Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - REPUBLIC SERVICES, INC.rsgex32293016.htm
EX-32.1 - EXHIBIT 32.1 - REPUBLIC SERVICES, INC.rsgex32193016.htm
EX-31.2 - EXHIBIT 31.2 - REPUBLIC SERVICES, INC.rsgex31293016.htm
EX-31.1 - EXHIBIT 31.1 - REPUBLIC SERVICES, INC.rsgex31193016.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
 _________________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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)
(I.R.S. Employer
Identification No.)
 
 
18500 NORTH ALLIED WAY
PHOENIX, ARIZONA
85054
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (480) 627-2700
_________________________________________________________ 
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 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
¨
Non-accelerated filer
 ¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

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 20, 2016, the registrant had outstanding 339,961,875 shares of Common Stock, par value $0.01 per share (excluding treasury shares of 7,818,774).



REPUBLIC SERVICES, INC.
INDEX
 
 
Item 1.
 
 
 
 
 
 
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,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
55.0

 
$
32.4

Accounts receivable, less allowance for doubtful accounts and other of $50.2 and $46.7, respectively
1,016.7

 
962.9

Prepaid expenses and other current assets
229.9

 
235.0

Total current assets
1,301.6

 
1,230.3

Restricted cash and marketable securities
85.6

 
100.3

Property and equipment, net
7,616.0

 
7,552.8

Goodwill
11,163.1

 
11,145.5

Other intangible assets, net
201.4

 
246.4

Other assets
294.0

 
260.6

Total assets
$
20,661.7

 
$
20,535.9

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
542.8

 
$
577.4

Notes payable and current maturities of long-term debt
5.7

 
5.5

Deferred revenue
320.2

 
313.9

Accrued landfill and environmental costs, current portion
177.0

 
149.8

Accrued interest
68.0

 
71.6

Other accrued liabilities
704.2

 
716.6

Total current liabilities
1,817.9

 
1,834.8

Long-term debt, net of current maturities
7,739.6

 
7,527.4

Accrued landfill and environmental costs, net of current portion
1,650.0

 
1,677.9

Deferred income taxes and other long-term tax liabilities
1,194.7

 
1,131.8

Insurance reserves, net of current portion
280.1

 
278.1

Other long-term liabilities
337.9

 
309.3

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; 347.7 and 346.0 issued
including shares held in treasury, respectively
3.5

 
3.5

Additional paid-in capital
4,741.5

 
4,677.7

Retained earnings
3,243.9

 
3,138.3

Treasury stock, at cost (6.9 and 0.4 shares, respectively)
(326.7
)
 
(14.9
)
Accumulated other comprehensive loss, net of tax
(23.0
)
 
(30.5
)
Total Republic Services, Inc. stockholders’ equity
7,639.2

 
7,774.1

Noncontrolling interests
2.3

 
2.5

Total stockholders’ equity
7,641.5

 
7,776.6

Total liabilities and stockholders’ equity
$
20,661.7

 
$
20,535.9

The accompanying notes are an integral part of these statements.

3


REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
2,409.3

 
$
2,344.0

 
$
7,008.5

 
$
6,824.8

Expenses:
 
 
 
 
 
 
 
Cost of operations
1,476.7

 
1,390.2

 
4,298.7

 
4,114.9

Depreciation, amortization and depletion
252.4

 
247.1

 
745.7

 
726.3

Accretion
19.7

 
19.7

 
59.3

 
59.2

Selling, general and administrative
235.4

 
244.1

 
720.1

 
719.5

Withdrawal costs - multiemployer pension funds

 

 
5.6

 

Restructuring charges
7.2

 

 
33.5

 

Operating income
417.9

 
442.9

 
1,145.6

 
1,204.9

Interest expense
(96.3
)
 
(91.8
)
 
(281.3
)
 
(272.0
)
Loss on extinguishment of debt
(196.2
)
 

 
(196.2
)
 

Interest income
0.2

 
0.1

 
0.9

 
0.6

Other (expense) income, net
1.3

 
(0.4
)
 
2.2

 
0.5

Income before income taxes
126.9

 
350.8

 
671.2

 
934.0

Provision for income taxes
41.2

 
135.6

 
247.6

 
356.0

Net income
85.7

 
215.2

 
423.6

 
578.0

Net income attributable to noncontrolling interests
(0.1
)
 
(0.2
)
 
(0.5
)
 
(0.3
)
Net income attributable to Republic Services, Inc.
$
85.6

 
$
215.0

 
$
423.1

 
$
577.7

Basic earnings per share attributable to Republic Services, Inc. stockholders:
 
 
 
 
 
 
 
Basic earnings per share
$
0.25

 
$
0.62

 
$
1.23

 
$
1.65

Weighted average common shares outstanding
342.6

 
348.9

 
344.0

 
351.0

Diluted earnings per share attributable to Republic Services, Inc. stockholders:
 
 
 
 
 
 
 
Diluted earnings per share
$
0.25

 
$
0.61

 
$
1.23

 
$
1.64

Weighted average common and common equivalent shares outstanding
344.0

 
350.3

 
345.3

 
352.4

Cash dividends per common share
$
0.32

 
$
0.30

 
$
0.92

 
$
0.86

The accompanying notes are an integral part of these statements.


4


REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
85.7

 
$
215.2

 
$
423.6

 
$
578.0

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
Hedging activity:
 
 
 
 
 
 
 
Settlements
(4.8
)
 
(4.6
)
 
(16.2
)
 
(11.0
)
Realized loss reclassified into earnings
9.5

 
5.0

 
21.6

 
12.9

Unrealized (loss) gain
3.2

 
(5.3
)
 
2.1

 
0.5

Pension activity:
 
 
 
 
 
 
 
Change in funded status of pension plan obligations

 

 

 
(0.1
)
Other comprehensive (loss) income, net of tax
7.9

 
(4.9
)
 
7.5

 
2.3

Comprehensive income
93.6

 
210.3

 
431.1

 
580.3

Comprehensive income attributable to noncontrolling interests
(0.1
)
 
(0.2
)
 
(0.5
)
 
(0.3
)
Comprehensive income attributable to Republic Services, Inc.
$
93.5

 
$
210.1

 
$
430.6

 
$
580.0

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 Loss,
Net of Tax
 
Noncontrolling
Interests
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
Total
Balance as of December 31, 2015
346.0

 
$
3.5

 
$
4,677.7

 
$
3,138.3

 
(0.4
)
 
