Republic Services, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Republic provides environmental services, including waste collection, transfer, recycling, landfill disposal, and environmental solutions, across the United States and Canada. The filing is unaudited.
Financial performance
- Revenue: $3.581 billion, up 20.6% year over year. Growth reflected acquisitions and divestitures net (11.0%), average yield (6.5%), volume (1.6%), fuel recovery fees (1.5%), and one additional workday (0.4%); lower recycling commodity sales reduced growth by 0.9%.
- Profit and margins: Operating income was $644.1 million, up 14.9%; operating margin was 18.0%, versus 18.9%. Net income attributable to Republic was $383.9 million, up 9.1%; diluted EPS was $1.21, versus $1.11. Adjusted EBITDA was $1.040 billion, up 15.1%, while adjusted EBITDA margin declined to 29.0% from 30.4%.
- Cash flow and investment: Operating cash flow was $687.7 million, versus $705.6 million. Capital expenditures were $378.6 million, versus $334.1 million; cash used for acquisitions and investments was $290.9 million, versus $81.6 million. Cash dividends paid were $156.4 million. No shares were repurchased in the quarter.
- Liquidity and debt: Cash and cash equivalents were $132.2 million; total debt carrying value was $11.925 billion, including $457.1 million current. Revolving credit facility availability was $2.152 billion. The company reported a 3.05 debt-to-EBITDA covenant ratio against a 4.25 maximum at March 31.
- Other metrics: Interest expense rose to $126.7 million from $83.5 million, primarily due to acquisition-related debt and higher rates on floating-rate borrowings. The quarterly dividend increased to $0.495 per share from $0.460.
Material changes and business drivers
Year-over-year revenue and segment results include the US Ecology business, acquired in May 2022; environmental solutions revenue also reflects the acquisition of Wasteco in March 2023. Acquisitions contributed substantially to reported growth. Organic performance benefited from pricing and collection and landfill volumes, while lower recycled commodity prices weighed on revenue. Operating costs increased, including labor, maintenance, transportation, and risk management costs. Group 1 adjusted EBITDA margin fell to 31.1% from 32.7%; Group 2 was flat at 29.2%; Group 3 rose to 20.6% from 14.3%, supported by pricing and US Ecology-related growth and synergies.
Outlook, risks, and unusual items
- Management expects cash, operating cash flow, and financing access to fund operating needs and commitments for at least the next 12 months and thereafter for the foreseeable future. It expects to invest at least $500 million in acquisitions in 2023.
- Management expects approximately $25–$30 million of additional US Ecology integration costs in 2023 and approximately $20 million of additional restructuring charges, primarily for back-office software redesign. Integration activities are expected to be substantially complete by year-end 2023.
- In March, the company issued $1.2 billion of senior notes: $400 million at 4.875% due 2029 and $800 million at 5.000% due 2034. Proceeds were used for general corporate purposes, including debt repayments.
- Environmental liabilities include $480.5 million for remediation. The reasonably possible high end of remediation estimates is approximately $374 million above recorded amounts. The company cannot currently estimate its subsidiary’s eventual share of future West Lake Superfund site response costs. Bridgeton Landfill’s recorded remediation liability was $84 million.
- Other exposures include landfill closure obligations, litigation, uncertain tax positions, fuel and commodity price volatility, and variable interest rates. A 100-basis-point rate change would affect annualized interest expense and net cash interest by approximately $23 million. No fuel or recycling commodity hedges were in place at quarter-end.
- The company reported no material change to its previously disclosed risk factors, no material adverse impact expected from pending legal proceedings, and effective disclosure controls. It was in compliance with credit facility covenants at quarter-end.
Important facts for investors to verify
- How much reported growth and future earnings depend on acquisitions, particularly US Ecology integration, expected synergies, and the Wasteco acquisition.
- Whether pricing and cost control can offset inflationary operating expenses and the decline in adjusted EBITDA margin.
- Debt refinancing needs, floating-rate exposure, covenant headroom, and continued access to credit markets.
- Changes in remediation, landfill closure, and West Lake obligations as designs, allocations, and cost estimates develop.
- Execution and cash requirements for the planned 2023 acquisitions, software restructuring, integration spending, capital expenditures, and dividends.