bridgeton and other remediation estimates, including potential liability above recorded reserves.
• Monitor progress against 2019 GAAP and adjusted EPS guidance and the assumptions behind adjusted results.