Republic Services, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; the filing also provides unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
Republic Services is the second-largest U.S. provider of non-hazardous solid-waste collection, transfer, disposal, recycling and energy services by revenue. At year-end, it operated in 40 states and Puerto Rico, with 343 collection operations, 195 active landfills and 90 recycling centers. Collection generated 73.8% of 2017 revenue. The company emphasizes pricing, operating efficiency, acquisitions and integrated local waste networks.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $10,041.5 million | $9,387.7 million |
| Operating income | $1,668.5 million; 16.6% margin | $1,537.5 million; 16.4% margin |
| Net income attributable to Republic | $1,278.4 million | $612.6 million |
| Diluted EPS | $3.77 | $1.78 |
| Cash provided by operating activities | $1,910.7 million | $1,847.8 million |
| Free cash flow | $927.0 million | $929.8 million |
| Capital expenditures | $989.8 million | $927.8 million |
| Cash and cash equivalents at year-end | $83.3 million | $67.8 million |
| Total debt, carrying value | $8,187.4 million | $7,658.9 million |
2017 fourth-quarter revenue was $2,560.0 million, operating income $406.8 million, net income attributable to Republic $664.4 million and diluted EPS $1.98. The quarter’s reported profit included a substantial tax benefit from the Tax Cuts and Jobs Act.
Reported 2017 net income and EPS are not directly comparable with 2016: the 2017 tax provision was only $3.1 million (0.2% effective rate), primarily reflecting a provisional $463.9 million benefit from remeasuring deferred taxes under the Tax Act. Management’s non-GAAP adjusted diluted EPS was $2.43 in 2017 versus $2.22 in 2016. The filing cautions that this measure may not be comparable with similarly titled measures at other companies.
Changes versus 2016
- Revenue grew 7.0%, reflecting total price increases of 2.9%, volume growth of 1.8%, higher recycled-commodity revenue of 0.9%, acquisitions net of divestitures of 0.8%, and energy-services growth of 0.6%.
- Operating income rose to $1.67 billion, and operating margin improved to 16.6% from 16.4%. Cost of operations increased to 61.9% of revenue from 61.4%; higher landfill operating, risk-management and recycling costs were among the pressures.
- Operating cash flow increased by $62.9 million, while free cash flow was broadly flat as higher operating cash flow was offset by increased capital spending.
- Debt increased by about $529 million. The company issued $650 million of 3.375% notes due 2027, using proceeds to repay credit-facility borrowings; the year-end balance also reflected $706.7 million of current debt maturities.
- Share repurchases totaled $610.7 million for 9.6 million shares, and dividends paid were $440.5 million. The quarterly dividend was increased to $0.345 per share.
Liquidity, debt and capital allocation
At December 31, 2017, Republic reported $83.3 million cash and $141.1 million restricted cash and marketable securities. Availability under its credit facilities was $1,639.1 million; facility borrowings were $130.0 million. Management said cash, operating cash flow and credit availability were sufficient for anticipated capital needs and maturities. The company was in covenant compliance: debt-to-EBITDA was 2.96 against a 3.50 maximum, and EBITDA-to-interest was 7.71 against a 3.00 minimum. Senior debt ratings were BBB+ from S&P, BBB from Fitch and Baa3 from Moody’s.
Capital allocation priorities include investment in operations and acquisitions, dividends, share repurchases and maintaining investment-grade ratings. The repurchase authorization had $1.8 billion remaining at year-end and was scheduled to extend through December 31, 2020.
Outlook and management commentary
- For 2018, management forecast adjusted diluted EPS of $3.05–$3.10, compared with 2017 adjusted EPS of $2.43, assuming an effective tax rate of approximately 27%. This is a non-GAAP forecast; the filing does not provide a directly comparable GAAP EPS outlook.
- Management forecast reported revenue growth of 0.25%–0.75%, including an estimated 3.75 percentage-point reduction from adopting the new revenue-recognition standard. Before that accounting effect, the forecast was 4.0%–4.5%, including 2.25% average yield, 0%–0.25% volume growth, 2.0% acquisitions and a projected recycled-commodity revenue decline of 0.75%–1.0%.
- Expected 2018 net property and equipment investment was approximately $1.1 billion. Planned restructuring charges of $25–$30 million were expected to generate annual savings of approximately $25–$30 million.
- The 2018 outlook assumed no significant change in overall economic conditions. Management highlighted continued focus on revenue quality, profitable growth, cost reduction, free cash flow and returns on invested capital.
Risks, contingencies and unusual items
- Environmental obligations: Accrued landfill and environmental costs totaled $1,821.7 million, including $1,257.7 million for landfill capping, closure and post-closure and $564.0 million for remediation. Management said reasonably possible high-end remediation estimates were approximately $466 million above recorded amounts.
- Bridgeton and West Lake: The recorded Bridgeton remediation liability was $177.3 million; management estimated the reasonably possible high end could be about $177 million higher. For West Lake, an EPA proposal issued February 6, 2018 estimated total site remediation costs of $236 million over five years, but Republic said it could not estimate its subsidiary’s share or predict the final remedy.
- Other legal proceedings: The company recorded approximately $44 million in legal accruals. A Missouri case concerning the Bridgeton landfill included a claim seeking approximately $37 million in civil penalties; the parties had reached an agreement in principle, with final settlement documents still being pursued. An EPA penalty demand concerning Pine Avenue Landfill was $0.6 million or $2.5 million, depending on sampling results.
- Recycling and fuel exposure: A $10-per-ton change in recycled-commodity prices was estimated to change annual revenue and operating income by about $20 million each. A $0.20-per-gallon diesel-price change was estimated to affect annual fuel costs by about $25 million, partly offset by fuel-recovery fees. Fuel costs were $349.8 million in 2017.
- Permits and landfill capacity: Expansion approvals can take years and are not assured. At year-end, estimated available disposal capacity was 5.086 billion cubic yards, including 350.3 million cubic yards of probable expansion airspace that had not received final permits.
- Debt and other risks: The company cited substantial indebtedness, interest-rate and refinancing exposure, competition, labor and pension obligations, severe weather, regulatory changes, insurance adequacy and cybersecurity among material risks. Approximately 24% of the workforce was union-represented; some multiemployer plans were classified as critical or endangered.
- Accounting transition: The new revenue standard took effect January 1, 2018. Had it applied to 2017, reported revenue would have been $395.3 million lower, with no projected change to operating income; the reclassification principally moves certain customer payments and contract costs from expenses to revenue reductions.
Important facts for investors to verify
- Reconcile reported earnings with adjusted earnings and assess how much of 2017’s net-income increase resulted from the provisional Tax Act benefit; the company said its tax accounting remained subject to refinement.
- Review the 2018 guidance on both a reported and adjusted basis, especially the revenue-recognition transition and the assumed 27% tax rate.
- Track cash generation against capital spending, dividends, repurchases and upcoming debt maturities, including the $706.7 million current debt balance.
- Monitor Bridgeton and West Lake remediation developments, potential liability allocations and whether environmental reserves remain adequate.
- Assess exposure to recycled-commodity prices, fuel costs, landfill permitting and probable expansion capacity, and multiemployer pension funding requirements.