REPUBLIC SERVICES, INC. - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
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) | (I.R.S. Employer Identification No.) | |||||||
18500 North Allied Way | 85054 | |||||||
Phoenix, | Arizona | |||||||
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (480) 627-2700
_________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, par value $0.01 per share | RSG | New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | þ | Accelerated filer | ¨ | Smaller reporting company | ☐ | ||||||||||||
Non-accelerated filer | ¨ | Emerging growth company | ☐ | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of October 23, 2019, the registrant had outstanding 319,144,722 shares of Common Stock, par value $0.01 per share (excluding treasury shares of 34,111,724).
REPUBLIC SERVICES, INC.
INDEX
Item 1. | ||||||||
Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 | ||||||||
Unaudited Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2019 and 2018 | ||||||||
Unaudited Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 | ||||||||
Unaudited Consolidated Statement of Stockholders' Equity for the Three and Nine Months Ended September 30, 2019 and 2018 | ||||||||
Unaudited Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
REPUBLIC SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
September 30, | December 31, | ||||||||||
2019 | 2018 | ||||||||||
(Unaudited) | |||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 55.6 | $ | 70.5 | |||||||
Accounts receivable, less allowance for doubtful accounts and other of $35.7 and $34.3, respectively | 1,162.9 | 1,102.7 | |||||||||
Prepaid expenses and other current assets | 255.4 | 391.2 | |||||||||
Total current assets | 1,473.9 | 1,564.4 | |||||||||
Restricted cash and marketable securities | 121.3 | 108.1 | |||||||||
Property and equipment, net | 8,257.6 | 8,020.1 | |||||||||
Goodwill | 11,650.5 | 11,400.1 | |||||||||
Other intangible assets, net | 124.1 | 106.5 | |||||||||
Other assets | 701.7 | 417.8 | |||||||||
Total assets | $ | 22,329.1 | $ | 21,617.0 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 697.2 | $ | 761.5 | |||||||
Notes payable and current maturities of long-term debt | 912.8 | 690.7 | |||||||||
Deferred revenue | 341.1 | 338.7 | |||||||||
Accrued landfill and environmental costs, current portion | 153.2 | 130.6 | |||||||||
Accrued interest | 79.7 | 68.5 | |||||||||
Other accrued liabilities | 813.4 | 728.6 | |||||||||
Total current liabilities | 2,997.4 | 2,718.6 | |||||||||
Long-term debt, net of current maturities | 7,705.8 | 7,646.8 | |||||||||
Accrued landfill and environmental costs, net of current portion | 1,702.0 | 1,701.6 | |||||||||
Deferred income taxes and other long-term tax liabilities, net | 1,074.6 | 1,028.3 | |||||||||
Insurance reserves, net of current portion | 279.3 | 270.8 | |||||||||
Other long-term liabilities | 591.5 | 321.4 | |||||||||
Commitments and contingencies | |||||||||||
Stockholders’ equity: | |||||||||||
Preferred stock, par value $0.01 per share; 50 shares authorized; none issued | — | — | |||||||||
Common stock, par value $0.01 per share; 750 shares authorized; 353.3 and 351.9 issued and outstanding, respectively | 3.5 | 3.5 | |||||||||
Additional paid-in capital | 4,979.5 | 4,924.9 | |||||||||
Retained earnings | 5,155.9 | 4,750.5 | |||||||||
Treasury stock, at cost; 33.9 and 29.4 shares, respectively | (2,153.9) | (1,782.6) | |||||||||
Accumulated other comprehensive income (loss), net of tax | (8.5) | 30.8 | |||||||||
Total Republic Services, Inc. stockholders’ equity | 7,976.5 | 7,927.1 | |||||||||
Non-controlling interests in consolidated subsidiary | 2.0 | 2.4 | |||||||||
Total stockholders’ equity | 7,978.5 | 7,929.5 | |||||||||
Total liabilities and stockholders’ equity | $ | 22,329.1 | $ | 21,617.0 |
The accompanying notes are an integral part of these statements.
3
REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
Revenue | $ | 2,646.9 | $ | 2,565.7 | $ | 7,722.7 | $ | 7,510.9 | |||||||||||||||
Expenses: | |||||||||||||||||||||||
Cost of operations | 1,631.4 | 1,577.4 | 4,754.4 | 4,624.4 | |||||||||||||||||||
Depreciation, amortization and depletion | 267.3 | 262.4 | 783.1 | 781.0 | |||||||||||||||||||
Accretion | 20.5 | 20.1 | 61.4 | 60.7 | |||||||||||||||||||
Selling, general and administrative | 275.4 | 260.9 | 806.3 | 775.0 | |||||||||||||||||||
Gain on disposition of assets and asset impairments, net | (24.0) | (4.6) | (23.5) | (5.3) | |||||||||||||||||||
Restructuring charges | 8.5 | 9.2 | 13.0 | 22.5 | |||||||||||||||||||
Operating income | 467.8 | 440.3 | 1,328.0 | 1,252.6 | |||||||||||||||||||
Interest expense | (98.0) | (96.0) | (296.9) | (287.3) | |||||||||||||||||||
Loss from unconsolidated equity method investment | (4.0) | (5.6) | (27.2) | (5.7) | |||||||||||||||||||
Loss on extinguishment of debt | — | — | — | (0.3) | |||||||||||||||||||
Interest income | 2.0 | 0.5 | 5.4 | 1.0 | |||||||||||||||||||
Other income, net | 1.7 | 1.1 | 1.6 | 3.3 | |||||||||||||||||||
Income before income taxes | 369.5 | 340.3 | 1,010.9 | 963.6 | |||||||||||||||||||
Provision for income taxes | 71.5 | 77.4 | 227.1 | 227.1 | |||||||||||||||||||
Net income | 298.0 | 262.9 | 783.8 | 736.5 | |||||||||||||||||||
Net loss (income) attributable to non-controlling interests in consolidated subsidiary | 0.3 | 0.5 | 0.2 | (0.5) | |||||||||||||||||||
Net income attributable to Republic Services, Inc. | $ | 298.3 | $ | 263.4 | $ | 784.0 | $ | 736.0 | |||||||||||||||
Basic earnings per share attributable to Republic Services, Inc. stockholders: | |||||||||||||||||||||||
Basic earnings per share | $ | 0.93 | $ | 0.81 | $ | 2.44 | $ | 2.25 | |||||||||||||||
Weighted average common shares outstanding | 320.6 | 325.5 | 321.5 | 327.8 | |||||||||||||||||||
Diluted earnings per share attributable to Republic Services, Inc. stockholders: | |||||||||||||||||||||||
Diluted earnings per share | $ | 0.93 | $ | 0.81 | $ | 2.43 | $ | 2.23 | |||||||||||||||
Weighted average common and common equivalent shares outstanding | 321.7 | 326.9 | 322.6 | 329.3 | |||||||||||||||||||
Cash dividends per common share | $ | 0.405 | $ | 0.375 | $ | 1.155 | $ | 1.065 |
The accompanying notes are an integral part of these statements.
4
REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
Net income | $ | 298.0 | $ | 262.9 | $ | 783.8 | $ | 736.5 | |||||||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
Hedging activity: | |||||||||||||||||||||||
Settlements | — | 1.2 | — | 2.8 | |||||||||||||||||||
Realized gain reclassified into earnings | (0.5) | (1.2) | (0.9) | (2.2) | |||||||||||||||||||
Unrealized (loss) gain | (11.9) | 3.2 | (43.0) | 32.7 | |||||||||||||||||||
Pension activity: | |||||||||||||||||||||||
Change in funded status of pension plan obligations | — | — | (0.8) | — | |||||||||||||||||||
Other comprehensive income (loss), net of tax | (12.4) | 3.2 | (44.7) | 33.3 | |||||||||||||||||||
Comprehensive income | 285.6 | 266.1 | 739.1 | 769.8 | |||||||||||||||||||
Comprehensive loss (income) attributable to non-controlling interests | 0.3 | 0.5 | 0.2 | (0.5) | |||||||||||||||||||
Comprehensive income attributable to Republic Services, Inc. | $ | 285.9 | $ | 266.6 | $ | 739.3 | $ | 769.3 |
The accompanying notes are an integral part of these statements.