$
(14.9
)
 
$
(30.5
)
 
$
2.5

 
$
7,776.6

Net income

 

 

 
423.1

 

 

 

 
0.5

 
423.6

Other comprehensive income

 

 

 

 

 

 
7.5

 

 
7.5

Cash dividends declared

 

 

 
(315.2
)
 

 

 

 

 
(315.2
)
Issuances of common stock
1.7

 

 
43.8

 

 

 

 

 

 
43.8

Stock-based compensation

 

 
20.0

 
(2.3
)
 

 

 

 

 
17.7

Purchase of common stock for treasury

 

 

 

 
(6.5
)
 
(311.8
)
 

 

 
(311.8
)
Distributions paid to noncontrolling interests

 

 

 

 

 

 

 
(0.7
)

(0.7
)
Balance as of September 30, 2016
347.7

 
$
3.5

 
$
4,741.5

 
$
3,243.9

 
(6.9
)
 
$
(326.7
)
 
$
(23.0
)
 
$
2.3

 
$
7,641.5

The accompanying notes are an integral part of these statements.


6


REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

 
Nine Months Ended September 30,
 
2016
 
2015
Cash provided by operating activities:
 
 
 
Net income
$
423.6

 
$
578.0

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, amortization, depletion and accretion
805.0

 
785.5

Non-cash interest expense
41.9

 
35.2

Restructuring charges
33.5

 

Stock-based compensation
17.7

 
15.1

Deferred tax provision (benefit)
58.2

 
(12.3
)
Provision for doubtful accounts, net of adjustments
17.5

 
17.3

Loss on extinguishment of debt
196.2

 

Gain on disposition of assets, net and asset impairments
(0.3
)
 
(1.6
)
Withdrawal liability - multiemployer pension funds
5.6

 

Environmental adjustments
0.3

 
(1.3
)
Excess income tax benefit from stock-based compensation activity and other non-cash items
(20.5
)
 
(7.0
)
Change in assets and liabilities, net of effects from business acquisitions and divestitures:
 
 
 
Accounts receivable
(70.8
)
 
(39.8
)
Prepaid expenses and other assets
(52.0
)
 
(64.2
)
Accounts payable
(19.5
)
 
11.7

Restructuring expenditures
(24.2
)
 

Capping, closure and post-closure expenditures
(56.7
)
 
(50.4
)
Remediation expenditures
(50.7
)
 
(50.1
)
Other liabilities
54.8

 
108.4

Cash provided by operating activities
1,359.6

 
1,324.5

Cash used in investing activities:
 
 
 
Purchases of property and equipment
(738.7
)
 
(732.0
)
Proceeds from sales of property and equipment
7.4

 
17.1

Cash used in business acquisitions, net of cash acquired
(30.7
)
 
(535.9
)
Change in restricted cash and marketable securities
10.0

 
8.4

Other
(0.4
)
 
(0.8
)
Cash used in investing activities
(752.4
)
 
(1,243.2
)
Cash used in financing activities:
 
 
 
Proceeds from notes payable and long-term debt
3,068.6

 
895.4

Proceeds from issuance of senior notes, net of discount
498.9

 
497.9

Payments of notes payable and long-term debt
(3,388.4
)
 
(908.9
)
Premiums paid on extinguishment of debt
(176.9
)
 

Fees paid to issue senior notes and retire certain hedging relationships
(9.5
)
 
(3.2
)
Issuances of common stock
35.4

 
52.3

Excess income tax benefit from stock-based compensation activity
8.4

 
6.2

Purchases of common stock for treasury
(306.6
)
 
(293.3
)
Cash dividends paid
(309.9
)
 
(295.0
)
Distributions paid to noncontrolling interests
(0.7
)
 
(0.4
)
Other
(3.9
)
 
(5.0
)
Cash used in financing activities
(584.6
)
 
(54.0
)
Increase in cash and cash equivalents
22.6

 
27.3

Cash and cash equivalents at beginning of year
32.4

 
75.2

Cash and cash equivalents at end of period
$
55.0

 
$
102.5

The accompanying notes are an integral part of these statements.


7


REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION
Republic Services, Inc., a Delaware corporation, and its consolidated subsidiaries (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 energy services in the United States, as measured by revenue. We manage and evaluate our operations through two field groups, Group 1 and Group 2, that we have identified as our reportable segments.
The unaudited consolidated financial statements include the accounts of Republic 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 year ended December 31, 2015 and Form 8-K filed on June 3, 2016.
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, landfill 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 plans, 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 year ended December 31, 2015 and Form 8-K filed on June 3, 2016. Our actual results may differ significantly from our estimates.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) amended the Accounting Standards Codification and created Topic 606, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue. In July 2015, the FASB voted to amend the guidance by approving a one-year deferral of the effective date and providing the option to early adopt the standard on the original effective date of 2017. Republic will adopt the standard beginning January 1, 2018. The new standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. We are currently assessing the method of adoption and the potential impact this guidance may have on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, which simplifies the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. The standard is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. We adopted this standard on a retrospective basis in the first quarter of 2016, which resulted in a reduction of our debt liability and other assets in our consolidated balance sheets of $37.7 million and $41.3 million as of September 30, 2016 and December 31, 2015, respectively.

8

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance requires lessees to recognize lease assets and liabilities for those leases classified as operating leases under previous U.S. GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the timing of the adoption and the potential impact this guidance may have on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718), which simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact this guidance may have on our consolidated financial statements.
2. BUSINESS ACQUISITIONS AND RESTRUCTURING CHARGES
Acquisitions
We acquired various waste businesses during the nine months ended September 30, 2016 and 2015.  The purchase price for these acquisitions and the allocations of the purchase price follow:
 
2016
 
2015
Purchase price:
 
 
 
Cash used in acquisitions, net of cash acquired
$
30.7

 
$
535.9

Contingent consideration

 
75.8

Holdbacks
3.3

 
2.6

Fair value, future minimum lease payments

 
1.5

Total
34.0

 
615.8

Allocated as follows:
 
 
 
Accounts receivable
0.5

 
36.1

Landfill airspace

 
159.7

Property and equipment
11.8

 
144.9

Other assets
0.1

 
1.8

Accounts payable

 
(7.1
)
Environmental remediation liabilities
(0.1
)
 
(2.8
)
Closure and post-closure liabilities
(0.1
)
 
(11.3
)
Other liabilities
(0.7
)
 
