Waste Management, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. Amounts are in millions of dollars except per-share data. Waste Management provides collection, transfer, recycling, disposal and waste-to-energy services, primarily in North America.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3,561 | $3,526 | $6,957 | $6,862 |
| Income from operations | $532 | $510 | $1,001 | $912 |
| Operating margin | 14.9% | 14.5% | 14.4% | 13.3% |
| Net income attributable to Waste Management | $210 | $244 | $438 | $412 |
| Diluted EPS | $0.45 | $0.52 | $0.94 | $0.88 |
| Operating cash flow | $555 | $545 | $1,139 | $1,122 |
| Free cash flow (non-GAAP) | $447 | $347 | $931 | $695 |
Q2 revenue increased 1.0%; six-month revenue increased 1.4%. Higher collection and disposal yield and acquisitions supported revenue, partially offset by lower volumes, divestitures, foreign currency translation and weaker recycling commodity prices. Q2 operating expenses fell $10, or 0.4%, and were 64.6% of revenue versus 65.5%. Six-month operating expenses rose $13, or 0.3%, but declined as a share of revenue to 65.2% from 65.9%. Management attributed operating improvement to cost control and recycling business improvements, among other factors.
Q2 net income attributable to the company fell despite higher operating income, primarily reflecting a higher tax provision: the effective tax rate was 44.7% versus 33.2%. For the six-month period, net income and diluted EPS increased year over year.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $1,139, up $17 year over year. Capital expenditures were $474 versus $501. Free cash flow, as defined by the company, includes $266 of divestiture proceeds, compared with $74 in the prior-year period; it is not a GAAP measure and excludes items such as dividends and debt service.
- Cash was $137 at June 30, 2014, up from $58 at December 31, 2013. Total assets were $22,179 versus $22,603; total equity was $6,147 versus $6,002.
- Total debt was $9,797, down from $10,226 at year-end; $786 was classified as current and $9,011 as long-term. The company reported $1.3 billion of unused and available capacity under its $2.25 billion revolving credit facility. It also had $517 of debt maturing within 12 months and $905 of tax-exempt borrowings subject to repricing within 12 months; $741 of obligations was classified as long-term based on expected refinancing capacity.
- Six-month financing cash outflow was $766, including $349 of cash dividends and net debt repayments of $425. The declared dividend was $0.375 per share for Q2, compared with $0.365 a year earlier. The board authorized up to $600 of future share repurchases; none were made in the first half.
Material changes and unusual items
- Q2 yield growth in collection and disposal was $66, or 2.3%; lower volumes reduced revenue by $51. Management said pricing discipline also contributed to customer and municipal contract losses, particularly where the company declined low-margin business.
- Q2 results included a $25 pretax loss on the sale of Puerto Rico operations and certain other assets, with no tax benefit recorded, plus $32 of tax charges to repatriate accumulated cash. Together these items reduced diluted EPS by $0.12. Other net pretax charges of $16, primarily a $12 impairment related to a decision to close a waste-processing facility, reduced diluted EPS by a further $0.03.
- For the first half, divestiture, impairment and unusual-item charges totaled $37. The company received $80 of proceeds from the Puerto Rico and related asset sale, consisting of $65 cash and $15 preferred stock. It also received $155 from the first-quarter sale of its Shanghai Environment Group investment.
- Solid Waste operating income was $707 in Q2 versus $677; Wheelabrator was $20 versus $4. Wheelabrator benefited from higher merchant electricity prices following an exceptionally cold winter and from lower maintenance costs in the current period.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided in the supplied filing text. Management described priorities including pricing discipline, customer-focused service, cost control, operational efficiency, strategic acquisitions and investment in alternatives to traditional disposal.
- On July 25, 2014, after quarter-end, the company signed an agreement to sell Wheelabrator to an Energy Capital Partners affiliate for $1.94 billion cash, subject to adjustments, customary conditions and regulatory approvals. Closing was expected by year-end 2014. Waste Management planned a long-term waste-supply agreement for certain facilities. The sale was not completed as of the filing date.
- Management cited seasonality, severe weather, competition, lower waste volumes, commodity and energy-price volatility, fuel costs, regulation, permit availability, environmental obligations, labor and pension-plan exposure, insurance and financial-assurance costs, and refinancing conditions as risks. Results can also fluctuate with maintenance timing and unusual events.
- Recorded environmental remediation liabilities were $223. Management estimated that using the high end of reasonable remediation-cost ranges would increase the liability by approximately $190. The company was identified as a potentially responsible party at 75 Superfund sites. A Hawaii landfill-related federal indictment was issued against a subsidiary and two employees; the company said it was defending the action and could not estimate a loss range.
- The company estimated up to approximately $40 of possible future charges related to Central States Pension Plan withdrawal demands; it said the matter could materially affect cash flow in a particular reporting period. The company also noted ongoing litigation concerning the plan.
- A new revenue-recognition standard was effective for the company beginning January 1, 2017. Management was assessing its impact and had not determined whether adoption would be material. Disclosure controls were reported effective at June 30, 2014, with no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the Wheelabrator sale closed, its final proceeds and adjustments, and the terms and economics of the planned waste-supply agreement.
- Whether pricing and yield gains can offset continuing volume declines and competitive pressure without further customer or contract losses.
- The sustainability of operating-margin and free-cash-flow improvement, considering divestiture proceeds, capital spending, dividends and debt service.
- Near-term maturities and tax-exempt debt repricing, refinancing capacity, and the effect of the Wheelabrator transaction on leverage and liquidity.
- Resolution and potential cash costs of environmental proceedings, the Hawaii indictment, Central States pension-plan matters and other contingencies.
- The full-year tax-rate trajectory after the Q2 divestiture-related tax charges and the effect of tax payments on cash flow.