5
REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in millions)
Republic Services, Inc. Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income, Net of Tax | Non-controlling Interests In Consolidated Subsidiary | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2018 | 351.9 | $ | 3.5 | $ | 4,924.9 | $ | 4,750.5 | (29.4) | $ | (1,782.6) | $ | 30.8 | $ | 2.4 | $ | 7,929.5 | |||||||||||||||||||||||||||||||||||||
Adoption of accounting standard | — | — | — | (5.4) | — | — | 5.4 | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 234.2 | — | — | — | 0.7 | 234.9 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (11.4) | — | (11.4) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | — | — | — | (120.7) | — | — | — | — | (120.7) | ||||||||||||||||||||||||||||||||||||||||||||
Issuances of common stock | 0.9 | — | 7.7 | — | (0.2) | (16.8) | — | — | (9.1) | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 12.0 | (1.1) | — | — | — | — | 10.9 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase of common stock for treasury | — | — | — | — | (1.5) | (111.5) | — | — | (111.5) | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2019 | 352.8 | 3.5 | 4,944.6 | 4,857.5 | (31.1) | (1,910.9) | 24.8 | 3.1 | 7,922.6 | ||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 251.5 | — | — | — | (0.6) | 250.9 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (20.9) | — | (20.9) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | — | — | — | (120.2) | — | — | — | — | (120.2) | ||||||||||||||||||||||||||||||||||||||||||||
Issuances of common stock | 0.2 | — | 6.3 | — | — | (0.3) | — | — | 6.0 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 9.8 | (0.9) | — | — | — | — | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase of common stock for treasury | — | — | — | — | (1.1) | (91.9) | — | — | (91.9) | ||||||||||||||||||||||||||||||||||||||||||||
Distributions paid | — | — | — | — | — | — | — | (0.2) | (0.2) | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2019 | 353.0 | 3.5 | 4,960.7 | 4,987.9 | (32.2) | (2,003.1) | 3.9 | 2.3 | 7,955.2 | ||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 298.3 | — | — | — | (0.3) | 298.0 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (12.4) | — | (12.4) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | — | — | — | (129.3) | — | — | — | — | (129.3) | ||||||||||||||||||||||||||||||||||||||||||||
Issuances of common stock | 0.3 | — | 8.7 | — | — | (0.3) | — | — | 8.4 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 10.1 | (1.0) | — | — | — | — | 9.1 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase of common stock for treasury | — | — | — | — | (1.7) | (150.5) | — | — | (150.5) | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2019 | 353.3 | $ | 3.5 | $ | 4,979.5 | $ | 5,155.9 | (33.9) | $ | (2,153.9) | $ | (8.5) | $ | 2.0 | $ | 7,978.5 |
The accompanying notes are an integral part of these statements.
6
REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY - (CONTINUED)
(in millions)
Republic Services, Inc. Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income, Net of Tax | Non-controlling Interests In Consolidated Subsidiary | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2017 | 350.1 | $ | 3.5 | $ | 4,839.6 | $ | 4,152.5 | (18.4) | $ | (1,059.4) | $ | 22.6 | $ | 2.3 | $ | 7,961.1 | |||||||||||||||||||||||||||||||||||||
Adoption of accounting standard, net of tax | — | — | — | 33.4 | — | — | — | — | 33.4 | ||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 237.7 | — | — | — | 0.2 | 237.9 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 19.1 | — | 19.1 | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | — | — | — | (113.3) | — | — | — | — | (113.3) | ||||||||||||||||||||||||||||||||||||||||||||
Issuances of common stock | 1.0 | — | 20.6 | — | (0.3) | (19.3) | — | — | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 11.4 | (1.0) | — | — | — | — | 10.4 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase of common stock for treasury | — | — | — | — | (3.8) | (235.6) | — | — | (235.6) | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2018 | 351.1 | 3.5 | 4,871.6 | 4,309.3 | (22.5) | (1,314.3) | 41.7 | 2.5 | 7,914.3 | ||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 234.9 | — | — | — | 0.8 | 235.7 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 11.1 | — | 11.1 | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | — | — | — | (112.4) | — | — | — | — | (112.4) | ||||||||||||||||||||||||||||||||||||||||||||
Issuances of common stock | 0.3 | — | 7.1 | — | — | (0.2) | — | — | 6.9 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 9.7 | (0.9) | — | — | — | — | 8.8 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase of common stock for treasury | — | — | — | — | (3.3) | (215.0) | — | — | (215.0) | ||||||||||||||||||||||||||||||||||||||||||||
Distributions paid | — | — | — | — | — | — | — | (0.6) | (0.6) | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2018 | 351.4 | 3.5 | 4,888.4 | 4,430.9 | (25.8) | (1,529.5) | 52.8 | 2.7 | 7,848.8 | ||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 263.4 | — | — | — | (0.5) | 262.9 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 3.2 | — | 3.2 | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared | — | — | — | (121.7) | — | — | — | — | (121.7) | ||||||||||||||||||||||||||||||||||||||||||||
Issuances of common stock | 0.4 | — | 12.1 | — | — | (0.4) | — | — | 11.7 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 10.5 | (1.0) | — | — | — | — | 9.5 | ||||||||||||||||||||||||||||||||||||||||||||
Purchase of common stock for treasury | — | — | — | — | (1.4) | (90.5) | — | — | (90.5) | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2018 | 351.8 | $ | 3.5 | $ | 4,911.0 | $ | 4,571.6 | (27.2) | $ | (1,620.4) | $ | 56.0 | $ | 2.2 | $ | 7,923.9 |
The accompanying notes are an integral part of these statements.
7
REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Nine Months Ended September 30, | |||||||||||
2019 | 2018 | ||||||||||
Cash provided by operating activities: | |||||||||||
Net income | $ | 783.8 | $ | 736.5 | |||||||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
Depreciation, amortization, depletion and accretion | 844.5 | 841.7 | |||||||||
Non-cash interest expense | 34.9 | 31.4 | |||||||||
Restructuring related charges | 13.0 | 22.5 | |||||||||
Stock-based compensation | 29.2 | 29.4 | |||||||||
Deferred tax provision | 72.9 | 113.7 | |||||||||
Provision for doubtful accounts, net of adjustments | 23.4 | 24.4 | |||||||||
Loss on extinguishment of debt | — | 0.3 | |||||||||
Gain on disposition of assets and asset impairments, net | (22.4) | (1.7) | |||||||||
Environmental adjustments | (9.6) | 3.3 | |||||||||
Loss from unconsolidated equity method investment | 27.2 | 5.7 | |||||||||
Other non-cash items | (0.9) | 0.6 | |||||||||
Change in assets and liabilities, net of effects from business acquisitions and divestitures: | |||||||||||
Accounts receivable | (65.3) | (72.1) | |||||||||
Prepaid expenses and other assets | 98.3 | (13.5) | |||||||||
Accounts payable | (9.3) | 58.6 | |||||||||
Restructuring expenditures | (7.9) | (18.7) | |||||||||
Capping, closure and post-closure expenditures | (47.7) | (42.5) | |||||||||
Remediation expenditures | (29.4) | (30.2) | |||||||||
Other liabilities | 52.2 | 26.4 | |||||||||
Proceeds from retirement of certain hedging relationships | — | 31.1 | |||||||||
Cash provided by operating activities | 1,786.9 | 1,746.9 | |||||||||
Cash used in investing activities: | |||||||||||
Purchases of property and equipment | (908.3) | (820.5) | |||||||||
Proceeds from sales of property and equipment | 11.7 | 7.9 | |||||||||
Cash used in acquisitions and investments, net of cash and restricted cash acquired | (455.9) | (130.5) | |||||||||
Cash received from business divestitures | 41.6 | 10.6 | |||||||||
Purchases of restricted marketable securities | (9.1) | (35.4) | |||||||||
Sales of restricted marketable securities | 8.6 | 36.2 | |||||||||
Other | (5.2) | — | |||||||||
Cash used in investing activities | (1,316.6) | (931.7) | |||||||||
Cash used in financing activities: | |||||||||||
Proceeds from notes payable and long-term debt, net of fees | 3,504.8 | 3,296.7 | |||||||||
Proceeds from issuance of senior notes, net of discount and fees | 891.9 | 782.0 | |||||||||
Payments of notes payable and long-term debt and senior notes | (4,145.9) | (4,032.6) | |||||||||
Issuances of common stock, net | 5.3 | 19.9 | |||||||||
Purchases of common stock for treasury | (353.8) | (574.9) | |||||||||
Cash dividends paid | (361.9) | (340.0) | |||||||||
Distributions paid to non-controlling interests in consolidated subsidiary | (0.2) | (0.6) | |||||||||
Other | (15.2) | (7.9) | |||||||||
Cash used in financing activities | (475.0) | (857.4) | |||||||||
Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents | (4.7) | (42.2) | |||||||||
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year | 133.3 | 179.1 | |||||||||
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 128.6 | $ | 136.9 |
The accompanying notes are an integral part of these statements.
