Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-14267
REPUBLIC SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
|
| |
Delaware | 65-0716904 |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
18500 North Allied Way Phoenix, Arizona | 85054 (Zip Code) |
(Address of Principal Executive Offices) | |
Registrant’s telephone number, including area code: (480) 627-2700Securities registered pursuant to Section 12(b) of the Act:
|
| |
Title of Each Class | Name of Each Exchange on which Registered |
Common Stock, par value $0.01 per share | The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | |
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of June 30, 2016, the aggregate market value of the shares of the Common Stock held by non-affiliates of the registrant was $17.6 billion.
As of February 6, 2017, the registrant had outstanding 339,128,998 shares of Common Stock (excluding treasury shares of 9,308,560).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement relative to the 2017 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
TABLE OF CONTENTS
|
| | |
| | |
Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| | |
Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
Item 9. | | |
Item 9A. | | |
Item 9B. | | |
| | |
| | |
Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
| | |
| | |
Item 15. | | |
| | |
Unless the context requires otherwise, all references in this Form 10-K to “Republic,” “the Company,” “we,” “us” and “our” refer to Republic Services, Inc. and its consolidated subsidiaries.
PART I
Overview
Republic is the second largest provider of non-hazardous solid waste collection, transfer, disposal, recycling, and energy services in the United States, as measured by revenue. As of December 31, 2016, we operated in 39 states and Puerto Rico through 333 collection operations, 204 transfer stations, 192 active landfills, 64 recycling centers, 7 treatment, recovery and disposal facilities, and 10 salt water disposal wells. We also operated 71 landfill gas and renewable energy projects and had post-closure responsibility for 124 closed landfills. We were incorporated in Delaware in 1996.
Based on an industry trade publication, the United States non-hazardous solid waste services industry generates annual revenue of approximately $60 billion, of which approximately 45% is generated by publicly owned waste companies. Industry data also indicates that the non-hazardous solid waste services industry in the United States remains fragmented as privately held companies and municipal and other local governmental authorities generate approximately 35% and 20%, respectively, of total industry revenue. We believe growth in the solid waste industry historically has been linked primarily to population growth and growth in the overall economy, including the level of new household and business formation and changes in residential and commercial construction activity.
Our operations are national in scope, but the physical collection and disposal of waste is very much a local business and the dynamics and opportunities differ in each of our markets. By combining local operating management with standardized business practices, we drive greater overall operating efficiency across the Company while maintaining day-to-day operating decisions at the local level, closest to the customer.
The Five Pillars of Our Strategy - Profitable Growth through Differentiation
We believe that our products and services are valuable, and that by developing a superior team and delivering superior products, we can differentiate ourselves from our competitors. Differentiation allows us to attract and retain the best talent, win more customers, increase loyalty, and ultimately drive higher revenue and profits. Our strategy of Profitable Growth through Differentiation is built on five key pillars including (1) market position, (2) operating model, (3) people and talent agenda, (4) customer zeal, and (5) digital platform.
Market Position
The goal of our market position pillar is to develop the best vertically integrated market position to enable us to build density and improve returns. We strive to have a number one or number two market position in each of the markets we serve, or have a clear path on how we will achieve a leading market position over time. In situations where we cannot establish a leading market position, or where operations are not generating acceptable returns, we may decide to divest certain assets and reallocate resources to other markets.
We have a robust market planning process to identify opportunities to grow internally through capital investments and infrastructure development, and externally through acquisitions and public-private partnerships. Additionally, our market planning process allows us to analyze market conditions and proactively adjust to trends as they emerge, including the effects of demographic shifts, market changes and the competitive landscape.
Internal Growth
| |
• | Volume Growth - We believe waste volumes are driven by population growth, household formation and new business formation. Volume growth through increases in our customer base and service offerings is the most capital efficient method to grow our business. We seek to obtain long-term contracts for collecting solid waste under residential collection contracts with municipalities, exclusive franchise agreements, and small-container commercial and large-container industrial contracts. By obtaining such long-term agreements, we can grow our contracted revenue base at the same rate as the underlying economic growth in these markets. In addition, by securing a base of long-term recurring revenue, we are better able to protect our market position from competition. We work to increase volumes while ensuring that prices charged for services provide an appropriate return on our capital investment. |
| |
• | Price Increases - We seek to secure price increases necessary to offset increased costs, improve our operating margins and earn an adequate return on our substantial investments in vehicles, equipment, landfills, transfer stations and recycling centers. |
| |
• | Expansion of Recycling Capabilities - Based on an industry trade publication, we believe approximately 35% of municipal solid waste is recycled. Communities have increasingly committed to enhance and expand their recycling programs for their residents. We continue to focus on innovative waste disposal processes and programs to help our customers achieve their goals related to sustainability and environmentally sound waste practices while also generating an acceptable return. We will continue to look for opportunities to expand our recycling capabilities in markets where these services are desired and provide an appropriate return on our investment. |
| |
• | Infrastructure Development - We seek to identify opportunities to further our position as an integrated service provider in markets where we are not fully integrated. Our goal is to create market-specific, vertically integrated operations typically consisting of one or more collection operations, transfer stations, landfills and recycling centers. Where appropriate, we obtain permits to build transfer stations, recycling centers and landfills that would vertically integrate our waste services or expand the service areas for our existing disposal sites. Development projects, while generally less capital intensive than acquisitions, typically require extensive permitting efforts that can take years to complete with no assurance of success. We undertake development projects when we believe there is a reasonable probability of success and where reasonably priced acquisition opportunities are not available. |
External Growth
| |
• | Acquisitions and Public-Private Partnerships - Our acquisition growth strategy focuses primarily on acquiring privately held solid waste and recycling companies that complement our existing business platform. We believe our ability to successfully complete these acquisitions is enhanced by the challenges facing many privately held companies, including increasing competition in the solid waste industry, increasing capital requirements due to changes in solid waste regulatory requirements and the limited number of exit strategies for privately held companies. We also evaluate opportunities to acquire operations and facilities that are being divested by other publicly owned waste companies. |
We continue to invest in accretive acquisitions in existing markets. Generally, we expect to maintain a steady pace of tuck-in acquisition investment of approximately $100 million annually. Given our free cash flow, availability under our credit facilities and our ability to access the public capital markets, we have the flexibility to make additional acquisitions that will complement our existing business platform, including larger acquisitions if the right opportunities present themselves.
We also focus on growth through public-private partnerships, which include the waste and recycling operations and facilities of municipal and other local governments. We believe we have an opportunity to acquire operations and facilities from municipalities and other local governments, as they increasingly seek to raise capital and reduce risk.
We realize synergies from consolidating businesses into our existing operations, whether through acquisitions or public-private partnerships, which allow us to reduce capital and expense requirements associated with truck routing, personnel, fleet maintenance, inventories and back-office administration.
Operating Model
The goal of our operating model pillar is to deliver a consistent, high quality service to all of our customers through the Republic Way: One Way. Everywhere. Every day. This approach of developing standardized processes with rigorous controls and tracking allows us to leverage our scale and deliver durable operational excellence. The Republic Way is the key to harnessing the best of what we do as operators and translating that across all facets of our business.
A key enabler of the Republic Way is our organizational structure that fosters a high performance culture by maintaining 360 degree accountability and full profit and loss responsibility with local management, supported by a functional structure to provide subject matter expertise. This structure allows us to take advantage of our scale by coordinating functionally across all of our markets, while empowering local management to respond to unique market dynamics.
We have rolled out several productivity and cost control initiatives designed to deliver the best service possible to our customers in the most efficient and environmentally sound way.
Fleet Automation
Approximately 74% of our residential routes have been converted to automated single driver trucks. By converting our residential routes to automated service, we reduce labor costs, improve driver productivity, decrease emissions and create a safer work environment for our employees. Additionally, communities using automated vehicles have higher participation rates in recycling programs, thereby complementing our initiative to expand our recycling capabilities.
Fleet Conversion to Compressed Natural Gas (CNG)
Approximately 18% of our fleet operates on natural gas. We expect to continue our gradual fleet conversion to CNG, our preferred alternative fuel technology, as part of our ordinary annual fleet replacement process. We believe a gradual fleet conversion is most prudent to realize the full value of our previous fleet investments. Approximately 36% of our replacement vehicle purchases during 2016 were CNG vehicles. We believe using CNG vehicles provides us a competitive advantage in communities with strict clean emission initiatives that focus on protecting the environment. Although upfront capital costs are higher, using CNG reduces our overall fleet operating costs through lower fuel expenses. As of December 31, 2016, we operated 38 CNG fueling stations.
Standardized Maintenance
Based on an industry trade publication, we operate the eighth largest vocational fleet in the United States. As of December 31, 2016, our average fleet age in years, by line of business, was as follows:
|
| | | | | |
| | Approximate Number of Vehicles | | Approximate Average Age |
Residential | | 7,300 |
| | 7 |
Small-container Commercial | | 4,400 |
| | 7 |
Large-container Industrial | | 4,100 |
| | 9 |
Total | | 15,800 |
| | 7.5 |
OneFleet, our standardized vehicle maintenance program, enables us to use best practices for fleet management, truck care and maintenance. Through standardization of core functions, we believe we can minimize variability in our maintenance processes, resulting in higher vehicle quality and a lower environmental footprint, while extending the average service life of our fleet. We believe operating a more reliable, greener, safer and more efficient fleet will lower our operating costs. We have implemented standardized maintenance programs for approximately 92% of our fleet maintenance operations as of December 31, 2016. We expect the entire fleet will be certified under OneFleet by the second quarter of 2017.
Organizational Structure
In January 2016, we realigned our field support functions by combining our three regions into two field groups, consolidating our areas and streamlining select operational support roles at our Phoenix headquarters. Following our restructuring, our senior management now evaluates, oversees and manages the financial performance of our operations through two field groups, referred to as Group 1 and Group 2. Group 1 primarily consists of geographic areas located in the western and portions of the mid-western United States, and Group 2 primarily consists of geographic areas located in Texas, the southeastern and portions of the mid-western United States, and the eastern seaboard of the United States. Each field group is organized into several areas and each area contains multiple business units or operating locations. Each of our field groups and all of our areas provide collection, transfer, recycling and landfill services. See Note 14, Segment Reporting, to our consolidated financial statements in Item 8 of this Form 10-K for further discussion of our operating segments.
People and Talent Agenda
The goal of our people and talent agenda pillar is to create an environment to attract and retain the best talent. Our people continue to be the most critical component in successfully executing our strategy. We strive to make Republic a desirable place to work for our approximately 33,000 full-time employees by creating learning experiences, programs, compensation and benefits that attract, develop, train, engage, motivate, reward and retain the best workforce. With a focus on safety, learning and talent development, and diversity and inclusion, we aspire to be a company where the best people want to work and are engaged every day.
Safety
Republic is dedicated to the safety of our employees, customers and the communities we serve. Due to the nature of our industry, we prioritize safety above all else and we recognize and reward employees for outstanding safety records. Over the past nine years, our safety performance (based on OSHA recordable rates) has been 41% better than the industry average. Our Think, Choose, Live slogan encapsulates our everyday safety messaging to our employees to: Think about what you are doing, Choose the safe answer, and Live to go home to your family. With the phrase printed on numerous items, including hard hats and the equipment our employees touch, there are constant reminders for employees to go home in the same condition that they came to work. Our goal is to ensure every one of our employees returns home safely each night.
We are proud of our two safety incentive programs: Dedicated to Safety and Dedicated to Excellence. For Dedicated to Safety, employees must meet all safety requirements for the year, including no preventable accidents and no safety warnings. For
Dedicated to Excellence, employees must earn the Dedicated to Safety Award and meet additional criteria for customer service, attendance and other performance metrics. Further, our safety training program, Focus 6, provides employees with tips and techniques to prevent the six most common types of serious accidents: backing, intersections, push-pull-lift, rear collisions, rollover, and pedestrian.
We take pride in recognizing employees who demonstrate a relentless commitment to safety. Employees with the best driving records are eligible for the industry’s most prestigious award, the National Waste & Recycling Association’s Driver of the Year. Republic drivers have won 75% of the Driver of the Year awards issued for the large truck category since 2009.
Learning and Talent Development
We are committed to developing our employees throughout their careers. Targeted onboarding experiences, including our Driver Training Center, Supervisor Onboarding and Sales Acceleration programs, focus on providing the fundamental skills each employee needs to succeed in his or her role. Our Leadership Trainee Program, an 18-month rotational experience for recent college graduates, is another example of our commitment to providing opportunities for growth.
Developing our leaders is also a critical part of our people and talent agenda. From Leadership Fundamentals, a program for new front line supervisors, to our Leadership Trainee and General Manager Acceleration program for early career leaders, we have developed programs and experiences to help ensure that as our leaders progress, they are accumulating the skills necessary to be successful at each level. Over the last two years, more than 2,000 leaders have completed our Leadership Fundamentals program, creating a common language and toolkit for how we coach and develop employees.
Diversity and Inclusion
We are actively and intentionally creating an environment in which all individuals are welcomed and valued. In 2013, we launched Mosaic as our renewed approach and commitment to diversity and inclusion. Through Mosaic, we have developed new strategies and activities to continue creating a more diverse workforce and inclusive work environment. In this way, we can leverage our best thinking to improve our culture and better serve our customers.
We believe there is no better way to protect our planet than to recruit and hire the heroes who have protected our country. We actively recruit and hire veterans - those transitioning from military life as well as those long discharged from active duty. We value the skills, experience and operational excellence they bring to our organization, as well as their commitment to a better tomorrow. Historically, we have had great success hiring veterans. In 2016, for example, 22% of general managers, 25% of operations managers, and 27% of maintenance managers that we hired self-identified as having served in the U.S. Army, Navy, Marines, Air Force or Coast Guard.
Customer Zeal
The goal of our customer zeal pillar is to drive customer loyalty by offering differentiated products and services specifically designed to meet our customers’ needs. We believe this increases customer loyalty and willingness to pay for a higher value service.
To help our sales team with their ability to identify specific customer needs and configure the right offering, we use a Priority Based Selling (PBS) technique and our Capture pricing tool nationwide.
| |
• | PBS enables us to identify and segment customers’ buying priorities, and attract customers that are willing to pay for enhanced offerings. |
| |
• | Capture is a cloud-based pricing tool that creates a more professional sales experience, helps realize better pricing levels at the point of sale and provides enhanced controls over the price quoting process. |
In response to our customers’ requests, we expanded our suite of products to include Electronics Recycling with BlueGuardTM, Universal Recycling and All-in-One Office. For those services that we don’t provide, we fulfill demand through our alliance partnerships while maintaining the customer facing relationship.
To help ensure a consistent customer experience, we invested in our customer service capabilities and have made continued progress on the consolidation of our over 100 customer service locations into three Customer Resource Centers. The new state-of-the-art facilities and the technology deployed provide our customer service employees with the tools and capabilities they need to provide better levels of service across a myriad of touch points, including voice, email, text, social media channels and live chat. The state-of-the-art centers enhance the customer experience and will lower the Company’s cost structure once the transition is complete by the end of 2017.
To help ensure our efforts are making an impact and building customer loyalty, we also have enhanced the way we receive feedback from our customers, including net promoter score, so that every General Manager receives recent, relevant feedback that allows him or her the ability to reach out to customers directly and address issues immediately.
Digital Platform
The goal of our digital platform pillar is to allow us to provide a consistent experience across our business while enabling our customers to do business with us through more channels and with better access to information.
We are responding to our customers' requests for options to do business with us digitally. By increasing the ease of use and functionality of our web-based market presence, we believe we enhance customer satisfaction, interaction, and connectivity while lowering our costs. These tools reinforce to our customers that they can rely on us to handle their recycling and waste service needs in a way that is easy and convenient for them.
| |
• | Our MyResource customer portal and mobile app are online account management tools, allowing customers access to their accounts and our services. Approximately 1.8 million customers are now enrolled in MyResource, significantly enhancing our interaction and connectivity with those customers. |
| |
• | Our ecommerce sales channel allows customers to secure services on a real-time basis, provides capabilities to meet our customer's evolving buying preferences, and provides a lower cost sales channel. |
We believe that leveraging technology to improve our core business strengthens our existing model and customer relationships, and will serve to solidify our differentiated offering.
Corporate Responsibility and Sustainability
In addition to being committed to our customers and employees, we are also committed to the communities we serve and to the environment. We strive to be America’s preferred recycling and waste services partner. At Republic, we believe in the preservation of our Blue Planet - a cleaner, safer and healthier world.
We believe we have a responsibility to regenerate our planet with the materials we are entrusted to handle every day by driving increased recycling, generating renewable energy, and helping our customers be more resourceful. Additionally, we must lead by example, working diligently to improve our relationship with the environment and society through decreased vehicle emissions, innovative landfill technologies, use of renewable energy, community engagement and employee growth opportunities. Sustainability contributes to a cleaner world, while also providing opportunities to improve brand awareness, to increase customer loyalty, to grow our business, to motivate our employees and to differentiate Republic from our competitors.
To maximize our efforts, we have chosen to focus our sustainability platform around the following five areas:
| |
• | Operations. We are working to minimize the effect of our operations around our fleet, our landfills and our buildings. Whenever we reduce waste and inefficiency, we become more sustainable and we reduce our costs. |
| |
• | Materials Management. We recognize we have an opportunity to extract value from materials in the waste stream in the form of commodities and energy and also reduce greenhouse gas emission from those materials. |
| |
• | Communities. We are devoted to being a good neighbor through customer engagement, philanthropic giving, and infrastructure investments. |
| |
• | Safety. We are committed to creating a safe environment for our employees, our customers and the communities we serve. |
| |
• | People. We employ and develop talented professionals who are committed to our planet, our customers and our Company. |
Each of these areas has a significant effect on the environment and society and contributes to preserving our Blue Planet, while forming the foundation of our business going forward. We have developed programs that will enable us to reduce our emissions by 2.5 million tons of carbon dioxide equivalent by 2018, including developing at least two landfill gas-to-energy projects each year, adding at least 150,000 tons per year of recycling capacity, and reducing the greenhouse gas emissions from our fleet by 3% by 2018. We added a safety goal in 2016 to reduce our OHSA recordable rates by 7% per year.
We have been steadily building on our sustainability progress and performance. We were announced as a CDP Climate A List company. Less than 10% of companies worldwide who participate are named to the Climate A List. In addition, we were inducted into both the North American and World Dow Jones Sustainability Indices (DJSI). We believe the DJSI is the gold standard for corporate sustainability. Republic is the only recycling and solid waste collection provider in the Commercial Services and Supplies sector that is included in the 2016 DJSI World Index. These achievements demonstrate our ability to connect financial performance with environmental and social performance. The rankings also highlight Republic's leadership in corporate governance, environmental, social and financial aspects of sustainability. Finally, we released our second Sustainability Report that follows the GRI G4 protocol which is available on our website at www.republicservices.com.
