Republic Services, Inc. — FY 2014 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2014; quarterly figures include fourth-quarter results. Republic is the second-largest U.S. provider of non-hazardous solid waste services, operating across 39 states and Puerto Rico. Its East, Central and West segments provide collection, transfer, recycling and landfill services.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $8,788.3 million | $8,417.2 million |
| Operating income / margin | $1,233.1 million / 14.0% | $1,210.3 million / 14.4% |
| Net income attributable to Republic | $547.6 million | $588.9 million |
| Diluted EPS | $1.53 | $1.62 |
| Cash from operating activities | $1,529.8 million | $1,548.2 million |
| Free cash flow | $703.0 million | $691.3 million |
| Cash and cash equivalents at year-end | $75.2 million | $213.3 million |
| Total debt | $7,061.2 million | $7,018.1 million |
FY 2014 revenue rose 4.4%, driven by average yield (+1.4%), volume (+2.0%), fuel recovery fees (+0.1%), recycled commodities (+0.1%) and net acquisitions (+0.8%). Cost of operations increased to 64.0% of revenue from 62.2%, while operating margin narrowed. Reported net income fell despite higher operating income, in part because the effective tax rate rose to 38.1% from 30.8% and remediation charges increased.
Fourth-quarter 2014 revenue was $2,225.2 million, operating income $166.4 million, net income attributable to Republic $50.3 million and diluted EPS $0.14. The quarter included a $174.5 million Bridgeton remediation charge; fourth-quarter 2013 diluted EPS was $0.65.
Debt principal was $7,123.9 million before discounts and other adjustments. Credit-facility availability was $1,615.4 million, with no facility borrowings; letters of credit used $615.1 million of that availability. Republic reported compliance with debt covenants. The company paid $378.6 million in dividends and repurchased $400.4 million of shares during 2014; $360.2 million remained under its repurchase authorization at year-end.
Material changes versus the prior year
- Revenue increased 4.4%, with improving commercial and industrial collection and landfill volumes; residential collection volume declined.
- Operating income increased 1.9%, but operating margin decreased from 14.4% to 14.0% as operating costs grew faster than revenue.
- Net income attributable to Republic declined 7.0%; diluted EPS decreased from $1.62 to $1.53.
- Bridgeton remediation and related charges were $227.1 million in 2014, versus $108.7 million in 2013. FY 2014 includes $210.6 million of remediation charges, with additional remediation-related items reflected in the broader $227.1 million total.
- Cash from operations edged down, while free cash flow increased to $703.0 million, reflecting lower capital expenditures and higher proceeds from asset sales.
- Republic acquired various waste businesses for total consideration of $253.1 million, including its 2014 acquisition of Rainbow Disposal. In February 2015, it acquired Tervita for approximately $485 million.
Outlook, management commentary, risks and unusual items
- For 2015, management guided to revenue growth of approximately 4.0%–5.0% and diluted EPS of $1.98–$2.04. Guidance includes the expected impact of the Tervita acquisition and assumes no significant change in the overall economy. Net property and equipment spending was expected to be approximately $885 million.
- Management emphasized improving revenue quality, investing in profitable growth, controlling costs, increasing free cash flow and shareholder returns, and maintaining investment-grade credit ratings.
- At Bridgeton Landfill, the recorded remediation liability was $240.3 million at year-end; the company disclosed a reasonably possible high-end estimate approximately $160 million above the recorded amount. The remediation facility was expected to reach full capacity in the first half of 2015. Across remediation matters, potential liabilities at the high ends of estimated ranges were approximately $360 million above recorded liabilities.
- Other notable exposures include $83.4 million recorded for Congress Landfill remediation, with a possible high end approximately $70 million higher, and approximately $68 million accrued for outstanding legal proceedings. The high ends of estimated legal-loss ranges would be approximately $74 million above the accrual.
- Republic’s estimated $153.4 million Central States pension withdrawal liability was under arbitration; an adverse outcome could add approximately $67 million in cash payments over 20 years. Progress payments continued during the dispute.
- Principal risks include environmental and landfill obligations, permitting and expansion uncertainty, substantial indebtedness, fuel and recycled-commodity price volatility, competition and pricing pressure, economic sensitivity, severe weather, labor and pension costs, and litigation. The filing notes proposed greenhouse-gas rules that could increase landfill compliance costs.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Track Bridgeton remediation spending, regulatory requirements, facility performance and revisions to the recorded liability.
- Assess whether 2015 guidance was achieved, including Tervita’s contribution, integration costs, financing and resulting leverage.
- Monitor operating-cost trends and margins, especially labor, maintenance, disposal costs and the effect of pricing relative to inflation.
- Review cash conversion, capital spending, dividends and repurchases alongside debt levels, credit-facility availability and covenant headroom.
- Follow the Central States arbitration and developments in Congress Landfill, legal proceedings and other environmental reserves.
- Consider that free cash flow is a company-defined, non-GAAP measure and excludes required uses of cash such as debt service and dividends.