Republic Services, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in millions of dollars except per-share data, percentages, and where noted. Republic provides recycling, solid waste, and environmental services. In Q3, it began presenting environmental solutions as a separate reportable segment (Group 3); the US Ecology business, acquired May 2, 2022, is included in that segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $3,597.8 | $2,933.9 | $9,981.5 | $8,342.2 |
| Operating income | $664.3 | $564.2 | $1,814.5 | $1,574.5 |
| Operating margin | 18.4% | 19.2% | 18.2% | 18.8% |
| Net income attributable to Republic | $416.9 | $350.3 | $1,140.8 | $977.3 |
| Diluted earnings per share | $1.32 | $1.10 | $3.60 | $3.06 |
| Adjusted EBITDA (non-GAAP) | $1,051.3 | $895.0 | $2,964.3 | $2,553.4 |
| Adjusted EBITDA margin (non-GAAP) | 29.2% | 30.5% | 29.7% | 30.6% |
Revenue rose 22.6% in Q3 and 19.7% year to date. For the nine months, management attributed growth to average yield (+5.0%), fuel recovery fees (+2.7%), volume (+2.7%), and acquisitions net of divestitures (+9.0%); recycling commodity sales reduced growth by 0.2%. Growth includes the US Ecology acquisition. Net income and EPS increased, while operating and adjusted EBITDA margins declined year over year.
Cost of operations increased to 60.9% of revenue in Q3 from 59.4%, and to 60.3% for the nine months from 59.1%. Management cited higher fuel, wages, maintenance, transportation and subcontract costs, and acquisition-related expenses. Nine-month interest expense was $282.7, up from $234.9, primarily due to acquisition financing and higher rates on floating-rate debt. Q3 and nine-month effective tax rates were 17.9% and 21.8%, respectively, versus 25.5% and 24.6% in 2021; tax-credit investments contributed to the lower 2022 provision.
Cash flow, liquidity, and capital
- Nine-month cash from operations was $2,383.4, compared with $2,137.8. Capital expenditures were $924.8, compared with $904.2; the difference between operating cash flow and capital expenditures was $1,458.6.
- Investing cash outflow was $3,700.9, including $2,847.6 for acquisitions and investments. Financing cash inflow was $1,362.8, reflecting increased borrowings; dividends paid were $436.5 and share repurchases were $203.5.
- At September 30, cash and cash equivalents were $81.4; restricted cash and marketable securities were $121.7. The company reported $1,633.1 of availability under its $3.0 billion revolving facility.
- Total debt carrying value was $11.6 billion, versus $9.6 billion at December 31, 2021. Debt due within 12 months was $455.8. The balance included $1.0 billion of commercial paper, with a 3.134% weighted-average rate and 28-day weighted-average maturity, backstopped by the revolving facility.
- The company reported a debt-to-EBITDA covenant ratio of 3.17 against a maximum of 3.75 and stated it was in compliance. It expected existing cash, operating cash flow, and financing sources to fund commitments for at least 12 months and thereafter for the foreseeable future.
Material changes, outlook, and risks
- US Ecology: Acquired for a transaction value of $2.2 billion on May 2, 2022, funded with a $1.0 billion term loan and revolving-facility borrowings. Nine-month acquisition integration and deal costs were $65.4. Purchase-price allocations remained preliminary. Management expected to invest at least $500 million in additional acquisitions in 2022.
- Segment results: Group 3’s Q3 adjusted EBITDA margin was 18.7%, down from 22.5% in the prior-year comparison; management attributed the decline to the US Ecology acquisition. Group 1’s margin also declined, while Group 2’s rose. Segment comparisons are affected by the changed reporting presentation.
- Additional costs: Management expected approximately $8 million of restructuring charges in the remainder of 2022, primarily for back-office software redesign. No specific earnings or revenue guidance was provided in the supplied filing text.
- Environmental obligations: Accrued landfill and environmental costs totaled $2,210.9. The reasonably possible high end of remediation ranges was approximately $376 higher than the recorded amount. The Bridgeton Landfill liability was $91.2, with a possible high end about $140 higher; the company could not predict its ultimate share of West Lake Superfund response costs.
- Market and financing exposure: The company had no fuel or recycling commodity hedges in place. A $0.20-per-gallon diesel price change was estimated to affect annual fuel costs by about $26, offset at current participation levels by a similar change in fuel recovery fees. A $10-per-ton change in recycled commodity prices was estimated to affect annual revenue and operating income by about $10. A 100-basis-point change in rates on variable-rate debt was estimated to change annualized interest expense and net cash interest payments by about $36.
- Other contingencies and controls: Legal proceedings accruals were approximately $14, with aggregate potential liability about $7 higher using the high end of estimated ranges. Management said pending legal matters were not expected to materially harm the company. It reported effective disclosure controls; assessment of internal controls did not yet include the acquired US Ecology business. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much revenue and earnings growth is organic versus attributable to US Ecology and other acquisitions, and how the acquisition affects margins and integration costs.
- Whether operating-cost inflation, particularly fuel, labor, maintenance, and subcontracting, continues to outpace pricing and fee recovery.
- Debt, refinancing, and interest-rate exposure, including commercial-paper rollover needs, covenant headroom, and the $455.8 of debt due within 12 months.
- Actual cash conversion and capital needs relative to acquisition spending, dividends, repurchases, and landfill and remediation obligations.
- Updates to environmental liability estimates, especially Bridgeton and West Lake, and the final US Ecology purchase-price allocation and integration progress.