Republic is one of the few Fortune 500 companies whose board has a Sustainability and Corporate Responsibility Committee. This committee has oversight responsibility with respect to our sustainability performance, our corporate responsibilities, our
role as a socially responsible organization and our enterprise risk, including cyber security, environmental and reputational risks.
Cash Utilization Strategy
We believe our ability to consistently increase free cash flow drives shareholder value and provides confirmation regarding the recurring cash provided by our operations. Free cash flow also demonstrates our ability to execute our cash utilization strategy, which includes investments in acquisitions and returning a majority of free cash flow to our shareholders through dividends and share repurchases. We are committed to an efficient capital structure and maintaining our investment grade credit ratings on our senior debt, which was rated BBB+ by Standard & Poor’s Ratings Services, BBB by Fitch Ratings, Inc. and Baa3 by Moody’s Investors Service, Inc. as of December 31, 2016. Such ratings have allowed us, and should continue to allow us, to readily access capital markets at competitive rates.
We manage our free cash flow by ensuring that capital expenditures and operating asset levels are appropriate in light of our existing business and growth opportunities, and by closely managing our working capital, which consists primarily of accounts receivable, accounts payable, and accrued landfill and environmental costs.
Dividends
In July 2016, our board of directors approved an increase in the quarterly dividend to $0.32 per share, which represents an increase of approximately 7% over the prior year. Over the last five years, our dividend has increased at a compounded annual growth rate of 7.8%. We expect to continue paying quarterly cash dividends and may consider additional dividend increases if we believe they will enhance shareholder value.
Share Repurchases
In October 2015, our board of directors added $900 million to the existing share repurchase authorization. As of December 31, 2016, there was $451.7 million remaining under our share repurchase authorization. At least annually, our board of directors reviews the intrinsic value of our stock. During 2017, we expect to use all our remaining authorization to repurchase shares of our common stock.
Shareholder Value
We are committed to creating long-term shareholder value by generating consistent earnings and cash flow growth, while continually improving returns on invested capital. Our incentive compensation programs are aligned with these objectives at all levels of management. We have an active shareholder outreach program and routinely interact with shareholders on a number of matters, including governance and executive compensation.
Management Team
We believe we have one of the most experienced management teams in the solid waste industry.
Donald W. Slager became our Chief Executive Officer (CEO) and remained our President on January 1, 2011, after having served as our President and Chief Operating Officer (COO) from the Allied Waste Industries, Inc. (Allied) acquisition in December 2008 until then. Prior to the Allied acquisition, Mr. Slager worked for Allied from 1992 through 2008 and served in various management positions, including President and COO from 2004 through 2008 and Executive Vice President and COO from 2003 to 2004. From 2001 to 2003, Mr. Slager served as Senior Vice President, Operations. Mr. Slager held various management positions at Allied from 1992 to 2003, and was previously General Manager at National Waste Services, where he served in various management positions since 1985. Mr. Slager has over 35 years of experience in the solid waste industry. Mr. Slager has been a member of our Board of Directors since June 24, 2010.
Catharine D. Ellingsen was named Executive Vice President, Chief Legal Officer, Chief Ethics and Compliance Officer, and Corporate Secretary in June 2016. Ms. Ellingsen joined Allied as Corporate Counsel in August 2001 and has experience in a variety of roles of increasing responsibility. She was named Managing Corporate Counsel in January 2003, Director, Legal and Associate General Counsel in January 2005, and Vice President and Deputy General Counsel in June 2007. Ms. Ellingsen continued as Vice President and Deputy General Counsel at Republic following the Allied acquisition in December 2008. She was then named Senior Vice President, Human Resources in August 2011 and served in that position until June 2016. Before joining Allied, Ms. Ellingsen was an attorney at Steptoe & Johnson LLP from 1996 to 2001 and at Bryan Cave LLP from 1993 to 1996.
Jeffrey A. Hughes was named Executive Vice President, Chief Administrative Officer in December 2008. Before that, Mr. Hughes served as Senior Vice President, Eastern Region Operations for Allied from 2004 until the Allied acquisition in December 2008. Mr. Hughes served as Assistant Vice President of Operations Support for Allied from 1999 to 2004 and as a District Manager for Allied from 1988 to 1999. Mr. Hughes has over 29 years of experience in the solid waste industry.
Charles F. Serianni was appointed Executive Vice President, Chief Financial Officer in August 2014. Mr. Serianni has over 30 years of experience in a variety of roles of increasing responsibility. He was named Vice President, Region Controller for the Company's former West Region in July 2013. Before that, Mr. Serianni served as our Assistant Controller starting in June 1998 and progressed to Senior Vice President, Chief Accounting Officer in December 2008. He served as the Accounting Operations Director for Republic Industries, Inc. (AutoNation) from February 1997 to June 1998. Before that, Mr. Serianni served as the Accounting Operations Director for Sunglass Hut International, Inc. from May 1993 to February 1997, and as Manager, Accounting and Auditing Services for Deloitte & Touche from September 1984 to May 1993.
Our local and area management teams have extensive industry experience in growing, operating and managing solid waste companies and have substantial experience in their local geographic markets. This allows us to quickly respond to and meet our customers’ needs and stay in touch with local businesses and municipalities. We believe our strong area management teams allow us to effectively and efficiently drive our initiatives and help ensure consistency throughout the organization. Our area management teams and area presidents have extensive authority and responsibility over operations within their respective geographic markets. As a result of retaining experienced managers with extensive knowledge of and involvement in their local communities, we are proactive in anticipating customers’ needs and adjusting to changes in our markets. We also seek to implement the best practices of our various business units throughout our operations to continue improving our operations and our operating margins.
Integrated Operations
We believe Republic is a company with a strong, national operating platform that allows us to compete more effectively and efficiently in the local markets in which we operate. We seek to achieve a high rate of internalization by controlling waste streams from the point of collection through processing or disposal. During the year ended December 31, 2016, approximately 68% of the total waste volume we collected was disposed at landfills we own or operate (internalization). Our fully integrated markets generally have a lower cost of operations and more favorable cash flows than our non-integrated markets. Through acquisitions, landfill operating agreements and other market development activities, we create market-specific, integrated operations typically consisting of one or more collection operations, transfer stations and landfills. We also operate recycling centers in markets where diversion of waste is a priority, it is profitable to do so, and we can earn an appropriate return on our investment.
Our operations primarily consist of providing collection, transfer and disposal of non-hazardous solid waste, recovering and recycling of certain materials, and energy services.
Collection Services
We provide residential, small-container commercial, and large-container industrial solid waste collection services through 333 collection operations. In 2016, approximately 76% of our total revenue was derived from our collection business, of which approximately 24% of our total revenue relates to residential services, approximately 31% relates to small-container commercial services, and approximately 21% relates to large-container industrial services.
Our residential collection business involves the curbside collection of waste for transport to transfer stations, or directly to landfills or recycling centers. We typically perform residential solid waste collection services under contracts with municipalities, which we generally secure by competitive bid and which give us exclusive rights to service all or a portion of the homes in the municipalities. These contracts usually range in duration from one to five years, although some of our exclusive franchises are for significantly longer periods. We also perform residential services on a subscription basis, in which individual households contract directly with us. The fees received for subscription residential collection are based primarily on the market, collection frequency, type of service, the distance to the disposal facility and the cost of disposal. In general, subscription residential collection fees are paid quarterly in advance by the customers receiving the service.
In our small-container commercial business, we supply our customers with waste containers of varying sizes. We typically perform commercial collection services under one- to three-year service agreements, and fees are determined based on a number of factors including the market, collection frequency, type of equipment furnished, type and volume or weight of the waste collected, transportation costs and the cost of disposal. Our small-container commercial services are typically offered to small business complexes, multi-family housing and strip malls, and include industries such as restaurants, retail, real-estate, and professional and other services.
Our large-container industrial collection business includes both recurring and temporary customer relationships. For the recurring portion, we supply our customers with waste containers of varying sizes and rent compactors to large waste generators. We typically perform the collection services under one- to three-year service agreements, and fees are determined based on a number of factors including the market, collection frequency, type of equipment furnished, type and volume or weight of the waste collected, transportation costs and the cost of disposal. Our recurring large-container industrial services are typically offered to larger facilities, hotels and office buildings, and include industries such as manufacturing, retail, hospitality and professional and other services.
For the temporary portion of our large-container industrial collection business, the majority of the waste relates to construction and demolition activities and is typically event-driven. We provide temporary waste collection services on a contractual basis with terms ranging from a single pickup to one-year or longer.
We also provide recycling collection services tailored to our customers' requirements to complete our service offerings.
Transfer Services
We own or operate 204 transfer stations. Revenue at our transfer stations is primarily generated by charging tipping or disposal fees, which accounted for approximately 5% of our revenue during 2016. Our collection operations deposit waste at these transfer stations, as do other private and municipal haulers, for compaction and transfer to disposal sites or recycling centers. Transfer stations provide collection operations with a cost effective means to consolidate waste and reduce transportation costs while providing our landfills with an additional "gate" to extend their geographic reach.
When our own collection operations use our transfer stations, this improves internalization by allowing us to retain fees we would otherwise pay to third-party disposal sites. It also allows us to manage costs associated with waste disposal because: (1) transfer trucks have larger capacities than collection trucks, allowing us to deliver more waste to the landfill in each trip; (2) waste is accumulated and compacted at strategically located transfer stations to increase efficiency; and (3) we can retain volume by managing the waste to one of our own landfills rather than to a competitor’s.
Landfill Services
We own or operate 192 active landfills. Our tipping fees charged to third parties accounted for approximately 12% of our revenue during 2016. As of December 31, 2016, we had approximately 37,400 permitted acres and total available permitted and probable expansion disposal capacity of approximately 5 billion in-place cubic yards. The in-place capacity of our landfills is subject to change based on engineering factors, requirements of regulatory authorities, our ability to continue to operate our landfills in compliance with applicable regulations, and our ability to successfully renew operating permits and obtain expansion permits at our sites. Some of our landfills accept non-hazardous special waste, including utility ash, asbestos and contaminated soils.
Most of our active landfill sites have the potential for expanded disposal capacity beyond the currently permitted acreage. We monitor the availability of permitted disposal capacity at each of our landfills and evaluate whether to pursue an expansion at a given landfill based on estimated future waste volumes and prices, market needs, remaining capacity and the likelihood of obtaining an expansion. To satisfy future disposal demand, we are currently seeking to expand permitted capacity at certain landfills; however, we cannot assure you that all proposed or future expansions will be permitted as designed.
Republic is committed to harnessing landfill gas, the natural byproduct of decomposing waste, and converting it to energy. The use of landfill gas provides our economy with benefits, including reducing air pollution through the capture and use of methane. As of December 31, 2016, we operated 71 landfill gas and renewable energy projects.
We also have responsibility for 124 closed landfills, for which we have associated closure and post-closure obligations.
Recycling Services
We own or operate 64 recycling centers. These facilities generate revenue through the processing and sale of old corrugated containers (OCC), old newsprint (ONP), aluminum, glass and other materials, which accounted for approximately 5% of our revenue during 2016. Approximately 74% of our recycling center volume relates to OCC, ONP and other mixed paper. Of the 5.0 million tons we sold during 2016, 2.5 million moved through our recycling centers and 2.5 million we collected and delivered to third parties.
Changing market demand for recycled commodities causes volatility in commodity prices. At current volumes and mix of materials, we believe a $10 per ton change in the price of recycled commodities will change annual revenue and operating income by approximately $27 million and $18 million, respectively.
In certain instances we issue recycling rebates to purchase materials from municipalities or large industrial customers, which can be based on the price we receive upon the final sale of recycled commodities, a fixed contractual rate or other measures. We also receive rebates when we dispose of recycled commodities at third-party facilities.
As consumer demand for recycling services has increased, we have met that demand by integrating recycling components to each of our collection service offerings. Our goal is to provide a complete waste stream management solution to our customers in an environmentally sustainable way.
We continue to invest in proven technologies to control costs and to simplify and streamline recycling for our customers. For example, advanced sorting equipment, such as disk screens, magnets and optical sorters, identifies and separates different kinds of paper, metals, plastics and other materials to increase efficiency and maximize our recycling efforts.
Energy Services
In addition to certain of our landfill disposal sites, we own or operate 7 treatment, recovery and disposal facilities and 10 salt water disposal wells. Energy services waste is generated from the by-products of oil and natural gas exploration and production activity, including waste created throughout the initial drilling and completion of an oil or natural gas well, production wastes and water produced during a well's operating life, contaminated soils that require treatment during site reclamation, and substances that require clean-up after a spill. Revenue is therefore primarily generated through waste managed from vertical and horizontal drilling, hydraulic fracturing, production and clean-up activity, as well as other services including closed loop collection systems and the sale of recovered products. In 2016, approximately 1% of our revenue was derived from energy services. Energy services activity varies across market areas that are tied to the natural resource basins in which the drilling activity occurs and reflects the regulatory environment, pricing and disposal alternatives available in any given market.
Other Services
Other revenue consists primarily of National Accounts revenue generated from nationwide or regional contracts in markets outside our operating areas where the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset with related subcontract costs, which are recorded in cost of operations.
Competition
We operate in a competitive industry. Competition in the non-hazardous solid waste industry comes from a few other large, national publicly owned companies, several regional publicly and privately owned companies, and thousands of small privately-owned companies. In any given market, competitors may have larger operations and greater resources. In addition, we compete with municipalities that maintain waste collection or disposal operations. These municipalities may have financial advantages due to the availability of tax revenue and tax-exempt financing.
We compete for collection accounts primarily on the basis of price and the quality of our services. From time-to-time, our competitors reduce the price of their services in an effort to expand market share or to win a competitively bid municipal contract. Our ability to maintain and increase prices in certain markets may be impacted by our competitors’ pricing policies. This may have an effect on our future revenue and profitability.
Seasonality and Severe Weather
Our operating revenues tend to be somewhat higher in the summer months, primarily due to higher volumes of construction and demolition waste. The volumes of large-container industrial and residential waste in certain regions of the country also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect this seasonality.
Our operations can be adversely affected by periods of inclement or severe weather, which could increase the volume of waste collected under our existing contracts (without corresponding compensation), delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites or delay the construction or expansion of our landfill sites and other facilities. Our operations also can be favorably affected by severe weather, which could increase the volume of waste in situations where we are able to charge for our additional services.
Regulation
Our facilities and operations are subject to a variety of federal, state and local requirements that regulate, among other things, the environment, public health, safety, zoning and land use. Operating and other permits, licenses and other approvals generally are required for landfills and transfer stations, certain solid waste collection vehicles, fuel storage tanks and other equipment and facilities that we own or operate. These permits are subject to denial, revocation, modification and renewal in certain circumstances. Federal, state and local laws and regulations vary, but generally govern wastewater or storm water discharges, air emissions, the handling, transportation, treatment, storage and disposal of hazardous and non-hazardous waste, and the remediation of contamination associated with the release or threatened release of hazardous substances. These laws and regulations provide governmental authorities with strict powers of enforcement, which include the ability to revoke or decline to renew any of our operating permits, obtain injunctions, or impose fines or penalties in the event of violations, including criminal penalties. The U.S. Environmental Protection Agency (EPA) and various other federal, state and local authorities administer these regulations.
We strive to conduct our operations in compliance with applicable laws, regulations and permits. However, from time to time we have been issued citations or notices from governmental authorities that have resulted in the need to expend funds for remedial work and related activities at various landfills and other facilities or in the need to expend funds for fines, penalties or settlements. We cannot assure you that citations and notices will not be issued in the future despite our strong regulatory compliance efforts. We have established final capping, closure, post-closure and remediation reserves that we believe, based on
currently available information, will be adequate to cover our current estimates of regulatory costs; however, we cannot assure you that actual costs will not exceed our reserves.
Federal Regulation
The following summarizes the primary federal, environmental, and occupational health and safety-related statutes that affect our facilities and operations:
| |
• | The Solid Waste Disposal Act, including the Resource Conservation and Recovery Act (RCRA). RCRA establishes a framework for regulating the handling, transportation, treatment, storage and disposal of hazardous and non-hazardous solid waste, and requires states to develop programs to ensure the safe disposal of solid waste in sanitary landfills. |
Subtitle D of RCRA establishes a framework for regulating the disposal of municipal solid waste. Regulations under Subtitle D currently include minimum comprehensive solid waste management criteria and guidelines, including location restrictions, facility design and operating criteria, final capping, closure and post-closure requirements, financial assurance standards, groundwater monitoring requirements and corrective action standards. All of the states in which we operate have implemented permit programs pursuant to RCRA and Subtitle D. These state permit programs may include landfill requirements that are more stringent than those of Subtitle D. Our failure to comply with any of these environmental requirements at any of our locations may lead to temporary or permanent loss of an operating permit, which would result in costs in connection with securing new permits and reduced revenue from lost operational time.
