Waste Management, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited quarterly results, including the fourth quarter. Waste Management provides waste collection, transfer, landfill, recycling and resource-recovery services, primarily in the U.S. and Canada.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $14.914 billion | $14.485 billion |
| Operating income | $2.789 billion | $2.636 billion |
| Operating margin | 18.7% | 18.2% |
| Net income attributable to Waste Management, Inc. | $1.925 billion | $1.949 billion |
| Diluted EPS | $4.45 | $4.41 |
| Cash from operating activities | $3.570 billion | $3.180 billion |
| Free cash flow (non-GAAP) | $2.084 billion | $1.770 billion |
| Capital expenditures | $1.694 billion | $1.509 billion |
| Total debt at year-end | $10.026 billion | $9.491 billion |
- Revenue rose 3.0%; collection and disposal yield contributed $291 million of growth and volume contributed $478 million. Recycling commodity prices reduced revenue by $273 million.
- Operating expenses were $9.249 billion, or 62.0% of revenue, versus $9.021 billion, or 62.3%, in 2017. Selling, general and administrative expenses were $1.453 billion, or 9.7% of revenue, versus $1.468 billion, or 10.1%. The filing does not provide a single gross-margin figure.
- Attributable net income declined despite higher operating income, chiefly reflecting a higher effective tax rate: 19% in 2018 versus 11% in 2017. The 2017 rate benefited from a $529 million tax-reform benefit. Diluted EPS increased, supported in part by fewer shares outstanding.
- Free cash flow is defined by the company as operating cash flow less capital expenditures plus divestiture proceeds; it is not a GAAP measure and excludes items such as dividends and debt service.
- Year-end cash and cash equivalents were $61 million; working capital was a deficit of $463 million. The company reported $1.2 billion of unused capacity under its $2.75 billion revolving credit facility, which matures in June 2023.
- The balance sheet reported $432 million of current debt and $9.594 billion of long-term debt. Management disclosed $1.9 billion of debt maturing within 12 months before refinancing assumptions; much was classified as long-term based on its stated intent and ability to refinance. About $2.2 billion of debt was exposed to market-rate changes within 12 months. A 100-basis-point rate increase was estimated to add $19 million to 2019 interest expense.
Material changes and fourth-quarter results
- Traditional Solid Waste performance strengthened on higher collection and disposal pricing and volume. The company said operating conditions and construction activity were generally favorable.
- Recycling commodity market prices at company facilities averaged 40% lower in 2018 than in 2017, amid tighter Chinese import restrictions and changing export markets. Management expected price declines to moderate in 2019.
- Fourth-quarter 2018 revenue was $3.842 billion, operating income $767 million, attributable net income $531 million and diluted EPS $1.24. In fourth-quarter 2017, the corresponding figures were $3.652 billion, $704 million, $903 million and $2.06. The year-over-year EPS comparison is heavily affected by the $529 million tax-reform benefit recorded in 2017.
- For the full year, net gains from divestitures and other items were $58 million, including a $52 million gain on hauling operations and $44 million of gains primarily from ancillary-operation divestitures, partly offset by a $30 million landfill impairment and $8 million of impairment charges primarily related to LampTracker.
- The company repurchased $1.008 billion of stock and paid $802 million in dividends in 2018. The board expected to raise the quarterly dividend from $0.465 to $0.5125 per share for dividends declared in 2019, subject to board approval. It authorized up to $1.5 billion in future repurchases.
Outlook, risks and contingencies
- Management described its strategy as focused differentiation through its asset network, alongside cost control and operational improvement. It planned to continue investing in organic growth, acquisitions, recycling operations and landfill-gas energy projects. No specific earnings or revenue guidance was provided in the filing.
- The company operated 252 landfills and estimated weighted-average remaining life of about 41 years on permitted capacity, or about 43 years including expansion airspace. Expansion permits are not assured; estimates of capacity, capping and closure costs affect amortization and impairment assessments.
- Landfill and environmental-remediation liabilities totaled $1.997 billion at year-end, including $1.760 billion for landfill obligations and $237 million for environmental remediation. Management noted remediation exposure could be approximately $140 million higher if high-end estimates within certain cost ranges were used.
- Recycling remains exposed to commodity-price volatility, stricter material-quality requirements, tariffs, export restrictions and uncertainty about alternative markets. Lower commodity prices can reduce recycling revenue and margins, while processing contamination can increase costs.
- Other principal risks include intensive competition, permitting and environmental regulation, landfill diversion, fuel and labor costs, severe weather, customer credit risk, cybersecurity, and interest-rate and refinancing exposure. The company identified 75 Superfund National Priorities List locations at which it had been notified as a potentially responsible party. Its recorded liability for the San Jacinto waste pits was $55 million; ultimate responsibility could differ materially.
- The company said it had all financial-assurance instruments required for current operations and did not expect known contingencies to materially affect results. Legal, environmental and insurance outcomes remain uncertain. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
- Upon adoption of the new lease standard, expected in 2019, the company anticipated recognizing approximately $300–$350 million of operating-lease right-of-use assets and related liabilities.
Important facts for investors to verify
- Whether 2019 operating growth and margins continue after separating price and volume gains from acquisitions, divestitures and commodity effects.
- Actual recycling commodity prices, contamination and processing costs, and progress in developing alternative end markets.
- Refinancing and remarketing outcomes for near-term debt, changes in borrowing costs, and continued access to revolving-credit capacity.
- Changes in landfill capacity assumptions, permit progress, impairment risk, and the adequacy of landfill-closure and environmental-remediation accruals.
- Whether cash generation supports planned capital investment, acquisitions, dividends and repurchases while managing debt and other obligations.