Republic Services, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2020; comparisons are with the three and six months ended June 30, 2019. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and environmental services, operating through two reportable field groups. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2,454.4 | $2,605.3 | $5,008.3 | $5,075.9 |
| Operating income | $395.2 | $437.4 | $828.2 | $860.2 |
| Operating margin | 16.1% | 16.8% | 16.5% | 17.0% |
| Net income attributable to Republic | $225.5 | $251.5 | $471.8 | $485.7 |
| Diluted EPS | $0.71 | $0.78 | $1.47 | $1.50 |
For the first six months, cash from operations was $1,333.5 (up from $1,135.6); capital expenditures were $654.7 (up from $588.7). Operating cash flow less capital expenditures was $678.8, compared with $546.9 in 2019. Investing activities used $721.8 and financing activities used $438.4. Cash and cash equivalents at June 30 were $269.7; restricted cash and marketable securities were $142.6.
Total debt carrying value was $8,658.0, versus $8,688.5 at year-end 2019. The $2.25 billion revolving facility had $1,885.2 available and no borrowings outstanding; letters of credit outstanding were $348.1. The company reported a 3.00 total debt-to-EBITDA covenant ratio against a 3.75 limit and said it was in compliance. Current debt maturities were $60.0. Current assets were $1,568.8 and current liabilities $2,066.1.
Material changes versus the prior comparable period
- Q2 revenue fell 5.8%; first-half revenue fell 1.3%. First-half volume declined 3.7%, while average yield rose 2.7% and net acquisitions/divestitures contributed 0.9%.
- COVID-19-related service reductions drove volume declines, especially in small- and large-container collection and at some landfills and transfer stations. Management said activity declines peaked in early April and gradually improved as economies reopened.
- First-half cost of operations as a share of revenue improved to 60.3% from 61.5%, helped by lower service-related costs and fuel prices. However, operating margin declined, with lower revenue and unusual charges among the factors.
- Q2 included $31.6 of multiemployer pension withdrawal costs. First-half results also included $35.9 of withdrawal costs and a favorable $10.8 Bridgeton insurance recovery. The company’s adjusted results exclude specified items; adjusted diluted EPS was $0.81 for Q2 and $1.57 for the first half, versus $0.79 and $1.52, respectively, in 2019.
- In February, Republic issued $1,000.0 of senior notes at 2.300% due 2030 and 3.050% due 2050, using proceeds principally to repay $850.0 of 5.000% notes that matured in March and other borrowings. First-half share repurchases were $98.8, versus $202.5 a year earlier; dividends paid were $257.9, versus $241.7.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is stated in the provided filing text. Management expected similar COVID-19-related business resumption costs through 2020 and potentially into future years; the amount was uncertain. Reported COVID-19 incremental costs were $31.0 in Q2 and $34.2 for the first half. Republic had committed $20.0 to its Committed to Serve initiative.
- Following July workforce reductions, management expected approximately $15.0 of additional 2020 restructuring charges, primarily severance and back-office systems redesign.
- Oil and gas activity weakness reduced environmental-services revenue; further declines could prompt impairment charges. Management reported no goodwill or intangible-asset impairment indicators in its reviews through June 30.
- Accrued landfill and environmental liabilities totaled $1,852.2. Management disclosed that using the reasonably possible high end of remediation ranges would increase aggregate remediation liability by approximately $365. At the Bridgeton site, the recorded liability was $128.8; the stated reasonably possible high end was approximately $163 higher. Republic could not estimate its eventual share of West Lake Superfund site response costs.
- Legal-proceeding accruals were approximately $26; using the high ends of estimated ranges would increase the aggregate potential liability by approximately $8. A $31.6 multiemployer pension withdrawal liability was paid in July. Further employer defaults or deterioration in pension-plan funding could increase exposure.
- COVID-19 duration, customer service levels, collections, operating costs, and access to liquidity remain uncertain. Other disclosed sensitivities include a $14 annual interest-cost change for a 100-basis-point move in rates, and approximately $13 annual revenue and operating-income change for a $10-per-ton recycled-commodity price move.
Key facts for investors to verify
- Whether waste volumes and customer service levels continued recovering after the first-half decline, and how that affected revenue and margins.
- Actual COVID-19 resumption and restructuring costs compared with management’s expectations.
- Debt covenant headroom, liquidity availability, and effects of the July credit-facility amendment.
- Changes to Bridgeton, West Lake, other remediation, and multiemployer pension liabilities or estimates.
- Whether environmental-services weakness, commodity-price changes, or customer credit deterioration resulted in further charges or losses.