All of our planned landfill expansions and new landfill development projects have been engineered to meet or exceed Subtitle D requirements, as applicable. Operating and design criteria for existing operations have been modified to comply with these regulations. Compliance with Subtitle D regulations has resulted in increased costs and may in the future require substantial additional expenditures in addition to other costs normally associated with our waste management activities.
| |
• | The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). CERCLA, among other things, provides for the cleanup of sites from which there is a release or threatened release of a hazardous substance into the environment. CERCLA may impose strict joint and several liability for the costs of cleanup and for damages to natural resources upon current owners and operators of a site, parties who were owners or operators of a site at the time the hazardous substances were disposed of, parties who transported the hazardous substances to a site, and parties who arranged for the disposal of the hazardous substances at a site. Under the authority of CERCLA and its implementing regulations, detailed requirements apply to the manner and degree of investigation and remediation of facilities and sites where hazardous substances have been or are threatened to be released into the environment. Liability under CERCLA is not dependent on the existence or disposal of only “hazardous wastes,” but also can be based upon the existence of small quantities of more than 700 “substances” characterized by the EPA as “hazardous,” many of which are found in common household waste. Among other things, CERCLA authorizes the federal government to investigate and remediate sites at which hazardous substances have been or are threatened to be released into the environment, or to order persons potentially liable for the cleanup of the hazardous substances to do so themselves. In addition, the EPA has established a National Priorities List of sites at which hazardous substances have been, or are threatened to be, released and which require investigation or cleanup. |
CERCLA liability is strict liability. It can be founded upon the release or threatened release, even as a result of unintentional, non-negligent or lawful action, of hazardous substances, including very small quantities of such substances. Thus, even if we have never knowingly transported or received hazardous substances, it is likely that hazardous substances have been deposited or “released” at landfills or other facilities that we presently or historically have owned or operated, or at properties owned by third parties to which we have transported waste. Therefore, we could be liable under CERCLA for the cost of cleaning up, or protecting against the release of, such hazardous substances at such sites and for damages to natural resources, even if those substances were deposited at our facilities before we acquired or operated them. The costs of a CERCLA cleanup can be very expensive and can include the costs of disposing of hazardous substances at appropriately-licensed facilities. Given the difficulty of obtaining insurance for environmental impairment liability, any such liability could have a material effect on our business, financial condition, results of operations and cash flows.
| |
• | The Federal Water Pollution Control Act of 1972 (the Clean Water Act). This act regulates the discharge of pollutants from a variety of sources, including solid waste disposal sites, into streams, rivers and other waters of the United States. Runoff from our landfills and transfer stations that is discharged into surface waters through discrete conveyances must be covered by discharge permits that generally require us to conduct sampling and monitoring, and, under certain circumstances, to reduce the quantity of pollutants in those discharges. Storm water discharge regulations under the Clean Water Act require a permit for certain construction activities and for runoff from industrial |
operations and facilities, which may affect our operations. If a landfill or transfer station discharges wastewater through a sewage system to a publicly owned treatment works, the facility must comply with discharge limits imposed by that treatment works. In addition, states may adopt groundwater protection programs under the Clean Water Act or the Safe Drinking Water Act that could affect the manner in which our landfills monitor and control their waste management activities. Furthermore, if development at any of our facilities alters or affects wetlands, we may be required to secure permits before such development starts. In these situations, permitting agencies may require mitigation of wetland impacts.
| |
• | The Clean Air Act. The Clean Air Act imposes limitations on emissions from various sources, including landfills. In March 1996, the EPA promulgated regulations that require large municipal solid waste landfills to install landfill gas monitoring systems along with landfill gas control systems unless emissions are below established thresholds. These regulations apply to landfills that commenced construction, reconstruction or modification on or after May 30, 1991, and, principally, to landfills that can accommodate 2.5 million cubic meters or more of municipal solid waste. The regulations apply whether the landfills are active or closed. The date by which each affected landfill must have a gas collection and control system installed and made operational varies depending on calculated emission rates at the landfill. On July 14, 2016, the EPA issued final amendments to its regulations that require large landfills that commenced construction, reconstruction, or modification on or after July 17, 2014 to capture additional landfill gas to reduce emissions of methane and certain non-methane gases, which are recognized as greenhouse gases. In a separate rule finalized that same day, the EPA issued updates to its 1996 Emission Guidelines to reduce emissions of landfill gas from existing active landfills. Both actions were part of the Obama Administration's Climate Action Plan - Strategy to Reduce Methane Emissions. These and other efforts to curtail the emission of greenhouse gases and to ameliorate the effect of climate change may require our landfills to deploy more stringent emission controls and monitoring systems, with resulting capital or operating costs. Many state regulatory agencies also currently require monitoring systems for the collection and control of certain landfill gas. Certain of these state agencies are also implementing greenhouse gas control regulations that would also apply to landfill gas emissions. See Item 1A, Risk Factors – “Regulation of greenhouse gas emissions could impose costs on our operations, the magnitude of which we cannot yet estimate,” in this Form 10-K. |
In addition, our vehicle fleet also may become subject to higher efficiency standards or other carbon-emission restrictions. Over the past three years, the EPA and the National Highway Traffic Safety Administration (NHTSA) have adopted regulations mandating the reduction of vehicle tail pipe emissions as a means of reducing greenhouse gas emissions. The regulations take the form of fuel economy standards. The EPA and the NHTSA have developed fuel economy standards in two vehicle categories: (1) conventional automobiles and light-duty trucks; and (2) heavy-duty trucks, including solid waste collection vehicles and tractor trailers. We own and operate vehicles in both categories. For conventional automobiles and light-duty trucks, in May 2010 the EPA and the NHTSA finalized fuel economy standards for model years 2012 through 2016. In October 2011, the EPA and the NHTSA initiated a second round of rulemaking for conventional automobiles and light-duty trucks in model years 2017 through 2025. In August 2011, the EPA and the NHTSA finalized standards for heavy-duty trucks, including solid waste collection vehicles and tractor trailers, for model years 2014 through 2018. On August 16, 2016, the EPA and the NHTSA jointly issued additional regulations that would impose more stringent standards for heavy-duty vehicles through model-year 2027. In issuing the proposed fuel economy standards for heavy-duty trucks (including tractor trailers), the government estimated that the increased equipment cost would be recouped over a period of two years for a tractor/trailer combo, and over a period of 6 years for a garbage truck, and each vehicle would continue to save fuel costs over its operating life.
| |
• | The Occupational Safety and Health Act of 1970 (OSHA). This act authorizes the Occupational Safety and Health Administration of the U.S. Department of Labor to promulgate occupational safety and health standards. A number of these standards, including standards for notices of hazardous chemicals and the handling of asbestos, apply to our facilities and operations. |
State and Local Regulation
Each state in which we operate has its own laws and regulations governing solid waste disposal, water and air pollution, and, in most cases, releases and cleanup of hazardous substances and liabilities for such matters. States also have adopted regulations governing the design, operation, maintenance and closure of landfills and transfer stations. Some counties, municipalities and other local governments have adopted similar laws and regulations. In addition, our operations may be affected by the trend in many states toward requiring solid waste reduction and recycling programs. For example, several states have enacted laws that require counties or municipalities to adopt comprehensive plans to reduce, through solid waste planning, composting, recycling or other programs, the volume of solid waste deposited in landfills. Additionally, laws and regulations restricting the disposal of certain waste in solid waste landfills, including yard waste, newspapers, beverage containers, unshredded tires, lead-acid batteries, electronic wastes and household appliances, have been adopted in several states and are being considered in others.
Legislative and regulatory measures to mandate or encourage waste reduction at the source and waste recycling also have been considered, or are under consideration by, the U.S. Congress and the EPA.
To construct, operate and expand a landfill, we must obtain one or more construction or operating permits, as well as zoning and land use approvals. These permits and approvals may be burdensome to obtain and to comply with, are often opposed by neighboring landowners and citizens’ groups, may be subject to periodic renewal, and are subject to denial, modification, non-renewal and revocation by the issuing agency. Significant compliance disclosure obligations often accompany these processes. In connection with our acquisition of existing landfills, we may be required to spend considerable time, effort and money to bring the acquired facilities into compliance with applicable requirements and to obtain the permits and approvals necessary to increase their capacity.
Other Regulations
Many of our facilities own and operate underground storage tanks that are generally used to store petroleum-based products. These tanks can be subject to federal, state and local laws and regulations that mandate their periodic testing, upgrading, closure and removal. In the event of leaks or releases from these tanks, these regulations require that polluted groundwater and soils be remediated. If underground storage tanks we own or operate leak, we could be liable for response costs and, if the leakage migrates onto the property of others, we could be liable for damages to third parties. We are unaware of facts indicating that issues of compliance with regulations related to underground storage tanks will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
With regard to our solid waste transportation operations, we are subject to the jurisdiction of the Surface Transportation Board and are regulated by the Federal Highway Administration, Office of Motor Carriers, and by regulatory agencies in states that regulate such matters. Various state and local government authorities have adopted, or are considering adopting, laws and regulations that would restrict the transportation of solid waste across state, county, or other jurisdictional lines. In 1978, the U.S. Supreme Court ruled that a law that restricts the importation of out-of-state solid waste is unconstitutional; however, states have attempted to distinguish proposed laws from those involved in and implicated by that ruling. In 1994, the U.S. Supreme Court ruled that a flow control law, which attempted to restrict solid waste from leaving its place of generation, imposes an impermissible burden upon interstate commerce and is unconstitutional. In 2007, however, the U.S. Supreme Court upheld the right of a local government to direct the flow of solid waste to a publicly-owned and publicly-operated waste facility. A number of county and other local jurisdictions have enacted ordinances or other regulations restricting the free movement of solid waste across jurisdictional boundaries. Other governments may enact similar regulations in the future. These regulations may cause a decline in volumes of waste delivered to our landfills or transfer stations and may increase our costs of disposal, thereby adversely affecting our operations and our financial results.
Liabilities Established for Landfill and Environmental Costs
We have established reserves for landfill and environmental costs, which include landfill site final capping, closure and post-closure costs. We periodically reassess such costs based on various methods and assumptions regarding landfill airspace and the technical requirements of Subtitle D of RCRA, and we adjust our amortization rates used to expense final capping, closure and post-closure costs accordingly. Based on current information and regulatory requirements, we believe that our recorded reserves for such landfill and environmental expenditures are adequate; however, environmental laws may change, and we cannot assure you that our recorded reserves will be adequate to cover requirements under existing or new environmental laws and regulations, future changes or interpretations of existing laws and regulations, or adverse environmental conditions previously unknown to us. Refer to the "Contractual Obligations" section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 of this Form 10-K and to Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in Item 8 of this Form 10-K for further information.
Liability Insurance and Bonding
The nature of our business exposes us to the possible risk of liabilities arising out of our operations, including damages to the environment, property, employees or the general public. Although we focus on operating safely and prudently, we occasionally receive claims, alleging damages, negligence or other wrongdoing in the planning or performance of work, which resulted in harm to the environment, property, employees or the general public. These liabilities can be significant. We also could be subject to fines and civil and criminal penalties in connection with alleged violations of regulatory requirements. We maintain various policies of insurance that, subject to limitations, exclusions, or deductibles, provide coverage for these types of claims. While we believe the amount of insurance is appropriate for our type of business, we can neither assure you that such insurance would be adequate, in scope or amount, in the event of a major loss, nor that we will not be exposed to uninsured liabilities that could have a material adverse effect on our consolidated financial condition, results of operations or cash flows. We also cannot assure you that we would continue to maintain the insurance should market conditions in the insurance industry make such coverage cost prohibitive.
Accruals for deductibles are based on claims filed and actuarial estimates of claims development and claims incurred but not reported. Due to the variable condition of the insurance market, we have experienced, and may experience in the future, increased deductible retention levels and increased premiums or unavailability of insurance. As we assume more risk through higher retention levels, we may experience more variability in our insurance reserves and expense.
In the normal course of business, we also purchase surety bonds, insurance policies, letters of credit or marketable securities deposits in connection with municipal residential collection contracts, financial assurance for closure and post-closure of landfills, environmental remediation, environmental permits, and business licenses and permits as a financial guarantee of our performance.
Availability of Reports and Other Information
Our corporate website is www.republicservices.com. We make available on that website, free of charge, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, and amendments to those materials filed or furnished with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make such materials available as soon as reasonably practicable after we electronically submit them to the SEC. Our corporate website also contains our Certificate of Incorporation, Bylaws, Corporate Governance Guidelines, Code of Ethics, Political Contributions Policy, and Charters of the Audit Committee, Management Development and Compensation Committee, Nominating and Corporate Governance Committee, and Sustainability and Corporate Responsibility Committee of the board of directors. In addition, the SEC makes available at its website (www.sec.gov), free of charge, reports, proxy statements, and other information regarding issuers, such as us, that file electronically with the SEC. Information on our website or the SEC website is not part of this Form 10-K. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and applicable New York Stock Exchange (NYSE) rules regarding amendments to or waivers of our Code of Ethics by posting this information on our website at www.republicservices.com.
This Form 10-K contains certain forward-looking information about us that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. Words such as “guidance,” “expect,” “will,” “may,” “anticipate,” “plan,” “estimate,” “project,” “intend,” “should,” “can,” “likely,” “could,” “believe” and similar expressions are intended to identify forward-looking statements. These statements include statements about our plans, strategies and prospects. Forward-looking statements are not guarantees of performance. These statements are based upon our management's current beliefs and expectations and are subject to risk and uncertainties, including the risks set forth below in these Risk Factors, which could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot assure you that the expectations will prove to be correct. Accordingly, you should not place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-K. Except to the extent required by applicable law or regulation, we undertake no obligation to update or publish revised forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.
General economic conditions can directly and adversely affect our operating results.
Our business is directly affected by changes in national and general economic factors and overall economic activity that are outside of our control, including consumer confidence and interest rates. A weak economy generally results in decreases in volumes of waste generated, which adversely affects our revenues. In addition, we have a relatively high fixed-cost structure, which is difficult to adjust quickly to match declining waste volume levels. Consumer uncertainty and the loss of consumer confidence may decrease overall economic activity and thereby limit the amount of services we provide. Additionally, the decline in waste volumes may result in increased competitive pricing pressure and increased customer turnover, resulting in lower revenue and increased operating costs. Operating in an environment of worsening economic conditions could have a material adverse effect on our consolidated financial condition, results of operations and cash flows. Further, recovery in the solid waste industry historically has lagged behind recovery in the general economy. Accordingly, we cannot assure you that an improvement in general economic conditions will result in an immediate, or any, improvement in our consolidated financial condition, results of operations or cash flows.
Weakness in the U.S. economy may expose us to credit risk for amounts due from governmental agencies, large national accounts, industrial customers and others.
Weakness in the U.S. economy reduces the amount of taxes collected by various governmental agencies. We provide services to a number of these agencies, including numerous municipalities. These governmental agencies may suffer financial difficulties resulting from a decrease in tax revenue and may ultimately be unable or unwilling to pay amounts owed to us. In addition, weakness in the economy may cause other customers, including our large national accounts, or industrial or energy services clients, to suffer financial difficulties and ultimately to be unable or unwilling to pay amounts owed to us. This could negatively impact our consolidated financial condition, results of operations and cash flows.
The waste industry is highly competitive and includes competitors that may have greater financial and operational resources, flexibility to reduce prices or other competitive advantages that could make it difficult for us to compete effectively.
We principally compete with large national waste management companies, numerous municipalities, and numerous regional and local companies. Competition for collection accounts is primarily based on price and the quality of services. Competition for disposal business is primarily based on price, geographic location and quality of operations. One of our competitors may have greater financial and operational resources than we do. Further, many counties and municipalities that operate their own waste collection and disposal facilities have the benefits of tax revenue or tax-exempt financing. Our ability to obtain solid waste volume for our landfills also may be limited by the fact that some major collection operations also own or operate landfills to which they send their waste. In certain markets in which we do not own or operate a landfill, from time to time our collection operations may have difficulty competing effectively. If we were to lose market share or if we were to lower prices to address competitive issues, it could negatively impact our consolidated financial condition, results of operations and cash flows.
Price increases may not be adequate to offset the effect of increased costs and may cause us to lose volume.
We seek to secure price increases necessary to offset increased costs, improve our operating margins and earn an adequate return on our substantial investments in assets such as our landfills. From time to time, our competitors reduce their prices in an effort to expand their market share. Contractual, general economic or market-specific conditions also may limit our ability to raise prices. For example, many of our contracts have price adjustment provisions that are tied to an index such as the consumer price index. Particularly in a weak U.S. economy, our costs may increase in excess of the increase, if any, in the consumer price index. This may continue to be the case even when the U.S. economy recovers because a recovery in the solid waste industry historically has lagged behind a recovery in the general economy. As a result, we may be unable to offset increases in costs, improve our operating margins and obtain adequate investment returns through price increases. Price increases also might cause us to lose volume to lower-cost competitors.
Increases in the cost of fuel or petrochemicals would increase our operating expenses, and we cannot assure you that we would be able to recover such cost increases from our customers.
We depend on fuel purchased in the open market to operate our collection and transfer trucks and other equipment used for collection, transfer and disposal. Fuel prices are unpredictable and fluctuate significantly based on events beyond our control, including geopolitical developments, actions by the Organization of the Petroleum Exporting Countries and other oil and gas producers, supply and demand for oil and gas, war, terrorism and unrest in oil-producing countries, adverse weather and regional production patterns. Due to contractual or market factors, we may not be able to offset such volatility through fuel recovery fees. Our fuel costs were $317.0 million in 2016, or 3.4% of revenue, compared to $362.4 million in 2015, or 4.0% of revenue.
To manage our exposure to volatility in fuel prices, we have entered into multiple swap agreements whereby we receive or make payments to counter-parties should the price of fuel vary from a specified amount. During 2016, approximately 20% of our fuel volume purchases were hedged with swap agreements. Additionally, we are able to collect fuel recovery fees from some customers. At current consumption levels, a twenty-cent per gallon change in the price of diesel fuel changes our fuel costs by approximately $25 million on an annual basis. Offsetting these changes in fuel expense would be changes in our fuel recovery fee charged to our customers. At current participation rates, we believe a twenty-cent per gallon change in the price of diesel fuel changes our fuel recovery fee by approximately $25 million. Accordingly, a substantial rise or drop in fuel costs could result in a material effect to our revenue and cost of operations.
Over the last several years, regulations have been adopted mandating changes in the composition of fuels for motor vehicles. The renewable fuel standards that the EPA sets annually affect the type of fuel our motor vehicle fleet uses. Pursuant to the Energy Independence and Security Act of 2007, the EPA establishes annual renewable fuel volume requirements for four different categories of renewable fuels (renewable fuel, advanced biofuel, cellulosic biofuel, and biomass-based diesel). These volume requirements set standards for the proportion of refiners' or importers' total fuel volume that must contain renewable fuels (as designated by regulation). The total volume metrics for each year vary based upon a number of factors (e.g., the
availability of such fuels), and it is difficult to predict the ultimate quantity that the EPA will eventually mandate for 2017 and beyond. These regulations are one of many factors that may affect the cost of the fuel we use.
Our operations also require the use of products (such as liners at our landfills) whose costs may vary with the price of petrochemicals. An increase in the price of petrochemicals could increase the cost of those products, which would increase our operating and capital costs. Petrochemical prices, and hence our operating and capital costs, may be further affected by regulatory efforts to reduce greenhouse gases from the industries that produce such petrochemicals. We are also susceptible to increases in indirect fuel recovery fees from our vendors.
Fluctuations in prices for recycled commodities that we sell to customers may adversely affect our consolidated financial condition, results of operations and cash flows.
We purchase or collect and process recyclable materials such as paper, cardboard, plastics, aluminum and other metals for sale to third parties. Our results of operations may be affected by changing prices or market requirements for recyclable materials. The resale and purchase prices of, and market demand for, recyclable materials are volatile due to changes in economic conditions and numerous other factors beyond our control. These fluctuations may affect our consolidated financial condition, results of operations and cash flows. Approximately 74% of our recycling center volume relates to OCC, ONP and other mixed paper.
Historically, to manage our exposure to fluctuations in prices for recycled commodities, we have entered into multiple hedging arrangements whereby we receive or make payments to counter-parties should the price of recycled commodities vary from a specified amount or range. During 2016, we entered into multiple agreements related to forecasted OCC sales. At current volumes and mix of materials, we believe a $10 per ton change in the price of recycled commodities will change annual revenue and operating income by approximately $27 million and $18 million, respectively, on an annual basis. Accordingly, a substantial rise or drop in recycled commodity prices could result in a material effect to our revenue and cost of operations.