(9.5
)
Fair value of tangible assets acquired and liabilities assumed
11.5

 
311.8

Excess purchase price to be allocated
$
22.5

 
$
304.0

Excess purchase price allocated as follows:
 
 
 
Other intangible assets
$
5.3

 
$
10.1

Goodwill
17.2

 
293.9

Total allocated
$
22.5

 
$
304.0

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. Substantially all of the goodwill and intangible assets recorded for these acquisitions are deductible for tax purposes. These acquisitions are not material to the Company's results of operations, individually or in the aggregate. As a result, no pro forma financial information is provided.
In 2015, we acquired all of the equity interests of Tervita, LLC (Tervita) in exchange for a cash payment of $476.6 million. Tervita provides waste services to a diverse customer base serving oil and natural gas producers and operates three types of waste management and disposal facilities: treatment, recovery and disposal facilities, engineered landfills and salt water disposal injection wells. We allocated $109.3 million of the purchase price to property and equipment, $85.5 million to landfill airspace, $7.2 million to intangible assets, and $21.0 million to net working capital. We also assumed $6.9 million of closure

9

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

and post-closure obligations and $7.6 million of environmental remediation and other liabilities. Approximately $268 million of the remaining purchase price was allocated to goodwill.
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 redesigning our accounts payable functions to streamline and consolidate our invoice processing and vendor support. The savings realized from these restructuring efforts will be reinvested in our customer-focused programs and initiatives, which include the consolidation of over 100 customer service locations into three Customer Resource Centers over the next two years.
During the three and nine months ended September 30, 2016, we incurred $7.2 million and $33.5 million, respectively, of restructuring charges that consisted of severance and other employee termination benefits, employee relocation benefits, and the closure of offices with lease agreements with non-cancelable terms. During the three and nine months ended September 30, 2016, we paid $9.7 million and $24.2 million, respectively, related to these restructuring efforts. We expect to incur additional charges of approximately $20 million over the next two years related to our field realignment, the consolidation of our customer service locations, and the redesign of our accounts payable processes. Substantially all of these restructuring charges will be recorded in our corporate segment.
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
In January 2016, we realigned our field support functions by combining our three regions into two field groups, consolidating our area locations 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.
During the first quarter of 2016, we determined that our 2016 reportable segments are Group 1 and Group 2. We also evaluated our reporting units and determined that our 2016 reporting units are our reportable segments. We allocated goodwill to the new reporting units using a relative fair value approach and determined that there were no indicators of goodwill impairment.
Goodwill
A summary of the activity and balances in goodwill accounts by reporting segment follows:
 
 
Balance as of December 31, 2015
 
Acquisitions
 
Adjustments to
Acquisitions
 
Balance as of September 30, 2016
Group 1
 
$
5,248.1

 
$
8.9

 
$

 
$
5,257.0

Group 2
 
5,897.4

 
8.3

 
0.4

 
5,906.1

Total
 
$
11,145.5

 
$
17.2

 
$
0.4

 
$
11,163.1

Adjustments to acquisitions during the nine months ended September 30, 2016 primarily related to working capital, and were recorded to goodwill in purchase accounting.

10

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Other Intangible Assets, Net
Other intangible assets, net, include values assigned to customer relationships, franchise agreements, other municipal agreements, non-compete agreements and trade names, and are amortized over periods ranging from 1 to 20 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, 2016
 
Balance as of December 31, 2015
 
Acquisitions
 
Balance as of September 30, 2016
 
Balance as of December 31, 2015
 
Additions
Charged to
Expense
 
Balance as of September 30, 2016
 
Customer relationships, franchise and other municipal agreements
$
651.6

 
$
4.4

 
$
656.0

 
$
(431.0
)
 
$
(46.8
)
 
$
(477.8
)
 
$
178.2

Non-compete agreements
30.8

 
0.9

 
31.7

 
(22.1
)
 
(2.4
)
 
(24.5
)
 
7.2

Other intangible assets
65.6

 

 
65.6

 
(48.5
)
 
(1.1
)
 
(49.6
)
 
16.0

Total
$
748.0

 
$
5.3

 
$
753.3

 
$
(501.6
)
 
$
(50.3
)
 
$
(551.9
)
 
$
201.4

4. OTHER ASSETS
Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets as of September 30, 2016 and December 31, 2015 follows:
 
2016
 
2015
Inventories
$
43.7

 
$
38.8

Prepaid expenses
86.3

 
66.1

Other non-trade receivables
35.2

 
34.6

Reinsurance receivable
13.1

 
12.5

Income tax receivable
44.8

 
78.5

Other current assets
6.8

 
4.5

Total
$
229.9

 
$
235.0

Other Assets
A summary of other assets as of September 30, 2016 and December 31, 2015 follows:
 
2016
 
2015
Deferred compensation plan
$
93.8

 
$
90.5

Amounts recoverable for capping, closure and post-closure obligations
27.8

 
25.9

Reinsurance receivable
61.4

 
44.0

Interest rate swaps
27.9

 
16.5

Other
83.1

 
83.7

Total
$
294.0

 
$
260.6


11

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, 2016 and December 31, 2015 follows:
 
2016
 
2015
Accrued payroll and benefits
$
169.3

 
$
187.8

Accrued fees and taxes
134.2

 
126.5

Insurance reserves, current portion
138.5

 
127.7

Ceded insurance reserves, current portion
13.1

 
12.5

Accrued dividends
109.0

 
103.7

Current tax liabilities
2.1

 
0.5

Fuel hedge fair value and settlements payable
16.1

 
41.0

Accrued professional fees and legal settlement reserves
32.8

 
44.2

Other
89.1

 
72.7

Total
$
704.2

 
$
716.6

Other Long-Term Liabilities
A summary of other long-term liabilities as of September 30, 2016 and December 31, 2015 follows:
 
2016
 
2015
Deferred compensation plan
$
86.4

 
$
83.3

Pension and other post-retirement liabilities
11.3

 
12.1

Legal settlement reserves
24.5

 
24.7

Ceded insurance reserves
61.4

 
44.0

Withdrawal liability - multiemployer pension funds
11.7

 
6.1

Contingent consideration and acquisition holdbacks
66.3

 
78.0

Interest rate locks liability
20.3

 

Other
56.0

 
61.1

Total
$
337.9

 
$
309.3

Insurance Reserves
Our liabilities for unpaid and incurred but not reported claims as of September 30, 2016 and December 31, 2015 (which include claims for workers’ compensation, commercial general and auto liability, and employee-related health care benefits) were $418.6 million and $405.8 million, respectively, under our risk management program and are included in other accrued liabilities and insurance reserves, net of current portion, in our consolidated balance sheets. While the ultimate amount of claims incurred depends on future developments, we believe the recorded reserves are adequate to cover the future payment of claims; however, it is possible that these recorded reserves may not be adequate to cover the future payment of claims. Adjustments, if any, to estimates recorded resulting from ultimate claim payments will be reflected in our consolidated statements of income in the periods in which such adjustments are known.

