Waste Management, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet figures are as of March 31, 2014, unless otherwise noted. Dollar amounts are in millions except per-share data. Waste Management provides collection, transfer, recycling, disposal, waste-to-energy and related environmental services across North America.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $3,396 | $3,336; up 1.8% |
| Operating income | $469 | $402; up 16.7% |
| Operating margin | 13.8% | 12.1% |
| Net income attributable to Waste Management | $228 | $168 |
| Diluted EPS | $0.49 | $0.36 |
| Operating cash flow | $584 | $577 |
| Capital expenditures | $266 | $266 |
| Free cash flow, company-defined | $484 | $348 |
- Operating expenses were $2,232, or 65.7% of revenue, versus $2,209, or 66.2%; SG&A fell to $375 from $390.
- Cash and cash equivalents were $339, up from $58 at year-end 2013. Total debt was $10,194, down from $10,226; $1,216 was classified as current and $8,978 as long-term.
- The company reported $576 of unused and available capacity under its $2.25 billion revolving credit facility, alongside $790 outstanding borrowings under that facility. It also had $1.3 billion of letters of credit outstanding across credit facilities.
- Cash dividends paid were $174; the declared quarterly dividend was $0.375 per share, versus $0.365 a year earlier. The board authorized up to $600 of future share repurchases; none occurred in Q1.
Material changes and operating drivers
- Revenue growth reflected $86 of improved average yield and $54 from acquisitions, partly offset by a $59 decline from volume, $17 from foreign currency translation and lower recycling commodity prices. Collection and disposal yield rose 2.6%.
- Management attributed about $23 of revenue declines to severe winter weather. Conversely, exceptionally cold weather lifted electricity prices: Wheelabrator revenue increased to $230 from $205, and its operating income rose to $34 from $9.
- Solid Waste operating income increased to $626 from $614. Results benefited from yield and cost initiatives and RCI, acquired in 2013, while weather and recycling-market weakness weighed on performance. Collection volumes declined in part as the company shed lower-margin customers and faced competitive municipal contract bids.
- Operating cash flow rose only $7 despite higher earnings; higher annual incentive payments reduced year-over-year cash flow by about $73, and the company paid $36 to settle matured forward-starting interest-rate swaps. Free cash flow also benefited from $166 of divestiture proceeds, including $155 from selling its Shanghai Environment Group investment, versus $37 of divestiture proceeds in Q1 2013.
- Q1 2013 included $15 of impairment charges and $8 of restructuring charges, which affected comparability. Q1 2014 restructuring expense was $1.
Outlook, risks and contingencies
- The filing provides no specific quantitative earnings or revenue guidance. Management describes seasonal revenue strength typically in the second and third quarters and notes that weather, commodity prices, volumes and maintenance timing can make quarterly results fluctuate.
- Management’s priorities include pricing discipline, cost control, operational efficiency, strategic acquisitions and investment in technologies that recover value from waste. It cautions that forward-looking statements are uncertain and assumes no duty to update them.
- Key business risks include competition and pricing-related volume losses; recycling and energy commodity-price volatility; fuel costs and availability; regulation, permits and environmental obligations; severe weather; labor and multiemployer pension exposure; customer credit; and the ability to refinance debt.
- Landfill and environmental remediation liabilities totaled $1,661, including $224 for remediation. The company stated that using the high end of reasonable remediation cost ranges would increase the recorded remediation liability by approximately $190. It had been identified as a potentially responsible party at 77 Superfund sites.
- For the Central States multiemployer pension plan, the company estimated up to approximately $40 of potential future charges. It said the matter could materially affect cash flows and, to a lesser extent, results in a particular period, though it did not expect material effects on overall financial condition or liquidity.
- On April 7, 2014, after quarter-end, the council for the U.K. waste-to-energy joint-venture project voted to terminate the project. Unless reversed, the council is expected to owe the joint venture approximately £30 million in fees and reimbursements. Management said any impairment of Waste Management’s interest would not be material.
- Other disclosed matters include customer class-action litigation concerning fuel and environmental charges, environmental proceedings and audits. Management said it could not estimate a loss range for certain matters, including the Hawaii investigation and the customer lawsuits.
Investor verification priorities
- Assess whether collection and disposal yield gains can persist while volumes remain pressured by pricing choices, competition and municipal contract rebids.
- Separate recurring cash generation from the quarter’s $155 Shanghai investment-sale proceeds when evaluating free cash flow; the company’s definition also excludes dividends and debt service.
- Review debt maturities, tax-exempt borrowings subject to repricing, revolving-credit availability and the company’s refinancing assumptions behind current-versus-long-term classification.
- Track remediation estimates, Superfund exposure and the Central States pension-plan dispute, including potential cash-flow effects.
- Confirm the final financial and contractual effects of the U.K. project termination and monitor whether weather-driven electricity revenue and earnings normalize.