Adverse weather conditions, including those brought about by climate change, may limit our operations and increase the costs of collection and disposal.
Our collection and landfill operations could be adversely impacted by extended periods of inclement weather, or by increased severity of weather and climate extremes resulting from climate change, some of which we may already be experiencing. Recent studies suggest that global warming is occurring faster than previously projected, with the EPA projecting a 3° to 12° Fahrenheit temperature increase in the United States by the end of the century. In addition to sea level rise, this temperature increase is expected to result in more severe droughts, floods, and other extreme weather events. Any of these factors could increase the volume of waste collected under our existing contracts (without corresponding compensation), interfere with collection, transfer station and landfill operations, delay the development of landfill capacity or reduce the volume of waste generated by our customers. In addition, adverse weather conditions may result in the temporary suspension of our operations, which can significantly affect our operating results in the affected regions during those periods.
The solid waste industry is a capital-intensive industry and our capital expenditures may exceed current expectations, which could require us to obtain additional funding for our operations or impair our ability to grow our business.
Our ability to remain competitive and to grow our business largely depends on our cash flow from operations and access to capital. If our capital efficiency programs cannot offset the effect of inflation and business growth, it may be necessary to increase the amount we spend. Additionally, if we make acquisitions or further expand our operations, the amount we spend on capital, capping, closure, post-closure, environmental remediation and other items will increase. Our cash needs also will increase if the expenditures for capping, closure, post-closure and remediation activities increase above our current estimates, which may occur over a long period due to changes in federal, state or local government requirements and other factors beyond our control. Increases in expenditures would negatively impact our cash flows.
We may be unable to obtain or maintain required permits or to expand existing permitted capacity of our landfills, which could decrease our revenue and increase our costs.
We cannot assure you that we will be able to obtain or maintain the permits required to operate because permits to operate new landfills and transfer stations, or to expand the permitted capacity of existing landfills, have become more difficult and expensive to obtain and maintain. Permits often take years to obtain as a result of numerous hearings and compliance requirements with regard to zoning, environmental and other regulations. These permits are also often subject to resistance from citizen or other groups and other political pressures. Local communities and citizen groups, adjacent landowners, governmental agencies and others may oppose the issuance of a permit or approval we may need, allege violations of the permits under which we currently operate or laws or regulations to which we are subject, or seek to impose liability on us for environmental damage. Responding to these challenges has at times increased our costs and extended the time associated with establishing new landfills and transfer stations and expanding existing landfills. In addition, failure to receive regulatory and zoning approval may prohibit us from establishing new landfills or transfer stations or expanding existing landfills. Our failure
to obtain the required permits to operate our landfills and transfer stations could have a material adverse effect on our consolidated financial condition, results of operations and cash flows. In addition, we may have to dispose collected waste at landfills operated by our competitors or haul the waste long distances at a higher cost to one of our other landfills, either of which could significantly increase our waste disposal costs.
If we do not appropriately estimate landfill capping, closure, post-closure and remediation costs, our financial condition and results of operations may be adversely affected.
A landfill must be closed and capped, and post-closure maintenance commenced, once the landfill's permitted capacity is reached and additional capacity is not authorized. Further, we undertake remediation activities at some of our solid waste facilities. We have significant financial obligations relating to capping, closure, post-closure and remediation costs at our existing owned or operated landfills, and will have material financial obligations with respect to any future owned or operated landfills. We establish accruals for the estimated costs associated with capping, closure, post-closure and remediation obligations. We could underestimate such costs, and our financial obligations for capping, closure, post-closure or remediation costs could exceed the amounts accrued or amounts otherwise receivable pursuant to trust funds established for this purpose. Additionally, if a landfill must be closed earlier than expected or its remaining airspace is reduced for any other reason, the accruals for capping, closure, post-closure and remediation could be required to be accelerated. If our capping, closure, post-closure or remediation costs exceed the amounts accrued, or if such accruals are required to be accelerated, this could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
Alternatives to landfill disposal could reduce our disposal volumes and cause our revenues and operating results to decline.
Most of the states in which we operate landfills require counties and municipalities to formulate comprehensive plans to reduce the volume of solid waste deposited in landfills through waste planning, composting, recycling or other programs. Some state and local governments mandate waste reduction at the source and prohibit the disposal of certain types of wastes, such as yard waste, at landfills. Further, many of our customers voluntarily are diverting waste to alternatives to landfill disposal, such as recycling and composting, while also working to reduce the amount of waste they generate. Many of the largest companies in the U.S. are setting zero-waste goals in which they strive to send no waste to landfills. Although such actions help to protect our environment, they have reduced, and will in the future reduce, the volume of waste going to landfills and may affect the prices that we can charge for landfill disposal. Accordingly, we cannot assure you that we will be able to operate our landfills at their current volumes or charge current prices for landfill disposal services due to possible decreases in demand for such services. If we cannot expand our service offerings and grow lines of business to service waste streams that do not go to landfills and to provide services for customers that wish to reduce waste entirely, this could have a negative effect on our consolidated financial condition, results of operations and cash flows. Further, even if we can develop such service offerings and lines of business, disposal alternatives nonetheless could have a negative effect on our consolidated financial condition, results of operations and cash flows.
The possibility of landfill and transfer station site development projects, or expansion projects not being completed or certain other events could result in material charges to income.
In accordance with U.S. GAAP, we capitalize certain expenditures relating to development, expansion and other projects. If a facility or operation is permanently shut down or determined to be impaired, or a development, expansion or other project is not completed or is determined to be impaired, we will charge against earnings any unamortized capitalized expenditures relating to such facility or project that we are unable to recover through sale, transfer or otherwise. We also carry a significant amount of goodwill on our consolidated balance sheets, which we must assess for impairment annually, and more frequently in the case of certain triggering events. We may incur charges against earnings in accordance with this policy, or other events may cause impairments. Such charges could have a material adverse effect on our results of operations.
The business and assets we operate expose us to safety, operational and other risks, including the risk of personal injury to our employees or third parties.
The provision of waste collection, transfer, disposal, recycling and energy services, including the operation of landfills, CNG fueling stations, a substantial fleet of trucks and other waste-related assets, involves risks. These risks include, among others, the risk of truck accidents, equipment defects, malfunctions and failures, improper use of dangerous equipment, the release of hazardous substances, fire and explosion, any of which could result in environmental liability, personal injury, loss of life, business interruption or property damage or destruction. While we carry insurance to cover many contingencies, and seek to minimize our exposure to these risks through maintenance, training and compliance programs, any substantial losses could have a material adverse effect on our business, results of operations and financial condition.
We are subject to costly environmental regulations and flow-control regulations that may affect our operating margins, restrict our operations and subject us to additional liability.
Complying with laws and regulations governing the collection, treatment, storage, transfer and disposal of solid and hazardous wastes and materials, air quality and emissions of greenhouse gases, water quality and the remediation of contamination associated with the release of hazardous substances is costly. Laws and regulations often require us to enhance or replace our equipment and to modify landfill operations or initiate final closure of a landfill. We cannot assure you that we will be able to implement price increases sufficient to offset the costs of complying with these laws and regulations. In addition, environmental regulatory changes could accelerate or increase expenditures for capping, closure, post-closure and environmental and remediation activities at solid waste facilities and obligate us to spend sums in addition to those presently accrued for such purposes.
Our collection, transfer, and landfill operations are and will continue to be affected by state or local laws or regulations that restrict the transportation of solid waste across state, county or other jurisdictional lines or that direct the flow of waste to a specified facility or facilities. Such laws and regulations could negatively affect our operations, resulting in declines in landfill volumes and increased costs of alternate disposal.
Regulation of greenhouse gas emissions could impose costs on our operations, the magnitude of which we cannot yet estimate.
Efforts to curtail the emission of greenhouse gases and to ameliorate the effects of climate change continue to progress. Our landfill operations emit anthropogenic methane, identified as a greenhouse gas, and our vehicle fleet emits, among other things, carbon dioxide, which also is a greenhouse gas. Conventional wisdom still suggests that passage of comprehensive, federal climate change legislation is highly unlikely. Nonetheless, should comprehensive federal climate change legislation be enacted, we expect it to impose costs on our operations, the materiality of which we cannot predict.
Absent comprehensive federal legislation to control greenhouse gas emissions, the EPA is moving ahead administratively under its existing Clean Air Act authority. The EPA is compelled to issue rules by the U.S. Supreme Court's April 2007 Massachusetts v. EPA ruling that greenhouse gases are “pollutants” for purposes of the Clean Air Act and the EPA's December 2009 finding that continued emissions of greenhouse gases endanger human health and welfare. With respect to our light- and heavy-duty vehicle fleet, the EPA has since finalized regulations limiting greenhouse gas emissions and increasing fuel economy standards. The EPA and the NHTSA have finalized such regulations applicable to heavy-duty vehicles through model-year 2018 and to light-duty vehicles through model-year 2025. On August 16, 2016, the EPA and the NHTSA issued additional regulations that would impose more stringent standards for heavy-duty vehicles through model-year 2027. Federal efforts to curtail greenhouse gas emissions and to increase the fuel efficiency of light-duty and heavy-duty vehicles could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
With regard to greenhouse gas emissions from our landfills, on July 14, 2016, the EPA issued amendments to its regulations that require large landfills that commenced construction, reconstruction or modification on or after July 17, 2014 to capture additional landfill gas to reduce emissions of methane and certain non-methane gases, which are recognized as greenhouse gases. In a separate action finalized that same day, the EPA issued updates to its 1996 Emission Guidelines to reduce emissions of landfill gas from existing active landfills. Both actions are part of the Obama Administration's Climate Action Plan - Strategy to Reduce Methane Emissions. These regulations may require our landfills to deploy more stringent emission controls and monitoring systems, with resulting capital or operating costs. The application of these or other greenhouse gas regulations to our landfills could have a material adverse effect on our landfill operations and on our consolidated financial condition, results of operations and cash flows.
We may have environmental liabilities that are not covered by our insurance. Changes in insurance markets also may impact our financial results.
We may incur environmental liabilities arising from our operations or properties. We maintain high deductibles for our environmental liability insurance coverage. If we were to incur substantial liability for environmental damage, our insurance coverage may be inadequate to cover such liability. This could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
Also, due to the variable condition of the insurance market, we have experienced, and may experience in the future, increased insurance retention levels and increased premiums or unavailability of insurance. As we assume more risk for insurance through higher retention levels, we may experience more variability in our insurance reserves and expense.
Despite our efforts, we may incur additional liability under environmental laws in excess of amounts presently known and accrued.
We are a potentially responsible party at many sites under CERCLA, which provides for the remediation of contaminated facilities and imposes strict, joint and several liability for the cost of remediation on current owners and operators of a facility at which there has been a release or a threatened release of a “hazardous substance.” CERCLA liability also extends to parties who were site owners and operators at the time hazardous substances were disposed, and on persons who arrange for the disposal of such substances at the facility (e.g., generators of the waste and transporters who selected the disposal site). Hundreds of substances are defined as “hazardous” under CERCLA and their presence, even in minute amounts, can result in substantial liability.
Notwithstanding our efforts to comply with applicable environmental laws, we may have additional liability under environmental laws in excess of our current reserves because, among other things, hazardous substances may be present in waste collected by us or disposed of in our landfills (or in waste collected, transported or disposed of in the past by companies we have acquired), environmental laws may change, or there may be adverse environmental conditions that develop or were otherwise previously unknown to us. For example, during 2012 through 2014, we recorded an aggregate of approximately $400 million in charges relating to environmental remediation at our closed landfill in Bridgeton, Missouri. Actual costs for liabilities at Bridgeton or other sites could be significantly greater than amounts we have accrued for these purposes. Environmental liabilities in excess of our current reserves could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
We have substantial indebtedness, which may limit our financial flexibility.
As of December 31, 2016, we had approximately $7.7 billion in principal value of debt and capital leases outstanding. This amount of indebtedness and our debt service requirements may limit our financial flexibility to access additional capital and make capital expenditures and other investments in our business, to withstand economic downturns and interest rate increases, to plan for or react to changes in our business and our industry, and to comply with the financial and other covenants of our debt instruments. Further, our ability to comply with these financial and other covenants may be affected by changes in economic or business conditions or other events that are beyond our control. If we do not comply with these covenants, we may be required to take actions such as reducing or delaying capital expenditures, reducing or eliminating dividends or stock repurchases, selling assets, restructuring or refinancing all or part of our existing debt, or seeking additional equity capital.
We may be unable to maintain our credit ratings or execute our financial strategy.
Our ability to execute our financial strategy depends in part on our ability to maintain investment grade ratings on our debt. The credit rating process is contingent upon a number of factors, many of which are beyond our control. We cannot assure you that we will be able to maintain our investment grade ratings in the future. If we were unable to do so, our interest expense would increase and our ability to obtain financing on favorable terms may be adversely affected.
Our financial strategy also depends on our ability to generate sufficient cash flow to reinvest in our existing business, fund internal growth, acquire other solid waste businesses, pay dividends, repurchase stock, and take other actions to enhance shareholder value. We cannot assure you that we will succeed in executing our broad-based pricing initiatives, that we will generate sufficient cash flow to execute our financial strategy, that we will be able to pay cash dividends at our present rate, or increase them, or that we will be able to continue our share repurchase program.
Currently pending or future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements.
We are and will continue to be involved in lawsuits, regulatory inquiries, and governmental and other legal proceedings arising out of the ordinary course of our business. Many of these matters raise complicated factual and legal issues and are subject to uncertainties. The timing of the final resolutions to lawsuits, regulatory inquiries, and governmental and other legal proceedings is uncertain. Further, the possible outcomes or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments and adversely affect our consolidated financial condition, results of operations and cash flows.
For example, we incur costs to defend against litigation brought by government agencies and private parties who allege we are in violation of our permits and applicable environmental laws and regulations, or who assert claims alleging nuisance, environmental damage, personal injury or property damage. As a result, we may be required to pay fines or judgments or implement corrective measures, or we may have our permits and licenses modified or revoked. A significant judgment against us, the loss of a significant permit or license, or the imposition of a significant fine could have a material adverse effect on our consolidated financial condition, results of operations and cash flows. We establish accruals for our estimates of the costs
associated with lawsuits, regulatory, governmental and other legal proceedings. We could underestimate such accruals. Such shortfalls could result in significant unanticipated charges to income.
We may be unable to manage our growth effectively.
Our growth strategy places significant demands on our financial, operational and management resources. To continue our growth, we may need to add administrative, managerial and other personnel, and may need to make additional investments in operations and systems. We cannot assure you that we will be able to find and train qualified personnel, or do so on a timely basis, or to expand or otherwise modify our operations and systems to the extent, and in the time, required.
We may be unable to execute our acquisition growth strategy.
Our ability to execute our growth strategy depends in part on our ability to identify and acquire desirable acquisition candidates and on our ability to successfully integrate acquired operations into our business. The integration of our operations with those of acquired companies may present significant challenges to our management. In addition, competition for acquisition candidates may prevent us from acquiring certain acquisition candidates. Thus, we cannot assure you that:
| |
• | desirable acquisition candidates exist or will be identified; |
| |
• | we will be able to acquire any of the candidates identified; |
| |
• | we will effectively integrate and manage companies we acquire; or |
| |
• | any acquisitions will be profitable or accretive to our earnings. |
If any of these factors force us to alter our growth strategy, our growth prospects could be adversely affected.
Businesses we acquire may have undisclosed liabilities.
Our due diligence investigations of acquisition candidates may fail to discover certain undisclosed liabilities. If we acquire a company having undisclosed liabilities such as environmental, remediation or contractual liabilities, as a successor owner we may be responsible for such undisclosed liabilities. We try to minimize our exposure to such liabilities by conducting due diligence, by obtaining indemnification from each seller of the acquired companies, by deferring payment of a portion of the purchase price as security for the indemnification and by acquiring only specified assets. However, we cannot assure you that we will be able to obtain indemnification or that any indemnification obtained will be enforceable, collectible or sufficient in amount, scope or duration to fully offset any undisclosed liabilities arising from our acquisitions.
Our consolidated financial statements are based on estimates and assumptions that may differ from actual results.
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and necessarily include amounts based on management's estimates. Actual results may differ from these amounts. Significant items requiring management to make subjective or complex judgments that are inherently uncertain include the recoverability of long-lived assets, the depletion and amortization of landfill development costs, accruals for final capping, closure and post-closure costs, valuation allowances for accounts receivable and deferred tax assets, liabilities for potential litigation, claims and assessments, and liabilities for environmental remediation, multiemployer pension plans, employee benefit plans, deferred taxes, uncertain tax positions, insurance and our estimates of the fair values of assets acquired and liabilities assumed in any acquisition. We cannot assure you that the liabilities recorded for items such as these will be adequate to cover the costs we ultimately will face.
The introduction of new accounting rules, laws or regulations could adversely impact our reported results of operations.
Complying with new accounting rules, laws or regulations could adversely impact our results of operations or cause unanticipated fluctuations in our results of operations or financial conditions in future periods.
We may be subject to workforce influences, including work stoppages, which could increase our operating costs and disrupt our operations.
As of December 31, 2016, approximately 27% of our workforce was represented by various local labor unions. If our unionized workers were to engage in strikes, work stoppages or other slowdowns, we could experience a significant disruption of our operations and an increase in our operating costs, which could have an adverse effect on our consolidated financial condition, results of operations and cash flows. Additional groups of employees may seek union representation in the future and, if successful, the negotiation of collective bargaining agreements could divert management's attention and result in increased operating costs. If a greater percentage of our workforce becomes unionized, our consolidated financial condition, results of operations and cash flows could be adversely impacted due to the potential for increased operating costs.
Our obligation to fund multiemployer pension plans to which we contribute, or our withdrawal from such plans, may have an adverse effect on us.
We contribute to 26 multiemployer pension plans under collective bargaining agreements (CBAs) covering union-represented employees. Approximately 20% of our total current employees participate in such multiemployer plans. We do not administer these plans and generally are not represented on the boards of trustees of these plans. The Pension Protection Act enacted in 2006 (the PPA) requires under-funded pension plans to improve their funding ratios. Based on the information available to us, we believe that some of the multiemployer plans to which we contribute are either “critical” or “endangered” as those terms are defined in the PPA. We cannot presently determine the amount of additional funding, if any, we may be required to make to these plans. However, plan assessments could have a material adverse effect on our results of operations or cash flows for a given period.
