Republic Services, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is with Q1 2018 unless otherwise noted. Republic is a U.S. provider of non-hazardous solid waste collection, transfer, recycling, disposal and energy services. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Revenue | $2,470.6 | $2,427.5; up 1.8% |
| Operating income / margin | $422.8 / 17.1% | $404.2 / 16.7% |
| Net income attributable to Republic | $234.2 | $237.7 |
| Diluted EPS | $0.72 | $0.72 |
| Cash from operations | $553.7 | $581.4 |
| Capital expenditures | $299.3 | $263.3 |
| Total debt carrying value | $8,397.1 | $8,337.5 at December 31, 2018 |
- Operating margin improved as revenue and operating income grew. Cost of operations rose to 61.0% of revenue from 60.5%.
- Revenue growth reflected average yield of 2.9%, fuel recovery fees of 0.2%, and net acquisitions of 0.5%; lower volume (1.5%), energy services and recycling commodity sales offset some growth. Core price was 4.7%.
- Net income attributable to Republic declined despite higher operating income, reflecting higher interest expense and an $11.6 million loss from an unconsolidated equity-method investment. The effective tax rate increased to 25.0% from 23.4%.
- Collection accounted for 76.0% of revenue. Net landfill revenue declined to $296.8 million from $306.6 million; net transfer revenue rose to $122.9 million from $118.3 million.
- Group 1 revenue was $1,193.2 million and operating margin 24.2%; Group 2 revenue was $1,239.0 million and operating margin 18.1%. Both segment margins improved year over year.
Cash flow, debt and liquidity
- Operating cash flow decreased by $27.7 million year over year. Investing used $359.1 million, including $299.3 million of capital expenditures and $62.7 million for acquisitions and investments. Financing used $191.4 million, including $111.5 million of share repurchases and $121.0 million of dividends paid.
- Cash and cash equivalents were $68.0 million at March 31, 2019; restricted cash and marketable securities were $115.1 million. Available capacity under the $2.25 billion revolving credit facility was $1,696.5 million.
- Total debt was $8.397 billion, including $1,595.6 million classified as current, versus $690.7 million at December 31, 2018. The filing lists a $650 million senior note due September 2019 and $850 million due March 2020.
- The company reported compliance with credit-facility covenants: debt-to-EBITDA of 2.97 against a 3.50 maximum, and EBITDA-to-interest of 7.36 against a 3.00 minimum. Management expected continued compliance through 2019 and said available cash, operating cash flow and revolver capacity should meet anticipated capital needs and maturities.
Outlook, material developments and risks
- No full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management expects approximately $5 million of additional 2019 restructuring charges, primarily for back-office software upgrades.
- April 2019: Republic acquired an Oregon hauling, transfer-station and recycling business for approximately $56 million. Q1 acquisitions were not material individually or in aggregate.
- Adoption of the new lease standard added a $236.2 million operating-lease right-of-use asset and $256.3 million liability at January 1, 2019; the company said the income-statement impact was not material. Total lease liabilities were $356.5 million at March 31, 2019.
- Environmental liabilities for landfill closure and remediation totaled $1,841.3 million. The company stated that the reasonably possible high end of remediation estimates was approximately $369 million above the amount recorded. Bridgeton Landfill liability was $158.2 million, with a possible high end approximately $171 million above the recorded amount.
- At West Lake Landfill, the EPA’s remedy estimate was $229 million over a four-to-five-year design and construction period. Republic said it could not predict the final remedy or its subsidiary’s share of costs; it believes its recorded reserve is adequate, but future developments could require changes.
- Other exposures include commodity and fuel-price volatility, variable-rate interest costs, severe weather, legal proceedings, and uncertainty around state tax-loss carryforwards and tax examinations. Legal-proceeding accruals were approximately $23 million; potential liability using the high ends of estimated ranges was about $13 million higher.
- The filing reported no material changes to risk factors from the 2018 Form 10-K and no material effect on internal controls during the quarter.
Most important facts for investors to verify
- Whether volume weakness, especially lower special-waste landfill volumes, persists and how pricing offsets it.
- Progress on refinancing or repaying the $1.5 billion of senior notes due in September 2019 and March 2020.
- Actual remediation costs and allocation outcomes for Bridgeton and West Lake, compared with recorded reserves.
- Whether recycling commodity prices recover; management estimated a $10-per-ton change could affect annual revenue and operating income by approximately $18 million each.
- Capital expenditure, acquisition, repurchase and dividend plans relative to operating cash flow and leverage.