8
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Republic Services, Inc., a Delaware corporation, and its consolidated subsidiaries (also referred to collectively as Republic, the Company, we, us, or our), is the second largest provider of non-hazardous solid waste collection, transfer, recycling, disposal and environmental services in the United States, as measured by revenue. We manage and evaluate our operations through two field groups, Group 1 and Group 2, which we have identified as our reportable segments.
The unaudited consolidated financial statements include the accounts of Republic Services, Inc. and its wholly owned and majority owned subsidiaries in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). We account for investments in entities in which we do not have a controlling financial interest under either the equity method or cost method of accounting, as appropriate. All material intercompany accounts and transactions have been eliminated in consolidation.
We have prepared these unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted. In the opinion of management, these financial statements include all adjustments that, unless otherwise disclosed, are of a normal recurring nature and necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of the results you can expect for a full year. You should read these financial statements in conjunction with our audited consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
For comparative purposes, certain prior year amounts have been reclassified to conform to the current year presentation. All dollar amounts in tabular presentations are in millions, except per share amounts and unless otherwise noted.
Management’s Estimates and Assumptions
In preparing our financial statements, we make numerous estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. We must make these estimates and assumptions because certain information we use is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In preparing our financial statements, the more critical and subjective areas that deal with the greatest amount of uncertainty relate to our accounting for our long-lived assets, including recoverability, development costs, and final capping, closure and post-closure costs; our valuation allowances for accounts receivable and deferred tax assets; our liabilities for potential litigation, claims and assessments; our liabilities for environmental remediation, multiemployer pension funds, employee benefit plans, deferred taxes, uncertain tax positions, and insurance reserves; and our estimates of the fair values of assets acquired and liabilities assumed in any acquisition. Each of these items is discussed in more detail in our description of our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Our actual results may differ significantly from our estimates.
9
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
New Accounting Pronouncements
Accounting Standards Adopted
Effective January 1, 2019, we adopted the following accounting standard updates (ASUs) as issued by the Financial Accounting Standards Board (FASB):
ASU | Effective Date | |||||||
ASU 2016-02 | Leases (Topic 842) | January 1, 2019 | ||||||
ASU 2017-12 | Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities | January 1, 2019 | ||||||
ASU 2018-16 | Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting | January 1, 2019 | ||||||
ASU 2018-02 | Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | January 1, 2019 | ||||||
ASU 2018-07 | Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting | January 1, 2019 | ||||||
ASU 2018-15 | Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | January 1, 2019 |
Leases
Effective January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) (ASC 842 or the new leasing standard) using the optional transition method prescribed by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Upon adoption of the new leasing standard, we recognized a right-of-use asset and a right-of-use liability for leases classified as operating leases in our consolidated balance sheet. We applied the package of practical expedients to leases that commenced before the effective date whereby we elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.
To assist in quantifying the impact on our consolidated financial statements and supplementing our existing disclosures, we designed internal controls over the adoption and implemented a software solution to manage and account for our leases. As of January 1, 2019, we recognized a right-of-use liability for our operating leases of $256.3 million classified as other accrued liabilities and other long-term liabilities and a corresponding right-of-use asset of $236.2 million classified as other long-term assets in our consolidated balance sheet. The right-of-use asset reflects adjustments for certain favorable or unfavorable leases recognized through acquisitions, prepaid or accrued rent, asset impairments and lease incentives, including but not limited to cash incentives, rent abatement or leasehold improvements paid by the lessor. We did not recognize a cumulative effect adjustment to retained earnings as of January 1, 2019 as the standard did not have a material impact on our consolidated statement of income. In addition, the standard did not have a material impact on our accounting for finance (capital) leases.
We assessed the disclosure requirements under the new leasing standard as part of our adoption. Refer to Note 4, Other Assets, Note 5, Other Liabilities, and Note 8, Leases, included herein for our enhanced supplemental disclosures.
Derivatives and Hedging
Effective January 1, 2019, we adopted the FASB's ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). We adopted the new guidance over income statement presentation and enhanced disclosures prospectively, and we adopted the guidance over the elimination of the separate measurement of ineffectiveness on a modified retrospective basis to existing hedging relationships as of the date of adoption. Prior to adoption, the net periodic earnings of our fair value hedges were presented within other income, net in our consolidated statement of income and are now presented within interest expense in our consolidated statement of income, i.e. the same line item as the effect of the hedged item. Our adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.
Effective January 1, 2019, in conjunction with ASU 2017-12, we adopted the FASB's ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting (ASU 2018-16) on a prospective basis. LIBOR is expected to no longer be published by 2021. Consequently, the FASB added the OIS rate based on SOFR as an eligible benchmark interest rate in order to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. We are developing a plan to transition our interest rate
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REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
swaps from LIBOR to SOFR. Our adoption of ASU 2018-16 did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2019.
Reclassifications of Certain Tax Effects from Accumulated Other Comprehensive Income
Effective January 1, 2019, we adopted the FASB's ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act (the Tax Act). The amendments only relate to the reclassification of the income tax effects of the Tax Act, and the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. Consequently, we reclassified $5.4 million of stranded tax effects from accumulated other comprehensive income to retained earnings.
Improvements to Nonemployee Share-Based Payment Accounting
Effective January 1, 2019, we adopted the FASB's ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. We will apply the guidance prescribed by this update on a prospective basis. Our adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2019.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Effective January 1, 2019, we early adopted the FASB's ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15) using a prospective approach. In accordance with the standard, we present capitalized implementation costs incurred in a hosting arrangement that is a service contract as other assets on our consolidated balance sheet. This presentation is consistent with the presentation of the prepayment of fees for the hosting arrangement. Historically, implementation costs were presented as a component of property and equipment, net.
As of January 1, 2019, we reclassified $28.7 million of capitalized implementation costs incurred in a hosting arrangement that is a service contract from property and equipment, net to other assets on our consolidated balance sheet. During the three and nine months ended September 30, 2019, we recognized $9.0 million and $25.3 million, respectively, of amortization expense for the prepayment of fees and capitalized implementation costs incurred in a hosting arrangement as a component of depreciation, amortization and depletion in our consolidated statement of income. During the nine months ended September 30, 2019, we recognized $9.0 million of payments for capitalized implementation costs in the same manner as payments made for fees associated with the hosting arrangement as a component of cash provided by operating activities in our consolidated statement of cash flows.
Accounting Standards Issued but not yet Adopted
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We are currently assessing the effect this guidance may have on our consolidated financial statements.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We are currently assessing the effect this guidance may have on our consolidated financial statements.
11
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20) Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). ASU 2018-14 removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the FASB’s efforts to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-14 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption is permitted for all entities. We are currently assessing the effect this guidance may have on our consolidated financial statements.