Further, under current law, upon the termination of a multiemployer pension plan, or in the event of a withdrawal by us (which we consider from time to time) or a mass withdrawal of contributing employers (each, a Withdrawal Event), we would be required to make payments to the plan for our proportionate share of the plan's unfunded vested liabilities. We cannot assure you that there will not be a Withdrawal Event with respect to any of the multiemployer pension plans to which we contribute or that, in the event of such a Withdrawal Event, the amounts we would be required to contribute would not have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
For additional discussion and detail regarding multiemployer pension plans see, Note 11, Employee Benefit Plans, to our consolidated financial statements in Item 8 of this Form 10-K.
The costs of providing for pension benefits and related funding requirements are subject to changes in pension fund values and fluctuating actuarial assumptions, and may have a material adverse effect on our results of operations and cash flows.
We sponsor a defined benefit pension plan that is funded with trustee assets invested in a diversified portfolio of debt and equity securities. Our costs for providing such benefits and related funding requirements are subject to changes in the market value of plan assets. Our pension expenses and related funding requirements are also subject to various actuarial calculations and assumptions, which may differ materially from actual results due to changing market and economic conditions, interest rates and other factors. A significant increase in our pension obligations and funding requirements could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
The loss of key personnel could have a material adverse effect on our consolidated financial condition, results of operations, cash flows and growth prospects.
Our future success depends on the continued contributions of several key employees and officers. The loss of the services of key employees and officers, whether such loss is through resignation or other causes, or the inability to attract additional qualified personnel, could have a material adverse effect on our consolidated financial condition, results of operations, cash flows and growth prospects.
Our strategy includes an increasing dependence on technology in our operations; if any of our key technology fails, our business could be adversely affected.
Our operations are increasingly dependent on technology. Our information technology systems are critical to our ability to drive profitable growth through differentiation, continue the implementation of standardized processes and deliver a consistent customer experience. One of the five pillars of our strategy is to grow through enabling our customers to do business with us through more channels and with better access to information and, accordingly, we have made substantial investment in our e-commerce platform. Problems with the operation of the information or communication technology systems we use could adversely affect, or temporarily disable, all or a portion of our operations. Inabilities and delays in implementing new systems can also affect our ability to realize projected or expected revenue or cost savings. Additionally, any systems failures could impede our ability to timely collect and report financial results in accordance with applicable laws.
A cyber security incident could negatively impact our business and our relationships with customers.
We use computers in substantially all aspects of our business operations. We also use mobile devices, social networking and other online activities to connect with our employees and our customers. Such uses give rise to cyber security risks, including security breach, espionage, system disruption, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ personal information, private information about employees, and financial and strategic information about the Company and its business partners. We also rely on a Payment Card Industry compliant third party to protect our customers’ credit card information. While the Company pursues its strategy to grow through acquisitions and to pursue new initiatives that improve our operations and cost structure, the Company is also expanding and improving its information technologies,
resulting in a larger technological presence and corresponding exposure to cyber security risk. If we fail to assess and identify cyber security risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks. Additionally, while we have implemented measures to prevent security breaches and cyber incidents, our preventive measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Our corporate office is located at 18500 North Allied Way, Phoenix, Arizona 85054, where we currently lease approximately 145,000 square feet of office space.
Our principal property and equipment consists of land, landfills, buildings, vehicles and equipment. We own or lease real property in the states in which we conduct operations. As of December 31, 2016, we owned or operated 333 collection operations, 204 transfer stations, 192 active landfills, 64 recycling centers, 7 treatment, recovery and disposal facilities, and 10 salt water disposal wells in 39 states and Puerto Rico. In the aggregate, our active solid waste landfills total approximately 107,500 acres, including approximately 37,400 permitted acres. We also have post-closure responsibility for 124 closed landfills. We believe that our property and equipment are adequate for our current needs.
General Legal Proceedings
We are subject to extensive and evolving laws and regulations and have implemented safeguards to respond to regulatory requirements. In the normal course of our business, we become involved in legal proceedings. Some may result in fines, penalties or judgments against us, which may impact earnings and cash flows for a particular period. Although we cannot predict the ultimate outcome of any legal matter with certainty, we do not believe the outcome of any of our pending legal proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
As used herein, the term legal proceedings refers to litigation and similar claims against us and our subsidiaries, excluding: (1) ordinary course accidents, general commercial liability and workers' compensation claims, which are covered by insurance programs, subject to customary deductibles, and which, together with self-insured employee health care costs, are discussed in Note 7, Other Liabilities, to our consolidated financial statements in Item 8 of this Form 10-K; and (2) environmental remediation liabilities, which are discussed in Note 8, Landfill and Environmental Costs, to our consolidated financial statements in Item 8 of this Form 10-K.
We accrue for legal proceedings when losses become probable and reasonably estimable. We have recorded an aggregate accrual of approximately $48 million relating to our outstanding legal proceedings as of December 31, 2016. As of the end of each applicable reporting period, we review each of our legal proceedings and, where it is probable that a liability has been incurred, we accrue for all probable and reasonably estimable losses. Where we are able to reasonably estimate a range of losses we may incur with respect to such a matter, we record an accrual for the amount within the range that constitutes our best estimate. If we are able to reasonably estimate a range but no amount within the range appears to be a better estimate than any other, we use the amount that is the low end of such range. If we had used the high ends of such ranges, our aggregate potential liability would be approximately $45 million higher than the amount recorded as of December 31, 2016.
Legal Proceedings over Certain Environmental Matters Involving Governmental Authorities with Possible Sanctions of $100,000 or More
Item 103 of the SEC's Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions unless we reasonably believe the monetary sanctions will not equal or exceed $100,000. We are disclosing the following matters in accordance with that requirement:
Bridgeton Landfill Matters - Regulatory
On July 23, 2012, the Missouri Department of Natural Resources (MDNR) issued a notice of violation (NOV) to the closed Bridgeton Landfill in Bridgeton, Missouri after it determined that a sub-surface smoldering event (SSE) was occurring at the landfill. The NOV specified required actions intended to prevent the spread of the SSE, offsite odors, and environmental pollution. On March 27, 2013, the Missouri Attorney General's Office, on behalf of MDNR, sued Republic Services, Inc., and our subsidiaries Allied Services, LLC, and Bridgeton Landfill, LLC in the Circuit Court of St. Louis County in connection with
odors and leachate from the landfill. The action alleges, among other things, violations of the Missouri Solid Waste Management, Hazardous Waste Management, Clean Water, and Air Conservation Laws, and claims for nuisance, civil penalties, costs, and natural resource damages. The suit seeks a preliminary and permanent injunction requiring us to take measures to remedy the alleged resulting nuisance, civil penalties of approximately $37 million, and other relief. On May 13, 2013, the court entered a stipulated preliminary injunction under which Bridgeton Landfill, LLC agreed, among other things, to continue remedial work plans previously approved by MDNR and to continue reporting to MDNR. On June 19, 2014, the court entered an agreed amendment to the injunction providing for increased frequency in some carbon monoxide monitoring, three new rounds of air sampling, implementation of an Odor Management Plan, and cost reimbursement to MDNR. On October 1, 2015, we removed the case to the United States District Court for the Eastern District of Missouri. The Missouri Attorney General’s motion to remand the case to the Circuit Court of St. Louis County was granted on April 26, 2016. The case is presently set for trial beginning October 31, 2017. On April 28, 2016, Bridgeton Landfill, LLC and the United States Environmental Protection Agency entered into an Administrative Settlement Agreement and Order on Consent addressing certain remedial actions in the north quarry of the Bridgeton Landfill, including a heat extraction barrier, an expanded landfill cover, and additional temperature monitoring probes.
Sunshine Canyon Landfill Matter
The Sunshine Canyon Landfill in Sylmar, California entered into settlement agreements with the South Coast Air Quality Management District (SCAQMD) in 2012 and 2013. The settlement agreements resolved claims for excess emission charges, civil penalties, and investigative and administrative costs relating to odor-related and surface emissions NOVs received from SCAQMD. Since the end of the period covered by the 2013 settlement agreement, which was September 6, 2013, and through February 10, 2017, Sunshine Canyon has received an additional 122 NOVs from SCAQMD for odors. We have received a $2.2 million civil penalty demand from the SCAQMD, and the SCAQMD's Executive Officer filed a Petition before the Hearing Board of the SCAQMD for an abatement order. We have entered into a Stipulated Abatement Order with the Hearing Board providing for certain abatement measures to be implemented at the landfill. We expect to contest the penalty amount.
Hunt County Matter
On July 15, 2015, Hunt County, Texas (the County) and the State of Texas Commission on Environmental Quality filed suit against Republic Services, Inc. and our subsidiaries, Republic Waste Services of Texas, Ltd. and Republic Waste Services of Texas GP, Inc., alleging violations of the Texas Water Code and Texas Health and Safety Code due to allegedly improper and unpermitted storage and disposal of waste on our surplus property adjacent to the Maloy Landfill. The parties have reached an agreement to resolve the dispute, which includes $400,000 in civil penalties. The agreement has been approved by the County and is pending final approval by the Texas Attorney General's Office.
Arbor Hills Landfill Matter
BFI Waste Systems of North America, LLC (BFIWS) formerly owned a landfill gas collection and control system (GCCS) at the Arbor Hills Landfill in Salem Township, Michigan. The Michigan Department of Environmental Quality issued NOVs to BFIWS on February 2, March 15, April 29, and December 14, 2016 and the EPA issued a Finding of Violation (FOV) to BFIWS on September 29, 2016. The NOVs and FOV, which were issued prior to the transfer of ownership of the GCCS, relate to alleged off site odors and operation conditions at the landfill. BFIWS has not yet received a civil penalty demand from either agency.
Pine Avenue Landfill Matter
On December 20, 2016, the EPA issued an FOV to Allied Waste Niagara Falls Landfill, LLC (Allied-Niagara). The FOV alleges violations of the Clean Air Act and associated regulations relating to operation of Allied-Niagara’s Pine Avenue Landfill in Niagara Falls, New York. Allied-Niagara has not yet received a civil penalty demand from the agency.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
None.
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information, Holders and Dividends
The principal market for our common stock is the New York Stock Exchange, and it is traded under the symbol RSG. The following table sets forth the range of the high and low sale prices per share of our common stock on the New York Stock Exchange and the cash dividends declared per share of common stock for the periods indicated:
|
| | | | | | | | | | | |
| High | | Low | | Dividends Declared |
Year Ended December 31, 2016: | | | | | |
First quarter | $ | 48.76 |
| | $ | 41.82 |
| | $ | 0.30 |
|
Second quarter | 51.31 |
| | 45.56 |
| | 0.30 |
|
Third quarter | 52.92 |
| | 49.42 |
| | 0.32 |
|
Fourth quarter | 58.00 |
| | 49.18 |
| | 0.32 |
|
Year Ended December 31, 2015: | | | | | |
First quarter | $ | 42.05 |
| | $ | 38.95 |
| | $ | 0.28 |
|
Second quarter | 41.46 |
| | 38.99 |
| | 0.28 |
|
Third quarter | 43.71 |
| | 39.17 |
| | 0.30 |
|
Fourth quarter | 45.35 |
| | 40.67 |
| | 0.30 |
|
There were 639 holders of record of our common stock at February 6, 2017, which does not include beneficial owners for whom Cede & Co. or others act as nominees.
In February 2017, our board of directors declared a regular quarterly dividend of $0.32 per share for shareholders of record on April 3, 2017. We expect to continue to pay quarterly cash dividends, and we may consider increasing our dividends if we believe it will enhance shareholder value.
We have the ability under our credit facilities to pay dividends and repurchase our common stock if we are in compliance with the financial covenants in our credit facilities. As of December 31, 2016, we were in compliance with those financial covenants.
Issuer Purchases of Equity Securities
The following table provides information relating to our purchases of shares of our common stock during the three months ended December 31, 2016:
|
| | | | | | | | | | | | | |
| Total Number of Shares Purchased (a) | | Average Price Paid per Share (a) | | Total Number of Shares Purchased as Part of Publicly Announced Program (b) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (c) |
October 1 - 31 | 1,330,907 |
| | $ | 50.08 |
| | 1,330,907 |
| | $ | 482,274,256 |
|
November 1 - 30 | 452,326 |
| | 52.39 |
| | 452,326 |
| | 458,574,918 |
|
December 1 - 31 | 122,326 |
| | 56.02 |
| | 122,326 |
| | 451,722,360 |
|
| 1,905,559 |
| | | | 1,905,559 |
| | |
| |
(a) | In October 2015, our board of directors added $900.0 million to the existing share repurchase authorization that now extends through December 31, 2017. Share repurchases under the program may be made through open market purchases or privately negotiated transactions in accordance with applicable federal securities laws. While the board of directors has approved the program, the timing of any purchases, the prices and the number of shares to be purchased will be determined by our management, at its discretion, and will depend upon market conditions and other factors. The share repurchase program may be extended, suspended or discontinued at any time. As of December 31, 2016, there were no repurchased shares pending settlement. |
| |
(b) | The total number of shares purchased as part of the publicly announced program were all purchased pursuant to the October 2013 and October 2015 authorizations. |
| |
(c) | Shares that may be purchased under the program exclude shares of common stock that may be surrendered to satisfy statutory minimum tax withholding obligations in connection with the vesting of restricted stock units issued to employees. |
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the three months ended December 31, 2016.
Performance Graph
The following graph compares the performance of our common stock to the Standard & Poor’s 500 Stock Index (S&P 500 Index) and the Dow Jones Waste & Disposal Services Index (DJ W&DS Index). The graph covers the period from December 31, 2011 to December 31, 2016 and assumes that the value of the investment in our common stock and in each index was $100 as of December 31, 2011 and that all dividends were reinvested.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Indexed Returns for the Years Ended December 31, |
| 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 |
Republic Services, Inc. | $ | 100.00 |
| | $ | 110.01 |
| | $ | 128.30 |
| | $ | 160.05 |
| | $ | 181.21 |
| | $ | 240.73 |
|
S&P 500 Index | 100.00 |
| | 116.00 |
| | 153.57 |
| | 174.60 |
| | 177.01 |
| | 198.18 |
|
DJ W&DS Index | 100.00 |
| | 108.50 |
| | 135.56 |
| | 154.20 |
| | 160.66 |
| | 194.63 |
|
| |
ITEM 6. | SELECTED FINANCIAL DATA |
You should read the following Selected Financial Data in conjunction with Item 8, Financial Statements and Supplementary Data, which includes our consolidated financial statements and notes thereto as of December 31, 2016 and 2015 and for each of the three years ended December 31, 2016, 2015 and 2014 and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-K.
See Notes 1, 2, 3, 8, 9, 10 and 12 to our consolidated financial statements in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for a discussion of basis of presentation, significant accounting policies, business acquisitions and divestitures, landfill and environmental costs, debt, income taxes and stockholders’ equity and their effect on comparability of year-to-year data. These historical results are not necessarily indicative of the results to be expected in the future. Amounts are in millions, except per share data. |
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Statement of Operations Data: | | | | | | | | | |
Revenue | $ | 9,387.7 |
| | $ | 9,115.0 |
| | $ | 8,803.3 |
| | $ | 8,417.2 |
| | $ | 8,118.3 |
|
Expenses: | | | | | | | | | |
Cost of operations | 5,764.0 |
| | 5,518.6 |
| | 5,643.1 |
| | 5,234.7 |
| | 5,005.7 |
|
Depreciation, amortization and depletion | 991.1 |
| | 970.6 |
| | 906.9 |
| | 877.4 |
| | 848.5 |
|
Accretion | 79.1 |
| | 79.4 |
| | 78.0 |
| | 76.6 |
| | 78.4 |
|
Selling, general and administrative | 969.8 |
| | 983.1 |
| | 918.9 |
| | 853.8 |
| | 820.9 |
|
Withdrawal costs - multiemployer pension funds | 5.6 |
| | 4.5 |
| | 1.5 |
| | 157.7 |
| | — |
|
(Gain) loss on disposition of assets and impairments, net | (0.1 | ) | | — |
| | 20.0 |
| | (1.9 | ) | | (2.7 | ) |
Restructuring charges | 40.7 |
| | — |
| | 1.8 |
| | 8.6 |
| | 11.1 |
|
Operating income | 1,537.5 |
| | 1,558.8 |
| | 1,233.1 |
| | 1,210.3 |
| | 1,356.4 |
|
Interest expense | (371.3 | ) | | (364.9 | ) | | (348.7 | ) | | (360.0 | ) | | (388.5 | ) |
Loss on extinguishment of debt | (196.2 | ) | | — |
| | (1.4 | ) | | (2.1 | ) | | (112.6 | ) |
Interest income | 0.9 |
| | 0.8 |
| | 0.6 |
| | 0.7 |
| | 1.0 |
|
Loss from unconsolidated equity method investment | (6.1 | ) | | — |
| | — |
| | — |
| | — |
|
Other income, net | 1.1 |
| | 1.2 |
| | 1.7 |
| | 2.3 |
| | 3.4 |
|
Income before income taxes | 965.9 |
| | 1,195.9 |
| | 885.3 |
| | 851.2 |
| | 859.7 |
|
Provision for income taxes | 352.7 |
| | 445.5 |
| | 337.4 |
| | 262.1 |
| | 251.8 |
|
Net income | 613.2 |
| | 750.4 |
| | 547.9 |
| | 589.1 |
| | 607.9 |
|
Net income attributable to noncontrolling interests in consolidated subsidiary | (0.6 | ) | | (0.5 | ) | | (0.3 | ) | | (0.2 | ) | | (0.3 | ) |
Net income attributable to Republic Services, Inc. | $ | 612.6 |
| | $ | 749.9 |
| | $ | 547.6 |
| | $ | 588.9 |
| | $ | 607.6 |
|
Basic earnings per share attributable to Republic Services, Inc. stockholders: | | | | | | | | | |
Basic earnings per share | $ | 1.79 |
| | $ | 2.14 |
| | $ | 1.54 |
| | $ | 1.63 |
| | $ | 1.56 |
|
Weighted average common shares outstanding | 343.0 |
| | 350.0 |
| | 356.7 |
| | 362.1 |
| | 366.9 |
|
Diluted earnings per share attributable to Republic Services, Inc. stockholders: | | | | | | | | | |
Diluted earnings per share | $ | 1.78 |
| | $ | 2.13 |
| | $ | 1.53 |
| | $ | 1.62 |
| | $ | 1.55 |
|
Weighted average common and common equivalent shares outstanding | 344.4 |
| | 351.4 |
| | 358.1 |
| | 363.4 |
| | 368.0 |
|
Cash dividends per common share | $ | 1.24 |
| | $ | 1.16 |
| | $ | 1.08 |
| | $ | 0.99 |
| | $ | 0.91 |
|
Other Operating Data: | | | | | | | | | |
Cash provided by operating activities | $ | 1,847.8 |
| | $ | 1,679.7 |
| | $ | 1,529.8 |
| | $ | 1,513.8 |
| | $ | 1,766.7 |
|
Purchases of property and equipment | 927.8 |
| | 945.6 |
| | 862.5 |
| | 903.5 |
| | 936.5 |
|
Proceeds from sales of property and equipment | 9.8 |
| | 21.2 |
| | 35.7 |
| | 28.7 |
| | 34.6 |
|
Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents | $ | 67.8 |
| | $ | 32.4 |
| | $ | 75.2 |
| | $ | 213.3 |
| | $ | 67.6 |
|
Restricted cash and marketable securities | 90.5 |
| | 100.3 |
| | 115.6 |
| | 169.7 |
| | 164.2 |
|
Total assets | 20,629.6 |
| | 20,535.9 |
| | 20,052.4 |
| | 19,949.2 |
| | 19,616.9 |
|
Total debt | 7,658.9 |
| | 7,532.9 |
| | 7,018.1 |
| | 7,070.5 |
| | 6,921.8 |
|
Total stockholders' equity | 7,693.7 |
| | 7,776.6 |
| | 7,747.8 |
| | 7,906.1 |
| | 7,705.7 |
|
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in Item 8 of this Form 10-K. This discussion may contain forward-looking statements that anticipate results that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ from expectations in Item 1A, Risk Factors in this Form 10-K.