12

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


6. LANDFILL AND ENVIRONMENTAL COSTS
As of September 30, 2016, we owned or operated 192 active landfills with total available disposal capacity of approximately 5.0 billion in-place cubic yards. We also have post-closure responsibility for 124 closed landfills.
Accrued Landfill and Environmental Costs
A summary of accrued landfill and environmental liabilities as of September 30, 2016 and December 31, 2015 follows:
 
2016
 
2015
Landfill final capping, closure and post-closure liabilities
$
1,211.9

 
$
1,181.6

Environmental remediation liabilities
615.1

 
646.1

Total accrued landfill and environmental costs
1,827.0

 
1,827.7

Less: current portion
(177.0
)
 
(149.8
)
Long-term portion
$
1,650.0

 
$
1,677.9

Final Capping, Closure and Post-Closure Costs
The following table summarizes the activity in our asset retirement obligation liabilities, which include liabilities for landfill final capping, closure and post-closure, for the nine months ended September 30, 2016 and 2015:
 
2016
 
2015
Asset retirement obligation liabilities, beginning of year
$
1,181.6

 
$
1,144.3

Non-cash additions
30.4

 
29.9

Acquisitions and other adjustments
0.5

 
11.4

Asset retirement obligation adjustments
(3.2
)
 
(5.9
)
Payments
(56.7
)
 
(50.4
)
Accretion expense
59.3

 
59.2

Asset retirement obligation liabilities, end of period
1,211.9

 
1,188.5

Less: current portion
(94.3
)
 
(103.1
)
Long-term portion
$
1,117.6

 
$
1,085.4

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 $27.8 million and $27.3 million as of September 30, 2016 and December 31, 2015, 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

13

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

remediation liability as of September 30, 2016 would be approximately $350 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 or cash flows.
The following table summarizes the activity in our environmental remediation liabilities for the nine months ended September 30, 2016 and 2015:
 
 
2016
 
2015
Environmental remediation liabilities, beginning of year
$
646.1

 
$
697.5

Net additions charged to expense
0.3

 
(1.3
)
Payments
(50.7
)
 
(50.1
)
Accretion expense (non-cash interest expense)
17.6

 
18.7

Acquisitions and other adjustments
1.8

 
2.8

Environmental remediation liabilities, end of period
615.1

 
667.6

Less: current portion
(82.7
)
 
(76.1
)
Long-term portion
$
532.4

 
$
591.5

Bridgeton Landfill.  During the nine months ended September 30, 2016, we paid $17.9 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.  On April 28, 2016, Bridgeton Landfill, LLC and the United States Environmental Protection Agency entered into an Administrative Settlement Agreement and Order on Consent (the Order) 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. The Order formalizes certain of the remediation work to be performed at the site that already was contemplated in our remediation liability. From time to time, however, we may be required to modify our future operating timeline and procedures, which could result in changes to our expected remediation liability.  As of September 30, 2016, the remediation liability recorded for this site is $199.6 million, of which approximately $7 million is expected to be paid during the remainder of 2016. We believe the remaining reasonably possible high end of our range would be approximately $164 million higher than the amount recorded as of September 30, 2016.

14

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


7. DEBT
The carrying value of our notes payable, capital leases and long-term debt as of September 30, 2016 and December 31, 2015 is listed in the following table, and is adjusted for debt issuance costs, the fair value of interest rate swaps, unamortized discounts and the unamortized portion of adjustments to fair value recorded in purchase accounting which are amortized to interest expense over the term of the applicable instrument using the effective interest method.
 
 
 
 
September 30, 2016
 
December 31, 2015
Maturity
 
Interest Rate
 
Principal
 
Adjustments
 
Carrying  Value
 
Principal
 
Adjustments
 
Carrying Value
Credit facilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Uncommitted Credit Facility
 
Variable
 
$
73.0

 
$

 
$
73.0

 
$
19.0

 
$

 
$
19.0

June 2019
 
Variable
 
70.0

 

 
70.0

 

 

 

May 2021
 
Variable
 
140.0

 

 
140.0

 

 

 

Senior notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
May 2018
 
3.800
 
700.0

 
(1.4
)
 
698.6

 
700.0

 
(2.0
)
 
698.0

September 2019
 
5.500
 
650.0

 
(3.5
)
 
646.5

 
650.0

 
(4.4
)
 
645.6

March 2020
 
5.000
 
850.0

 
(2.8
)
 
847.2

 
850.0

 
(3.4
)
 
846.6

November 2021
 
5.250
 
600.0

 
(2.0
)
 
598.0

 
600.0

 
(2.3
)
 
597.7

June 2022
 
3.550
 
850.0

 
(5.8
)
 
844.2

 
850.0

 
(6.5
)
 
843.5

May 2023
 
4.750
 
550.0

 
19.4

 
569.4

 
550.0

 
9.4

 
559.4

March 2025
 
3.200
 
500.0

 
(5.6
)
 
494.4

 
500.0

 
(6.0
)
 
494.0

June 2026
 
2.900
 
500.0

 
(5.6
)
 
494.4

 

 

 

March 2035
 
6.086
 
181.9

 
(15.6
)
 
166.3

 
275.7

 
(23.9
)
 
251.8

March 2040
 
6.200
 
399.9

 
(4.0
)
 
395.9

 
650.0

 
(6.6
)
 
643.4

May 2041
 
5.700
 
385.7

 
(5.6
)
 
380.1

 
600.0

 
(8.9
)
 
591.1

Debentures:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
May 2021
 
9.250
 
35.3

 
(1.2
)
 
34.1

 
35.3

 
(1.4
)
 
33.9

September 2035
 
7.400
 
148.1

 
(35.3
)
 
112.8

 
165.2

 
(39.9
)
 
125.3

Tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 - 2044
 
0.500 - 5.625
 
1,079.1

 
(6.5
)
 
1,072.6

 
1,079.1

 
(7.0
)
 
1,072.1

Capital leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 - 2046
 
4.000 - 12.203
 
107.8

 

 
107.8

 
111.5

 

 
111.5

Total Debt
 
 
 
$
7,820.8

 
$
(75.5
)
 
7,745.3

 
$
7,635.8

 
$
(102.9
)
 
7,532.9

Less: current portion
 
 
 
 
 
 
 
(5.7
)
 
 
 
 
 
(5.5
)
Long-term portion
 
 
 
 
 
 
 
$
7,739.6

 
 
 
 
 
$
7,527.4

Loss on Extinguishment of Debt and Other Related Costs
During the three months ended September 30, 2016, we incurred a loss on the early extinguishment of debt and other related costs. We paid a cash premium of $148.1 million, early tender consideration of $28.7 million and $1.6 million of 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.

