Waste Management, Inc. — Q3 2016 Form 10-Q
Business and period: North American waste and environmental-services provider, with collection, transfer, recycling, resource recovery and disposal operations. This unaudited report covers the quarter and nine months ended September 30, 2016; amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3,548 | $3,360 | $10,149 | $9,715 |
| Income from operations | $560 | $601 | $1,679 | $1,543 |
| Operating margin | 15.8% | 17.9% | Not stated | Not stated |
| Net income attributable to WM | $302 | $335 | $847 | $480 |
| Diluted EPS | $0.68 | $0.74 | $1.89 | $1.05 |
| Operating cash flow | $753 | $657 | $2,207 | $1,972 |
| Free cash flow* | $428 | $358 | $1,277 | $1,222 |
- Revenue drivers: Q3 revenue increased 5.6%. Management attributed $127 of growth to internal yield and volume gains and $60 to acquisitions net of divestitures. Nine-month revenue rose 4.5%.
- Costs and margins: Q3 operating expense was $2,216, or 62.5% of revenue, versus $2,095, or 62.4%, a year earlier. Higher acquired-business and volume-related costs, leachate disposal, recyclable-goods costs, and employee costs were partly offset by lower fuel expense. SG&A was flat at $330 and fell to 9.3% of revenue from 9.8%.
- Cash flow and capital spending: Nine-month capital expenditures were $962, up from $864; acquisitions used $600, versus $473. Dividends paid were $546 and share repurchases were $500. Free cash flow is a company-defined non-GAAP measure: operating cash flow less capital expenditures plus divestiture proceeds.
- Debt and liquidity: Total debt was $9,261 at September 30, 2016, compared with $8,929 at December 31, 2015. Cash was $30. The $2.25 billion revolving facility had $295 of borrowings and $817 of letters of credit outstanding, leaving $1,138 available. Current debt was $432, including $295 of revolver borrowings.
- Other balance-sheet items: Total assets were $20,756 and equity $5,383. Landfill and environmental remediation liabilities totaled $1,829, including $253 for environmental remediation.
Changes versus comparable periods
- Q3 revenue growth did not translate into higher operating income: operating income fell $41 and net income attributable to WM declined $33, with results burdened by unusual charges. Excluding the after-tax effect of those Q3 charges, management said net income was reduced by $72, or $0.16 per diluted share.
- Nine-month net income rose to $847 from $480, but the comparison is substantially affected by the $552 pretax debt-extinguishment loss recorded in 2015. Nine-month operating income increased $136.
- Solid Waste operating income was essentially flat in Q3 ($728 versus $727) but increased to $2,169 from $1,970 for the nine-month period. Tier 2 operating income declined in both comparisons.
- Debt increased by $332 from year-end; the company reported $326 of net borrowings during the nine months. The share count also declined: 442.0 million shares outstanding at quarter-end versus 446.5 million a year earlier.
Outlook, management commentary, risks and unusual items
- Strategy: Management emphasized customer service, operational improvement, growth, pricing discipline and cost control. It cited improving market conditions, reduced customer churn and disciplined growth as volume supports. The filing provides no clear numeric full-year earnings or revenue guidance.
- Unusual charges: Q3 included $106 of pretax charges, principally landfill impairment related to lost expected volumes, an environmental-remediation reserve increase for a closed Harris County, Texas site, a loss on sale of an organics business, and goodwill impairment in LampTracker. For the nine months, the filing reports $107 of net charges, including a $43 landfill impairment, a $42 environmental reserve increase, $10 goodwill impairment and an $8 sale loss. Separately, the company recorded $41 of impairments on minority-owned waste-diversion technology investments in Q2.
- Environmental exposure: The company increased its environmental reserve by $42 for its subsidiary’s estimated share of the EPA’s proposed San Jacinto waste-pits remedy. The proposed plan was not final, the subsidiary disputed it, and ultimate liability could differ materially. WM was identified as a potentially responsible party at 75 Superfund sites. Management estimated that using the high end of remediation-cost ranges could increase aggregate environmental liability by approximately $143 above the $253 recorded.
- Debt-market exposure: Certain tax-exempt bonds depend on remarketing; a failed remarketing could require repayment. Management expected future remarketings to succeed and said revolver capacity could fund obligations if needed. $503 of bonds had term interest-rate periods expiring within 12 months, in addition to $491 of variable-rate bonds supported by letters of credit.
- Operating and market risks: The filing highlights competition and pricing-related volume losses, commodity and fuel-price volatility, economic conditions, regulatory and permitting requirements, environmental and landfill obligations, weather and seasonality, labor and multiemployer pension exposure, cybersecurity, insurance and financing risks. Summer activity typically supports revenue; severe weather can disrupt operations or produce temporary, lower-margin work.
- Other contingencies: WM retained certain guarantees related to the divested Wheelabrator business; maximum specified future payments were $106, with a recorded estimated fair value net of fees of $12. Management did not expect known contingencies or the discussed guarantee arrangements to have a material adverse effect, while noting that estimates and outcomes may change.
Important facts for investors to verify
- How much of reported revenue growth and future performance reflects pricing, volumes, acquired operations and commodity-price changes.
- The final remedy, allocation of responsibility and potential cash cost for the San Jacinto waste pits, plus developments across the company’s other environmental matters.
- Whether the Q3 margin decline and unusual charges are isolated or indicate recurring operating or impairment pressures, particularly in Tier 2.
- Debt maturities, variable-rate exposure, tax-exempt bond remarketing conditions and actual availability of the revolver after letters of credit.
- Whether operating cash flow and free cash flow can sustain capital spending, acquisitions, dividends and share repurchases; free cash flow excludes debt service and declared dividends.
- The impact of the SWS acquisition, integration and associated borrowings, as well as future landfill and environmental liability estimates.
*Free cash flow is non-GAAP and is not a substitute for operating cash flow; the filing notes that similarly titled measures may not be calculated consistently across companies.