Republic Services, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Republic provides environmental services, including solid-waste collection, transfer, recycling, disposal and environmental solutions, across the United States and Canada. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3,725.9 | $3,413.6 | $7,307.0 | $6,383.7 |
| Operating income | $707.2 | $589.6 | $1,351.4 | $1,150.2 |
| Net income attributable to Republic | $427.4 | $371.9 | $811.2 | $723.9 |
| Diluted EPS | $1.35 | $1.17 | $2.56 | $2.28 |
| Adjusted EBITDA | $1,116.1 | $1,009.6 | $2,156.2 | $1,912.9 |
| Adjusted EBITDA margin | 30.0% | 29.6% | 29.5% | 30.0% |
Revenue increased 9.1% in Q2 and 14.5% for the first half. Operating margin was 19.0% in Q2 and 18.5% for the first half. Q2 net income margin was 11.5%. Adjusted EBITDA and adjusted EPS are non-GAAP measures.
- Cash flow, first half: Operating cash flow was $1,766.2, versus $1,563.2. Capital expenditures were $714.3, versus $647.3. Operating cash flow less capital expenditures was $1,051.9, compared with $915.9 (calculated from reported figures).
- Debt and liquidity: Total debt carrying value was $12.1 billion at June 30, 2023, versus $11.8 billion at year-end 2022. Cash and cash equivalents were $181.6; restricted cash and marketable securities were $149.6. Revolving-facility availability was $1,738.4. The company reported a debt-to-EBITDA covenant ratio of 2.97 against a maximum of 3.75.
- Returns and investment: First-half dividends paid were $313.0. No shares were repurchased in the first half. Capital expenditures and acquisition cash use were $714.3 and $987.7, respectively.
Changes and operating drivers
- First-half revenue growth reflected acquisitions net of divestitures (+7.5%), average yield (+6.2%), volume (+0.9%), fuel-recovery fees (+0.4%) and one additional workday (+0.2%); lower recycling commodity sales reduced growth by 1.1%.
- Core price, as defined by the company, was 9.1% of related-business revenue in the first half, versus 6.6% a year earlier. Volume growth was 1.1% on that basis, versus 3.2%.
- First-half environmental solutions revenue was $806.6, up from $393.6, mainly reflecting the US Ecology acquisition. Group 3 adjusted EBITDA margin improved to 21.7% from 16.4%; Group 1 margin declined to 31.4% from 32.9%, while Group 2 increased to 29.5% from 28.9%.
- Operating income improved, while interest expense rose to $251.1 for the first half from $177.5. Management attributed the increase primarily to higher floating rates and debt used to fund the US Ecology acquisition.
Outlook, risks and unusual items
- 2023 adjusted diluted EPS guidance: $5.33–$5.38, excluding estimated impacts of $0.08 per share of restructuring charges and $0.08 per share of US Ecology integration and deal costs. The filing also presents anticipated GAAP diluted EPS of $5.17–$5.22. Management expected about $15 million of additional restructuring charges and $15 million of additional US Ecology integration costs during the remainder of 2023, with integration substantially complete by year-end.
- Management stated that available cash, operating cash flow and financing sources should be sufficient for operating needs and cash commitments for at least the next 12 months and thereafter for the foreseeable future. It expected to invest at least $1.0 billion in acquisitions in 2023.
- Recycled commodity prices were materially lower: average prices, excluding glass and organics, were $119 per ton in Q2 and $112 for the first half, versus $218 and $210 in the comparable periods. The company estimates a $10-per-ton change could alter annual revenue and operating income by about $10 million.
- The company had no fuel or recycling commodity hedges at June 30. It estimated that a 20-cent-per-gallon diesel-price change would affect annual fuel costs by about $27 million, partly offset by changes in fuel-recovery fees; a 100-basis-point move in variable interest rates could change annualized interest expense and net cash interest by about $25 million.
- Accrued landfill and environmental costs totaled $2,351.0. The company said remediation liability could be about $369 million higher using the reasonably possible high ends of estimates. Its West Lake Superfund-site share remains uncertain; management said it could not predict the final remedy or estimate its subsidiary’s share of future costs. The company reported an $81.2 million Bridgeton Landfill remediation liability.
- Legal-proceeding accruals were approximately $12 million; using the high ends of estimated loss ranges would raise the aggregate potential liability by about $7 million. Management did not believe pending legal proceedings would materially adversely affect the company. It reported no material changes to previously disclosed risk factors.
- Other notable items included $21.0 million of first-half restructuring charges, $18.2 million of US Ecology integration and deal costs, and a $0.2 million non-cash loss on early debt repayment. The effective tax rate was 26.4% for the first half, compared with 23.8%, with prior-year tax benefits from qualifying solar investments contributing to the difference.
Important facts for investors to verify
- Reconcile reported GAAP results with adjusted EBITDA and adjusted EPS, including the recurring nature of excluded costs and whether the full-year guidance assumptions are achieved.
- Track acquisition integration, the Colorado operations acquired in June, expected acquisition spending and the company’s ability to sustain pricing and organic volume growth.
- Monitor debt costs, short-term commercial paper refinancing, covenant headroom and liquidity as floating-rate exposure and interest expense remain significant.
- Assess landfill remediation estimates, West Lake developments, environmental obligations and the sensitivity of earnings to commodity and fuel prices.
- Review cash conversion and capital needs against dividends, acquisitions and the company’s stated liquidity outlook.