15

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table summarizes the charge incurred during the three and nine months ended September 30, 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

Credit Facilities
In May 2016, we entered into a $1.0 billion unsecured revolving credit facility (the Replacement Credit Facility), which replaced our $1.0 billion credit facility maturing in May 2017. The Replacement Credit Facility matures in May 2021 and includes a feature that allows us to increase availability, at our option, by an aggregate amount up to $500.0 million through increased commitments from existing lenders or the addition of new lenders. At our option, borrowings under the Replacement 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 agreements).
Contemporaneous with the execution of the Replacement Credit Facility, we entered into Amendment No. 1 to our existing $1.25 billion unsecured credit facility (the Existing Credit Facility and, together with the Replacement Credit Facility, the Credit Facilities), to conform certain terms of the Existing Credit Facility with those of the Replacement Credit Facility. Amendment No. 1 does not extend the maturity date of the Existing Credit Facility, which matures in June 2019. The Existing Credit Facility also maintains the feature that allows us to increase availability, at our option, by an aggregate amount of up to $500.0 million through increased commitments from existing lenders or the addition of new lenders.
Our Credit Facilities are subject to facility fees based on applicable rates defined in the agreements and the aggregate commitments, regardless of usage. Availability under our Credit Facilities totaled $1,513.5 million and $1,727.7 million as of September 30, 2016 and December 31, 2015, respectively, and can be used for working capital, capital expenditures, acquisitions, letters of credit and other general corporate purposes.  The credit agreements require 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, 2016, we had $210.0 million of borrowings under our Credit Facilities and no borrowings as of December 31, 2015.  We had $508.0 million and $503.3 million of letters of credit outstanding under our Credit Facilities as of September 30, 2016 and December 31, 2015, respectively.
During the three months ended September 30, 2016, we amended our existing unsecured credit facility agreement (the Uncommitted Credit Facility), to increase the size to $135.0 million, with all other terms remaining unchanged. Our Uncommitted Credit Facility 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 agreements governing our Uncommitted Credit Facility require us to comply with covenants. The Uncommitted Credit Facility may be terminated by either party at any time. As of September 30, 2016 and December 31, 2015, we had $73.0 million and $19.0 million, respectively, of borrowings under our Uncommitted Credit Facility.

16

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Senior Notes and Debentures
During the three months ended September 30, 2016, we priced cash tender offers to purchase up to $575.4 million combined aggregate principal amount of the 6.20% Notes due March 2040, 5.70% Notes due May 2041, 7.40% Debentures due September 2035 and 6.09% Notes due March 2035 (collectively "Existing Notes"), subject to the priority levels and the other terms and conditions set forth in the Offer to Purchase. During the three months ended September 30, 2016, we priced an offering of $500.0 million of 2.90% senior notes due 2026 (the 2.90% Notes). The sale of the 2.90% Notes closed on July 5, 2016. We used the net proceeds of the offering, together with borrowing under our credit facilities, to purchase $575.4 million of the combined aggregate principal amount of the Existing Notes tendered as well as premium due of $148.1 million and early tender consideration of $28.7 million.
During 2015, we issued $500.0 million of 3.20% notes due 2025 (the 3.20% Notes). The 3.20% Notes are unsubordinated and unsecured obligations. We used the net proceeds from the 3.20% Notes to refinance debt incurred in connection with our acquisition of all of the equity interests of Tervita during 2015.
Our senior notes and debentures are general unsecured obligations. Interest is payable semi-annually. The senior notes have a make-whole provision that is exercisable at any time prior to the respective maturity dates per the debt table above at a stated redemption price.
Tax-Exempt Financings
As of September 30, 2016, 90% 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 our variable rate unsecured tax-exempt bonds. As of September 30, 2016 and December 31, 2015, we had $1,072.6 million and $1,072.1 million, respectively, of fixed and variable rate tax-exempt financings outstanding with maturities ranging from 2019 to 2044. These bonds have been classified as long-term because of our ability and intent to refinance them using availability under our revolving Credit Facilities, if necessary.
Capital Leases
We had capital lease liabilities of $107.8 million and $111.5 million as of September 30, 2016 and December 31, 2015, respectively, with maturities ranging from 2016 to 2046.
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 have also 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).
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, 2016, 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, 2016 and December 31, 2015, the interest rate swap agreements are reflected at their fair value of $27.9 million and $16.5 million, respectively, and are included in other assets. 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. We recognized net interest income of $1.5 million and $4.9 million during the three and nine months ended September 30, 2016, respectively, and $1.9 million and $5.7 million during the three and nine months ended September 30, 2015, respectively, related to net swap settlements for these interest rate swap agreements, which is included as an offset to interest expense in our unaudited consolidated statements of income.
For the three months ended September 30, 2016 and 2015, we recognized a gain (loss) of $4.5 million and $(9.2) million, respectively, on the change in fair value of the hedged senior notes attributable to changes in the benchmark interest rate, with an offsetting (loss) gain of $(3.8) million and $9.6 million, respectively, on the related interest rate swaps. For the nine months ended September 30, 2016 and 2015, we recognized a (loss) of $(9.6) million and $(6.3) million on the change in fair value of the hedged senior notes attributable to changes in the benchmark interest rate, respectively, with an offsetting gain of $11.4

