Republic Services, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless otherwise noted. Republic provides integrated environmental services, including waste collection, transfer, recycling and disposal.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $2,596.4 million | $2,553.9 million | +1.7% |
| Operating income | $492.4 million | $433.1 million | +13.7% |
| Operating margin | 18.9% | 17.0% | +1.9 percentage points |
| Net income attributable to Republic | $295.9 million | $246.3 million | +20.1% |
| Diluted EPS | $0.93 | $0.77 | +20.8% |
| Cash provided by operations | $661.0 million | $595.8 million | +10.9% |
| Capital expenditures | $331.0 million | $373.1 million | Down $42.1 million |
| Cash, cash equivalents and restricted cash equivalents | $88.3 million | $114.2 million at Dec. 31, 2020 | Down $25.9 million |
| Total debt, carrying value | $8.8 billion | $8.9 billion at Dec. 31, 2020 | Down about $171 million |
Revenue growth reflected average yield growth of 2.3%, net acquisitions of 1.0% and higher recycling commodity sales of 0.8%, offset by lower volumes (0.8%), environmental solutions revenue (0.7%), fuel recovery fees (0.4%) and one fewer workday (0.5%). Core price rose 4.3%, compared with 5.2% a year earlier. Recycling commodity prices averaged $133 per ton versus $76; management estimates that a $10-per-ton change would affect annual revenue and operating income by about $12 million.
Operating margin improved as cost of operations declined to 59.1% of revenue from 60.7%, and SG&A declined to 10.2% from 10.9%. Depreciation, amortization and depletion increased to 10.2% of revenue from 9.9%. Interest expense fell to $78.4 million from $96.7 million, mainly reflecting lower-cost debt refinancing. The effective tax rate increased to 25.9% from 23.5%.
Cash, debt and liquidity
Operating cash flow was $661.0 million; investing activities used $344.6 million and financing activities used $342.3 million. Capital expenditures were $331.0 million, and dividends paid were $135.5 million. The company had $23.2 million of unrestricted cash and cash equivalents at quarter-end; reported restricted cash and marketable securities of $134.6 million are subject to restrictions.
Long-term debt was $8.6 billion, with $168.7 million of current maturities and notes payable. Available capacity was $1.0 billion under the 364-day facility maturing in August 2021 and $1.873 billion under the revolving facility maturing in June 2023; the latter had no borrowings and $361.3 million of letters of credit outstanding. An additional $12.6 million was drawn on an uncommitted facility. The company reported a debt-to-EBITDA covenant ratio of 2.94 against a maximum of 3.75 and said it was in compliance. Ratings were investment grade: BBB+ (S&P), Baa2 (Moody’s) and BBB (Fitch).
Material changes, outlook and management commentary
- Management raised full-year 2021 adjusted diluted EPS guidance to $3.74–$3.79. The corresponding GAAP diluted EPS range is $3.65–$3.69; adjustments include $0.03–$0.04 per share for restructuring and $0.06 for accelerated CEO-transition compensation expense. Adjusted EPS is a non-GAAP measure.
- CEO Donald W. Slager announced his retirement effective June 25, 2021. Republic expects an approximately $20 million charge in Q2 2021 for accelerated vesting of his compensation awards.
- Republic expects another $10–$15 million of restructuring charges during the remainder of 2021, primarily for back-office software redesign.
- COVID-19 service disruptions and associated volume declines improved sequentially through March 2021, but small- and large-container volumes remained below pre-pandemic levels. The company expects certain pandemic-related safety and healthcare costs to continue in 2021, at a lower annual level than in 2020.
- On May 5, 2021, after quarter-end, Republic acquired Santek Waste Services; the preliminary purchase-price allocation was not yet available in this filing.
- For 2021 Q1, prior-year comparisons include a $10.8 million Bridgeton insurance recovery and $4.3 million of multiemployer pension withdrawal costs. The company also recorded restructuring charges of $2.8 million in Q1 2021 and $3.8 million in Q1 2020.
Risks, contingencies and unusual items
- Accrued landfill and environmental costs totaled $1.831 billion. Management says the reasonably possible high end of remediation estimates was approximately $356 million above recorded remediation liabilities. For the Bridgeton site, the recorded liability was $115.7 million; the site-specific high end was approximately $140 million higher.
- Republic is one of several potentially responsible parties at the West Lake Superfund site and says it cannot yet predict the final remedy design or its share of response costs. Management believes the current reserve is adequate, but subsequent design, divisibility or allocation developments could require changes.
- Legal-proceeding accruals were approximately $28 million; using the high ends of estimated ranges would increase aggregate potential liability by about $9 million. The company said pending proceedings were not expected to have a material adverse effect. A separate EPA matter concerning Pine Avenue Landfill proposes a penalty of $0.6 million or $2.5 million, depending on sampling results; negotiations were ongoing.
- COVID-19 duration and effects, commodity prices, fuel costs, interest rates, weather, landfill obligations and access to capital markets may affect results. Republic had no fuel or recycling commodity hedges at March 31, 2021. Management estimates a 100-basis-point interest-rate change would alter annualized interest expense and net cash interest payments by about $14 million.
- Derivative fair-value changes were significant but largely offsetting: Q1 included a $47.1 million gain on extended interest-rate locks and a $46.7 million offsetting loss on related swaps.
Investor verification priorities
- Confirm the assumptions behind full-year adjusted EPS guidance and the expected CEO-transition and restructuring charges.
- Track whether collection volumes continue recovering and whether pricing, commodity prices and environmental-solutions demand support revenue and margins.
- Review unrestricted liquidity, the August 2021 facility maturity, debt maturities and covenant headroom; distinguish restricted cash from funds available for general use.
- Monitor remediation estimates and developments at Bridgeton and West Lake, including potential costs beyond recorded reserves.
- Reconcile operating cash flow with capital spending, dividends, acquisitions, debt repayment and share repurchases; assess the final Santek purchase-price allocation when reported.