2. BUSINESS ACQUISITIONS, INVESTMENTS AND RESTRUCTURING CHARGES
Acquisitions
We acquired various waste businesses during the nine months ended September 30, 2019 and 2018. The purchase price for these business acquisitions and the allocations of the purchase price follows:
2019 | 2018 | ||||||||||
Purchase price: | |||||||||||
Cash used in acquisitions, net of cash acquired | $ | 424.3 | $ | 111.1 | |||||||
Contingent consideration | 2.5 | — | |||||||||
Holdbacks | 16.0 | 10.9 | |||||||||
Fair value, future minimum finance lease payments | 5.8 | — | |||||||||
Total | 448.6 | 122.0 | |||||||||
Allocated as follows: | |||||||||||
Accounts receivable | 18.3 | 1.9 | |||||||||
Landfill airspace | — | 22.2 | |||||||||
Property and equipment | 143.0 | 17.5 | |||||||||
Operating right-of-use lease assets | 18.1 | — | |||||||||
Other assets | 2.5 | 0.1 | |||||||||
Inventory | 1.1 | 0.2 | |||||||||
Accounts payable | (11.5) | (0.3) | |||||||||
Environmental remediation liabilities | (0.1) | — | |||||||||
Closure and post-closure liabilities | — | (1.7) | |||||||||
Operating right-of-use lease liabilities | (18.4) | — | |||||||||
Other liabilities | (2.3) | (3.7) | |||||||||
Fair value of tangible assets acquired and liabilities assumed | 150.7 | 36.2 | |||||||||
Excess purchase price to be allocated | $ | 297.9 | $ | 85.8 | |||||||
Excess purchase price allocated as follows: | |||||||||||
Other intangible assets | $ | 31.5 | $ | 14.8 | |||||||
Goodwill | 266.4 | 71.0 | |||||||||
Total allocated | $ | 297.9 | $ | 85.8 |
The purchase price allocations are preliminary and are based on information existing at the acquisition dates. Accordingly, the purchase price allocations are subject to change. We are finalizing the valuation of tangible and intangible assets for certain acquisitions that closed during the three months ended September 30, 2019.
Substantially all of the goodwill and intangible assets recorded for these acquisitions are deductible for tax purposes. These acquisitions are not material to our results of operations, individually or in the aggregate. As a result, no pro forma financial information is provided.
Investments
In 2019 and 2018, we acquired non-controlling equity interests in certain limited liability companies that qualified for investment tax credits under Section 48 of the Internal Revenue Code. In exchange for our non-controlling interests, we made certain capital contributions of $14.1 million and $17.4 million, which were recorded to other assets in our September 30, 2019
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REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and 2018 consolidated balance sheets, respectively. During the nine months ended September 30, 2019 and 2018, we also reduced the carrying value of these investments by $27.2 million and $5.7 million, respectively, as a result of tax credits allocated to us, cash distributions and our share of income and loss pursuant to the terms of the limited liability company agreements.
Restructuring Charges
In January 2018, we eliminated certain positions following the consolidation of select back-office functions, including but not limited to the integration of our National Accounts support functions into our existing corporate support functions. These changes include a reduction in administrative staffing and closing of certain office locations.
During the three and nine months ended September 30, 2019, we incurred restructuring charges of $8.5 million and $13.0 million, respectively, that primarily related to upgrades to our back-office software systems. During the three and nine months ended September 30, 2018, we incurred restructuring charges of $9.2 million and $22.5 million, respectively, that primarily consisted of severance and other employee termination benefits and the closure of offices with lease agreements with non-cancelable terms. We paid $7.9 million and $18.7 million during the nine months ended September 30, 2019 and 2018, respectively, related to these restructuring efforts.
In 2019, we expect to incur additional restructuring charges of approximately $3 million to $5 million primarily related to upgrades to our back-office software systems. Substantially all of these restructuring charges will be recorded in our corporate segment.
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Our senior management evaluates, oversees and manages the financial performance of our operations through two field groups, referred to as Group 1 and Group 2.
Goodwill
A summary of the activity and balances in goodwill accounts by reporting segment follows:
Balance as of December 31, 2018 | Acquisitions | Divestitures | Adjustments to Acquisitions | Balance as of September 30, 2019 | ||||||||||||||||||||||||||||
Group 1 | $ | 6,150.6 | $ | 85.9 | $ | — | $ | (1.2) | $ | 6,235.3 | ||||||||||||||||||||||
Group 2 | 5,249.5 | 180.5 | (14.6) | (0.2) | 5,415.2 | |||||||||||||||||||||||||||
Total | $ | 11,400.1 | $ | 266.4 | $ | (14.6) | $ | (1.4) | $ | 11,650.5 |
Other Intangible Assets, Net
Other intangible assets, net, include values assigned to customer relationships, non-compete agreements and trade names, and are amortized over periods ranging from 1 to 18 years. A summary of the activity and balances by intangible asset type follows:
Gross Intangible Assets | Accumulated Amortization | Other Intangible Assets, Net as of September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2018 | Acquisitions | Adjustments and Other (1) | Balance as of September 30, 2019 | Balance as of December 31, 2018 | Additions Charged to Expense | Adjustments and Other (1) | Balance as of September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Customer relationships, franchise and other municipal agreements | $ | 692.4 | $ | 26.1 | $ | — | $ | 718.5 | $ | (607.2) | $ | (11.2) | $ | 0.2 | $ | (618.2) | $ | 100.3 | ||||||||||||||||||||||||||||||||||||||
Non-compete agreements | 37.0 | 7.0 | 0.9 | 44.9 | (31.5) | (2.9) | — | (34.4) | 10.5 | |||||||||||||||||||||||||||||||||||||||||||||||
Other intangible assets | 64.3 | — | (6.1) | 58.2 | (48.5) | (0.6) | 4.2 | (44.9) | 13.3 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 793.7 | $ | 33.1 | $ | (5.2) | $ | 821.6 | $ | (687.2) | $ | (14.7) | $ | 4.4 | $ | (697.5) | $ | 124.1 | ||||||||||||||||||||||||||||||||||||||
(1) In accordance with our adoption of the new leasing standard, we transferred $1.9 million of net favorable lease assets recognized through historical acquisitions to other assets as of January 1, 2019. |
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REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. OTHER ASSETS
Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets as of September 30, 2019 and December 31, 2018 follows:
2019 | 2018 | ||||||||||
Prepaid expenses | $ | 88.0 | $ | 75.6 | |||||||
Inventories | 55.3 | 53.1 | |||||||||
Other non-trade receivables | 39.0 | 34.4 | |||||||||
Reinsurance receivable | 31.4 | 25.7 | |||||||||
Income tax receivable | 17.6 | 187.7 | |||||||||
Prepaid fees for cloud-based hosting arrangements, current | 11.8 | 10.2 | |||||||||
Other current assets | 12.3 | 4.5 | |||||||||
Total | $ | 255.4 | $ | 391.2 |
Other Assets
A summary of other assets as of September 30, 2019 and December 31, 2018 follows:
2019 | 2018 | ||||||||||
Right-of-use lease asset (1) | $ | 243.1 | $ | — | |||||||
Deferred compensation plan | 110.4 | 100.0 | |||||||||
Deferred contract costs and sales commissions | 82.4 | 89.2 | |||||||||
Reinsurance receivable | 78.0 | 68.0 | |||||||||
Investments | 58.6 | 73.0 | |||||||||
Prepaid fees and capitalized implementation costs for cloud-based hosting arrangements (2) | 33.6 | — | |||||||||
Amounts recoverable for capping, closure and post-closure obligations | 32.8 | 30.5 | |||||||||
Interest rate swaps and locks | 13.1 | 12.8 | |||||||||
Other derivative assets | 4.9 | — | |||||||||
Deferred financing costs | 3.3 | 4.2 | |||||||||
Other | 41.5 | 40.1 | |||||||||
Total | $ | 701.7 | $ | 417.8 |
(1) Refer to Note 1, Basis of Presentation, for discussion regarding our adoption of ASC 842.