17

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

million and $7.3 million on the related interest rate swaps, respectively. The difference of these fair value changes represents hedge ineffectiveness, which is recorded directly in earnings as other expense, net.
Cash Flow Hedges
During the nine months ended September 30, 2016, we entered into a number of interest rate lock agreements having an aggregate notional amount of $525.0 million with fixed interest rates ranging from 1.900% to 2.280% to manage exposure to fluctuations in interest rates in anticipation of a planned future issuance of senior notes. Upon the expected issuance of the 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 as of September 30, 2016 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 value of the outstanding interest rate locks as of September 30, 2016 was $20.3 million and was recorded in other long-term liabilities in our consolidated balance sheet. As of September 30, 2016, the effective portion of the interest rate locks recorded as a component of accumulated other comprehensive loss, net of tax, was $12.2 million.
As of September 30, 2016 and December 31, 2015, the effective portion of our previously terminated interest rate locks, recorded as a component of accumulated other comprehensive loss, net of tax, was $13.8 million and $19.4 million, respectively. The effective portion of the interest rate locks is amortized as an adjustment to interest expense over the life of the issued debt using the effective interest method. We expect to amortize approximately $1.6 million of net expense, net of tax, over the next twelve months as a yield adjustment of our senior notes.
The effective portion of the interest rate locks amortized as a net increase to interest expense was $7.8 million and $0.7 million during the three months ended September 30, 2016 and 2015, respectively, and $9.1 million and $2.0 million during the nine months ended September 30, 2016 and 2015, respectively.
8. INCOME TAXES
Our effective tax rate, exclusive of noncontrolling interests, for the three and nine months ended September 30, 2016 was 32.5% and 36.9%, respectively. Our effective tax rate, exclusive of noncontrolling interests, for the three and nine months ended September 30, 2015 was 38.7% and 38.1%, respectively. The effective tax rate for the three months ended September 30, 2016 was favorably affected by the realization of additional federal and state benefits as well as adjustments to deferred taxes due to the completion of our 2015 tax returns. The impact on our effective tax rate appears greater than past periods due to lower pre-tax earnings as a result of our debt refinancing in July 2016. For the nine months ended September 30, 2016, in addition to the item mentioned previously, our effective tax rate was favorably affected by the resolution of state and federal tax matters. The effective tax rate for the nine months ended September 30, 2015 was favorably affected by the resolution of a Puerto Rican tax matter and tax refunds received as the result of filing various state amended tax returns.
Cash paid for income taxes was $145.7 million and $256.8 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease in cash paid for income taxes is primarily due to the expected benefits to be realized from our debt refinancing in July 2016.
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 tax authorities. These authorities may challenge the positions taken in our tax filings. We are currently under examination or administrative review by state and local taxing authorities for various tax years. We recognize interest and penalties as incurred within the provision for income taxes in the consolidated statements of income. As of September 30, 2016, we accrued a liability for penalties of $0.5 million and a liability for interest (including interest on penalties) of $11.3 million related to our uncertain tax positions.
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 or cash flows. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will increase or decrease. Gross unrecognized benefits we expect to settle in the next twelve months are in the range of zero to $10 million.
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. The weight given to the positive and negative evidence is commensurate with the extent such evidence can be objectively verified.

18

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

We adjust the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized.
Substantially all of our valuation allowance is associated with state loss carryforwards. 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. We continue to regularly monitor both positive and negative evidence in determining the ongoing need for a valuation allowance. As of September 30, 2016, the valuation allowance associated with our state loss carryforwards was approximately $60 million.
9. STOCK-BASED COMPENSATION
Available Shares
In March 2013, our board of directors approved the Republic Services, Inc. Amended and Restated 2007 Stock Incentive Plan (the Plan), and in May 2013 our shareholders ratified the Plan. We currently have approximately 14.9 million shares of common stock reserved for future grants under the Plan.
Stock Options
The following table summarizes stock option activity for the nine months ended September 30, 2016:
 
Number of
Shares (in millions)
 
Weighted Average
Exercise
Price per Share
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding as of December 31, 2015
5.0

 
$
30.08

 
 
 
 
Granted

 

 
 
 
 
Exercised
(1.2
)
 
29.49

 
 
 
$
22.6

Forfeited or expired
(0.1
)
 
31.60

 
 
 
 
Outstanding as of September 30, 2016
3.7

 
$
30.23

 
2.5
 
$
73.7

Exercisable as of September 30, 2016
2.9

 
$
29.88

 
2.2
 
$
61.5

During the nine months ended September 30, 2016 and 2015, compensation expense for stock options was $0.4 million and $2.1 million, respectively.
As of September 30, 2016, total unrecognized compensation expense related to outstanding stock options was $0.3 million, which will be recognized over a weighted average period of 1.0 year. The total fair value of stock options that vested during the nine months ended September 30, 2016 was $5.6 million.
Restricted Stock Units
The following table summarizes restricted stock unit (RSU) activity for the nine months ended September 30, 2016:
 
Number of
RSUs
(in thousands)
 
Weighted Average
Grant Date Fair
Value per Share
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding as of December 31, 2015
1,727.3

 
$
34.15

 
 
 
 
Granted
623.0

 
45.09

 
 
 
 
Vested and issued
(342.5
)
 
30.21

 
 
 
 
Forfeited
(162.1
)
 
38.61

 
 
 
 
Outstanding as of September 30, 2016
1,845.7

 
$
37.38

 
1.0
 
$
93.1

Vested and unissued as of September 30, 2016
624.3

 
$
31.25

 
 
 
 

19

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

During the nine months ended September 30, 2016, we awarded our non-employee directors 49,566 RSUs, which vested immediately. During the nine months ended September 30, 2016, we awarded 538,369 RSUs to executives and employees that vest in four equal annual installments beginning on the anniversary date of the original grant or cliff vest after four years. In addition, 35,064 RSUs were earned as dividend equivalents. The RSUs do not carry any voting or dividend rights, except the right to receive additional RSUs in lieu of dividends.
The fair value of RSUs is based on the closing market price on the date of the grant. The compensation expense related to RSUs is amortized ratably over the vesting period, or to the employee's retirement eligible date, if earlier.
During the nine months ended September 30, 2016 and 2015, compensation expense related to RSUs totaled $13.5 million and $12.4 million, respectively. As of September 30, 2016, total unrecognized compensation expense related to outstanding RSUs was $36.2 million, which will be recognized over a weighted average period of 2.8 years.
Performance Shares
During the nine months ended September 30, 2016, we awarded 168,786 performance shares (PSUs) to our named executive officers. These awards are performance-based as the number of shares ultimately earned depends on performance against pre-determined targets for return on invested capital (ROIC), cash flow value creation (CFVC), and total shareholder return relative to the S&P 500 index (RTSR). The PSUs are payable 50% in shares of common stock and 50% in cash after the end of a three-year performance period, when our financial performance for the entire performance period is reported, typically in February of the succeeding year. At the end of the performance period, the number of PSUs awarded can range from 0% to 150% of the targeted amount, depending on the performance against the pre-determined targets.
During the nine months ended September 30, 2016, we awarded 217,790 PSUs to our employees other than our named executive officers. The PSUs are payable 100% in shares of common stock after the end of a three-year performance period, when the Company's financial performance for the entire performance period is reported, typically in February of the succeeding year. At the end of the performance period, the number of PSUs awarded can range from 0% to 150% of the targeted amount, depending on the performance against the pre-determined targets.
The following table summarizes PSU activity for the nine months ended September 30, 2016:
 
