Waste Management, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial amounts are in millions of dollars, except per-share data. The interim statements are unaudited.
Business context
Waste Management is a North American waste-services provider, with collection, transfer, recycling and disposal operations, plus waste-to-energy and other businesses. Its principal reporting segments are Solid Waste, Wheelabrator and Other.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First nine months 2014 | First nine months 2013 |
|---|---|---|---|---|
| Revenue | $3,602 | $3,621 | $10,559 | $10,483 |
| Income from operations | $546 | $577 | $1,547 | $1,489 |
| Operating margin | 15.2% | 15.9% | 14.7% | 14.2% |
| Net income attributable to Waste Management | $270 | $291 | $708 | $703 |
| Diluted EPS | $0.58 | $0.62 | $1.52 | $1.50 |
| Operating cash flow | $672 | $736 | $1,811 | $1,858 |
| Free cash flow (company-defined, non-GAAP) | $418 | $452 | $1,349 | $1,147 |
Q3 operating expenses were $2,299 (63.8% of revenue), down from $2,325 (64.2%). SG&A rose to $377 from $349, largely due to higher litigation reserves. For the first nine months, operating expenses were $6,832 and depreciation and amortization was $985. The effective tax rate was 32.1% for Q3 and 35.7% year to date.
At September 30, cash was $183, total debt was $10,164, and stockholders’ equity was $5,364. Current debt was $1,141 and long-term debt was $9,023. The company reported $797 of unused, available capacity under its $2.25 billion revolving credit facility; $1.3 billion of letters of credit were outstanding across credit facilities. Landfill and environmental remediation liabilities totaled $1,660.
Changes and notable items
- Q3 revenue fell 0.5% year over year: $68 of positive collection-and-disposal yield growth was outweighed by $49 lower volume, $24 from divestitures and $12 from foreign-currency translation. For the first nine months, revenue increased 0.7%.
- Q3 net income attributable to the company declined 7.2%, and diluted EPS fell from $0.62 to $0.58. The filing attributes $0.09 per diluted share of Q3 impact to $67 of restructuring charges and $0.05 to $20 of net charges, including litigation reserves and an investment write-down, partly offset by a divestiture gain.
- Operating cash flow declined $47 year to date. Management cites higher cash taxes, larger incentive-plan payments and settlement of forward-starting swaps, partly offset by higher cash earnings and favorable working-capital changes. Free cash flow increased year to date, aided by higher divestiture proceeds.
- Capital expenditures were $781 year to date, versus $824 in 2013. The company paid $521 in dividends and $600 for an accelerated share repurchase in the first nine months. The repurchase was funded with revolver borrowings; final share delivery and average price remained dependent on the ASR terms.
- Q3 income from operations increased in Solid Waste to $748 from $719, but consolidated operating income fell, in part because Corporate and Other costs increased to $240 from $150.
Outlook, transactions and risks
- Wheelabrator: A July 2014 agreement provides for sale of substantially all of the business for $1.94 billion cash, subject to adjustments, approvals and closing conditions; closing was expected by year-end 2014. The business was classified as held for sale, not discontinued operations. Waste Management expected to enter a long-term agreement to supply waste to certain facilities after closing.
- Other transaction: The company signed an agreement to acquire Deffenbaugh Disposal, with closing expected in late 2014 or early 2015, subject to approvals and customary conditions.
- Restructuring: A corporate-function consolidation announced in August was expected to be completed by year-end. About 650 employees had separated; the company did not expect material future charges from the plan. It recorded $67 of Q3 charges and had about $48 of accrued severance at September 30.
- Contingencies: Environmental remediation liability was $231; management said using the high end of estimated remediation ranges would increase the aggregate liability by about $190. The filing discusses Superfund sites, a Hawaii Clean Water Act indictment, and other litigation; outcomes or losses could not be estimated in certain cases. A Central States multiemployer pension dispute could generate up to approximately $40 of future charges.
- Operating risks: Management identifies pricing and competition, volume declines, commodity prices, regulation and permits, fuel costs, weather, environmental obligations, labor and pension exposure, debt refinancing, and execution of the Wheelabrator sale and cost-reduction initiatives. No specific company-wide earnings or revenue guidance is stated in the supplied filing text.
- The company noted that revenue-recognition guidance effective January 1, 2017 was under assessment; its financial impact had not been determined. Management said disclosure controls were effective as of September 30, 2014 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Wheelabrator sale closed on expected terms, and the economics and continuing obligations under the waste-supply agreement.
- Whether collection-volume declines and competitive contract losses continued, and whether pricing gains translated into durable margins.
- Cash conversion, tax payments, capital spending, dividends and debt needs after the $600 share repurchase and pending transactions.
- Progress and final costs of restructuring, litigation matters, environmental remediation and the Central States pension dispute.
- Deffenbaugh acquisition completion, financing and expected contribution; the filing provides no quantified outlook for these effects.