(2) In accordance with our adoption of ASU 2018-15, capitalized implementation costs for cloud-based hosting arrangements are presented as other assets as of September 30, 2019. Similar costs are presented as a component of property and equipment, net as of December 31, 2018.
14
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. OTHER LIABILITIES
Other Accrued Liabilities
A summary of other accrued liabilities as of September 30, 2019 and December 31, 2018 follows:
2019 | 2018 | ||||||||||
Accrued payroll and benefits | $ | 206.0 | $ | 205.1 | |||||||
Insurance reserves, current | 156.7 | 152.9 | |||||||||
Accrued fees and taxes | 139.7 | 124.2 | |||||||||
Accrued dividends | 129.3 | 121.0 | |||||||||
Operating right-of-use lease liabilities, current (1) | 36.6 | — | |||||||||
Ceded insurance reserves, current | 31.1 | 25.7 | |||||||||
Interest rate swap locks | 29.1 | — | |||||||||
Accrued professional fees and legal settlement reserves | 9.5 | 13.1 | |||||||||
Other | 75.4 | 86.6 | |||||||||
Total | $ | 813.4 | $ | 728.6 |
(1) Refer to Note 1, Basis of Presentation, for discussion regarding our adoption of ASC 842.
Other Long-Term Liabilities
A summary of other long-term liabilities as of September 30, 2019 and December 31, 2018 follows:
2019 | 2018 | ||||||||||
Operating right-of-use lease liabilities (1) | $ | 226.0 | $ | — | |||||||
Deferred compensation plan liability | 112.9 | 96.0 | |||||||||
Ceded insurance reserves | 79.6 | 68.0 | |||||||||
Contingent purchase price and acquisition holdbacks | 68.6 | 73.9 | |||||||||
Other derivative liabilities | 24.2 | — | |||||||||
Withdrawal liability - multiemployer pension funds | 12.1 | 12.2 | |||||||||
Legal settlement reserves | 10.0 | 10.0 | |||||||||
Pension and other post-retirement liabilities | 6.1 | 6.0 | |||||||||
Interest rate swap locks | 1.6 | — | |||||||||
Other | 50.4 | 55.3 | |||||||||
Total | $ | 591.5 | $ | 321.4 |
(1) Refer to Note 1, Basis of Presentation, for discussion regarding our adoption of ASC 842.
6. LANDFILL AND ENVIRONMENTAL COSTS
As of September 30, 2019, we owned or operated 190 active landfills with total available disposal capacity of approximately 5.0 billion in-place cubic yards. Additionally, we have post-closure responsibility for 129 closed landfills.
Accrued Landfill and Environmental Costs
A summary of accrued landfill and environmental liabilities as of September 30, 2019 and December 31, 2018 follows:
2019 | 2018 | ||||||||||
Landfill final capping, closure and post-closure liabilities | $ | 1,339.6 | $ | 1,292.0 | |||||||
Environmental remediation | 515.6 | 540.2 | |||||||||
Total accrued landfill and environmental costs | 1,855.2 | 1,832.2 | |||||||||
Less: current portion | (153.2) | (130.6) | |||||||||
Long-term portion | $ | 1,702.0 | $ | 1,701.6 |
15
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Final Capping, Closure and Post-Closure Costs
The following table summarizes the activity in our asset retirement obligation liabilities, which includes liabilities for final capping, closure and post-closure, for the nine months ended September 30, 2019 and 2018:
2019 | 2018 | ||||||||||
Asset retirement obligation liabilities, beginning of year | $ | 1,292.0 | $ | 1,257.7 | |||||||
Non-cash additions | 32.9 | 33.0 | |||||||||
Acquisitions, net of divestitures and other adjustments | 0.3 | (0.6) | |||||||||
Asset retirement obligation adjustments | 0.7 | (18.4) | |||||||||
Payments | (47.7) | (42.5) | |||||||||
Accretion expense | 61.4 | 60.7 | |||||||||
Asset retirement obligation liabilities, end of period | 1,339.6 | 1,289.9 | |||||||||
Less: current portion | (80.9) | (94.2) | |||||||||
Long-term portion | $ | 1,258.7 | $ | 1,195.7 |
We review annually, in the fourth quarter, and update as necessary, our estimates of asset retirement obligation liabilities. However, if there are significant changes in the facts and circumstances related to a site during the year, we will update our assumptions prospectively in the period that we know all the relevant facts and circumstances and make adjustments as appropriate.
The fair value of assets that are legally restricted for purposes of settling final capping, closure and post-closure liabilities was $30.4 million and $29.5 million as of September 30, 2019 and December 31, 2018, respectively, and is included in restricted cash and marketable securities in our consolidated balance sheets.
Landfill Operating Expenses
In the normal course of business, we incur various operating costs associated with environmental compliance. These costs include, among other things, leachate treatment and disposal, methane gas and groundwater monitoring, systems maintenance, interim cap maintenance, costs associated with the application of daily cover materials, and the legal and administrative costs of ongoing environmental compliance. These costs are expensed as cost of operations in the periods in which they are incurred.
Environmental Remediation Liabilities
We accrue for remediation costs when they become probable and can be reasonably estimated. There can sometimes be a range of reasonable estimates of the costs associated with remediation of a site. In these cases, we use the amount within the range that constitutes our best estimate. If no amount within the range appears to be a better estimate than any other, we use the amount that is at the low end of the range. It is reasonably possible that we will need to adjust the liabilities recorded for remediation to reflect the effects of new or additional information, to the extent such information impacts the costs, timing or duration of the required actions. If we used the reasonably possible high ends of our ranges, our aggregate potential remediation liability as of September 30, 2019 would be approximately $369 million higher than the amount recorded. Future changes in our estimates of the cost, timing or duration of the required actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
The following table summarizes the activity in our environmental remediation liabilities for the nine months ended September 30, 2019 and 2018:
2019 | 2018 | ||||||||||
Environmental remediation liabilities, beginning of year | $ | 540.2 | $ | 564.0 | |||||||
Net adjustments charged to expense | (9.6) | 3.3 | |||||||||
Payments | (29.4) | (30.2) | |||||||||
Accretion expense (non-cash interest expense) | 14.3 | 15.2 | |||||||||
Acquisitions, net of divestitures and other adjustments | 0.1 | — | |||||||||
Environmental remediation liabilities, end of period | 515.6 | 552.3 | |||||||||
Less: current portion | (72.3) | (74.1) | |||||||||
Long-term portion | $ | 443.3 | $ | 478.2 |
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REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Bridgeton Landfill. During the nine months ended September 30, 2019, we paid $12.0 million related to management and monitoring of the remediation area for our closed Bridgeton Landfill in Missouri. We continue to work with state and federal regulatory agencies on our remediation efforts. From time to time, this may require us to modify our future operating timeline and procedures, which could result in changes to our expected liability. As of September 30, 2019, the remediation liability recorded for this site was $149.1 million, of which approximately $2 million is expected to be paid during the remainder of 2019. We believe the remaining reasonably possible high end of our range would be approximately $171 million higher than the amount recorded as of September 30, 2019.
West Lake Landfill Superfund Site. Our subsidiary Bridgeton Landfill, LLC is one of several currently designated Potentially Responsible Parties for the West Lake Landfill Superfund site (West Lake) in Missouri. On September 27, 2018, the U.S. Environmental Protection Agency (EPA) issued a Record of Decision Amendment for West Lake that includes a total undiscounted cost estimate of $229 million over a - to -year design and construction timeline. On March 11, 2019, the EPA issued special notice letters under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) to Bridgeton Landfill, LLC and the other currently designated Potentially Responsible Parties to initiate negotiations to implement the remedy. At this time we are neither able to predict the final design of that remedy, nor estimate how much of the future response costs of the site our subsidiary may agree or be required to pay. During any subsequent administrative proceedings or litigation, our subsidiary will vigorously contest liability for the costs of remediating radiologically-impacted materials generated on behalf of the federal government during the Manhattan Project and delivered to the site by an Atomic Energy Commission licensee and its subcontractor. Currently, we believe we are adequately reserved for our expected remediation liability. However, subsequent events related to remedy design, divisibility, or allocation may require us to modify our expected remediation liability.
