Republic Services, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing also reports fourth-quarter results. Republic is a U.S. non-hazardous waste collection, transfer, recycling and disposal provider operating in 39 states and Puerto Rico, with three reportable regions: East, Central and West.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $8,417.2 million | $8,118.3 million | +3.7% |
| Operating income | $1,210.3 million | $1,320.6 million | -8.4% |
| Operating margin | 14.4% | 16.3% | -1.9 percentage points |
| Net income attributable to Republic | $588.9 million | $571.8 million | +3.0% |
| Diluted EPS | $1.62 | $1.55 | +4.5% |
| Cash from operating activities | $1,548.2 million | $1,513.8 million | +2.3% |
| Free cash flow (non-GAAP) | $691.3 million | $639.0 million | +8.2% |
| Capital expenditures | $880.8 million | $903.5 million | -2.5% |
Revenue growth reflected average yield (+1.3%), fuel recovery fees (+0.3%), volume (+1.3%), recycled commodities (+0.3%) and net acquisitions/divestitures (+0.5%). Collection produced 76.8% of revenue. Cost of operations rose to 62.2% of revenue from 61.7%, while operating income fell despite higher sales.
Fourth quarter: Revenue was $2,141.5 million versus $2,028.3 million in Q4 2012; operating income was $402.6 million versus $288.8 million; net income attributable to Republic was $236.6 million versus $127.0 million; diluted EPS was $0.65 versus $0.35. Quarterly results include unusual items noted below; the filing does not provide a comparable Q4 adjusted result in the supplied text.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $213.3 million; restricted cash and marketable securities were $169.7 million and are not generally available for operating purposes.
- Total debt carrying value was $7,018.1 million, down from $7,070.5 million. Credit facilities had no borrowings and $1,527.9 million of availability after letters of credit. The company reported compliance with covenants; its debt/EBITDA covenant ratio was 3.03 against a 3.75 maximum then in effect.
- Cash dividends paid were $348.5 million. The quarterly dividend increased to $0.26 per share in July 2013. Share repurchases totaled $213.6 million in 2013; $760.6 million remained authorized at year-end.
- Management expected to spend approximately $400 million on repurchases in 2014 and approximately $820 million on property and equipment, net of disposal proceeds.
- Free cash flow is a company-defined non-GAAP measure: operating cash flow less property and equipment purchases plus proceeds from asset sales. It excludes debt service and dividends and is not cash available solely for discretionary spending.
Material changes and unusual items
- Operating income declined year over year, principally amid higher operating costs and substantial charges. 2013 included $157.7 million of Central States and other pension negotiation/withdrawal costs, including a $140.7 million withdrawal-liability charge; 2012 included $35.8 million.
- Bridgeton Landfill remediation charges were $108.7 million in 2013 and $74.1 million in 2012. The 2013 charge contributed to corporate operating losses; the West region’s operating margin improved to 23.1% from 21.7%.
- Interest expense declined to $360.0 million from $388.5 million, reflecting prior refinancing. 2013 debt-extinguishment loss was $2.1 million, versus $112.6 million in 2012.
- The effective tax rate was 30.8% versus 30.6%. 2013 benefited from approximately $42 million of deferred-tax valuation allowance reductions and approximately $14 million from IRS tax settlements.
- Republic completed $68.7 million of acquisitions in 2013, compared with $95.3 million in 2012. Management described an ongoing restructuring; 2013 restructuring charges were $8.6 million.
Outlook, risks and contingencies
2014 guidance: Revenue growth of approximately 3.5%–4.5%, including 1.0%–1.5% average yield, 1.5%–2.0% volume growth and 1.0% net acquisitions/divestitures; management assumed no significant change in the overall economy. Expected diluted EPS was $1.93–$1.98. Management cited quality of revenue, profitable growth, cost control, free-cash-flow growth, investment-grade ratings and shareholder returns as priorities.
- Environmental exposures are significant and estimates may change. Accrued landfill and environmental costs totaled $1,643.0 million, including $1,091.3 million for capping, closure and post-closure and $551.7 million for remediation. Management said reasonably possible remediation costs at the high ends of estimated ranges would be approximately $446 million above recorded amounts.
- For Bridgeton, the recorded remediation liability was $93.9 million, with a remaining reasonably possible loss range of $63 million–$342 million. The site was subject to a subsurface smoldering event, regulatory proceedings and a resident class action; remedial work and monitoring continued under a stipulated injunction.
- The company had accrued $169.3 million for its Central States pension-fund withdrawal, expected to be paid over 20 years. Future assessments or changes in estimates could affect results and cash flow. Some other multiemployer plans were identified as critical or endangered.
- Other principal risks include permitting and landfill expansion, competition and pricing, economic-driven waste volumes, fuel and recycled-commodity volatility, severe weather, regulatory and greenhouse-gas compliance, substantial debt, and litigation or environmental liabilities.
- Legal-proceeding accruals were approximately $51 million. The filing states that using high-end estimates for accrued legal matters would increase potential liability by approximately $67 million.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2013.
Investor verification priorities
- Track whether pricing, volume and cost-control initiatives support the 2014 revenue and EPS guidance, particularly given the 2013 operating-margin decline.
- Review updated Bridgeton remediation estimates, regulatory requirements, litigation status and cash spending against recorded liabilities and disclosed loss ranges.
- Verify the amount, timing and accounting for Central States withdrawal payments and any further multiemployer pension assessments.
- Assess debt maturities, covenant headroom, credit-facility availability and the sustainability of dividends and planned share repurchases alongside capital needs.
- Monitor fuel and recycled-commodity prices and hedging: the filing estimates a $10-per-ton commodity-price change affects annual revenue by about $31 million and operating income by about $19 million.