Waste Management, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Amounts are in millions of dollars, except per-share data. The filing is unaudited. Waste Management provides collection, transfer, recycling, resource recovery and disposal services; its Wheelabrator waste-to-energy business was sold in December 2014.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Operating revenue | $3,040 | $3,396; down 10.5% |
| Income from operations | $440; 14.5% margin | $469; 13.8% margin |
| Net income (loss) attributable to Waste Management | $(129); $(0.28) diluted EPS | $228; $0.49 diluted EPS |
| Net cash from operating activities | $499 | $584 |
| Capital expenditures | $233 | $266 |
| Free cash flow, as defined by the company | $285 | $484 |
| Interest expense, net | $104 | $121 |
| Total debt at March 31 | $9,207 | $9,435 at December 31, 2014 |
| Cash and cash equivalents | $277 | $1,307 at December 31, 2014 |
Operating expenses were $1,946, or 64.0% of revenue, versus $2,232, or 65.7%, a year earlier. Selling, general and administrative expense was $348, down 7.2%. The company declared dividends of $0.385 per share, compared with $0.375 a year earlier.
At March 31, the company had no borrowings under its $2.25 billion revolving credit facility and $1.504 billion of unused available capacity after letters of credit. Current debt was $168; long-term debt was $9,039. Total assets were $20,691 and total equity was $5,575.
Material changes versus Q1 2014
- Revenue declined $356. The principal drivers were divestitures ($220), lower volumes ($95), lower recycling commodity prices ($42), lower fuel surcharges and mandated fees ($36), and foreign currency translation ($25). Collection and disposal yield growth of $54, or 2.0%, partly offset the declines.
- Operating income fell $29, although the operating margin improved 0.7 percentage point. Lower operating costs and SG&A helped offset reduced revenue and the departure of divested operations.
- The net loss principally reflects a $550 pre-tax loss on early debt extinguishment. Excluding that charge, reported operating performance was positive; the filing does not provide a single adjusted net-income figure.
- Operating cash flow fell $85, in part because annual incentive-plan payments were about $65 higher year over year. Free cash flow declined by $199, also reflecting lower divestiture proceeds.
- Investing cash use rose to $628, chiefly from the $445 cash acquisition of Deffenbaugh Disposal on March 26. Deffenbaugh contributed immaterial post-acquisition revenue and income in the quarter.
- The company refinanced high-coupon notes, issuing $1.8 billion of senior notes at 3.125%, 3.90% and 4.10%, due 2025, 2035 and 2045. Management said the refinancing lowered the weighted-average senior-note interest rate by 1 percentage point and extended average duration by three years; it reduced quarterly interest expense by $17 year over year.
Outlook, management commentary and risks
- Outlook: The filing provides no specific earnings or revenue guidance. Management’s stated priorities are customer service, operational improvement, growth, yield management and cost control. Management expects seasonally higher revenues and results in the second and third quarters, while warning that weather and one-time work can affect results and margins.
- Demand, pricing and commodities: Management cited competitive pressure, pricing-related volume losses, weaker recycling prices and reduced fuel surcharges. Collection and disposal yield improved, but volumes remained a headwind. Recycling commodity prices were approximately 14% lower year over year.
- Acquisition and divestiture: Deffenbaugh was acquired for $416, including estimated working capital ($413 cash); its purchase-price allocation was preliminary. The Wheelabrator sale generated $1.95 billion of proceeds in December 2014, but continuing waste-supply commitments extend up to seven years.
- Debt and liquidity: The company reported $621 of tax-exempt bonds with term-rate periods expiring within 12 months and another $491 of variable-rate bonds supported by letters of credit. It expects remarketings to succeed; a failed remarketing could require use of its revolving facility. The company also identified refinancing, interest-rate and credit-market conditions as risks.
- Environmental and legal contingencies: Recorded environmental remediation liabilities were $230. The company estimates that using the high end of reasonable remediation cost ranges would increase potential liability by about $190. It was identified as a potentially responsible party at 75 Superfund sites. A Hawaii landfill-related federal indictment remains pending; the company said it could not predict the outcome or estimate a loss range.
- Pension and other obligations: The company estimated up to approximately $40 of future charges related to withdrawal demands from the Central States pension plan; resolution could materially affect cash flows in a particular period. Wheelabrator-related guarantees had estimated fair value of $19, with some guarantees potentially extending through 2041.
- Taxes: Management expected 2015 tax payments to be approximately $425 lower than in 2014, primarily due to lower pre-tax earnings and an anticipated prior-year overpayment. Bonus depreciation was expected to increase 2015 cash taxes by $90, with deductions shifting taxes to later periods.
- Other risks: The filing highlights regulation and permitting, fuel and compressed natural gas costs, labor, safety, insurance and financial assurance, weather, customer credit, cybersecurity, and changes in waste diversion and technology. The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the revenue decline reflects sold businesses versus continuing-operation volumes, commodity prices and foreign exchange.
- The recurring earnings and cash-flow impact of the debt refinancing, compared with the one-time $550 extinguishment charge and $554 cash premiums paid.
- Deffenbaugh’s final purchase-price allocation, integration costs and expected contribution, and the economics of the Wheelabrator waste-supply commitments.
- Whether the $285 of company-defined free cash flow can support dividends, the newly authorized $1 billion repurchase program and debt obligations; free cash flow excludes some required expenditures, including dividends and debt service.
- Developments in environmental remediation estimates, the Hawaii case, Central States pension withdrawal liability, and outstanding Wheelabrator guarantees.