Business context and reporting period
Waste Management, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. It provides collection, transfer, recycling, resource recovery and disposal services across North America. The company reported 2015 results following the December 2014 sale of Wheelabrator, its waste-to-energy business; prior-year comparisons are therefore affected by divestitures.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Comparisons are 2015 versus 2014.
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $12,961 | $13,996 |
| Income from operations | $2,045 | $2,299 |
| Operating margin | 15.8% | 16.4% |
| Net income attributable to Waste Management, Inc. | $753 | $1,298 |
| Diluted EPS | $1.65 | $2.79 |
| Net cash from operating activities | $2,498 | $2,331 |
| Capital expenditures | $1,233 | $1,151 |
| Company-defined free cash flow | $1,410 | $3,433 |
| Total debt at year-end | $8,981 | $9,435 |
- Revenue fell 7.4%. The largest listed factors were divestitures ($762), lower volumes ($215), lower fuel surcharges and mandated fees ($171), lower recycling commodity prices ($138), and foreign currency translation ($126). Collection and disposal yield growth of $203 and acquisitions, chiefly Deffenbaugh, partly offset the decline.
- Operating expenses fell to $8,231, or 63.5% of revenue, from $9,002, or 64.3%. SG&A declined to $1,343, or 10.4% of revenue, from $1,481, or 10.6%.
- Net income was affected by a $555 pre-tax loss on early debt extinguishment. Interest expense declined to $385 from $466 after refinancing. The effective tax rate was 29.1%, versus 23.6%.
- Operating cash flow increased by $167. Company-defined free cash flow includes $145 of divestiture proceeds in 2015, compared with $2,253 in 2014; it is a non-GAAP measure and excludes certain required or committed uses of cash, including dividends and debt service.
- Year-end cash was $39, down from $1,307. Working capital was a deficit of $165. The $2.25 billion revolving facility had $1,399 of unused available capacity after borrowings and letters of credit.
- Current assets totaled $2,345 and current liabilities $2,510. Total assets were $20,419 and total equity $5,367 at year-end.
Material changes and notable items
- The 2015 revenue decline primarily reflects the full-year absence of Wheelabrator and other 2014 divestitures, alongside lower volumes, commodity prices, fuel surcharges and Canadian-dollar translation.
- The company acquired Deffenbaugh in March 2015 for approximately $416, expanding its Midwest collection and disposal operations. In January 2016, it acquired Southern Waste Systems/Sun Recycling for $516, primarily using revolving-credit borrowings.
- In 2015, the company issued $1.8 billion of senior notes and redeemed or tendered higher-coupon debt. It reported a $555 loss on early extinguishment, but said the transactions reduced the weighted-average senior-note rate by 1 percentage point and extended average duration by three years.
- 2015 included $51 of charges for withdrawals from underfunded multiemployer pension plans and $82 of net charges from impairments, restructuring and divestitures, including a $66 impairment of oil and gas properties. In 2014, the Wheelabrator sale generated a $519 gain.
- In fourth-quarter 2015, revenue was $3,246, operating income $502, net income attributable to Waste Management, Inc. $273, and diluted EPS $0.61. Fourth-quarter 2014 included the Wheelabrator sale gain, affecting comparability.
Outlook, risks and contingencies
- Management said its 2016 priorities were yield-driven revenue growth, customer service, productivity and cost control, while continuing investment, dividends and repurchases and maintaining a strong balance sheet. It expected a 2016 recurring effective tax rate of approximately 35%; the filing does not provide a specific revenue or EPS forecast.
- The Board expected to raise the quarterly dividend from $0.385 to $0.41 per share for 2016 declarations. Future dividends and repurchases remain discretionary.
- Debt maturities included $500 of 2.6% senior notes due September 2016. The filing also identifies $316 of tax-exempt bonds subject to repricing within 12 months before scheduled maturity and $491 of variable-rate tax-exempt bonds. A 100-basis-point rate increase on variable-rate debt was estimated to add about $8 to 2016 interest expense.
- Key risks include intense local competition and pricing pressure; lower waste volumes from economic weakness, recycling, composting and waste-reduction initiatives; volatility in recyclable commodity, fuel and energy prices; oil-and-gas activity and regulation; landfill permitting and expansion; environmental obligations and changing regulation; severe weather; labor and pension costs; and operational, cybersecurity and insurance risks.
- Recorded landfill liabilities were $1,518 and environmental remediation liabilities $209 at year-end. The company identified 76 Superfund National Priorities List locations where it had been notified as a potentially responsible party. Management said known contingencies were not expected to materially affect financial condition, results or cash flows, while noting that outcomes and estimates can change.
- The filing reports effective internal control over financial reporting and unqualified audit opinions. The company was still assessing the potential effects of the revenue-recognition standard scheduled to take effect in 2018.
Important facts for investors to verify
- Separate the underlying Solid Waste performance from divestitures, fuel-surcharge declines, commodity prices and currency effects; assess whether collection and disposal yield growth can continue alongside volume declines.
- Reconcile reported earnings with the $555 debt-extinguishment charge and other unusual items, and evaluate the expected interest savings against the upfront refinancing cost.
- Review the definition and reconciliation of free cash flow, particularly the inclusion of divestiture proceeds, and compare recurring cash generation with capital spending, dividends, repurchases and acquisition needs.
- Check debt refinancing and liquidity capacity, including scheduled maturities, tax-exempt bond remarketing and repricing exposure, and financial-assurance commitments.
- Monitor the Deffenbaugh and Southern Waste Systems/Sun Recycling integrations, purchase accounting, acquisition funding and expected returns.
- Assess landfill expansion assumptions, environmental remediation estimates, multiemployer pension exposure and the potential financial effects of regulatory or litigation developments.