Republic Services, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Dollar amounts are in millions except per-share data. Republic is a U.S. provider of non-hazardous waste collection, transfer, recycling, disposal and environmental services, reporting through two geographic field groups.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,646.9 | $2,565.7 | $7,722.7 | $7,510.9 |
| Operating income | $467.8 | $440.3 | $1,328.0 | $1,252.6 |
| Operating margin | 17.7% | 17.1% | 17.2% | 16.7% |
| Net income attributable to Republic | $298.3 | $263.4 | $784.0 | $736.0 |
| Diluted EPS | $0.93 | $0.81 | $2.43 | $2.23 |
| Operating cash flow | Not separately reported | Not separately reported | $1,786.9 | $1,746.9 |
Q3 revenue increased 3.2%; nine-month revenue increased 2.8%. Nine-month growth reflected 2.8% average yield, 0.7% net acquisition contribution and 0.1% fuel recovery fees, partly offset by 0.4% lower volume, 0.3% lower environmental services revenue and 0.1% lower recycling and commodity sales. The company reported adjusted diluted EPS of $0.91 for Q3 versus $0.82, and $2.43 for nine months versus $2.29; these are non-GAAP measures.
For nine months, capital expenditures were $908.3, acquisition and investment cash outflows were $455.9, cash used in investing activities was $1,316.6, and cash used in financing activities was $475.0. Free cash flow is not presented as a filing-defined measure.
Balance sheet, debt and liquidity
| Metric | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Cash and cash equivalents | $55.6 | $70.5 |
| Restricted cash and marketable securities | $121.3 | $108.1 |
| Total debt, carrying value | $8,618.6 | $8,337.5 |
| Current debt | $912.8 | $690.7 |
| Long-term debt | $7,705.8 | $7,646.8 |
Availability under the $2.25 billion revolving credit facility was $1,710.6. The company reported compliance with debt covenants: debt-to-EBITDA of 2.96 against a 3.50 maximum and EBITDA-to-interest of 7.53 against a 3.00 minimum. In August, it issued $900 of 2.500% notes due 2024, using proceeds in part to repay $650 of 5.500% notes that matured in September. Nine-month dividends paid were $361.9 and share repurchases were $353.8.
Material changes, outlook and risks
- Margins improved year over year, while cost of operations remained 61.6% of revenue for the nine-month period. Pricing supported growth, but collection-volume declines, labor and maintenance costs, third-party disposal rates, and lower recycling commodity prices were offsets. Average recycled commodity price was $81 per ton for nine months versus $103.
- Management’s preliminary 2020 outlook is diluted EPS of $3.44–$3.49 and adjusted diluted EPS of $3.46–$3.51, including a $0.02 restructuring adjustment. The filing says this is not full guidance; formal guidance was expected in February 2020.
- October 2019 fires affected certain Group 1 facilities after quarter-end. The company was assessing damage and warned of possible higher Q4 operating expenses or asset impairments.
- Environmental liabilities were $1,855.2, including $515.6 for remediation. The filing says aggregate remediation liability could be approximately $369 higher using the reasonably possible high ends of estimates. Bridgeton Landfill’s recorded remediation liability was $149.1, with a stated high end approximately $171 above the recorded amount.
- At the West Lake Superfund site, the EPA’s remedy estimate was $229 over a four-to-five-year design and construction period. Republic said it could not predict the final remedy or estimate its subsidiary’s share of costs; future design, liability allocation or proceedings could change the recorded liability.
- Other sensitivities include an estimated $18 annual change in revenue and operating income for each $10-per-ton movement in recycled commodity prices, and approximately $16 annual interest expense and net cash interest sensitivity to a 100-basis-point rate change. No fuel or recycling commodity hedges were in place at September 30.
- Legal proceedings accruals were approximately $19; the aggregate potential liability could be approximately $15 higher using the high ends of estimated ranges. Management said pending legal proceedings were not expected to materially adversely affect results, but outcomes remain uncertain.
Important facts for investors to verify
- Whether the preliminary 2020 adjusted EPS range is confirmed or revised with formal guidance, and how restructuring adjustments reconcile to GAAP results.
- The financial impact of the October facility fires and any resulting Q4 costs or impairments.
- Developments in Bridgeton and West Lake remediation, including final remedy design, liability allocation and changes to environmental reserves.
- Whether pricing continues to offset volume weakness, cost inflation and recycling-commodity volatility.
- Debt maturities, covenant headroom and liquidity after capital spending, acquisitions, dividends and share repurchases.