Republic Services, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 13, 2020. Republic is the second-largest U.S. provider of non-hazardous waste collection, transfer, disposal, recycling and environmental services, operating in 41 states and Puerto Rico.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $10.299 billion | $10.041 billion | +2.6% |
| Operating income | $1.787 billion | $1.736 billion | +3.0% |
| Operating margin | 17.3% | 17.3% | Flat |
| Net income attributable to Republic | $1.073 billion | $1.037 billion | +3.5% |
| Diluted EPS | $3.33 | $3.16 | +5.4% |
| Cash from operations | $2.352 billion | $2.243 billion | +4.9% |
| Capital expenditures | $1.207 billion | $1.072 billion | +12.6% |
| Total debt, carrying value | $8.689 billion | $8.338 billion | +$351 million |
- Cash from operations less property and equipment purchases was approximately $1.145 billion in 2019, versus $1.171 billion in 2018; this is a simple calculation, not a company-reported free-cash-flow measure.
- Year-end cash and cash equivalents were $47.1 million; restricted cash and marketable securities were $179.4 million. Availability under the $2.25 billion revolving credit facility was $1.697 billion. Restricted balances are not generally available for corporate use.
- Principal debt maturities due in 2020 were $930.7 million. The company reported compliance with its credit-facility covenants: debt-to-EBITDA of 2.99 against a 3.50 maximum and EBITDA-to-interest of 7.54 against a 3.00 minimum.
- Quarter four revenue was $2.577 billion, operating income $459.2 million, net income attributable to Republic $289.3 million and diluted EPS $0.90. In Q4 2018, the corresponding figures were $2.530 billion, $483.3 million, $301.0 million and $0.92.
Material changes versus 2018
- Revenue growth was led by total price, including fuel recovery fees, up 2.8%, and acquisitions net of divestitures, adding 0.8%. Volume declined 0.4%; recycled commodities and environmental services each reduced growth by 0.3%.
- Average recycled commodity prices fell to $77 per ton from $104, and processed-and-sold volume declined to 2.2 million tons from 2.4 million. Management estimates that a $10-per-ton price change would affect annual revenue and operating income by about $13 million each.
- Fuel costs declined to $347.9 million from $391.4 million, reflecting lower fuel prices and volumes and retroactive CNG tax credits. Fuel recovery fees had no net revenue contribution to 2019 growth.
- Pre-tax income decreased to $1.296 billion from $1.321 billion, while net income and EPS rose. The effective tax rate fell to 17.1% from 21.5%, including an approximately $84 million benefit from solar investment tax credits.
- Operating cash flow increased, but capital spending and acquisition/investment cash outlays also rose. Acquisitions and investments used $575.1 million, versus $277.3 million in 2018; dividends paid were $491.2 million and share repurchases were $399.4 million.
Outlook, commentary, risks and unusual items
- 2020 outlook: Management forecast revenue growth of 4.25%–5.00%, including average yield growth of 3.0%, volume growth of 0.75%–1.0% and net acquisitions/divestitures of 1.0%. Environmental services and recycling commodity sales were each expected to range from a 0.25% decline to flat. Guidance assumed no significant change in overall economic conditions.
- 2020 diluted EPS guidance was $3.44–$3.49; adjusted diluted EPS guidance was $3.48–$3.53, compared with 2019 adjusted EPS of $3.34. Adjusted EPS is a non-GAAP measure. The outlook assumes an approximately $110 million charge related to solar energy investments qualifying for tax credits.
- Management expects about $15 million of additional restructuring charges in 2020, primarily for redesign of back-office software systems. 2019 included $14.2 million of restructuring charges, $6.6 million of acquisition integration and deal costs, and $7.7 million of fire-related costs. Bridgeton insurance recoveries reduced remediation expenses by $24.0 million in 2019, versus $40.0 million in 2018.
- Landfill and environmental exposures are significant: recorded capping, closure and post-closure liabilities were $1.336 billion and environmental remediation liabilities were $500.2 million. Management said aggregate remediation exposure at reasonably possible high ends could be about $365 million above recorded amounts. The company could not estimate its eventual share of the West Lake Superfund remedy costs; it stated that it was adequately reserved based on current expectations.
- Other key risks include permit and landfill-expansion uncertainty, environmental regulation and climate-related costs, fuel and recycled-commodity price volatility, competition and pricing pressure, economic-driven volume declines, labor and pension obligations, severe weather, cybersecurity, and substantial debt. Approximately 24% of employees were covered by collective bargaining agreements.
- Management set 2030 sustainability targets, including a 35% reduction in absolute Scope 1 and 2 greenhouse-gas emissions from a 2017 baseline, and a 50% increase in biogas sent to beneficial reuse. The emissions target was approved by the Science Based Targets initiative.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The audit highlighted landfill development amortization, landfill closure obligations and environmental liabilities as critical audit matters.
Most important facts for investors to verify
- Debt refinancing needs and liquidity, particularly the $930.7 million of 2020 principal maturities and continued covenant compliance.
- The assumptions, timing and potential range of landfill closure and remediation costs, including Bridgeton and the unresolved West Lake allocation.
- Whether pricing and volume assumptions in 2020 guidance are achieved, given index-based contract pricing lags and recent collection-volume declines.
- The economics and cash-flow implications of solar investments, including the tax benefits and the forecast $110 million investment-related charge.
- Recycling commodity-price sensitivity, landfill permit and expansion progress, and the sustainability of capital spending and shareholder returns.