REPUBLIC SERVICES, INC. quarterly report, Q2 FY2021

Republic Services, Inc. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021. Republic provides integrated environmental services, including waste collection, transfer, recycling and disposal. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Revenue	$2,812.8	$2,454.4	$5,409.2	$5,008.3
Operating income	$517.9	$395.4	$1,010.3	$828.5
Operating margin	18.4%	16.1%	18.6%	16.5%
Net income attributable to Republic	$331.1	$225.5	$627.0	$471.8
Diluted EPS	$1.03	$0.71	$1.96	$1.47

Q2 revenue grew 14.6%; first-half revenue grew 8.0%. First-half growth reflected volume (+3.6%), average yield (+2.5%), acquisitions net of divestitures (+1.5%), and recycling commodity sales (+0.9%), partly offset by lower environmental solutions revenue and one fewer workday.
For the first half, cost of operations declined to 58.9% of revenue from 60.3%, contributing to improved operating margin. Fuel expense rose to $171.3 from $138.3, while labor, maintenance, and disposal costs also increased in dollars with higher service levels.
Interest expense fell to $156.7 for the first half from $188.5, primarily reflecting lower-cost debt refinancing. The first-half effective tax rate was 24.1%, unchanged from 2020; Q2’s rate was 22.4%, including benefits from solar investment tax credits.
First-half cash from operations was $1,482.8, versus $1,333.5. Capital expenditures were $608.6, versus $654.7; operating cash flow less capital expenditures was $874.2, versus $678.8. Acquisitions and investments used $576.6, versus $95.1.

Balance sheet, debt and liquidity

At June 30, cash and cash equivalents were $34.0; restricted cash and marketable securities were $151.0. Total debt carrying value was approximately $9.0 billion, compared with $8.9 billion at year-end 2020. Total assets were $23.9 billion.
Available capacity under the $2.25 billion revolving credit facility was $1,808.5; the separate $1.0 billion 364-day facility was undrawn and scheduled to mature in August 2021. The company also had $113.7 outstanding under an uncommitted credit facility.
The credit-facility debt-to-EBITDA covenant ratio was 2.86, below the 3.75 maximum; the company reported covenant compliance and expected continued compliance through 2021. Debt principal maturing within 12 months was $135.2.
First-half dividends paid were $271.1 and share repurchases were $40.1. The quarterly dividend was $0.425 per share. The company stated that operating cash flow, excess cash and credit availability should be sufficient for anticipated capital needs and maturities.

Material changes, outlook and notable items

Management raised full-year 2021 adjusted diluted EPS guidance to $4.00–$4.05; GAAP diluted EPS guidance was $3.91–$3.96. Adjustments include $0.04 per share for restructuring and $0.05 for accelerated CEO-transition compensation expense. Adjusted EPS is a non-GAAP measure and may not be comparable with similarly titled measures at other companies.
Donald W. Slager retired as CEO in June. Accelerated vesting of his compensation awards resulted in a $15.4 charge in Q2 and the first half. The filing also reports a $10 million expected additional restructuring charge for the remainder of 2021, mainly for back-office software redesign.
Acquisition spending increased substantially year over year. The company acquired Santek Waste Services on May 5, 2021; first-half acquisitions had a total purchase price of $607.4, with preliminary purchase-price allocations including $438.7 of goodwill.
COVID-19 service disruptions had improved sequentially through June 30, 2021, and management described service activity as recovering. It expected similar pandemic-related safety and health-program costs during 2021, potentially into later years, but at lower annual levels than in 2020. Environmental solutions revenue remained affected by below-pre-COVID rig counts and drilling activity.
Environmental obligations are significant: accrued landfill and environmental liabilities totaled $1,894.3. The company estimated that using the high end of remediation cost ranges could add approximately $356 to recorded remediation liabilities. The recorded Bridgeton Landfill liability was $111.8, with a reasonably possible high end about $140 higher. For the West Lake Superfund site, the company could not predict the final remedy or its share of costs.
Other uncertainties include approximately $28 of accrued legal proceedings, with aggregate potential liability about $10 higher using high-end estimates; IRS examinations for 2015–2017 and expected expansion to 2018; and variable fuel, commodity and interest-rate exposure. No fuel or recycling commodity hedges were in place at quarter-end.
The company reported no material changes to the risk factors in its 2020 Form 10-K and no material adverse outcome expected from pending legal proceedings. Disclosure controls were deemed effective; there was no identified material change in internal control over financial reporting.

Important facts for investors to verify

Whether revenue and margin growth persist as pandemic comparisons normalize, and whether wage, fuel, disposal and other operating-cost increases remain manageable.
How full-year performance tracks the $4.00–$4.05 adjusted diluted EPS guidance, including the specified exclusions and any subsequent revisions.
The final Santek and other acquisition valuations, integration results, goodwill implications and funding impact.
Developments in Bridgeton, West Lake and other environmental matters, including potential costs above recorded reserves and the timing of cash payments.
Debt-facility renewal or replacement after the August 2021 364-day facility maturity, covenant headroom, and the balance of acquisitions, capital spending, dividends and buybacks.
Exposure to recycled-commodity prices, diesel fuel, variable interest rates, tax examinations and the continuing effects of COVID-19 or severe weather.