Waste Management, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. North American environmental services provider, with collection, transfer, landfill, recycling and renewable-energy operations. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $5.027bn | $4.476bn | $9.688bn | $8.588bn |
| Operating income | $890m | $791m | $1.658bn | $1.441bn |
| Operating margin | 17.7% | 17.7% | 17.1% | 16.8% |
| Net income attributable to WM | $587m | $351m | $1.100bn | $772m |
| Diluted EPS | $1.41 | $0.83 | $2.64 | $1.82 |
| Operating cash flow | $1.047bn | $1.043bn | $2.305bn | $2.163bn |
| Free cash flow (non-GAAP) | $503m | $649m | $1.348bn | $1.514bn |
Q2 revenue rose 12.3%, reflecting higher collection and disposal pricing, fuel surcharges, recycling commodity prices and volume. Collection and disposal average yield increased 6.2%; volume added 1.6% to company revenue. Operating income rose 12.5%, while operating margin held flat: higher revenue was offset by cost inflation, fuel and recycling-related costs, wage adjustments, training and overtime. Q2 net income also benefited from the prior-year period’s $220m debt-extinguishment loss.
For the first half, operating cash flow increased $142m year over year, but free cash flow declined $166m, mainly as capital expenditures rose to $968m from $666m. The company defines free cash flow as operating cash flow less capital expenditures plus net divestiture proceeds; it is a non-GAAP measure and excludes items including dividends and debt service.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $894m, total debt was $14.277bn and current debt was $231m. At December 31, 2021, these were $118m, $13.405bn and $708m, respectively. Total liabilities were $22.936bn; equity was $7.192bn.
- Approximately $2.4bn of debt comes due or has interest-rate periods expiring within 12 months. The company classified $2.1bn as long-term based on its stated intent and ability to refinance, supported by its revolving facility; $231m remained current.
- In May, WM issued $1bn of 4.15% senior notes due 2032 and entered into a $1bn, two-year term loan, outstanding at period-end. It also amended and extended its $3.5bn revolving credit facility through May 2027. No revolver borrowings were outstanding; after letters of credit and commercial paper, $2.3bn of capacity was available.
- Six-month financing included $524m of share repurchases and $544m of dividends. The board’s remaining repurchase authorization was $976m at June 30.
Outlook, commentary and risks
- Management said it was encouraged by 2022 results and emphasized disciplined pricing, cost control, operational efficiency, employee investment, digitalization, recycling automation and sustainability growth investments. The filing provides no specific quantified full-year earnings or revenue guidance.
- Management expected second-half 2022 interest costs to increase versus 2021, citing incremental borrowing and rising rates, particularly on commercial paper and the term loan. It expected recycling commodity price comparisons to be slightly lower year over year for the rest of 2022 after strong second-half 2021 prices.
- Key pressures include labor shortages and wage inflation, higher fuel and repair costs, supply-chain and transportation constraints, recycling rebate costs, and lagged recovery of inflation under some customer contracts. Management noted that customer contracts and price-escalation lookbacks can delay price increases.
- Business is seasonal: summer construction activity typically supports Q2 and Q3. Severe weather can disrupt operations, while storms, wildfires and other events may increase waste volumes but can produce lower-margin work.
- Environmental liabilities included $2.379bn for landfill obligations and $211m for remediation at June 30. The estimated potential liability for the San Jacinto River Waste Pits remediation was $68m; the ultimate amount may differ materially. The filing also describes Superfund, litigation, insurance and multiemployer pension exposures, but management did not expect known contingencies to materially affect overall financial condition, results or cash flows.
- The company identified macroeconomic, regulatory, environmental, labor, commodity, weather, technology and cybersecurity risks, among others. It reported no material changes to the risk factors in its 2021 Form 10-K. Disclosure controls were considered effective; a new finance and general-ledger system was implemented in Q1, with no material control impact reported.
Most important facts to verify
- Whether pricing can continue to offset labor, fuel, maintenance and other inflation, and whether operating margins hold up.
- How recycling commodity prices, fuel costs and volumes develop relative to management’s expectations.
- Debt refinancing and rate exposure, including the $2.4bn of near-term maturities or rate-period expirations and variable-rate borrowing costs.
- Capital spending and sustainability investments: whether they generate expected returns while free cash flow remains lower year over year.
- Potential changes in landfill, environmental-remediation and litigation estimates, particularly the San Jacinto matter.