Waste Management, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, with unaudited fourth-quarter results also presented. Amounts are in U.S. dollars.
Business context
Waste Management is a North American provider of collection, transfer, landfill disposal, recycling, and environmental services. Its network included 249 landfills, 305 transfer stations, and 90 material recovery facilities at year-end. The company’s strategy emphasizes pricing, profitable volume growth, operational efficiency, and returns to shareholders.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $14.485 billion | $13.609 billion |
| Operating income | $2.636 billion; 18.2% margin | $2.296 billion; 16.9% margin |
| Net income attributable to Waste Management | $1.949 billion | $1.182 billion |
| Diluted earnings per share | $4.41 | $2.65 |
| Cash from operating activities | $3.180 billion | $3.006 billion |
| Free cash flow, company-defined non-GAAP | $1.770 billion | $1.710 billion |
| Capital expenditures | $1.509 billion | $1.339 billion |
| Interest expense, net | $363 million | $376 million |
- Revenue rose 6.4%, driven by $536 million of collection and disposal yield and volume growth, $237 million from higher recycling commodity prices, and $73 million from fuel surcharges and mandated fees.
- Operating expenses were $9.021 billion, or 62.3% of revenue, versus $8.486 billion, or 62.4%. SG&A was $1.468 billion, or 10.1% of revenue, versus $1.410 billion, or 10.4%. Depreciation and amortization increased to $1.376 billion from $1.301 billion.
- Operating cash flow increased $174 million year over year; higher earnings and favorable working-capital changes were partly offset by $120 million higher cash tax payments and $41 million higher incentive payments.
- At year-end, total debt was $9.491 billion, cash and cash equivalents $22 million, and working capital was a deficit of $638 million. The $2.25 billion revolving facility had $1.093 billion of available capacity after letters of credit and commercial paper. Restricted trust and escrow accounts totaled $319 million.
- The company returned $1.5 billion to shareholders in 2017: $750 million in dividends and $750 million in share repurchases. The Board expected to raise the 2018 quarterly dividend from $0.425 to $0.465 per share; future declarations remain discretionary.
Material changes and unusual items
- Net income benefited from a $529 million tax benefit related to the Tax Cuts and Jobs Act: a $595 million deferred-tax remeasurement benefit, partly offset by $66 million of transition tax expense. This lifted diluted EPS by about $1.20; therefore, reported earnings growth substantially reflects a one-time tax item.
- Excluding tax reform, 2017 also included $32 million of excess tax benefits from equity awards. Net pre-tax unusual charges were $36 million, including goodwill and investment impairments, pension withdrawal and environmental remediation charges, partly offset by asset-sale gains and reduced contingent consideration.
- 2016 included $112 million of net charges, notably a landfill impairment, environmental remediation adjustment, goodwill impairment, and an organics-business sale loss. 2015 included a $555 million debt-extinguishment loss, primarily from refinancing high-coupon notes.
- Fourth-quarter 2017 net income attributable to the company was $903 million and diluted EPS was $2.06, including the tax-reform benefit. Fourth-quarter 2016 diluted EPS was $0.75.
- Recycling commodity prices supported 2017 revenue, but market disruption began in September. Management expected downward price pressure and disruption through the first half of 2018, following China’s announced restrictions on certain imported recyclables.
Outlook, risks, and contingencies
- Management cited earnings and cash-flow momentum entering 2018 and planned investment in frontline employees, technology, and revenue-generating assets. It did not provide specific 2018 revenue or earnings guidance in the supplied filing text.
- The company expected a recurring 2018 effective tax rate of approximately 26%, based on projected income, credits, and other permanent items; this is distinct from 2017’s unusually low 11.0% effective rate.
- Key risks include recycling commodity-price volatility and export restrictions; fuel and interest-rate increases; intense price competition; permitting and landfill-capacity constraints; environmental regulation and remediation exposure; waste diversion away from landfills; severe weather; labor and multiemployer pension obligations; and operational, cybersecurity, and litigation risks.
- Environmental remediation liabilities were $251 million and landfill liabilities were $1.675 billion at year-end. The company recorded a $55 million estimated share of the San Jacinto waste-pits remedy; allocation among potentially responsible parties remained unresolved, and ultimate liability could differ materially.
- Approximately $1.8 billion of debt was exposed to market-rate changes within 12 months. Management estimated a 100-basis-point increase would add $15 million to 2018 interest expense. The company reported compliance with debt covenants and expected tax-exempt bond remarketings to succeed, but failed remarketings could require repayment or refinancing.
- Management stated that known contingencies were not expected to materially affect financial condition, results, or cash flows. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much 2017 earnings growth remains after excluding the $529 million tax-reform benefit and other unusual items.
- Whether recycling prices, China-related export limits, and alternative-market demand develop as management anticipated for 2018.
- Cash-flow conversion and capital needs, including planned landfill investment, dividends, and the authorized share-repurchase program.
- Debt maturities, available revolving-credit capacity, variable-rate exposure, and refinancing or remarketing conditions.
- Changes in landfill airspace estimates and permits, environmental remediation exposure—especially the San Jacinto site—and multiemployer pension withdrawal obligations.