Number of
PSUs
(in thousands)
 
Weighted Average
Grant Date Fair
Value per Share
Outstanding as of December 31, 2015
143.4

 
$
38.69

Granted
393.8

 
46.22

Vested and issued

 

Forfeited
(38.9
)
 
43.50

Outstanding as of September 30, 2016
498.3

 
$
44.40

During the nine months ended September 30, 2016, 7,251 PSUs accumulated as dividend equivalents. The PSUs do not carry any voting or dividend rights, except the right to accumulate additional PSUs in lieu of dividends.
For the stock-settled portion of the awards that vest based on future ROIC and CFVC performance, compensation expense is measured using the fair value of our common stock at the grant date. For the cash-settled portion of the awards that vest based on future ROIC and CFVC performance, compensation expense is recorded based on the fair value of our common stock at the end of each reporting period. Compensation expense is recognized ratably over the performance period based on our estimated achievement of the established performance criteria. Compensation expense is only recognized for the portion of the award that we expect to vest, which we estimate based on an assessment of the probability that the performance criteria will be achieved.
For the stock-settled portion of the awards that vest based on RTSR, the grant date fair value is based on a Monte Carlo valuation and compensation expense is recognized on a straight-line basis over the vesting period. For the cash-settled portion of the awards that vest based on RTSR, compensation expense also incorporates the fair value of our PSUs at the end of each reporting period. Compensation expense is recognized for the RTSR portion of the award whether or not the market conditions are achieved.
During the nine months ended September 30, 2016 and 2015, compensation expense related to PSUs totaled $5.9 million and $1.2 million, respectively. As of September 30, 2016, total unrecognized compensation expense related to outstanding PSUs was $15.5 million which we expect to be recognized over a weighted average period of 2.0 years.

20

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10. STOCK REPURCHASES, DIVIDENDS AND EARNINGS PER SHARE
Stock Repurchases
Stock repurchase activity during the nine months ended September 30, 2016 and 2015 follows (in millions except per share amounts):
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2016
 
2015
2016
 
2015
Number of shares repurchased
2.2

 
2.3

6.5

 
7.3

Amount paid
$
110.5

 
$
93.8

$
306.6

 
$
293.3

Weighted average cost per share
$
50.75

 
$
40.89

$
47.83

 
$
40.66

As of September 30, 2016 and 2015, 0.2 million and 0.1 million repurchased shares were pending settlement and $9.1 million and $5.3 million were unpaid and included within other accrued liabilities, respectively.
Dividends
In July 2016, our board of directors approved a quarterly dividend of $0.32 per share. Cash dividends declared were $315.2 million for the nine months ended September 30, 2016. As of September 30, 2016, we recorded a quarterly dividend payable of $109.0 million to shareholders of record at the close of business on October 3, 2016.
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) 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, 2016 and 2015 are calculated as follows (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Basic earnings per share:
 
 
 
 
 
 
 
Net income attributable to Republic Services, Inc.
$
85,600

 
$
215,000

 
$
423,100

 
$
577,700

Weighted average common shares outstanding
342,611

 
348,935

 
343,968

 
350,966

Basic earnings per share
$
0.25

 
$
0.62

 
$
1.23

 
$
1.65

Diluted earnings per share:
 
 
 
 
 
 
 
Net income attributable to Republic Services, Inc.
$
85,600

 
$
215,000

 
$
423,100

 
$
577,700

Weighted average common shares outstanding
342,611

 
348,935

 
343,968

 
350,966

Effect of dilutive securities:
 
 
 
 
 
 

Options to purchase common stock
1,040

 
1,196

 
1,097

 
1,271

Unvested RSU awards
204

 
136

 
172

 
127

Unvested PSU awards
125

 
14

 
82

 
8

Weighted average common and common equivalent shares outstanding
343,980

 
350,281

 
345,319

 
352,372

Diluted earnings per share
$
0.25

 
$
0.61

 
$
1.23

 
$
1.64

Antidilutive securities not included in the diluted earnings per share calculations:
 
 
 
 
 
 
 
Options to purchase common stock

 
9

 

 
14



21

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

11. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS (INCOME) BY COMPONENT
A summary of changes in accumulated other comprehensive loss (income), net of tax, by component, for the nine months ended September 30, 2016 follows:
 
Cash Flow Hedges
 
Defined Benefit Pension Items
 
Total
Balance as of December 31, 2015
$
41.6

 
$
(11.1
)
 
$
30.5

Other comprehensive loss before reclassifications
14.1

 

 
14.1

Amounts reclassified from accumulated other comprehensive income
(21.6
)
 

 
(21.6
)
Net current period other comprehensive (income)
(7.5
)
 

 
(7.5
)
Balance as of September 30, 2016
$
34.1

 
$
(11.1
)
 
$
23.0

A summary of reclassifications out of accumulated other comprehensive loss (income) for the three and nine months ended September 30, 2016 and 2015 follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
Details about Accumulated Other Comprehensive Loss (Income) Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss (Income)
 
Amount Reclassified from Accumulated Other Comprehensive Loss (Income)
 
Affected Line Item in the Statement where Net Income is Presented
Gain (loss) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Fuel hedges
 
$
(8.0
)
 
$
(7.5
)
 
$
(26.7
)
 
$
(19.4
)
 
Cost of operations
Terminated interest rate locks
 
(7.8
)
 
(0.7
)
 
(9.1
)
 
(2.0
)
 
Interest expense
 
 
(15.8
)
 
(8.2
)
 
(35.8
)
 
(21.4
)
 
Total before tax
 
 
6.3

 
3.2

 
14.2

 
8.5

 
Tax benefit
Total loss reclassified into earnings
 
$
(9.5
)
 
$
(5.0
)
 
$
(21.6
)
 
$
(12.9
)
 