17
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT
The carrying value of our notes payable, finance leases and long-term debt as of September 30, 2019 and December 31, 2018 is listed in the following table, and is adjusted for the fair value of interest rate swaps, unamortized discounts, deferred issuance costs and the unamortized portion of adjustments to fair value recorded in purchase accounting. Original issue discounts and adjustments to fair value recorded in purchase accounting are amortized to interest expense over the term of the applicable instrument using the effective interest method.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||
Maturity | Interest Rate | Principal | Adjustments | Carrying Value | Principal | Adjustments | Carrying Value | |||||||||||||||||||||||||||||||||||||
Credit facilities: | ||||||||||||||||||||||||||||||||||||||||||||
Uncommitted Credit Facility | Variable | $ | 12.2 | $ | — | $ | 12.2 | $ | 33.4 | $ | — | $ | 33.4 | |||||||||||||||||||||||||||||||
June 2023 | Variable | 170.0 | — | 170.0 | 159.0 | — | 159.0 | |||||||||||||||||||||||||||||||||||||
Senior notes: | ||||||||||||||||||||||||||||||||||||||||||||
September 2019 | 5.500 | — | — | — | 650.0 | (0.9) | 649.1 | |||||||||||||||||||||||||||||||||||||
March 2020 | 5.000 | 850.0 | (0.4) | 849.6 | 850.0 | (1.0) | 849.0 | |||||||||||||||||||||||||||||||||||||
November 2021 | 5.250 | 600.0 | (0.8) | 599.2 | 600.0 | (1.2) | 598.8 | |||||||||||||||||||||||||||||||||||||
June 2022 | 3.550 | 850.0 | (2.9) | 847.1 | 850.0 | (3.6) | 846.4 | |||||||||||||||||||||||||||||||||||||
May 2023 | 4.750 | 550.0 | 4.9 | 554.9 | 550.0 | (5.5) | 544.5 | |||||||||||||||||||||||||||||||||||||
August 2024 | 2.500 | 900.0 | (8.0) | 892.0 | — | — | — | |||||||||||||||||||||||||||||||||||||
March 2025 | 3.200 | 500.0 | (3.7) | 496.3 | 500.0 | (4.3) | 495.7 | |||||||||||||||||||||||||||||||||||||
July 2026 | 2.900 | 500.0 | (4.0) | 496.0 | 500.0 | (4.4) | 495.6 | |||||||||||||||||||||||||||||||||||||
November 2027 | 3.375 | 650.0 | (5.4) | 644.6 | 650.0 | (5.9) | 644.1 | |||||||||||||||||||||||||||||||||||||
May 2028 | 3.950 | 800.0 | (16.1) | 783.9 | 800.0 | (17.3) | 782.7 | |||||||||||||||||||||||||||||||||||||
March 2035 | 6.086 | 181.9 | (14.1) | 167.8 | 181.9 | (14.4) | 167.5 | |||||||||||||||||||||||||||||||||||||
March 2040 | 6.200 | 399.9 | (3.7) | 396.2 | 399.9 | (3.8) | 396.1 | |||||||||||||||||||||||||||||||||||||
May 2041 | 5.700 | 385.7 | (5.3) | 380.4 | 385.7 | (5.3) | 380.4 | |||||||||||||||||||||||||||||||||||||
Debentures: | ||||||||||||||||||||||||||||||||||||||||||||
May 2021 | 9.250 | 35.3 | (0.5) | 34.8 | 35.3 | (0.7) | 34.6 | |||||||||||||||||||||||||||||||||||||
September 2035 | 7.400 | 148.1 | (33.2) | 114.9 | 148.1 | (33.8) | 114.3 | |||||||||||||||||||||||||||||||||||||
Tax-exempt: | ||||||||||||||||||||||||||||||||||||||||||||
2020 - 2049 | 1.300 - 1.875 | 1,072.4 | (6.1) | 1,066.3 | 1,042.4 | (5.6) | 1,036.8 | |||||||||||||||||||||||||||||||||||||
Finance leases: | ||||||||||||||||||||||||||||||||||||||||||||
2019 - 2049 | 3.070 - 12.203 | 112.4 | — | 112.4 | 109.5 | — | 109.5 | |||||||||||||||||||||||||||||||||||||
Total Debt | $ | 8,717.9 | $ | (99.3) | 8,618.6 | $ | 8,445.2 | $ | (107.7) | 8,337.5 | ||||||||||||||||||||||||||||||||||
Less: current portion | (912.8) | (690.7) | ||||||||||||||||||||||||||||||||||||||||||
Long-term portion | $ | 7,705.8 | $ | 7,646.8 |
Credit Facilities
In June 2018, we entered into a $2.25 billion unsecured revolving credit facility (the Credit Facility), which replaced our $1.0 billion and $1.25 billion unsecured credit facilities that would have matured in May 2021 and June 2019, respectively. The Credit Facility matures in June 2023. We may request two -year extensions of the maturity date but none of the lenders are committed to participate in such extension. The Credit Facility also includes a feature that allows us to increase availability, at our option, by an aggregate amount of up to $1.0 billion through increased commitments from existing lenders or the addition of new lenders. At our option, borrowings under the Credit Facility bear interest at a Base Rate, or a Eurodollar Rate, plus an applicable margin based on our Debt Ratings (all as defined in the Credit Facility agreement).
The Credit Facility is subject to facility fees based on applicable rates defined in the Credit Facility agreement and the aggregate commitment, regardless of usage. Availability under our Credit Facility totaled $1,710.6 million and $1,694.1 million
18
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
as of September 30, 2019 and December 31, 2018, respectively. The Credit Facility can be used for working capital, capital expenditures, acquisitions, letters of credit and other general corporate purposes. The Credit Facility agreement requires us to comply with financial and other covenants. We may pay dividends and repurchase common stock if we are in compliance with these covenants.
As of September 30, 2019 and December 31, 2018, we had $170.0 million and $159.0 million of borrowings under our Credit Facility, respectively. We had $352.0 million and $379.6 million of letters of credit outstanding under our Credit Facility as of September 30, 2019 and December 31, 2018, respectively.
We also have an Uncommitted Credit Facility, which bears interest at LIBOR, plus an applicable margin and is subject to facility fees defined in the agreement, regardless of usage. We can use borrowings under the Uncommitted Credit Facility for working capital and other general corporate purposes. The agreement governing our Uncommitted Credit Facility requires us to comply with certain covenants. The Uncommitted Credit Facility may be terminated by either party at any time. We had $12.2 million of borrowings and $33.4 million of borrowings outstanding under our Uncommitted Credit Facility as of September 30, 2019 and December 31, 2018, respectively.
Senior Notes and Debentures
In August 2019, we issued $900.0 million of 2.500% senior notes due 2024 (the 2.500% Notes). We used the net proceeds from the 2.500% Notes to repay $650.0 million of 5.500% senior notes that matured in September 2019. Any remaining proceeds were used to repay amounts outstanding under our unsecured credit facilities as well as for general corporate purposes. Contemporaneously with this offering, we amended interest rate lock agreements with a notional value of $375.0 million and dedesignated the hedging relationship. There was no ineffectiveness recognized in the termination of these cash flow hedges. In addition, we entered into an offsetting interest rate swap to manage exposure to fluctuations in interest rates associated with the amended agreements. For further detail regarding the effect of our derivative contracts on interest expense, refer to Note 12, Financial Instruments, to our unaudited consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
In 2018, we issued $800.0 million of 3.950% senior notes due 2028 (the 3.950% Notes). We used the net proceeds from the 3.950% Notes to repay $700.0 million of 3.800% senior notes that matured in May 2018, and any remaining proceeds were used for general corporate purposes. In connection with this offering, we terminated interest rate lock agreements with a notional value of $600.0 million, resulting in net proceeds of $31.1 million. There was no ineffectiveness recognized in the termination of these cash flow hedges.
