Waste Management, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 17, 2015. Amounts are in U.S. dollars. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Waste Management provides collection, transfer, recycling, resource recovery and disposal services across North America. At year-end it owned or operated 252 landfills, 298 transfer stations and 126 material recovery facilities. The company sold its Wheelabrator waste-to-energy business in December 2014 and stated that it intended to reinvest the proceeds, prioritizing accretive Solid Waste acquisitions.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $13.996 billion | $13.983 billion |
| Income from operations | $2.299 billion | $1.079 billion |
| Operating margin | 16.4% | 7.7% |
| Net income attributable to Waste Management | $1.298 billion | $98 million |
| Diluted earnings per share | $2.79 | $0.21 |
| Net cash provided by operating activities | $2.331 billion | $2.455 billion |
| Capital expenditures | $1.151 billion | $1.271 billion |
| Cash and cash equivalents at year-end | $1.307 billion | $58 million |
| Total debt at year-end | $9.435 billion | $10.226 billion |
| Working capital | $156 million | $(515) million |
Operating expenses were $9.002 billion, or 64.3% of revenue, versus $9.112 billion, or 65.2%, in 2013. Selling, general and administrative expenses were $1.481 billion, or 10.6% of revenue. Net interest expense was $466 million, down from $477 million. The 2014 effective tax rate was 23.6%; management estimated a recurring 2015 rate of approximately 36%.
Operating cash flow less capital expenditures was $1.180 billion. The company’s reported non-GAAP free cash flow was $3.433 billion, but this measure includes $2.253 billion of proceeds from divestitures and asset sales, principally Wheelabrator; it is not comparable to operating cash flow less capital expenditures alone. Cash dividends were $693 million, and $600 million was used for share repurchases. Cash returned to shareholders totaled $1.293 billion.
Available capacity under the $2.25 billion revolving facility was $1.465 billion after $785 million of letters of credit; there were no cash borrowings under that facility at year-end. Approximately $1.4 billion of debt was exposed to interest-rate changes during 2015. The company redeemed $947 million of senior notes with available cash in January 2015, paying a $130 million make-whole premium.
Material changes and unusual items
- Revenue increased only $13 million, or 0.1%. Collection and disposal yield contributed $262 million, while lower volumes reduced revenue by $188 million; acquisitions added $124 million, divestitures reduced revenue by $90 million, and currency translation reduced it by $61 million.
- Reported 2014 income includes a $519 million pre-tax gain on the Wheelabrator sale. Net pre-tax gains from divestitures were $515 million.
- 2014 also included $345 million of non-goodwill asset impairments and $10 million of goodwill impairments. Notable charges included $272 million for oil and gas properties, $69 million relating to waste-diversion technology investments, and other write-downs and litigation costs. Restructuring charges were $82 million.
- 2013 results included $509 million of goodwill impairments and $472 million of other asset impairments; net income attributable to the company was $98 million. Thus, the sharp year-over-year earnings increase reflects both the 2014 sale gain and substantially higher 2013 impairment charges, as well as 2014 impairments.
- Fourth-quarter 2014 revenue was $3.437 billion, versus $3.500 billion in fourth-quarter 2013. Fourth-quarter income from operations was $752 million and attributable net income was $590 million, compared with operating and net losses of $410 million and $605 million, respectively, in fourth-quarter 2013. The 2014 quarter included the Wheelabrator gain; the 2013 quarter included about $1 billion of pre-tax charges.
Outlook, risks and contingencies
- Management said fourth-quarter Solid Waste operating income and margin growth built momentum it expected to continue into 2015. It forecast annual savings exceeding $100 million when the 2014 restructuring was fully implemented in 2015; this is a target, not earnings guidance.
- The board expected to raise the 2015 quarterly dividend from $0.375 to $0.385 per share and authorized up to $1 billion of future share repurchases. Dividends and repurchases remain subject to board or management discretion and business needs.
- A definitive agreement to acquire Deffenbaugh Disposal was pending at year-end; closing was expected in early 2015, subject to approvals and customary conditions.
- Key business risks include intense price competition, volume losses, weaker recycled-commodity prices, customer diversion from landfill disposal, fuel and energy-price volatility, lower oil-and-gas drilling activity, severe weather, and difficulty obtaining landfill permits or expansions. Environmental, safety and other regulation may raise costs or constrain operations.
- Environmental remediation liabilities were $235 million at year-end, in addition to $1.443 billion of landfill closure, capping and post-closure liabilities. The company was identified as a potentially responsible party at 75 Superfund sites. A Hawaii Clean Water Act indictment was being contested; the company said it could not yet estimate an outcome or loss range.
- The company estimated it could incur up to approximately $40 million in future charges related to Central States multiemployer pension withdrawal liability. It also retained certain Wheelabrator-related guarantees after the sale, with $176 million maximum future payments on specified guarantees and an estimated recorded fair value of $18 million.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- How much of 2014 earnings and reported margin improvement is attributable to the Wheelabrator gain and lower prior-year impairments, versus ongoing Solid Waste operations?
- Whether pricing gains can be sustained without further volume losses, and whether recycling commodity prices and rebates improve.
- Whether the expected restructuring savings are achieved and whether the Deffenbaugh acquisition closes on expected terms.
- How proceeds from the Wheelabrator sale are allocated among acquisitions, share repurchases, debt reduction and other investments.
- Potential cash and earnings effects of landfill permitting, environmental remediation, pension withdrawal claims, litigation and continuing Wheelabrator guarantees.
- Whether operating cash flow can sustain capital needs and shareholder distributions after excluding one-time divestiture proceeds from free cash flow.