Net of tax
12. FINANCIAL INSTRUMENTS
Fuel Hedges
We have entered into multiple swap agreements designated as cash flow hedges to mitigate some of our exposure related to changes in diesel fuel prices. These swaps qualified for, and were designated as, effective hedges of changes in the prices of forecasted diesel fuel purchases (fuel hedges).
The following table summarizes our outstanding fuel hedges as of September 30, 2016:
Year
 
Gallons Hedged
 
Weighted Average Contract 
Price per Gallon
2016
 
6,750,000
 
3.57
2017
 
12,000,000
 
2.92
2018
 
3,000,000
 
2.61
If the national U.S. on-highway average price for a gallon of diesel fuel as published by the Department of Energy exceeds the contract price per gallon, we receive the difference between the average price and the contract price (multiplied by the notional gallons) from the counterparty. If the average price is less than the contract price per gallon, we pay the difference to the counterparty.
The fair values of our fuel hedges are determined using standard option valuation models with assumptions about commodity prices based on those observed in underlying markets (Level 2 in the fair value hierarchy). The aggregate fair values of our

22

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

outstanding fuel hedges as of September 30, 2016 and December 31, 2015 were current liabilities of $12.8 million and $37.8 million, respectively, and have been recorded in other accrued liabilities in our consolidated balance sheets. The ineffective portions of the changes in fair values resulted in gains of $0.1 million and $0.6 million for the three and nine months ended September 30, 2016, respectively, and a loss of $0.2 million and $0.3 million for the three and nine months ended September 30, 2015, respectively, and have been recorded in other expense, net in our consolidated statements of income.
Total gain (loss) recognized in other comprehensive loss, net of tax, for fuel hedges (the effective portion) was $4.0 million and $(5.3) million for the three months ended September 30, 2016 and 2015, respectively, and $14.7 million and $0.5 million for the nine months ended September 30, 2016 and 2015. We classify cash inflows and outflows from our fuel hedges within operating activities in the unaudited consolidated statements of cash flows.
Recycling Commodity Hedges
Revenue from the sale of recycled commodities is primarily from sales of old corrugated cardboard and old newspaper. From time to time we use derivative instruments such as swaps and costless collars designated as cash flow hedges to manage our exposure to changes in prices of these commodities. During the three months ended September 30, 2016, we entered into multiple agreements related to the forecasted OCC sales. The agreements qualified for, and were designated as, effective hedges of changes in the prices of certain forecasted recycling commodity sales (commodity hedges).
We entered into costless collar agreements on forecasted sales of OCC. The agreements involve combining a purchased put option giving us the right to sell OCC at an established floor strike price with a written call option obligating us to deliver OCC at an established cap strike price. The puts and calls have the same settlement dates, are net settled in cash on such dates and have the same terms to expiration. The contemporaneous combination of options resulted in no net premium for us and represents costless collars. Under these agreements, we will make or receive no payments as long as the settlement price is between the floor price and cap price; however, if the settlement price is above the cap, we will pay the counterparty an amount equal to the excess of the settlement price over the cap times the monthly volumes hedged. If the settlement price is below the floor, the counterparty will pay us the deficit of the settlement price below the floor times the monthly volumes hedged. The objective of these agreements is to reduce variability of cash flows for forecasted sales of OCC between two designated strike prices.
As of September 30, 2016, we had outstanding costless collar hedges for OCC totaling 240,000 tons with a weighted average floor strike price of $81.50 per ton and a weighted average cap strike price of $120.00 per ton, all of which will be settled in 2018. Costless collar hedges are recorded in our consolidated balance sheets at fair value. Fair values of costless collars are determined using standard option valuation models with assumptions about commodity prices based upon forward commodity price curves in underlying markets (Level 2 in the fair value hierarchy). We had no outstanding recycling commodity hedges as of December 31, 2015.
The aggregated fair values of the outstanding recycling commodity hedges as of September 30, 2016 were current liabilities of $0.7 million, and have been recorded in other accrued liabilities in our consolidated balance sheets. No amounts were recognized in other (expense) income, net in our consolidated statements of income for the ineffectiveness portion of the changes in fair values during each of the three and nine months ended September 30, 2016.
Total losses recognized in other comprehensive income for recycling commodity hedges (the effective portion) were $0.4 million, net of tax, for the three and nine months ended September 30, 2016.
Fair Value Measurements
In measuring the fair values of assets and liabilities, we use valuation techniques that maximize the use of observable inputs (Level 1) and minimize the use of unobservable inputs (Level 3). We also use market data or assumptions that we believe market participants would use in pricing an asset or liability, including assumptions about risk when appropriate.
The carrying value for certain of our financial instruments, including cash, accounts receivable, accounts payable and certain other accrued liabilities, approximates fair value because of their short-term nature.

23

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As of September 30, 2016 and December 31, 2015, our assets and liabilities that are measured at fair value on a recurring basis include the following:
 
 
 
Fair Value Measurements Using
 
Carrying Amount
 
Total as of September 30, 2016
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
27.2

 
$
27.2

 
$
27.2

 
$

 
$

Bonds - restricted cash and marketable securities and other assets
54.0

 
54.0

 

 
54.0

 

Interest rate swaps - other assets
27.9

 
27.9

 

 
27.9

 

Total assets
$
109.1

 
$
109.1

 
$
27.2

 
$
81.9

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Fuel hedges - other accrued liabilities
$
12.8

 
$
12.8

 
$

 
$
12.8

 
$

Commodity hedges - other accrued liabilities
0.7

 
0.7

 

 
0.7

 

Interest rate locks - other long-term liabilities
20.3

 
20.3

 

 
20.3

 

Contingent consideration - other long-term liabilities
69.1

 
69.1

 

 

 
69.1

Total liabilities
$
102.9

 
$
102.9

 
$

 
$
33.8

 
$
69.1

 
 
 
Fair Value Measurements Using
 
Carrying Amount
 
Total as of December 31, 2015
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
43.0

 
$
43.0

 
$
43.0

 
$

 
$

Bonds - restricted cash and marketable securities and other assets
56.3

 
56.3

 

 
56.3

 

Interest rate swaps - other assets
16.5

 
16.5

 

 
16.5

 

Total assets
$
115.8

 
$
115.8

 
$
43.0

 
$
72.8

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Fuel hedges - other accrued liabilities
$
37.8

 
$
37.8

 
$

 
$
37.8

 
$

Contingent consideration- other long-term liabilities
69.6

 
69.6