Republic Services, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative figures are for Q1 2019. Republic is a large U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and environmental services.
Financial performance
- Revenue: $2,553.9 million, up 3.4% from $2,470.6 million. Growth included 2.9% from average yield, 0.4% from volume and 1.0% from acquisitions net of divestitures; lower fuel recovery fees, recycling commodity sales and environmental services partly offset growth.
- Profit: Operating income was $433.0 million, up from $422.8 million; operating margin was 17.0% versus 17.1%. Net income attributable to Republic was $246.3 million versus $234.2 million. Diluted EPS was $0.77 versus $0.72.
- Cash flow: Operating cash flow was $569.5 million versus $553.7 million. Capital expenditures were $346.8 million versus $299.3 million; operating cash flow less capital expenditures was $222.7 million versus $254.4 million. Investing activities used $435.4 million; financing activities provided $31.9 million.
- Liquidity and debt: Cash and cash equivalents were $281.6 million, up from $47.1 million at year-end; restricted cash and marketable securities were $117.7 million. Total debt carrying value was approximately $9.0 billion versus $8.7 billion at December 31, 2019. Revolver availability was $1.53 billion. The company reported compliance with credit-facility covenants.
- Shareholder returns: The quarterly dividend was $0.405 per share, up from $0.375 a year earlier. The company repurchased 1.2 million shares for $98.8 million.
Material changes and operating trends
- Revenue growth accelerated from 1.8% in Q1 2019 to 3.4% in Q1 2020. Core price was 5.2%, compared with 4.7%.
- COVID-19 reduced service levels in small- and large-container collection. Management also cited weaker environmental-services activity and lower recycled-commodity prices; the average price for recycled commodities (excluding glass and organics) was $76 per ton versus $93.
- Cost of operations declined as a share of revenue to 60.7% from 61.0%, helped by lower fuel costs and CNG tax credits. Higher depreciation, SG&A, transportation and subcontract costs, and other cost increases weighed on margins.
- In February, Republic issued $600 million of 2.300% senior notes due 2030 and $400 million of 3.050% notes due 2050. Proceeds principally refinanced $850 million of 5.000% notes maturing in March and repaid credit-facility borrowings.
Outlook, risks and unusual items
- Guidance: Republic suspended its detailed full-year 2020 financial guidance because the duration and economic effects of the COVID-19 pandemic were uncertain and visibility was limited. It expected additional pandemic-related safety, cleaning and employee-support costs; Q1 business-resumption costs were $3.1 million.
- COVID-19 exposure: Management warned that prolonged economic disruption could reduce waste volumes and collections, increase costs and harm results, liquidity and financial condition. Fixed costs may be difficult to reduce quickly. The company intended to defer $100–$110 million of employer Social Security tax payments under the CARES Act.
- Environmental obligations: Accrued landfill and environmental costs totaled $1.85 billion. The reasonably possible high end of aggregate remediation estimates was about $365 million above the recorded amount. Bridgeton’s recorded remediation liability was $132.4 million; its reasonably possible high end was about $163 million higher. The company also could not estimate its ultimate share of West Lake Superfund remediation costs.
- Other notable items: Q1 included a $10.8 million favorable Bridgeton insurance recovery, $4.3 million of multiemployer-pension withdrawal charges and $3.8 million of acquisition integration and deal costs. Republic expected about $10 million of additional 2020 restructuring charges. It also recorded a $2.6 million net loss from changes in fair value of certain derivative contracts in interest expense.
- Contingencies: Legal proceedings accruals were approximately $19 million; using high-end estimates would add about $14 million. Management said it believed pending legal matters would not materially adversely affect the company. Multiemployer-plan defaults and tax-authority challenges could nevertheless require changed estimates or additional payments.
Important facts for investors to verify
- How the pandemic affected collection volumes, customer payments, operating costs and the company’s ability to provide updated guidance after quarter-end.
- Whether liquidity, revolver availability and covenant headroom remain adequate as operating conditions and financing markets evolve.
- Changes to recorded remediation liabilities, particularly at Bridgeton and West Lake, and the potential for environmental costs above current reserves.
- Whether reported earnings and margins are sustained after considering unusual recoveries, derivative valuation changes and other identified adjustments.