Republic Services, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing was signed February 11, 2016. This is an annual report, not a standalone fourth-quarter filing. Republic is a major U.S. provider of non-hazardous waste collection, transfer, disposal, recycling and energy services, operating in 41 states and Puerto Rico.
Financial performance
Amounts are in millions except per-share data. Annual results are compared with 2014 unless otherwise noted.
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $9,115.0 | $8,803.3 |
| Operating income | $1,558.8 | $1,233.1 |
| Operating margin | 17.1% | 14.0% |
| Net income attributable to Republic | $749.9 | $547.6 |
| Diluted earnings per share | $2.13 | $1.53 |
| Cash provided by operating activities | $1,679.7 | $1,529.8 |
| Free cash flow (company-defined, non-GAAP) | $755.3 | $703.0 |
| Capital expenditures | $945.6 | $862.5 |
| Cash and cash equivalents at year-end | $32.4 | $75.2 |
| Total debt, carrying value | $7,574.2 | $7,061.2 |
Revenue grew 3.5%: average yield contributed 2.3%, volume 1.1%, and acquisitions net of divestitures 2.2%; lower fuel recovery fees reduced growth by 1.4% and recycled commodity prices by 0.7%. Collection generated 76.4% of revenue. Fuel expense fell to $362.4 million from $500.0 million, while depreciation, amortization and depletion rose to $970.6 million from $906.9 million. Interest expense was $364.9 million, versus $348.7 million; the effective tax rate was 37.3%, versus 38.1%.
Fourth-quarter 2015 revenue was $2,290.2 million, operating income $353.9 million, net income attributable to Republic $172.3 million and diluted EPS $0.49. Fourth-quarter 2014 figures were $2,229.1 million, $166.4 million, $50.3 million and $0.14, respectively; the comparison was materially affected by 2014 Bridgeton remediation charges.
Liquidity, debt and capital allocation
- Operating cash flow increased to $1,679.7 million; investing activities used $1,482.8 million, including $572.7 million for acquisitions. Financing activities used $239.7 million.
- Year-end debt principal was $7,635.8 million. Republic had $1,727.7 million available under its revolving credit facilities, no borrowings under those facilities, and $19.0 million outstanding under an uncommitted facility. Restricted cash and marketable securities totaled $100.3 million and are not generally available for operations.
- Credit-covenant measures were within limits: debt to EBITDA was 2.89 against a maximum of 3.75, and EBITDA to interest was 7.17 against a minimum of 3.00. The company reported covenant compliance.
- Republic paid $399.3 million in dividends and repurchased $404.7 million of shares during 2015. The quarterly dividend was raised to $0.30 per share; $855.5 million remained under the repurchase authorization at year-end.
Material changes and unusual items
- Operating income and reported EPS improved substantially, but reported results include a $50.0 million Bridgeton insurance recovery in 2015. In 2014, Republic recorded $210.6 million of Bridgeton remediation charges plus related remediation and litigation costs; the filing identifies $227.1 million of total Bridgeton-related charges and adjustments for 2014.
- Management’s adjusted diluted EPS, a non-GAAP measure, was $2.06 in 2015 versus $1.96 in 2014. These figures exclude specified items, including Bridgeton items, and should not be treated as GAAP results.
- Republic acquired Tervita for $479.6 million in cash and entered a long-term waste-management contract with Sonoma County. Total 2015 acquisition consideration was $649.9 million, including contingent consideration; purchase-price allocations remained preliminary.
- Republic settled its Central States multiemployer pension withdrawal liabilities in December 2015, paying $139.0 million to the Fund; the cash-flow statement reports $153.5 million of total withdrawal expenditures. No remaining liability for withdrawal from that Fund was reported at year-end.
- In January 2016, the company announced a field-support reorganization, consolidating 20 areas into 10 and eliminating the three-region structure. It expected approximately $25 million in restructuring charges, mostly in the first half of 2016, and up to approximately $10 million in additional charges over two years for customer-service center consolidation.
Guidance, outlook and risks
For 2016, management expected revenue growth of approximately 2.5%–3.0%, including 2.0% average yield, 0.5%–1.0% volume growth and 1.0% from acquisitions, offset by a 1.0% decline in fuel recovery fees. It forecast GAAP diluted EPS of $2.07–$2.11 and adjusted diluted EPS of $2.13–$2.17, assuming a 39.5% effective tax rate. Expected net property and equipment investment was approximately $900 million. Guidance assumed no significant change in overall economic conditions.
Key risks include environmental remediation and landfill closure obligations, permitting and expansion uncertainty, commodity-price and fuel volatility, competition and pricing pressure, economic and weather-related volume changes, substantial indebtedness, litigation, and potential multiemployer pension funding or withdrawal exposure. Recorded landfill and environmental liabilities totaled $1,827.7 million; management said reasonably possible high-end remediation estimates across sites could exceed recorded amounts by approximately $350 million. Bridgeton’s recorded remediation liability was $217.5 million, with a site-specific reasonably possible high end approximately $164 million above the recorded amount. Legal-proceeding accruals were approximately $65 million; use of high ends of estimated legal-loss ranges would have increased the aggregate potential liability by approximately $62 million.
Other considerations include recycled commodity exposure (a $10-per-ton price change was estimated to affect annual revenue by $27 million and operating income by $18 million), possible additional greenhouse-gas requirements, and the possibility that insurance coverage or recorded reserves may not cover ultimate claims. The company reported unqualified audit opinions on its financial statements and internal control over financial reporting; Tervita was excluded from management’s 2015 internal-control assessment.
Important facts for investors to verify
- How much of the reported earnings and margin improvement reflects recurring operating performance versus the Bridgeton recovery and the absence of prior-year remediation charges; compare GAAP results with management’s adjusted measures.
- Whether the 2016 revenue and EPS guidance was achieved, including the assumptions for pricing, volume, acquisitions, fuel recovery and restructuring costs.
- Progress on Bridgeton remediation, legal proceedings and environmental reserves, including changes to estimated costs, timing or regulatory requirements.
- Debt, covenant headroom, refinancing needs and liquidity after capital spending, acquisitions, dividends and share repurchases.
- Whether acquisitions, particularly Tervita and the Sonoma County contract, deliver expected returns and whether their preliminary valuations or contingent payments change.
- Trends in labor, maintenance and fleet costs, recycled commodity prices, fuel recovery, landfill capacity permitting and multiemployer pension obligations.