Republic Services, Inc. — 2016 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2016; quarterly figures below include the fourth quarter. Republic is the second-largest U.S. provider of non-hazardous solid-waste collection, transfer, disposal, recycling and energy services. It operated in 39 states and Puerto Rico.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $9.388 billion | $9.115 billion |
| Operating income | $1.538 billion; 16.4% margin | $1.559 billion; 17.1% margin |
| Net income attributable to Republic | $612.6 million | $749.9 million |
| Diluted EPS | $1.78 | $2.13 |
| Cash provided by operations | $1.848 billion | $1.680 billion |
| Capital expenditures | $927.8 million | $945.6 million |
| Free cash flow (company-defined, non-GAAP) | $929.8 million | $755.3 million |
| Cash and cash equivalents at year-end | $67.8 million | $32.4 million |
| Total debt, carrying value | $7.659 billion | $7.533 billion |
| Cash dividends per share | $1.24 | $1.16 |
For Q4 2016, revenue was $2.379 billion, operating income $392.0 million, net income attributable to Republic $189.5 million and diluted EPS $0.55. In Q4 2015, the corresponding amounts were $2.290 billion, $353.9 million, $172.3 million and $0.49.
Changes versus prior year
- Revenue increased 3.0%, reflecting average yield growth of 2.1%, volume growth of 1.0%, net acquisitions of 0.6% and improved recycled-commodity revenue of 0.5%; lower fuel recovery fees and energy-services revenue partly offset growth.
- Operating income declined modestly and operating margin fell to 16.4% from 17.1%. Lower fuel costs and reduced SG&A were offset by higher labor, maintenance and landfill costs, plus 2016 restructuring charges.
- Reported net income and EPS decreased, principally because 2016 included a $196.2 million loss on debt extinguishment. Company-reported adjusted diluted EPS, a non-GAAP measure, was $2.22 in 2016 versus $2.06 in 2015.
- Operating cash flow and company-defined free cash flow increased. Acquisition spending fell to $62.4 million from $572.7 million.
Liquidity, debt and capital allocation
- Year-end cash was $67.8 million; an additional $90.5 million of restricted cash and marketable securities was not generally available for operations.
- Credit-facility availability was $1.543 billion, with $210 million borrowed and $478.4 million of letters of credit outstanding. The company reported compliance with facility covenants and expected continued compliance in 2017.
- Debt covenant ratios were 7.05x EBITDA to interest against a 3.00x minimum, and 2.96x total debt to EBITDA against a 3.50x maximum.
- In 2016, Republic issued $500 million of 2.90% notes due 2026 and tendered $575.4 million of higher-coupon debt, recording a $196.2 million extinguishment loss. It repurchased $403.8 million of shares and paid $418.9 million in dividends.
Outlook, risks and unusual items
- For 2017, management projected revenue growth of approximately 4.5%–5.0% and adjusted diluted EPS of $2.32–$2.36. The EPS outlook excludes specified items and assumes an effective tax rate of about 39.5%; guidance assumes no significant change in the overall economy.
- Management expected approximately $975 million of 2017 property and equipment investment, net of asset-sale proceeds, and approximately $15 million of additional restructuring charges. Restructuring and customer-service consolidation were expected to continue through 2017.
- Material risks include economic and waste-volume weakness, competitive pricing, fuel and recycled-commodity volatility, severe weather, landfill permitting and capacity, environmental regulation and liability, and substantial debt and capital requirements.
- Landfill and environmental liabilities totaled $1.828 billion at year-end, including $602.9 million for remediation. The Bridgeton closed-landfill remediation liability was $197.2 million; management said its reasonably possible high-end estimate was about $156 million above the recorded amount. Across remediation matters, the reasonably possible high end was about $377 million above recorded liabilities.
- Legal-proceeding accruals were approximately $48 million; using high-end loss estimates would increase the aggregate potential liability by about $45 million. The Bridgeton matter included a pending state case set for trial in October 2017. The filing states management did not believe pending legal proceedings would materially affect consolidated results, but outcomes remain uncertain.
- Other exposures include underfunded multiemployer pension plans, insurance claims and regulatory sanctions. The company reported $7.7 billion of debt and noted that covenant default could trigger acceleration across debt instruments. Environmental reserves and landfill capacity estimates depend on management judgments and permitting outcomes.
Most important facts for investors to verify
- Whether 2017 revenue and adjusted EPS guidance was achieved, and how the non-GAAP EPS measure reconciles to GAAP results.
- Underlying price, volume and cost trends, including the sustainability of margin performance as restructuring and fuel effects change.
- Cash conversion after capital spending, dividends, repurchases and debt service; confirm the company-defined free-cash-flow reconciliation and limitations.
- Debt maturities, borrowing costs, revolver availability, covenant headroom and capacity to sustain shareholder returns.
- Updates to Bridgeton remediation costs, other environmental reserves, landfill permits and expansion capacity, and the status and potential exposure of significant litigation.