Waste Management, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in millions of dollars except per-share data. The company provides waste collection, transfer, disposal, recycling and resource-recovery services. Interim results are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3,822 | $3,716 | $11,072 | $10,833 |
| Income from operations | $699 | $701 | $2,022 | $1,932 |
| Operating margin | 18.3% | 18.9% | 18.3% | 17.8% |
| Net income attributable to Waste Management | $499 | $386 | $1,394 | $1,046 |
| Diluted EPS | $1.16 | $0.87 | $3.22 | $2.36 |
| Operating cash flow | $874 | $853 | $2,658 | $2,388 |
| Free cash flow (non-GAAP) | $480 | $509 | $1,524 | $1,426 |
Q3 operating expenses were $2,373 (62.1% of revenue), versus $2,302 (61.9%) a year earlier. SG&A was $345 (9.0% of revenue), down from $356 (9.6%); depreciation and amortization rose to $376 from $350. The effective tax rate fell to 16.6% in Q3 and 18.9% for the nine-month period, from 35.7% and 34.9%, respectively. The company declared dividends of $0.465 per share in Q3, versus $0.425.
At September 30, cash and cash equivalents were $83; restricted trust and escrow accounts were $394. Total debt was $10,016, up from $9,491 at year-end 2017. Current liabilities were $3,070 and current debt was $447. The company reported $1.0 billion of unused capacity under its $2.75 billion revolving credit facility after commercial paper borrowings and letters of credit. It identified $2.2 billion of debt maturing or subject to rate-period expiry within the next 12 months, while classifying portions as long-term based on intent and ability to refinance.
Nine-month cash flow included $1,240 of capital expenditures, $342 of acquisition spending, $750 of share repurchases and $605 of dividends. Free cash flow is a company-defined non-GAAP measure and excludes, among other items, dividends and debt service.
Material changes and drivers
- Q3 revenue increased 2.9%; management attributed growth to higher collection and disposal volumes and yield, partly offset by weaker recycling commodity prices. Collection and disposal yield contributed $78, and volume contributed $155.
- Recycling commodity price declines reduced revenue by $91 in Q3 and $252 for the nine months. Average commodity prices at company facilities were down 47% and 42%, respectively, versus prior-year periods. Management expected market disruption to continue through the rest of 2018 and likely beyond.
- Q3 operating income was slightly lower despite revenue growth, reflecting higher operating costs and a $28 net charge for divestitures, impairments and unusual items. For the nine months, the comparable line was a net gain of $14, including $43 of divestiture gains partly offset by a $29 landfill impairment.
- Q3 net income and diluted EPS rose substantially, primarily from stronger Traditional Solid Waste performance and lower taxes. Tax benefits included tax reform, tax-return and state-law adjustments, and audit settlements. The lower tax rate is an important contributor to earnings growth.
- Nine-month operating cash flow rose by $270, mainly on stronger Traditional Solid Waste earnings and lower tax payments. Free cash flow increased year over year for the nine months, but declined $29 in Q3 as capital expenditures increased.
Outlook, risks and contingencies
- No specific full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management described the macroeconomic environment as generally favorable and did not expect a significant near-term shift.
- Management cited pricing and volume execution, competition, acquisition integration, fuel and labor costs, recycling-market disruption, regulatory changes, weather, technology shifts, cybersecurity and potential landfill-capacity constraints as risks to performance.
- Landfill and environmental remediation liabilities totaled $1,990, including $237 of environmental remediation liabilities. The company says actual remediation costs could differ materially; using the high end of estimated ranges would increase the recorded environmental liability by approximately $140.
- The company was identified as a potentially responsible party at 75 EPA Superfund sites. Its recorded estimated share for the San Jacinto waste pits was $55; allocation among responsible parties was not established, and ultimate liability could differ materially.
- Management did not expect known proceedings or financial-assurance claims to have a material adverse effect, but noted uncertainty around environmental matters, litigation, self-insured claims, guarantees and possible multiemployer pension withdrawals.
- The $2.75 billion revolving credit facility was extended through June 2023, with two one-year extension options and a $750 million accordion feature. The company said it expected future remarketings of variable-rate tax-exempt bonds to succeed; failed remarketings could require use of facility capacity.
- Operating cash flows generally cover working-capital needs, dividends and investment, according to management. The company continued acquisitions, capital spending, dividends and buybacks, while noting these allocations could change if cash flows decline.
Most important facts for investors to verify
- Whether recycling commodity prices and export-market restrictions continue to pressure revenue and margins beyond 2018.
- How much of earnings growth is attributable to recurring operating performance versus the lower tax rate, tax adjustments and settlements.
- Whether higher labor, maintenance, fuel and other operating costs can be offset by pricing, volume growth and cost controls.
- Refinancing and liquidity plans for near-term debt and tax-exempt bonds, including commercial paper dependence and remaining revolving-credit capacity.
- Updates to landfill, environmental and self-insurance estimates, including the San Jacinto matter and the potential range of remediation costs.
- Capital allocation discipline and free-cash-flow conversion, considering increased capital expenditures, acquisitions, dividends and share repurchases.