Overview
Republic is the second largest provider of services in the domestic non-hazardous solid waste industry, as measured by revenue. As of December 31, 2016, we operated in 39 states and Puerto Rico through 333 collection operations, 204 transfer stations, 192 active landfills, 64 recycling centers, 7 treatment, recovery and disposal facilities, and 10 salt water disposal wells. We also operated 71 landfill gas and renewable energy projects and had post-closure responsibility for 124 closed landfills.
Revenue for the year ended December 31, 2016 increased by 3.0% to $9,387.7 million compared to $9,115.0 million in 2015. This change in revenue is due to increases in average yield of 2.1%, volume of 1.0%, acquisitions, net of divestitures of 0.6%, and recycled commodities of 0.5%, partially offset by decreases in fuel recovery fees of 0.8% and energy services of 0.4%.
The following table summarizes our revenue, costs and expenses for the years ended December 31, 2016, 2015 and 2014 (in millions of dollars and as a percentage of revenue):
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Revenue | $ | 9,387.7 |
| | 100.0 | % | | $ | 9,115.0 |
| | 100.0 | % | | $ | 8,803.3 |
| | 100.0 | % |
Expenses: | | | | | | | | | | | |
Cost of operations | 5,764.0 |
| | 61.4 |
| | 5,518.6 |
| | 60.5 |
| | 5,643.1 |
| | 64.1 |
|
Depreciation, amortization and depletion of property and equipment | 919.8 |
| | 9.8 |
| | 898.7 |
| | 9.9 |
| | 838.5 |
| | 9.5 |
|
Amortization of other intangible assets and other assets | 71.3 |
| | 0.8 |
| | 71.9 |
| | 0.8 |
| | 68.4 |
| | 0.8 |
|
Accretion | 79.1 |
| | 0.8 |
| | 79.4 |
| | 0.9 |
| | 78.0 |
| | 0.9 |
|
Selling, general and administrative | 969.8 |
| | 10.3 |
| | 983.1 |
| | 10.8 |
| | 918.9 |
| | 10.4 |
|
Withdrawal costs - multiemployer pension funds | 5.6 |
| | 0.1 |
| | 4.5 |
| | — |
| | 1.5 |
| | — |
|
(Gain) loss on disposition of assets and impairments, net | (0.1 | ) | | — |
| | — |
| | — |
| | 20.0 |
| | 0.3 |
|
Restructuring charges | 40.7 |
| | 0.4 |
| | — |
| | — |
| | 1.8 |
| | — |
|
Operating income | $ | 1,537.5 |
| | 16.4 | % | | $ | 1,558.8 |
| | 17.1 | % | | $ | 1,233.1 |
| | 14.0 | % |
Our pre-tax income was $965.9 million, $1,195.9 million and $885.3 million for 2016, 2015 and 2014, respectively. Our net income attributable to Republic Services, Inc. was $612.6 million, or $1.78 per diluted share for 2016, compared to $749.9 million, or $2.13 per diluted share, for 2015, and $547.6 million, or $1.53 per diluted share, for 2014.
During each of 2016, 2015 and 2014, we recorded a number of charges, other expenses and benefits that impacted our pre-tax income, net income attributable to Republic Services, Inc. (net income – Republic) and diluted earnings per share as noted in the following table (in millions, except per share data). Additionally, see our “Cost of Operations,” “Selling, General and Administrative Expenses” and “Income Taxes” discussions contained in the Results of Operations section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of other items that impacted our earnings.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2016 | | Year Ended December 31, 2015 | | Year Ended December 31, 2014 |
| Pre-tax Income | | Net Income - Republic | | Diluted Earnings per Share | | Pre-tax Income | | Net Income - Republic | | Diluted Earnings per Share | | Pre-tax Income | | Net Income - Republic | | Diluted Earnings per Share |
As reported | $ | 965.9 |
| | $ | 612.6 |
| | $ | 1.78 |
| | $ | 1,195.9 |
| | $ | 749.9 |
| | $ | 2.13 |
| | $ | 885.3 |
| | $ | 547.6 |
| | $ | 1.53 |
|
Withdrawal costs - multiemployer pension funds(1) | 5.6 |
| | 3.4 |
| | 0.01 |
| | 4.5 |
| | 2.7 |
| | 0.01 |
| | 1.5 |
| | 0.9 |
| | — |
|
Restructuring charges(1) | 40.7 |
| | 24.6 |
| | 0.07 |
| | — |
| | — |
| | — |
| | 1.8 |
| | 1.0 |
| | — |
|
Loss on extinguishment of debt(1) | 203.4 |
| | 122.7 |
| | 0.36 |
| | — |
| | — |
| | — |
| | 1.4 |
| | 0.9 |
| | — |
|
(Gain) loss on disposition of assets and impairments, net | (0.1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 20.0 |
| | 12.6 |
| | 0.04 |
|
Bridgeton (insurance recovery) / remediation charge and other | — |
| | — |
| | — |
| | (50.0 | ) | | (30.3 | ) | | (0.08 | ) | | 227.1 |
| | 137.6 |
| | 0.38 |
|
Total adjustments | 249.6 |
| | 150.7 |
| | 0.44 |
| | (45.5 | ) | | (27.6 | ) | | (0.07 | ) | | 251.8 |
| | 153.0 |
| | 0.43 |
|
As adjusted | $ | 1,215.5 |
| | $ | 763.3 |
| | $ | 2.22 |
| | $ | 1,150.4 |
| | $ | 722.3 |
| | $ | 2.06 |
| | $ | 1,137.1 |
| | $ | 700.6 |
| | $ | 1.96 |
|
(1) The aggregate effect of the noted items to adjusted diluted earnings per share totals to $0.01 for the year ended December 31, 2014.
We believe that presenting adjusted pre-tax income, adjusted net income – Republic, and adjusted diluted earnings per share, which are not measures determined in accordance with accounting principles generally accepted in the United States (U.S. GAAP), provides an understanding of operational activities before the financial effect of certain items. We use these measures, and believe investors will find them helpful, in understanding the ongoing performance of our operations separate from items that have a disproportionate effect on our results for a particular period. We have incurred comparable charges and costs and have recorded similar recoveries in prior periods, and similar types of adjustments can reasonably be expected to be recorded in future periods. In the case of the Bridgeton remediation charges and insurance recovery, we are adjusting such amounts due to their significant effect on our operating results; however, in the ordinary course of our business, we often incur remediation charges and recoveries that we do not adjust from our operating results. Our definition of adjusted pre-tax income, adjusted net income – Republic, and adjusted diluted earnings per share may not be comparable to similarly titled measures presented by other companies.
Withdrawal costs - Multiemployer Pension Funds. During 2016 and 2015, we recorded charges to earnings of $5.6 million and $4.5 million, respectively, for withdrawal events at the multiemployer pension plan to which we contribute related to our operations in Puerto Rico. During 2014, we recorded charges to earnings of $1.5 million, primarily related to costs associated with our 2013 withdrawal from the Central States, Southeast and Southwest Areas Pension Fund (the Fund).
Restructuring charges. In January 2016, we realigned our field support functions by combining our three regions into two field groups, consolidating our areas and streamlining select operational support roles at our Phoenix headquarters. These changes included reducing administrative staffing levels, relocating office space and closing certain office locations. Additionally, in the second quarter, we began the redesign of our back-office functions as well as the consolidation of over 100 customer service locations into three Customer Resource Centers. The savings realized from these restructuring efforts will be reinvested in our customer-focused programs and initiatives. We expect our consolidation efforts to continue through 2017.
During 2016, we incurred $40.7 million of restructuring charges that consisted of severance and other employee termination benefits, relocation benefits, and the closure of offices with lease agreements with non-cancelable terms. We paid $32.5 million related to these restructuring efforts. We expect to incur additional charges of approximately $15 million over the next year related to our field realignment, the consolidation of our customer service locations, and the redesign of our back-office functions. Substantially all of these restructuring charges will be recorded in our corporate segment.
During 2014, we incurred costs of $1.8 million due to a change in estimate of amounts recoverable from sublet income associated with abandoned office space with non-cancellable lease terms.
Loss on extinguishment of debt. During 2016, we priced cash tender offers to purchase $575.4 million of outstanding notes and debentures with coupons ranging from 5.7% to 7.4% (the Existing Notes). Additionally, we issued $500.0 million of 2.90% senior notes due 2026 (the 2.90% Notes) and used the net proceeds of the offering, together with borrowing under our credit facilities, to purchase the $575.4 million of the combined aggregate principal amount of the Existing Notes. We also used the net proceeds to pay a premium due of $148.1 million and early tender consideration of $28.7 million. The tender of the Existing Notes and sale of the 2.90% Notes closed on July 5, 2016. In 2014, we refinanced our credit facilities and certain of our tax-exempt financings, resulting in non-cash charges for deferred issuance costs of $1.4 million. For a more detailed discussion of
the components of these costs and the debt series to which they relate, see our “Loss on Extinguishment of Debt” discussion contained in the Results of Operations section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Gain) loss on disposition of assets and impairments, net. During 2016, we recorded a charge to earnings of $4.6 million primarily related to environmental costs associated with one of our divested landfills. During 2016, we also recorded a net gain on disposition of assets and impairments related to a business divestiture of $4.7 million. During 2014, we recorded a charge to earnings of $20.0 million primarily related to environmental costs associated with one of our divested landfills, of which $14.1 million is related to closure and post-closure costs and $5.9 million is related to remediation expenditures.
Bridgeton (insurance recovery) / remediation charge and other. During 2015, we collected an insurance recovery of $50.0 million related to our closed Bridgeton Landfill in Missouri. As such, we recorded a reduction of remediation expenses included in our cost of operations. During 2014, we updated our cost and timeline estimates to build and operate a leachate management facility and related infrastructure, manage the remediation area and monitor the site. Accordingly, we recorded environmental remediation charges of $210.6 million. Additionally, we recorded certain remediation charges for the adjacent superfund site and ongoing litigation costs.
Recent Developments
2017 Financial Guidance
In 2017, we will continue to focus on managing the controllable aspects of our business by enhancing the quality of our revenue, investing in profitable growth opportunities and reducing costs. Our team remains focused on executing our strategy to deliver consistent earnings and free cash flow growth, and improve return on invested capital. We are committed to an efficient capital structure, maintaining our investment grade credit ratings and increasing cash returns to our shareholders.
Our guidance is based on current economic conditions and does not assume any significant changes in the overall economy in 2017. Specific guidance follows:
Revenue
We expect 2017 revenue to increase by approximately 4.5 to 5.0% comprised of the following:
|
| |
| Increase (Decrease) |
Average yield | 2.0% |
Volume | 1.0 to 1.25 |
Energy services | 0.25 |
Fuel recovery fees | 0.25 |
Recycled commodities | 0.50 to 0.75 |
Acquisitions | 0.50 |
Total change | 4.5 to 5.0% |
Changes in price are restricted on approximately 50% of our annual service revenue. Of these restricted pricing arrangements:
| |
• | approximately 60% of the revenue has price changes based on fluctuations in a specific index (primarily a consumer price index) as defined in the contract; |
| |
• | approximately 25% of the revenue has fixed price increases based on stated contract terms; and |
| |
• | approximately 15% of the revenue has price changes based on a cost plus a specific profit margin or other measurement. |
The consumer price index varies from a single historical stated period of time or an average of trailing historical rates over a stated period of time. In addition, the initial effect of pricing resets typically lags 6 to 12 months from the end of the index measurement period to the date the revised pricing goes into effect. As a result, current changes in a specific index may not manifest themselves in our reported pricing for several quarters into the future.
Adjusted Diluted Earnings per Share
The following is a summary of anticipated adjusted diluted earnings per share for the year ending December 31, 2017 compared to the actual adjusted diluted earnings per share for the year ended December 31, 2016. Adjusted diluted earnings per share is not a measure determined in accordance with U.S. GAAP: |
| | | | | | |
| (Anticipated) Year Ending December 31, 2017 | | (Actual) Year Ended December 31, 2016 |
Diluted earnings per share | $ 2.29 - 2.33 |
| | $ | 1.78 |
|
Withdrawal costs - multiemployer pension funds | — |
| | 0.01 |
|
Restructuring charges | 0.03 |
| | 0.07 |
|
Loss on extinguishment of debt | — |
| | 0.36 |
|
(Gain) loss on disposition of assets and impairments, net | — |
| | — |
|
Adjusted diluted earnings per share | $ 2.32 - 2.36 |
| | $ | 2.22 |
|
The 2017 anticipated adjusted diluted earnings per share assumes an effective tax rate of approximately 39.5%.
We believe that the presentation of adjusted diluted earnings per share, which excludes withdrawal costs - multiemployer pension funds, restructuring charges, loss on extinguishment of debt, and (gain) loss on business dispositions and impairments, net, provides an understanding of operational activities before the financial effect of certain items. We use this measure, and believe investors will find it helpful, in understanding the ongoing performance of our operations separate from items that have a disproportionate effect on our results for a particular period. We have incurred comparable charges and costs in prior periods, and similar types of adjustments can reasonably be expected to be recorded in future periods. Our definition of adjusted diluted earnings per share may not be comparable to similarly titled measures presented by other companies.
Property and Equipment, Net
In 2017, we anticipate receiving approximately $975 million of property and equipment, net of proceeds from sales of property and equipment, as follows:
|
| | | |
Trucks and equipment | $ | 350 |
|
Landfill | 330 |
|
Containers | 160 |
|
Facilities and other | 150 |
|
Property and equipment received during 2017 | 990 |
|
Proceeds from sales of property and equipment | (15 | ) |
Property and equipment received, net of proceeds, during 2017 | $ | 975 |
|
Results of Operations
Revenue
We generate revenue primarily from our solid waste collection operations. Our remaining revenue is from other services, including transfer station, landfill disposal, recycling, and energy services. Our residential and small-container commercial collection operations in some markets are based on long-term contracts with municipalities. Certain of our municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as a consumer price index. We generally provide small-container commercial and large-container industrial collection services to customers under contracts with terms up to three years. Our transfer stations, landfills and, to a lesser extent, our recycling facilities generate revenue from disposal or tipping fees charged to third parties. In general, we integrate our recycling operations with our collection operations and obtain revenue from the sale of recycled commodities. Our revenue from energy services consists mainly of fees we charge for the treatment of liquid and solid waste derived from the production of oil and natural gas. Other revenue consists primarily of revenue from National Accounts, which represents the portion of revenue generated from nationwide or regional contracts in markets outside our operating areas where the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset with related subcontract costs, which are recorded in cost of operations.
The following table reflects our revenue by service line for the years ended December 31, 2016, 2015 and 2014 (in millions of dollars and as a percentage of revenue):
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Collection: | | | | | | | | | | | |
Residential | $ | 2,239.7 |
| | 23.9 | % | | $ | 2,242.3 |
| | 24.6 | % | | $ | 2,193.6 |
| | 24.9 | % |
Small-container commercial | 2,877.5 |
| | 30.7 |
| | 2,799.9 |
| | 30.7 |
| | 2,723.3 |
| | 30.9 |
|
Large-container industrial | 1,975.8 |
| | 21.0 |
| | 1,890.2 |
| | 20.7 |
| | 1,784.0 |
| | 20.3 |
|
Other | 38.2 |
| | 0.4 |
| | 39.8 |
| | 0.4 |
| | 37.2 |
| | 0.4 |
|
Total collection | 7,131.2 |
| | 76.0 |
| | 6,972.2 |
| | 76.4 |
| | 6,738.1 |
| | 76.5 |
|
Transfer | 1,157.6 |
| | | | 1,112.7 |
| | | | 1,062.6 |
| | |
Less: intercompany | (694.1 | ) | | | | (682.3 | ) | | | | (654.4 | ) | | |
Transfer, net | 463.5 |
| | 4.9 |
| | 430.4 |
| | 4.7 |
| | 408.2 |
| | 4.6 |
|
Landfill | 2,083.6 |
| | | | 2,036.4 |
| | | | 1,975.8 |
| | |
Less: intercompany | (962.4 | ) | | | | (951.9 | ) | | | | (928.1 | ) | | |
Landfill, net | 1,121.2 |
| | 11.9 |
| | 1,084.5 |
| | 11.9 |
| | 1,047.7 |
| | 11.9 |
|
Energy services | 76.4 |
| | 0.8 |
| | 95.8 |
| | 1.1 |
| | 38.7 |
| | 0.5 |
|
Other: | | | | | | | | | | | |
Sale of recycled commodities | 420.4 |
| | 4.5 |
| | 372.0 |
| | 4.1 |
| | 405.8 |
| | 4.6 |
|
Other non-core | 175.0 |
| | 1.9 |
| | 160.1 |
| | 1.8 |
| | 164.8 |
| | 1.9 |
|
Total other | 595.4 |
| | 6.4 |
| | 532.1 |
| | 5.9 |
| | 570.6 |
| | 6.5 |
|
Total revenue | $ | 9,387.7 |
| | 100.0 | % | | $ | 9,115.0 |
| | 100.0 | % | | $ | 8,803.3 |
| | 100.0 | % |
The following table reflects changes in components of our revenue, as a percentage of total revenue, for the years ended December 31, 2016, 2015 and 2014:
|
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
Average yield | 2.1 | % | | 2.3 | % | | 1.4 | % |
Fuel recovery fees | (0.8 | ) | | (1.4 | ) | | 0.1 |
|
Total price | 1.3 |
| | 0.9 |
| | 1.5 |
|
Volume | 1.0 |
| | 1.1 |
| | 2.0 |
|
Recycled commodities | 0.5 |
| | (0.7 | ) | | 0.1 |
|
Energy Services | (0.4 | ) | | — |
| | — |
|
Total internal growth | 2.4 |
| | 1.3 |
| | 3.6 |
|
Acquisitions / divestitures, net | 0.6 |
| | 2.2 |
| | 0.8 |
|
Total | 3.0 | % | | 3.5 | % | | 4.4 | % |
| | | | | |
Core price | 3.3 | % | | 3.6 | % | | 3.1 | % |
Average yield is defined as revenue growth from the change in average price per unit of service, expressed as a percentage. Core price is defined as price increases to our customers and fees, excluding fuel recovery, net of price decreases to retain customers. We also measure changes in average yield and core price as a percentage of related-business revenue, defined as total revenue excluding recycled commodities and fuel recovery fees, to determine the effectiveness of our pricing strategies. Average yield as a percentage of related-business revenue was 2.3%, 2.6%, and 1.5% for 2016, 2015 and 2014, respectively. Core price as a percentage of related-business revenue was 3.7%, 4.0%, and 3.4% for 2016, 2015 and 2014, respectively.