Our senior notes and debentures are general unsecured obligations. Interest is payable semi-annually.
Tax-Exempt Financings
During the second quarter of 2019, we refinanced $35.0 million of tax-exempt financings and issued $30.0 million of new tax-exempt financings. As of September 30, 2019, we had $1,066.3 million of certain variable rate tax-exempt financings outstanding with maturities ranging from 2020 to 2049. As of December 31, 2018, we had $1,036.8 million of certain variable rate tax-exempt financings outstanding with maturities ranging from 2019 to 2044. Approximately 100% of our tax-exempt financings are remarketed quarterly by remarketing agents to effectively maintain a variable yield. The holders of the bonds can put them back to the remarketing agents at the end of each interest period. To date, the remarketing agents have been able to remarket all of our variable rate unsecured tax-exempt bonds.
Finance Leases
We had finance lease liabilities of $112.4 million and $109.5 million as of September 30, 2019 and December 31, 2018, respectively, with maturities ranging from 2019 to 2049 and 2019 to 2046, respectively.
Interest Rate Swap and Lock Agreements
Our ability to obtain financing through the capital markets is a key component of our financial strategy. Historically, we have managed risk associated with executing this strategy, particularly as it relates to fluctuations in interest rates, by using a combination of fixed and floating rate debt. From time to time, we also have entered into interest rate swap and lock agreements to manage risk associated with interest rates, either to effectively convert specific fixed rate debt to a floating rate (fair value hedges), or to lock interest rates in anticipation of future debt issuances (cash flow hedges).
19
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Fair Value Hedges
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. The goal was to reduce overall borrowing costs and rebalance our debt portfolio's ratio of fixed to floating interest rates. As of September 30, 2019 and December 31, 2018, these swap agreements had a total notional value of $300.0 million and mature in May 2023, which is identical to the maturity of the hedged senior notes. We pay interest at floating rates based on changes in LIBOR and receive interest at a fixed rate of 4.750%. These transactions were designated as fair value hedges because the swaps hedge against the changes in fair value of the fixed rate senior notes resulting from changes in interest rates.
As of September 30, 2019 and December 31, 2018, the interest rate swap agreements are reflected at their fair value of $13.1 million and $2.5 million, respectively, and are included in other assets in our consolidated balance sheet. To the extent they are effective, these interest rate swap agreements are included as an adjustment to long-term debt in our consolidated balance sheets.
For the three months ended September 30, 2019 and 2018, we recognized a loss of $1.1 million and a gain of $1.9 million, respectively, on the change in fair value of the hedged senior notes attributable to changes in the benchmark interest rate, with an offsetting gain of $1.4 million and an offsetting loss of $2.0 million, respectively, on the related interest rate swaps. For the nine months ended September 30, 2019 and 2018, we recognized a loss of $10.0 million and a gain of $11.1 million, respectively, on the change in fair value of the hedged senior notes attributable to changes in the benchmark interest rate, with an offsetting gain of $10.5 million and an offsetting loss of $11.5 million, respectively, on the related interest rate swaps. The difference of these fair value changes for the nine months ended September 30, 2018 was recorded directly in earnings as other income, net. In accordance with our adoption of ASU 2017-12, the difference of these fair value changes for the nine months ended September 30, 2019 was recorded directly in earnings as an adjustment to interest expense in our consolidated statement of income.
For further detail regarding the effect of our fair value hedging on interest expense, refer to Note 12, Financial Instruments, to our unaudited consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Cash Flow Hedges
As of September 30, 2019 and December 31, 2018, our interest rate lock agreements had an aggregate notional value of $575.0 million and $725.0 million, respectively, with fixed interest rates ranging from 1.330% to 3.000% and 1.900% to 3.250%, respectively. We entered into these transactions to manage exposure to fluctuations in interest rates in anticipation of planned future issuances of senior notes in 2019 through 2021. Upon the expected issuance of senior notes, we will terminate the interest rate locks and settle with our counterparties. These transactions were accounted for as cash flow hedges.
The fair value of our interest rate locks was determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (Level 2 in the fair value hierarchy). The aggregate fair values of the outstanding interest rate locks as of September 30, 2019 were assets of $1.3 million, which were recorded in prepaid expenses and other current assets in our consolidated balance sheet and liabilities of $30.7 million, which were recorded in other accrued liabilities and other long-term liabilities in our consolidated balance sheet. As of December 31, 2018, the aggregate fair values of the outstanding interest rate locks were assets of $10.3 million and were recorded in other assets in our consolidated balance sheet.
Total unrealized (loss) gain recognized in other comprehensive income for interest rate locks was $(11.9) million and $4.2 million for the three months ended September 30, 2019 and 2018, respectively. Total unrealized (loss) gain recognized in other comprehensive income for interest rate locks was $(43.0) million and $33.1 million for the nine months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019 and December 31, 2018, our previously terminated interest rate locks were recorded as components of accumulated other comprehensive income (loss), net of tax of $(3.5) million and $11.2 million, respectively. The amortization of the terminated interest rate locks is recorded as an adjustment to interest expense over the life of the issued debt using the effective interest method. We expect to amortize approximately $1.9 million of net interest expense, net of tax, over the next 12 months as a yield adjustment of our senior notes.
For detail regarding the effect of our cash flow hedging on interest expense, refer to Note 12, Financial Instruments, to our unaudited consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
8. LEASES
We lease property and equipment in the ordinary course of business under various lease agreements. The most significant lease obligations are for real property and equipment specific to our industry, including property operated as a landfill or transfer
20
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
station and operating equipment. Our leases have varying terms. Some may include renewal or purchase options, escalation clauses, restrictions, penalties or other obligations that we consider in determining minimum lease payments. Our lease terms include options to renew the lease when it is reasonably certain that we will exercise the option.
Certain leases require payments that are variable in nature based on volume measurements, e.g. a fixed rate per ton at our landfills. In addition, certain rental payments are adjusted annually based on changes in an underlying base index such as a consumer price index. Variable lease payments are recognized in our consolidated statement of income in the period incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We generally account for lease components separately from non-lease components.
Leases are classified as either operating leases or finance leases, as appropriate. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet.
Operating Leases
Many of our leases are operating leases. Operating lease classification generally can be attributed to either (1) relatively low fixed minimum lease payments (including, for example, real property lease payments that are not fixed and vary based on the volume of waste we receive or process), or (2) minimum lease terms that are shorter than the asset's economic useful life. We expect that, in the ordinary course of business, our operating leases will be renewed, replaced by other leases, or replaced with capital expenditures. We recognize rent expense for these leases on a straight-line basis over the lease term.
We recognize a right-of-use liability and right-of-use asset for leases classified as operating leases in our consolidated balance sheet upon lease commencement. The right-of-use liability represents the present value of the remaining lease payments. An implicit rate is often not readily available for these leases. As such, we use our incremental borrowing rate at the commencement date to determine the present value of the lease payments. Our incremental borrowing rate represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. In addition, we recognize a corresponding right-of-use asset, which represents our right to use an underlying asset for the lease term. The right-of-use asset is adjusted for certain favorable or unfavorable leases recognized through acquisition, prepaid or accrued rent, asset impairments and lease incentives, including but not limited to cash incentives, rent abatement or leasehold improvements paid by the lessor.
Finance Leases
We capitalize assets acquired under finance leases at lease commencement and amortize them to depreciation expense over the lesser of the useful life of the asset or the lease term on either a straight-line or a units-of-consumption basis, depending on the asset leased. We record the present value of the related lease payments as a debt obligation. Our finance lease liability relates primarily to certain long-term landfill operating agreements that require minimum lease payments with offsetting finance lease assets recorded as part of the landfill development costs.
