Waste Management, Inc. — 2012 Form 10-K Summary
Business context and reporting period
Waste Management provides collection, transfer, recycling, resource recovery and disposal services, primarily in North America, and operates waste-to-energy facilities. This annual report covers the fiscal year ended December 31, 2012; fourth-quarter figures are unaudited. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Revenue | $13,649 | $13,378 | Up 2.0%; acquisition revenue helped, while weaker recycling commodity and electricity prices weighed on results. |
| Operating income | $1,851 | $2,028 | Down 8.7%; operating margin fell to 13.6% from 15.2%. |
| Net income attributable to Waste Management | $817 | $961 | Down 15.0%. |
| Diluted EPS | $1.76 | $2.04 | Down 13.7%. |
| Cash from operations | $2,295 | $2,469 | Down $174. |
| Capital expenditures | $1,510 | $1,324 | Higher investment in vehicles, infrastructure and growth initiatives. |
| Free cash flow | $829 | $1,198 | Company-defined non-GAAP measure; lower year over year. |
| Total debt | $9,916 | $9,756 | Cash and equivalents were $194 at year-end versus $258. |
Operating expenses rose to $8,879, or 65.1% of revenue, from $8,541, or 63.8%. SG&A declined to $1,472 from $1,551. Interest expense was $488, compared with $481. Working capital was a deficit of $613 at year-end, versus a deficit of $689 in 2011. The $2.0 billion revolving credit facility had $400 of borrowings and $933 of letters of credit outstanding, leaving $667 of available capacity. Debt maturities include $695 due in 2013; certain tax-exempt bonds are subject to near-term repricing.
For the fourth quarter, revenue was $3,434 versus $3,406 in Q4 2011; operating income was $484 versus $552; net income attributable to the company was $224 versus $266; and diluted EPS was $0.48 versus $0.58.
Material changes versus the prior comparable period
- Revenue growth was supported by $535 of acquisition-related revenue, including Oakleaf, and $67 of volume growth. Internal collection and disposal yield added $86, but total average yield declined by $319, largely due to a $428 reduction in recycling commodity revenue and lower electricity pricing.
- Recycling commodity prices declined about 25% year over year, with an estimated negative impact of approximately $130 on operating income. Lower commodity prices also reduced customer rebates and related costs.
- Wheelabrator operating income fell to $113 from $172, reflecting contract expirations, lower merchant electricity prices, increased maintenance costs and international development spending.
- Oakleaf contributed $617 of revenue in 2012 but recorded a net loss of $29. The 2012 results also included $83 of asset impairment charges and $67 of restructuring charges; management cited total restructuring costs of $82 when including Oakleaf integration costs.
- The July 2012 reorganization eliminated approximately 700 positions and reduced geographic Areas from 22 to 17. The company reported $20 in labor and benefit savings during 2012.
Outlook, commentary, risks and contingencies
Management said it expected increased internal revenue growth from yield and volume in 2013, continued benefits from cost-saving initiatives, and a focus on cash generation to support dividends, debt reduction, share repurchases and selective acquisitions. It expected recycling commodity prices to average near late-2012 levels and be slightly negative in the first half of 2013 versus 2012. Management also expected a recurring 2013 effective tax rate of approximately 35% and announced an expected quarterly dividend increase to $0.365 per share for dividends declared in 2013. These are expectations, not guaranteed results; the filing does not provide a specific numerical earnings or revenue forecast.
Key risks include exposure to volatile recycling and electricity prices; competition and pressure on collection pricing and volumes; customer diversion of waste from landfill and waste-to-energy; fuel, labor and maintenance costs; extensive environmental regulation, permit requirements and landfill closure obligations; and interest-rate, refinancing and liquidity risks. The company also disclosed pending litigation concerning fuel and environmental charges on customer invoices, environmental proceedings, and unresolved pension withdrawal matters. Management stated it could not estimate a range of loss for the fuel/environmental-charge cases and did not expect known contingencies to materially affect the company, while acknowledging litigation outcomes are uncertain.
Environmental and landfill liabilities totaled $1,591 at year-end, including $1,338 for landfill obligations and $253 for environmental remediation. Management noted that using the high end of reasonable remediation cost ranges would increase the recorded remediation estimate by approximately $140. Financial assurance instruments outstanding totaled $6,555. Two U.K. waste-to-energy joint ventures involved funding commitments of up to $93 and $253, respectively. The company reported compliance with debt covenants and effective internal controls; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether 2013 collection and disposal yield, waste volumes and cost savings improved as management expected, particularly after the restructuring.
- How recycling commodity prices and electricity market exposure affect revenue, operating income and cash flow; verify the company’s hedging and contract coverage.
- Whether free cash flow can sustain the dividend and planned capital spending, debt reduction and any share repurchases.
- Debt maturities, tax-exempt bond repricing and available revolving-credit capacity, including the effect of any increase in interest rates.
- Potential changes in landfill expansion permits, closure and remediation estimates, impairment assumptions, and outcomes of the disclosed litigation and pension matters.