Revenue – 2016 compared to 2015
During 2016, we experienced the following changes in our revenue as compared to 2015:
| |
• | Average yield increased revenue by 2.1% due to positive pricing in all lines of business. |
| |
• | The fuel recovery fee program, which mitigates our exposure to increases in fuel prices, decreased revenue by 0.8%. These fees fluctuate with the price of fuel and, consequently, any decrease in fuel prices results in a decrease in our revenue. Lower fuel recovery fees for 2016 resulted primarily from the decrease in fuel prices. |
| |
• | Volume increased revenue by 1.0% primarily due to volume growth in our large-container industrial collection, landfill and transfer station lines of business, which were partially offset by volume declines in our residential collection line of business. The volume increase in our landfill line of business is primarily attributable to increased municipal solid waste and construction and demolition volumes offset by declines in our special waste volume. |
| |
• | Recycled commodities increased revenue by 0.5% primarily due to increased commodity prices and processing fees. The average price for old corrugated containers for 2016 was $114 per ton compared to $103 per ton for 2015. The average price of old newsprint for 2016 was $99 per ton compared to $80 per ton for 2015. Our processed recycled commodity volume was approximately 2.5 million tons sold for both 2016 and 2015. |
Changing market demand for recycled commodities causes volatility in commodity prices. At current volumes and mix of materials, we believe a $10 per ton change in the price of recycled commodities will change annual revenue and operating income by approximately $27 million and $18 million, respectively.
| |
• | Acquisitions increased revenue by 0.6% due to our continued acquisition growth strategy of acquiring privately held solid waste and recycling companies that complement our existing business platform. |
Revenue – 2015 compared to 2014
During 2015, we experienced the following changes in our revenue as compared to 2014:
| |
• | Average yield increased revenue by 2.3% due to positive pricing in all lines of business. |
| |
• | The fuel recovery fee program, which mitigates our exposure to increases in fuel prices, decreased revenue by 1.4%. These fees fluctuate with the price of fuel and, consequently, any decrease in fuel prices results in a decrease in our revenue. Lower fuel recovery fees for 2015 resulted primarily from the decrease in fuel prices. |
| |
• | Volume increased revenue by 1.1% due to volume growth in all lines of business. The volume increase in our landfill line of business is primarily attributable to increased municipal solid waste and construction and demolition volumes, partially offset by a decline in energy services volumes. |
| |
• | Recycled commodities decreased revenue by 0.7% primarily due to lower commodity prices, partially offset by an increase in production volumes. The average price for old corrugated containers for 2015 was $103 per ton compared to $116 per ton for 2014. The average price of old newsprint for 2015 was $80 per ton compared to $89 per ton for 2014. Our processed recycled commodity volume for 2015 of 2.5 million tons sold was approximately 11% higher than the volume in 2014, primarily due to acquisitions of recycling facilities. |
| |
• | Acquisitions increased revenue by 2.2% primarily due to the acquisitions of Rainbow Disposal Co., Inc. in October 2014, Tervita, LLC (Tervita) in February 2015, and our waste management contract with the County of Sonoma, California that was executed in April 2015. |
Cost of Operations
Cost of operations includes labor and related benefits, which consists of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes. It also includes transfer and disposal costs representing tipping fees paid to third party disposal facilities and transfer stations; maintenance and repairs relating to our vehicles, equipment and containers, including related labor and benefit costs; transportation and subcontractor costs, which include costs for independent haulers that transport our waste to disposal facilities and costs for local operators who provide waste handling services associated with our National Accounts in markets outside our standard operating areas; fuel, which includes the direct cost of fuel used by our vehicles, net of fuel tax credits; disposal franchise fees and taxes, consisting of landfill taxes, municipal franchise fees, host community fees and royalties; landfill operating costs, which includes financial assurance, leachate disposal, remediation charges and other landfill maintenance costs; risk management costs, which includes casualty insurance premiums and claims; cost of goods sold, which includes material costs paid to suppliers associated with recycled commodities; and other, which includes expenses such as facility operating costs, equipment rent and gains or losses on sale of assets used in our operations.
The following table summarizes the major components of our cost of operations for the years ended December 31, 2016, 2015 and 2014 (in millions of dollars and as a percentage of revenue):
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Labor and related benefits | $ | 1,919.4 |
| | 20.4 | % | | $ | 1,848.9 |
| | 20.3 | % | | $ | 1,724.1 |
| | 19.6 | % |
Transfer and disposal costs | 759.7 |
| | 8.1 |
| | 724.4 |
| | 7.9 |
| | 685.3 |
| | 7.8 |
|
Maintenance and repairs | 894.9 |
| | 9.5 |
| | 853.3 |
| | 9.3 |
| | 786.7 |
| | 8.9 |
|
Transportation and subcontract costs | 537.1 |
| | 5.7 |
| | 510.7 |
| | 5.6 |
| | 500.0 |
| | 5.7 |
|
Fuel | 317.0 |
| | 3.4 |
| | 362.4 |
| | 4.0 |
| | 500.0 |
| | 5.7 |
|
Franchise fees and taxes | 451.0 |
| | 4.8 |
| | 443.6 |
| | 4.9 |
| | 427.7 |
| | 4.9 |
|
Landfill operating costs | 175.2 |
| | 1.9 |
| | 151.5 |
| | 1.7 |
| | 145.1 |
| | 1.6 |
|
Risk management | 184.7 |
| | 2.0 |
| | 167.7 |
| | 1.8 |
| | 179.4 |
| | 2.0 |
|
Cost of goods sold | 183.2 |
| | 2.0 |
| | 168.0 |
| | 1.8 |
| | 170.9 |
| | 1.9 |
|
Other | 341.8 |
| | 3.6 |
| | 338.1 |
| | 3.7 |
| | 306.8 |
| | 3.5 |
|
Subtotal | 5,764.0 |
| | 61.4 |
| | 5,568.6 |
| | 61.0 |
| | 5,426.0 |
| | 61.6 |
|
Bridgeton (insurance recovery) / remediation charge | — |
| | — |
| | (50.0 | ) | | (0.5 | ) | | 217.1 |
| | 2.5 |
|
Total cost of operations | $ | 5,764.0 |
| | 61.4 | % | | $ | 5,518.6 |
| | 60.5 | % | | $ | 5,643.1 |
| | 64.1 | % |
These cost categories may change from time to time and may not be comparable to similarly titled categories used by other companies. As such, you should take care when comparing our cost of operations by cost component to that of other companies.
Cost of Operations - 2016 compared to 2015
Our cost of operations increased for 2016 compared to 2015, primarily as a result of the following:
| |
• | Labor and related benefits increased due to increased hourly and salaried wages as a result of merit increases, increased headcount, higher collection volumes and acquisitions. Additionally, there was an increase in health care costs. |
| |
• | Transfer and disposal costs increased primarily due to higher collection volumes. During both 2016 and 2015, approximately 68% of the total waste volume we collected was disposed at landfill sites that we own or operate (internalization). |
| |
• | Maintenance and repairs expense increased due to higher collection volumes, cost of parts, internal labor, third party truck repairs, vehicle complexity and costs associated with our fleet maintenance initiative. |
| |
• | Transportation and subcontract costs increased primarily due to higher collection and transfer station volumes, partially offset by lower fuel surcharges due to the decline in diesel fuel. |
| |
• | Our fuel costs decreased due to lower prices of diesel fuel and our continued conversion to lower cost compressed natural gas (CNG). The national average fuel cost per gallon for 2016 was $2.30 compared to $2.71 for 2015, a decrease of $0.41 or approximately 15%. |
At current consumption levels, we believe a twenty-cent per gallon change in the price of diesel fuel would change our fuel costs by approximately $25 million per year. Offsetting these changes in fuel expense would be changes in our fuel recovery fee charged to our customers. At current participation rates, we believe a twenty-cent per gallon change in the price of diesel fuel changes our fuel recovery fee by approximately $25 million per year.
| |
• | Franchise fees and taxes increased primarily due to volume increases in our landfill line of business. |
| |
• | Landfill operating expenses increased due to volume increases in our landfill line of business and increased leachate transportation and disposal costs. Additionally, during 2015 we recorded favorable remediation adjustments that did not recur for the same period in 2016. |
| |
• | Risk management expenses increased primarily due to favorable actuarial developments in our workers' compensation program recorded during 2015 that were less favorable for 2016, coupled with continued unfavorable actuarial development in our vehicle liability insurance program. |
| |
• | During 2016, cost of goods sold increased primarily due to higher rebates paid for volumes delivered to our recycling facilities as a result of the increase in commodity prices. |
| |
• | During 2015, we collected an insurance recovery of $50.0 million related to our closed Bridgeton Landfill in Missouri. As such, we recorded a reduction of remediation expenses which did not recur in 2016. |
Cost of Operations – 2015 compared to 2014
Excluding the effect of the Bridgeton insurance recovery, our cost of operations increased for 2015 compared to 2014, primarily as a result of the following:
| |
• | Labor and related benefits increased due to increased hourly and salaried wages as a result of merit increases, increased headcount, higher collection volumes and acquisitions. Additionally, there was an increase in health care costs. |
| |
• | Transfer and disposal costs increased primarily due to higher collection volumes. During both 2015 and 2014, approximately 68% of the total waste volume we collected was disposed at landfill sites that we own or operate (internalization). |
| |
• | Maintenance and repairs expense increased due to higher collection volume, cost of parts, internal labor, third party truck repairs, vehicle complexity and costs associated with our fleet maintenance initiative. |
| |
• | Our fuel costs decreased due to lower prices of diesel fuel, our continued conversion to lower cost compressed natural gas (CNG), and higher alternative fuel tax credits recognized in 2015. The national average fuel cost per gallon for 2015 was $2.71 compared to $3.83 for 2014, a decrease of $1.12 or approximately 29%. |
| |
• | Franchise fees and taxes increased primarily due to changes in the relative mix of landfill volumes. |
| |
• | Risk management expenses decreased primarily due to favorable actuarial developments in our workers' compensation program, partially offset by unfavorable developments in our vehicle liability insurance program. |
| |
• | Other expenses increased primarily due to higher facility operating costs, including outside facility maintenance repairs, a lower net gain on sale of operating assets, and property taxes. |
| |
• | During 2015, we collected an insurance recovery of $50.0 million related to our closed Bridgeton Landfill in Missouri. As such, we recorded a reduction of remediation expenses. During 2014, we updated our cost and timeline estimates to build and operate a leachate management facility and related infrastructure, manage the remediation area and monitor our Bridgeton Landfill. Accordingly, we recorded environmental remediation charges of $210.6 million. Additionally, we recorded certain remediation charges for the adjacent superfund site and ongoing litigation costs. |
Depreciation, Amortization and Depletion of Property and Equipment
The following table summarizes depreciation, amortization and depletion of property and equipment for the years ended December 31, 2016, 2015 and 2014 (in millions of dollars and as a percentage of revenue):
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Depreciation and amortization of property and equipment | $ | 629.6 |
| | 6.7 | % | | $ | 613.4 |
| | 6.8 | % | | $ | 575.5 |
| | 6.5 | % |
Landfill depletion and amortization | 290.2 |
| | 3.1 |
| | 285.3 |
| | 3.1 |
| | 263.0 |
| | 3.0 |
|
Depreciation, amortization and depletion expense | $ | 919.8 |
| | 9.8 | % | | $ | 898.7 |
| | 9.9 | % | | $ | 838.5 |
| | 9.5 | % |
Depreciation, Amortization and Depletion of Property and Equipment - 2016 compared to 2015
Depreciation and amortization of property and equipment increased primarily due to higher acquisition costs of replacement vehicles, increased trucks to support volume growth, additional assets acquired with our acquisitions, and an increased number of CNG vehicles in our fleet, which are more expensive to purchase than diesel vehicles.
Landfill depletion and amortization expense increased primarily due to increased landfill disposal volumes and an overall increase in our average depletion and amortization rate. The increase in expense was partially offset by favorable amortization adjustments recorded during 2016 of $6.5 million relative to asset retirement obligations, compared to favorable amortization adjustments of $0.7 million during 2015.
Depreciation, Amortization and Depletion of Property and Equipment - 2015 compared to 2014
Depreciation and amortization of property and equipment increased primarily due to higher acquisition costs of replacement vehicles, increased trucks to support volume growth, additional assets acquired with our acquisitions, and an increased number of CNG vehicles in our fleet, which are more expensive to purchase than diesel vehicles. In addition, we made increased investments in new and upgraded recycling infrastructure projects that became operational over the past several quarters.
Landfill depletion and amortization expense increased primarily due to increased landfill disposal volumes and an overall increase in our average depletion and amortization rate. Additionally, during 2015, we recorded favorable amortization adjustments of $0.7 million relative to asset retirement obligations, compared to favorable amortization adjustments of $13.3 million during 2014.
Amortization of Other Intangible Assets and Other Assets
Expenses for amortization of other intangible assets and other assets were $71.3 million, $71.9 million and $68.4 million for the years ended December 31, 2016, 2015 and 2014, respectively, or 0.8% of revenue for each of 2016, 2015 and 2014. Our other intangible assets and other assets primarily relate to customer relationships, franchise agreements, other municipal agreements, and, to a lesser extent, non-compete agreements and trade names. The changes in amortization expense are the result of assets acquired in the acquisitions of various waste businesses throughout the year, offset by certain intangible assets now being fully amortized.
Accretion Expense
Accretion expense was $79.1 million, $79.4 million and $78.0 million, or 0.8% of revenue, for the year ended December 31, 2016, and 0.9% of revenue for the years ended December 31, 2015 and 2014. Accretion expense has remained relatively unchanged as our asset retirement obligations remained relatively consistent period over period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries, health and welfare benefits, and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems, and clerical and administrative departments. Other expenses include rent and office costs, fees for professional services provided by third parties, legal settlements, marketing, investor and community relations services, directors’ and officers’ insurance, general employee relocation, travel, entertainment and bank charges. Restructuring charges are excluded from selling, general and administrative expenses and are discussed separately below.
The following table summarizes our selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014 (in millions of dollars and as a percentage of revenue):
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Salaries | $ | 646.3 |
| | 6.9 | % | | $ | 636.6 |
| | 7.0 | % | | $ | 579.8 |
| | 6.6 | % |
Provision for doubtful accounts | 20.4 |
| | 0.2 |
| | 22.7 |
| | 0.2 |
| | 22.6 |
| | 0.3 |
|
Other | 303.1 |
| | 3.2 |
| | 323.8 |
| | 3.6 |
| | 316.5 |
| | 3.5 |
|
Total selling, general and administrative expenses | $ | 969.8 |
| | 10.3 | % | | $ | 983.1 |
| | 10.8 | % | | $ | 918.9 |
| | 10.4 | % |
These cost categories may change from time to time and may not be comparable to similarly titled categories used by other companies. As such, you should take care when comparing our selling, general and administrative expenses by cost component to those of other companies.
Selling, General and Administrative Expenses – 2016 compared to 2015
Salaries increased primarily due to higher wages, benefits, and other payroll related items resulting from merit increases and increased headcount.
Other selling, general and administrative expenses decreased primarily due to a reduction in acquisition-related transaction and integration costs associated with our acquisition of Tervita in February 2015 that did not recur in 2016 and favorable legal settlement results.
Selling, General and Administrative Expenses – 2015 compared to 2014
Salaries increased primarily due to higher wages, benefits, and other payroll related items resulting from merit increases and increased headcount, as well as higher management incentive compensation.
Other selling, general and administrative expenses increased primarily due to costs associated with strategic growth initiatives, as well as acquisition-related transaction and integration costs primarily associated with our acquisition of Tervita in February 2015. This increase was partially offset by favorable litigation results during 2015.
Withdrawal Costs - Multiemployer Pension Funds
During 2016, we recorded charges to earnings of $5.6 million for withdrawal events at the multiemployer pension plan to which we contribute related to our operations in Puerto Rico. As we obtain updated information regarding the multiemployer pension plan, the factors used in deriving our estimated withdrawal liability will be subject to change, which may adversely impact our reserves for withdrawal costs.
During 2015, we recorded charges to earnings of $4.1 million for withdrawal events at the multiemployer pension plan to which we contribute related to our operations in Puerto Rico, as well as $0.4 million of legal charges. During 2014, we recorded charges to earnings of $1.5 million, primarily related to costs associated with our 2013 withdrawal from the Fund.
For additional discussion and detail regarding our settlement with the Fund, see our Central States, Southeast and Southwest Areas Pension Fund discussion in Note 11, Employee Benefit Plans, to our consolidated financial statements in Item 8 of this Form 10-K.
(Gain) Loss on Disposition of Assets and Impairments, Net
During 2016, we recorded a charge to earnings of $4.6 million primarily related to environmental costs associated with one of our divested landfills. During 2016, we also recorded a net gain on a business divestiture of $4.7 million. There were no charges to earnings related to disposition of assets and impairments in 2015. During 2014, we recorded a charge to earnings of $20.0 million, primarily related to environmental costs associated with one of our divested landfills, of which $14.1 million is related to closure and post-closure costs and $5.9 million is related to remediation expenditures.
We strive to have a number one or number two market position in each of the markets we serve, or have a clear path on how we will achieve a leading market position over time. In situations where we cannot establish a leading market position, or where operations are not generating acceptable returns, we may decide to divest certain assets and reallocate resources to other markets. Asset or business divestitures could result in gains, losses or asset impairment charges that may be material to our results of operations in a given period.
Restructuring Charges
In January 2016, we realigned our field support functions by combining our three regions into two field groups, consolidating our areas and streamlining select operational support roles at our Phoenix headquarters. These changes included reducing administrative staffing levels, relocating office space and closing certain office locations. Additionally, in the second quarter, we began the redesign of our back-office functions as well as the consolidation of over 100 customer service locations into three Customer Resource Centers. The savings realized from these restructuring efforts will be reinvested in our customer-focused programs and initiatives. We expect our consolidation efforts to continue through 2017.