A summary of the lease classification on our consolidated balance sheet as of September 30, 2019 follows:
2019 | ||||||||
Assets | ||||||||
Operating right-of-use lease assets | Other assets | $ | 243.1 | |||||
Finance lease assets | Property and equipment, net | 128.2 | ||||||
Total lease assets | $ | 371.3 | ||||||
Liabilities | ||||||||
Current | ||||||||
Operating | Other accrued liabilities | $ | 36.6 | |||||
Finance | Notes payable and current maturities of long-term debt | 7.0 | ||||||
Long-term | ||||||||
Operating | Other long-term liabilities | 226.0 | ||||||
Finance | Long-term debt, net of current maturities | 105.4 | ||||||
Total lease liabilities | $ | 375.0 |
21
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the lease cost reflected in our consolidated statement of income for the three and nine months ended September 30, 2019 follows:
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||||||||
Operating lease cost | ||||||||||||||
Fixed lease cost | Cost of operations | $ | 10.7 | $ | 31.0 | |||||||||
Short-term lease cost | Cost of operations | 9.4 | 28.4 | |||||||||||
Variable lease cost | Cost of operations | 4.6 | 13.3 | |||||||||||
Finance lease cost | ||||||||||||||
Amortization of leased assets | Depreciation amortization, and depletion | 1.4 | 4.1 | |||||||||||
Interest on lease liabilities | Interest expense | 1.9 | 5.6 | |||||||||||
Variable lease cost | Interest expense | 1.6 | 4.3 | |||||||||||
Total lease cost | $ | 29.6 | $ | 86.7 |
As of September 30, 2019, aggregate principal payments for operating and finance leases follows:
Operating Leases | Finance Leases | Total | ||||||||||||||||||
2019 (remaining) | $ | 12.7 | $ | 3.7 | $ | 16.4 | ||||||||||||||
2020 | 42.8 | 15.6 | 58.4 | |||||||||||||||||
2021 | 39.5 | 14.0 | 53.5 | |||||||||||||||||
2022 | 33.3 | 13.4 | 46.7 | |||||||||||||||||
2023 | 31.7 | 39.2 | 70.9 | |||||||||||||||||
Thereafter | 157.0 | 129.0 | 286.0 | |||||||||||||||||
Total lease payments | 317.0 | 214.9 | 531.9 | |||||||||||||||||
Less: interest | (54.4) | (102.5) | (156.9) | |||||||||||||||||
Present value of lease liabilities | $ | 262.6 | $ | 112.4 | $ | 375.0 |
A summary of the weighted-average remaining lease term and weighted-average discount rate as of September 30, 2019 follows:
September 30, 2019 | ||||||||
Weighted-average remaining lease term (years) | ||||||||
Operating leases | 9.0 | |||||||
Finance leases | 14.7 | |||||||
Weighted-average discount rate | ||||||||
Operating leases | 3.9 | % | ||||||
Finance leases | 7.0 | % |
22
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Supplemental cash flow and other non-cash information for the three and nine months ended September 30, 2019 follows:
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
Operating cash flows from operating leases | $ | 25.0 | $ | 73.3 | ||||||||||
Operating cash flows from finance leases | $ | 3.5 | $ | 9.9 | ||||||||||
Financing cash flows from finance leases | $ | 1.6 | $ | 4.4 | ||||||||||
Leased assets obtained in exchange for new finance lease liabilities | $ | 6.3 | $ | 7.1 | ||||||||||
Leased assets obtained in exchange for new operating lease liabilities | $ | 26.6 | $ | 36.0 |
9. INCOME TAXES
Our effective tax rate, exclusive of non-controlling interests, for the three and nine months ended September 30, 2019 was 19.3% and 22.5%, respectively. Our effective tax rate, exclusive of non-controlling interests, for the three and nine months ended September 30, 2018 was 22.7% and 23.6%, respectively. Our effective tax rate, for the three and nine months ended September 30, 2019, was favorably affected by settlements of various state matters and the realization of additional federal and state benefits as well as adjustments to deferred taxes due to the completion of our 2018 tax returns.
Cash paid for income taxes was a net refund of $4.3 million and a net payment of $43.5 million for the nine months ended September 30, 2019 and 2018, respectively. Cash taxes have been favorably impacted from the receipt of funds from amended returns filed during 2018.
We have deferred tax assets related to state net operating loss carryforwards. We provide a partial valuation allowance due to uncertainty surrounding the future utilization of these carryforwards in the taxing jurisdictions where the loss carryforwards exist. When determining the need for a valuation allowance, we consider all positive and negative evidence, including recent financial results, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.
As a result of changes in U.S. tax law and our ongoing efforts to evaluate, streamline and maximize the efficiency of our tax footprint, we could adjust our valuation allowance in a future period if there is sufficient evidence to support a conclusion that it is more certain than not that a portion of the state net operating loss carryforwards, on which we currently provide a valuation allowance, would be realized. Future changes in our valuation allowance could have a material effect on our results of operations in the period recorded.
The realization of our deferred tax asset for state loss carryforwards ultimately depends upon the existence of sufficient taxable income in the appropriate state taxing jurisdictions in future periods. The weight given to the positive and negative evidence is commensurate with the extent such evidence can be objectively verified. We continue to regularly monitor both positive and negative evidence in determining the ongoing need for a valuation allowance. As of September 30, 2019, the valuation allowance associated with our state loss carryforwards was approximately $68 million.
We are subject to income tax in the United States and Puerto Rico, as well as in multiple state jurisdictions. Our compliance with income tax rules and regulations is periodically audited by taxing authorities. These authorities may challenge the positions taken in our tax filings. We are currently under examination or administrative review by the Internal Revenue Service, state and local taxing authorities and Puerto Rico for various tax years.
We believe that our recorded liabilities for uncertain tax positions are adequate. However, a significant assessment against us in excess of the liabilities recorded could have a material adverse effect on our consolidated financial position, results of operations and cash flows. As of September 30, 2019, we are unable to estimate the resolution of our gross unrecognized benefits over the next 12 months.
We recognize interest and penalties as incurred within the provision for income taxes in the consolidated statement of income. As of September 30, 2019, we accrued a liability for penalties of $0.3 million and a liability for interest (including interest on penalties) of $11.0 million related to our uncertain tax positions.
10. STOCK REPURCHASES, DIVIDENDS AND EARNINGS PER SHARE
Available Shares
We currently have approximately 12.8 million shares of common stock reserved for future grants under the Republic Services, Inc. Amended and Restated 2007 Stock Incentive Plan.
23
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock Repurchases
Stock repurchase activity during the three and nine months ended September 30, 2019 and 2018 follows (in millions, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
Number of shares repurchased | 1.7 | 1.4 | 4.3 | 8.5 | |||||||||||||||||||
Amount paid | $ | 151.3 | $ | 100.9 | $ | 353.8 | $ | 574.9 | |||||||||||||||
Weighted average cost per share | $ | 86.87 | $ | 71.83 | $ | 81.63 | $ | 67.84 |
As of September 30, 2019, there were less than 0.1 million repurchased shares pending settlement, resulting in an associated $0.1 million of share repurchases unpaid and included within other accrued liabilities. As of September 30, 2018, there were no repurchased shares pending settlement.
In October 2017, our Board of Directors added $2.0 billion to the existing share repurchase authorization that now extends through December 31, 2020. 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 of common stock 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 September 30, 2019, the remaining authorized purchase capacity under our October 2017 repurchase program was $750.3 million.
Dividends
In July 2019, our Board of Directors approved a quarterly dividend of $0.405 per share. Cash dividends declared were $370.2 million for the nine months ended September 30, 2019. As of September 30, 2019, we recorded a quarterly dividend payable of $129.3 million to shareholders of record at the close of business on October 1, 2019.
Earnings per Share
Basic earnings per share is computed by dividing net income attributable to Republic Services, Inc. by the weighted average number of common shares (including vested but unissued RSUs and PSUs) outstanding during the period. Diluted earnings per share is based on the combined weighted average number of common shares and common share equivalents outstanding, which include, where appropriate, the assumed exercise of employee stock options, unvested RSUs and unvested PSUs at the expected attainment levels. We use the treasury stock method in computing diluted earnings per share.
Earnings per share for the three and nine months ended September 30, 2019 and 2018 are calculated as follows (in thousands, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, |