Waste Management, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Unless noted otherwise, amounts are in U.S. dollars.
Business context
Waste Management is a North American waste and environmental services company, with collection, landfill, transfer, recycling and resource-recovery operations. At year-end it owned or operated 248 landfills, 310 transfer stations and 95 material recovery facilities, and employed approximately 41,200 people. Its largest customer accounted for 1% of annual revenue.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $13.609 billion | $12.961 billion |
| Operating income | $2.296 billion; 16.9% margin | $2.045 billion; 15.8% margin |
| Net income attributable to WM | $1.182 billion | $753 million |
| Diluted EPS | $2.65 | $1.65 |
| Cash from operating activities | $2.960 billion | $2.498 billion |
| Capital expenditures | $1.339 billion | $1.233 billion |
| Free cash flow (company-defined non-GAAP) | $1.664 billion | $1.410 billion |
| Total debt at year-end | $9.310 billion | $8.929 billion |
| Cash and cash equivalents | $32 million | $39 million |
| Working capital | Deficit of $418 million | Deficit of $165 million |
Revenue increased 5.0%. Management attributed growth principally to yield and volume gains, acquisitions—especially the January 2016 SWS purchase—and improved recycling commodity prices. Operating expenses were 62.4% of revenue versus 63.5%; higher landfill leachate costs, acquired-business costs and volume-related expenses were partly offset by lower fuel costs. Net income and EPS also benefited from the absence of 2015’s large debt-extinguishment loss.
Interest expense was $376 million, down from $385 million. Approximately $1.6 billion of debt was exposed to market-rate changes within 12 months; management estimated a 100-basis-point increase would add about $15 million to 2017 interest expense. The $2.25 billion revolving facility had $1.035 billion of unused capacity after borrowings and letters of credit. The company reported compliance with debt covenants.
The company paid $726 million in dividends and repurchased $725 million of stock in 2016, returning $1.451 billion in total. The Board expected to raise the quarterly dividend from $0.41 to $0.425 per share for 2017, subject to Board approval; it also authorized up to $750 million of future repurchases.
Material changes and unusual items
- Internal yield and volume growth contributed $437 million of revenue growth; acquisitions contributed $268 million and foreign exchange reduced revenue by $27 million. Divestitures reduced revenue by $30 million.
- Solid Waste operating income rose 8.0% to $2.946 billion. Leachate collection and treatment costs increased to $176 million from $96 million, contributing to higher landfill operating costs.
- 2016 included $112 million of net charges, principally a $44 million increase in the estimated Harris County, Texas environmental-remediation liability, a $43 million landfill impairment, goodwill and investment impairments, and a loss on sale of an organics business. The charges reduced diluted EPS by approximately $0.26.
- 2015 included a $555 million debt-extinguishment loss related primarily to refinancing nearly $2 billion of high-coupon notes; it reduced diluted EPS by approximately $0.75. 2015 also included $51 million of multiemployer pension withdrawal charges.
- Fourth-quarter 2016 revenue was $3.460 billion, operating income $617 million, and diluted EPS $0.75, compared with $3.246 billion, $502 million and $0.61, respectively, in fourth-quarter 2015.
Outlook, risks and contingencies
Management described 2016 as exceeding expectations and cited continued momentum, disciplined profitable growth, cost control and plans to invest in the business. It anticipated solid earnings and further growth in 2017, but the filing text does not provide a clear numeric revenue or EPS forecast. The company estimated a recurring 2017 effective tax rate of approximately 36.5% and landfill construction and development spending of about $400 million in 2017.
- Environmental exposure: Recorded landfill and environmental-remediation liabilities totaled $1.822 billion. The $44 million Harris County reserve increase relates to an EPA-proposed remedy that was not final when filed; the subsidiary disputed aspects of the proposal, and its ultimate liability could differ materially from the estimate.
- Regulatory and operating risks: Environmental rules, landfill permits, closure obligations, weather events, fuel costs, labor and safety issues, and changes in waste-diversion requirements may affect costs, capacity and volumes. The company also identified cybersecurity, litigation and insurance adequacy as risks.
- Recycling and commodity exposure: Commodity prices and export restrictions can affect recycling revenue, costs and margins. Recycling commodity prices improved in 2016 after declines in 2015.
- Capacity and estimates: Weighted average landfill life was estimated at about 45 years on permitted capacity and 47 years including qualifying expansion capacity. Expansion permits and landfill cost, capacity and closure estimates involve significant judgment.
- Other commitments: The company disclosed $96 million of maximum future payments under certain continuing Wheelabrator-related guarantees, plus substantial long-term debt, landfill closure obligations, leases and purchase commitments.
Most important facts for investors to verify
- Whether operating cash flow and free cash flow remain strong after capital spending, dividends, repurchases and acquisitions; free cash flow is a company-defined non-GAAP measure.
- Whether the Harris County environmental matter’s final remedy or cost allocation changes the recorded $44 million estimate, and whether other remediation liabilities increase.
- Whether leachate-management costs, fuel prices and recycling commodity prices support or pressure operating margins.
- Debt maturities, refinancing and tax-exempt bond remarketing needs, available revolver capacity, and sensitivity to higher interest rates.
- Whether 2017 growth expectations and the planned dividend increase are supported by operating results, and how the SWS acquisition performs.