During 2016, we incurred $40.7 million of restructuring charges that consisted of severance and other employee termination benefits, relocation benefits, and the closure of offices with lease agreements with non-cancelable terms. We paid $32.5 million related to these restructuring efforts. We expect to incur additional charges of approximately $15 million over the next year related to our field realignment, the consolidation of our customer service locations, and the redesign of our back-office functions. Substantially all of these restructuring charges will be recorded in our corporate segment.
During 2014, we incurred costs of $1.8 million due to a change in estimate of amounts recoverable from sublet income associated with abandoned office space with non-cancellable lease terms.
Interest Expense
The following table provides the components of interest expense, including accretion of debt discounts and accretion of discounts primarily associated with environmental and risk insurance liabilities assumed in acquisitions (in millions of dollars):
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Interest expense on debt and capital lease obligations | $ | 324.1 |
| | $ | 324.6 |
| | $ | 310.3 |
|
Accretion of debt discounts | 7.6 |
| | 7.4 |
| | 6.6 |
|
Accretion of remediation liabilities and other | 45.8 |
| | 39.7 |
| | 38.2 |
|
Less: capitalized interest | (6.2 | ) | | (6.8 | ) | | (6.4 | ) |
Total interest expense | $ | 371.3 |
| | $ | 364.9 |
| | $ | 348.7 |
|
As a result of the debt that was extinguished in 2016, total interest expense for 2016 increased primarily due to $7.2 million of unamortized cash flow hedges reclassified to earnings as non-cash interest expense. Total interest expense increased during 2015 due to the issuance of $500.0 million of 3.20% notes in March 2015, as well as borrowings under our Credit Facilities.
During the second half of 2013, we entered into various interest rate swap agreements relative to our 4.750% fixed rate senior notes due in May 2023. These swap agreements, which were designated as fair value hedges, have a total notional value of $300.0 million and resulted in a $6.3 million reduction in interest expense during 2016, compared to a $7.5 million reduction in interest expense during 2015 and a $7.7 million reduction in interest expense during 2014. Additionally, during 2014, there were lower variable rates on our tax-exempt financings, which also contributed to the increase in 2015 interest expense.
During 2016, 2015 and 2014, cash paid for interest was $330.2 million, $327.6 million and $320.2 million, respectively.
Loss on Extinguishment of Debt
During 2016, we incurred a loss on the early extinguishment of debt. We paid a cash premium of $148.1 million, early tender consideration of $28.7 million and $1.6 million of associated legal and other fees. We also incurred a non-cash charge related to the proportional share of unamortized discounts and deferred issuance costs of $17.8 million. The unamortized proportional share of certain cash flow hedges reclassified to earnings as non-cash interest expense was $7.2 million.
The following table summarizes the loss on extinguishment of debt and other related costs incurred during the year ended December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Loss on Extinguishment of Debt | | |
| | Principal Repaid | | Cash Paid in Loss on Extinguishment of Debt | | Non-cash Loss on Extinguishment of Debt | | Total Loss on Extinguishment of Debt | | Non-cash Interest Expense |
$275.7 million 6.09% senior notes due March 2035 | | $ | 93.8 |
| | $ | 26.1 |
| | $ | 8.0 |
| | $ | 34.1 |
| | $ | (1.1 | ) |
$165.2 million 7.40% debentures due September 2035 | | 17.2 |
| | 7.3 |
| | 4.1 |
| | 11.4 |
| | — |
|
$650.0 million 6.20% senior notes due March 2040 | | 250.1 |
| | 85.3 |
| | 2.6 |
| | 87.9 |
| | 1.0 |
|
$600.0 million 5.70% senior notes due May 2041 | | 214.3 |
| | 59.7 |
| | 3.1 |
| | 62.8 |
| | 7.3 |
|
| | | | | | | | | | |
Total | | | | $ | 178.4 |
| | $ | 17.8 |
| | $ | 196.2 |
| | $ | 7.2 |
|
During 2014, we refinanced our credit facilities and certain of our tax-exempt financings, resulting in non-cash charges for deferred issuance costs of $1.4 million.
Income Taxes
Our provision for income taxes was $352.7 million, $445.5 million and $337.4 million for 2016, 2015 and 2014, respectively. Our effective income tax rate was 36.5%, 37.3% and 38.1% for 2016, 2015 and 2014, respectively. We made income tax payments (net of refunds received) of approximately $265 million, $321 million and $382 million for 2016, 2015 and 2014, respectively.
Our 2016 tax provision was reduced by approximately $13 million due to the resolution of various state and federal tax matters as well as the realization of tax credits and lower state rates due to changes in estimates.
In addition, during 2016 we acquired a noncontrolling interest in a limited liability company that qualifies for a federal investment tax credit under Section 48 of the Internal Revenue Code. Our 2016 tax provision was reduced by approximately $10 million mostly due to a federal tax credit related to this investment, which was recognized currently and not deferred. We account for this investment using the equity method of accounting and recognize our share of income or loss and other reductions in the value of our investment in “Loss from unconsolidated equity method investment” within our Consolidated Statements of Income. During 2016, we reduced the carrying value of this investment by $6.1 million as a result of the tax credits allocated to us, cash distributions, and our share of income and loss pursuant to the terms of the limited liability company agreement.
Our 2015 tax provision was reduced by approximately $17 million due to the resolution of outstanding tax matters in various states and Puerto Rico. Our 2014 tax provision was reduced by approximately $5 million due to the realization of tax credits and lower state rates due to changes in estimates.
Income taxes paid in 2016 and 2015 reflect the favorable tax depreciation provisions of the Protecting Americans from Tax Hikes Act signed into law in December 2015. This legislation extends bonus depreciation for property placed in service through 2019. Bonus depreciation deductions for assets placed in service in 2015 to 2017 is 50% of the capitalized value and decreases to 40% in 2018 and 30% in 2019.
Income taxes paid in 2014 reflect the favorable tax depreciation provisions of the Tax Increase Protection Act of 2014, signed into law in December 2014. This legislation extended 50% bonus depreciation for property placed in service during 2014.
For additional discussion and detail regarding our income taxes, see Note 10, Income Taxes, to our consolidated financial statements in Item 8 of this Form 10-K.
Reportable Segments
In January 2016, we realigned our field support functions by combining our three regions into two field groups, consolidating our areas and streamlining select operational support roles at our Phoenix headquarters. Following our restructuring, our senior management now evaluates, oversees and manages the financial performance of our operations through two field groups, referred to as Group 1 and Group 2. Group 1 primarily consists of geographic areas located in the western and portions of the mid-western United States, and Group 2 primarily consists of geographic areas located in Texas, the southeastern and portions of the mid-western United States, and the eastern seaboard of the United States.
The two field groups, Group 1 and Group 2, are presented below as our reportable segments, which provide integrated waste management services consisting of non-hazardous solid waste collection, transfer, recycling, disposal and energy services.
Summarized financial information concerning our reportable segments for the years ended December 31, 2016, 2015 and 2014 is shown in the following table (in millions of dollars and as a percentage of revenue in the case of operating margin):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Revenue | | Depreciation, Amortization, Depletion and Accretion Before Adjustments for Asset Retirement Obligations | | Adjustments to Amortization Expense for Asset Retirement Obligations | | Depreciation, Amortization, Depletion and Accretion | | (Loss) Gain on Disposition of Assets and Impairments, Net | | Operating Income (Loss) | | Operating Margin |
2016: | | | | | | | | | | | | | |
Group 1 | $ | 4,185.3 |
| | $ | 416.7 |
| | $ | (2.3 | ) | | $ | 414.4 |
| | $ | — |
| | $ | 895.5 |
| | 21.4 | % |
Group 2 | 5,013.5 |
| | 542.6 |
| | (3.9 | ) | | 538.7 |
| | — |
| | 1,026.9 |
| | 20.5 |
|
Corporate entities | 188.9 |
| | 117.4 |
| | (0.3 | ) | | 117.1 |
| | 0.1 |
| | (384.9 | ) | | |
Total | $ | 9,387.7 |
| | $ | 1,076.7 |
| | $ | (6.5 | ) | | $ | 1,070.2 |
| | $ | 0.1 |
| | $ | 1,537.5 |
| | 16.4 | % |
2015: | | | | | | | | | | | | | |
Group 1 | $ | 4,025.9 |
| | $ | 397.5 |
| | $ | 1.4 |
| | $ | 398.9 |
| | $ | — |
| | $ | 857.2 |
| | 21.3 | % |
Group 2 | 4,924.5 |
| | 544.2 |
| | (1.6 | ) | | 542.6 |
| | — |
| | 953.5 |
| | 19.4 |
|
Corporate entities | 164.6 |
| | 109.0 |
| | (0.5 | ) | | 108.5 |
| | — |
| | (251.9 | ) | | |
Total | $ | 9,115.0 |
| | $ | 1,050.7 |
| | $ | (0.7 | ) | | $ | 1,050.0 |
| | $ | — |
| | $ | 1,558.8 |
| | 17.1 | % |
2014: | | | | | | | | | | | | | |
Group 1 | $ | 3,835.9 |
| | $ | 375.1 |
| | $ | (6.2 | ) | | $ | 368.9 |
| | $ | — |
| | $ | 826.0 |
| | 21.5 | % |
Group 2 | 4,789.2 |
| | 516.1 |
| | (8.8 | ) | | 507.3 |
| | — |
| | 938.6 |
| | 19.6 |
|
Corporate entities | 178.2 |
| | 107.0 |
| | 1.7 |
| | 108.7 |
| | (20.0 | ) | | (531.5 | ) | | |
Total | $ | 8,803.3 |
| | $ | 998.2 |
| | $ | (13.3 | ) | | $ | 984.9 |
| | $ | (20.0 | ) | | $ | 1,233.1 |
| | 14.0 | % |
Corporate entities include legal, tax, treasury, information technology, risk management, human resources, closed landfills and other administrative functions. National Accounts revenue included in corporate entities represents the portion of revenue generated from nationwide and regional contracts in markets outside our operating areas where the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset with related subcontract costs, which are recorded in cost of operations.
Significant changes in the revenue and operating margins of our reportable segments for 2016 compared to 2015, and 2015 compared to 2014, are discussed below.
2016 compared to 2015
Group 1
Revenue for 2016 increased 4.0% from 2015 primarily due to increases in average yield in all lines of business, and volume increases in all lines of business. Additionally, we recognized increased recycled commodity revenue due to the increase in commodity prices.
Operating income for Group 1 increased from $857.2 million for 2015, or a 21.3% operating margin, to $895.5 million for 2016, or a 21.4% operating margin. The following cost categories impacted our operating income:
| |
• | Cost of operations favorably impacted operating income margin during 2016, primarily due to lower fuel costs resulting from lower prices of diesel fuel and lower risk management expenses. These favorable items were partially offset by higher cost of goods sold, landfill operating costs, labor and related benefits costs, and repair and maintenance costs. |
| |
• | Landfill depletion and amortization unfavorably impacted operating income margin during 2016, primarily due to an overall increase in the average depletion and amortization rate and increased landfill disposal volumes. The increase was partially offset by favorable amortization adjustments during 2016 compared to unfavorable amortization adjustments in 2015. |
| |
• | Selling, general and administrative expenses had a favorable impact on operating income margin during 2016 primarily due to net favorable litigation adjustments and reduced acquisition-related transaction costs. |
Group 2
Revenue for 2016 increased 1.8% from 2015 primarily due to increases in average yield in all lines of business and volume increases in our large-container industrial collection and disposal lines of business. Volume increases in our landfill line of business were primarily attributable to increased construction and demolition and municipal solid waste volumes. These increases were partially offset by declines in our energy services business, as well as volume declines primarily in our residential collection and small-container commercial collection lines of business and special waste volume declines in our landfill line of business.
Operating income in Group 2 increased from $953.5 million, or a 19.4% operating margin, to $1,026.9 million, or a 20.5% operating margin. The following cost categories impacted our operating income:
| |
• | Cost of operations favorably impacted operating income margin during 2016, primarily due to lower fuel costs resulting from lower prices of diesel fuel and lower risk management expenses. These favorable items were partially offset by higher cost of goods sold, repair and maintenance costs, and transfer and disposal costs. |
| |
• | Landfill depletion and amortization favorably impacted operating income margin during 2016, primarily due to a decrease in the average depletion and amortization rate. Landfill depletion and amortization also was impacted by favorable amortization adjustments during 2016 compared to unfavorable amortization adjustments in 2015. |
| |
• | Selling, general and administrative costs had a favorable impact on operating income margin during 2016 primarily due to lower labor and related benefit costs. |
Corporate Entities
Operating loss in our Corporate Entities increased from $251.9 million for 2015 to $384.9 million for 2016 primarily due to an insurance recovery of $50.0 million related to our Bridgeton Landfill that was recorded during 2015, restructuring charges of $40.7 million related to our 2016 restructuring and $5.6 million for withdrawal events at our multiemployer pension plan in Puerto Rico. During 2016, we also recognized increased risk management expenses primarily due to favorable actuarial developments in our workers' compensation program recorded during 2015 that were less favorable for the same period in 2016 as well as unfavorable claims experience in our employee-related health care benefits programs in 2016 as compared to 2015. Partially offsetting these unfavorable items were reduced acquisition-related transaction costs for 2016 compared to the costs associated with our acquisition of Tervita in February 2015. Additionally, during 2016, we recognized net favorable legal settlements from matters occurring in the ordinary course of business that were more favorable compared to net legal settlements in 2015.
2015 compared to 2014
Group 1
Revenue for 2015 increased 5.0% from 2014 primarily due to acquisitions, including a waste management contract with the County of Sonoma, California that was executed in April 2015. Excluding the effect of acquisitions, revenue increased due to increases in average yield in all lines of business and volume increases in all collection lines of business. Additionally, revenue increased due to volume increases in our landfill municipal solid waste and construction and demolition lines of business. Partially offsetting these revenue increases was lower recycled commodity revenue due to the decline in commodity prices.
Operating income in Group 1 increased from $826.0 million for 2014, or a 21.5% operating margin, to $857.2 million for 2015, or a 21.3% operating margin. The following cost categories impacted our operating income:
| |
• | Cost of operations favorably impacted operating income margin primarily due to lower fuel costs resulting from lower prices of diesel fuel, partially offset by higher labor and related benefits, repair and maintenance costs, and transfer and disposal costs. |
| |
• | Depreciation and amortization of property and equipment unfavorably impacted operating income margin primarily due to higher asset acquisition costs. Landfill depletion and amortization also was impacted by an unfavorable amortization adjustment of $1.4 million in 2015, compared to a favorable amortization adjustment of $6.2 million that occurred during 2014 primarily due to an increase in deemed airspace at one of our active landfills. |
| |
• | For 2015, the selling, general and administrative expenses margin impact was flat for Group 1. |
Group 2
Revenue for 2015 increased 2.8% from 2014 primarily due to acquisitions. Excluding the effect of acquisitions, revenue increased due to increases in average yield in all collection lines of business, and volume increases in our large-container industrial and residential collection and transfer station lines of business. These increases were partially offset by declines in volume in our landfill line of business resulting from lower base energy services waste volumes. Additionally, we recognized lower recycled commodity revenue due to the decline in commodity prices.
Operating income in Group 2 increased from $938.6 million for 2014, or a 19.6% operating margin, to $953.5 million for 2015, or a 19.4% operating margin. Overall, our operating margins were unfavorably impacted due to the effect of commodity prices on our recycling business and higher integration, transition and operating costs in our acquired energy services business.
The following cost categories impacted our operating income:
| |
• | Cost of operations favorably impacted operating income margin primarily due to lower fuel costs resulting from lower prices of diesel fuel. These favorable items were partially offset by higher labor and related benefits and repair and maintenance costs. |
| |
• | Depreciation and amortization of property and equipment unfavorably impacted operating income margin due to higher acquisition costs of replacement vehicles. Landfill depletion and amortization also unfavorably impacted operating income margin due to higher favorable amortization adjustments in 2014. During 2015, we recognized favorable amortization adjustments of $1.6 million, compared to favorable amortization adjustments of $8.8 million during 2014. |
| |
• | Selling, general and administrative expenses unfavorably impacted operating income margin primarily due to higher wages and payroll related items resulting from merit increases and increased headcount, as well as higher management incentive compensation. This unfavorable impact was partially offset by favorable legal settlement from matters occurring in the ordinary course of business, compared to unfavorable legal settlement charges during 2014. |
Corporate Entities
Operating loss in our Corporate Entities decreased from $531.5 million for 2014 to $251.9 million for 2015 primarily due to an insurance recovery of $50.0 million related to our closed Bridgeton Landfill during 2015, compared to unfavorable remediation and litigation adjustments in 2014 of $227.1 million.
Landfill and Environmental Matters
Our landfill costs include daily operating expenses, costs of capital for cell development, costs for final capping, closure and post-closure, and the legal and administrative costs of ongoing environmental compliance. Daily operating expenses include leachate treatment and disposal, methane gas and groundwater monitoring and system maintenance, interim cap maintenance, and costs associated with applying daily cover materials. We expense all indirect landfill development costs as they are incurred. We use life cycle accounting and the units-of-consumption method to recognize certain direct landfill costs related to landfill development. In life cycle accounting, certain direct costs are capitalized and charged to depletion expense based on the consumption of cubic yards of available airspace. These costs include all costs to acquire and construct a site, including excavation, natural and synthetic liners, construction of leachate collection systems, installation of methane gas collection and monitoring systems, installation of groundwater monitoring wells, and other costs associated with acquiring and developing the site. Obligations associated with final capping, closure and post-closure are capitalized and amortized on a units-of-consumption basis as airspace is consumed.
Cost and airspace estimates are developed at least annually by engineers. Our operating and accounting personnel use these estimates to adjust the rates we use to expense capitalized costs. Changes in these estimates primarily relate to changes in costs, available airspace, inflation and applicable regulations. Changes in available airspace include changes in engineering estimates, changes in design and changes due to the addition of airspace lying in expansion areas that we believe have a probable likelihood of being permitted.
Available Airspace
|
| | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2015 | | New Expansions Undertaken | | Landfills Acquired, Net of Divestitures | | Permits Granted, Net of Closures | | Airspace Consumed | | Changes in Engineering Estimates | | Balance as of December 31, 2016 |
Cubic yards (in millions): | | | | | | | | | | | | | |
Permitted airspace | 4,676.5 |
| | — |
| | — |
| | 107.2 |
| | (78.9 | ) | | 2.8 |
| | 4,707.6 |
|
Probable expansion airspace | 290.1 |
| | 63.9 |
| | | | (63.3 | ) | | — |
| | (3.9 | |