Waste Management, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 18, 2014. Amounts are in U.S. dollars. The filing reports annual results and unaudited quarterly data.
Business context
Waste Management provides collection, transfer, recycling, resource recovery and disposal services, alongside waste-to-energy and landfill-gas energy operations. It reported 2013 revenue of $13.983 billion and operated 267 landfills and 300 transfer stations. Greenstar, a recycler, was acquired in January and Quebec operator RCI in July.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $13.983 billion | $13.649 billion |
| Operating income | $1.079 billion | $1.851 billion |
| Operating margin | 7.7% | 13.6% |
| Net income attributable to Waste Management | $98 million | $817 million |
| Diluted EPS | $0.21 | $1.76 |
| Cash from operating activities | $2.455 billion | $2.295 billion |
| Capital expenditures | $1.271 billion | $1.510 billion |
| Free cash flow (company-defined, non-GAAP) | $1.322 billion | $829 million |
| Total debt | $10.226 billion | $9.916 billion |
- Revenue rose 2.4%, supported by acquisitions and improved collection and disposal pricing. Collection and disposal yield increased 2.1%; lower volumes reduced revenue by $133 million, or 1.0%.
- Operating expenses were $9.112 billion, or 65.2% of revenue, versus $8.879 billion, or 65.1%, in 2012. SG&A was $1.468 billion, or 10.5% of revenue, compared with $1.472 billion, or 10.8%.
- Cash and cash equivalents were $58 million at year-end, and working capital was negative $515 million. The $2.25 billion revolving facility had $958 million of available capacity after borrowings and letters of credit. The Canadian credit facility also provided capacity.
- Interest expense was $481 million, compared with $488 million. About $2.4 billion of debt was exposed to rate changes within 12 months; management estimated a 100-basis-point increase would add about $19 million to 2014 interest expense.
- The company paid $683 million in dividends and repurchased $239 million of stock during 2013. Dividends declared were $1.46 per share.
Material changes and unusual items
- Revenue growth was partly offset by weaker volumes and recycling commodity prices. Recyclable commodity price declines reduced revenue by $79 million and operating income by an estimated $20 million in 2013; the corresponding 2012 revenue reduction was $428 million.
- Approximately $1.0 billion of pre-tax charges, primarily impairments, materially reduced reported earnings. Major items included a $483 million Wheelabrator goodwill impairment, $262 million of landfill impairments, and $144 million of write-downs at three waste-to-energy facilities. Additional charges included waste-diversion investments and recycling and oil-and-gas assets. Management said the impairments were not expected to materially affect future operating results or cash flows.
- Fourth-quarter revenue was $3.500 billion, versus $3.434 billion a year earlier. The quarter recorded an operating loss of $410 million and a net loss attributable to Waste Management of $605 million, compared with operating income of $484 million and attributable net income of $224 million in Q4 2012. The quarter’s impairment charges drove the losses.
- Acquisitions contributed $292 million to 2013 revenue. Greenstar recorded $139 million of post-acquisition revenue and a $17 million net loss; RCI recorded $87 million of revenue and $7 million of net income.
Outlook, management commentary and risks
- Management expected 2014 to build on 2013, with solid earnings and cash flow supported by improved pricing and cost controls. It planned to use free cash flow for dividends, share repurchases, debt reduction and suitable acquisitions and investments. The filing provides no specific numerical earnings or revenue guidance.
- In February 2014, the Board expected to raise the quarterly dividend from $0.365 to $0.375 per share for 2014 and authorized up to $600 million in future share repurchases. Both remain subject to Board or management discretion and financial conditions.
- Key business risks include intense competition, pricing-related customer or volume losses, ongoing waste diversion, and exposure to volatile recycled-commodity and electricity prices. More power contracts are moving to market rates; management expected nearly 62% of Wheelabrator electricity revenue to be market-priced by year-end 2014.
- Environmental regulation, landfill permitting, remediation and closure obligations could raise costs or constrain operations. Recorded landfill and environmental remediation liabilities totaled $1.648 billion. Financial assurance instruments totaled $6.629 billion; this is assurance support, not reported debt.
- Other risks include fuel and labor costs, severe weather, interest-rate and refinancing exposure, acquisitions and emerging-technology execution, and multiemployer pension liabilities. The company estimated it could incur up to about $40 million in future charges related to the Central States pension plan matter. Fuel/environmental-fee class actions remained pending, with no estimable loss range disclosed.
Important facts for investors to verify
- Review the impairment assumptions and whether Wheelabrator’s remaining $305 million goodwill balance or other assets face further write-downs.
- Assess whether pricing gains can persist without further volume losses, and monitor recycling commodity prices and the share of electricity sold at market rates.
- Check the timing and funding of debt maturities and tax-exempt bond repricing, available credit capacity, and the effect of higher interest rates.
- Monitor cash generation against capital needs, dividends and buybacks; free cash flow is a company-defined non-GAAP measure and excludes some committed cash uses.
- Track landfill permits and expansion assumptions, remediation and closure estimates, the Central States pension dispute, and pending fuel/environmental-fee litigation.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also reported disclosure controls as effective at year-end.