Waste Management, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. Waste Management provides collection, transfer, disposal, recycling, resource recovery and landfill gas-to-energy services across North America.
Financial highlights
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $3.511 billion | $3.440 billion; up 2.1% |
| Income from operations | $608 million; 17.3% of revenue | $558 million; 16.2% of revenue |
| Net income attributable to Waste Management | $396 million; diluted EPS $0.91 | $298 million; diluted EPS $0.67 |
| Effective income tax rate | 22.7% | 31.7% |
| Cash provided by operating activities | $809 million | $722 million |
| Free cash flow (non-GAAP) | $423 million | $397 million |
| Capital expenditures | $400 million | $332 million |
| Total debt | $9.957 billion | $9.491 billion at Dec. 31, 2017 |
| Cash and cash equivalents | $52 million | $22 million at Dec. 31, 2017 |
| Restricted trust and escrow accounts | $422 million | $319 million at Dec. 31, 2017 |
| Quarterly dividend declared per share | $0.465 | $0.425 |
Material changes and drivers
- Revenue growth reflected $88 million of volume growth and $68 million from collection and disposal yield, partly offset by a $73 million decline in recycling commodity revenue. Commercial, industrial and landfill activity was strong; residential volumes declined amid disciplined contract selection and renegotiation.
- Operating income rose 9.0%. Solid Waste operating income increased $28 million; improved Other-segment results and lower corporate costs also contributed. Q1 2017 included a $25 million impairment of an equity-method investment, versus no comparable charge disclosed for Q1 2018.
- Net income benefited from stronger Solid Waste results and tax reform, which reduced the federal corporate tax rate from 35% to 21%. The company also recorded a $28 million benefit from extended federal natural-gas fuel credits relating to 2017 activity.
- Recycling remained a significant headwind: management said market disruptions, including Chinese restrictions on recycled-fiber imports, pressured commodity prices and were expected to persist through 2018 and likely beyond.
- Operating cash flow increased $87 million year over year. Investing outflows rose to $637 million, including $246 million for seven solid-waste acquisitions and $400 million of capital expenditures.
- Financing included $471 million of net commercial-paper borrowings, $258 million of share repurchases and $206 million of dividends. The company reported $992 million of remaining share-repurchase authorization at quarter-end.
Liquidity, debt and obligations
- Debt was $9.957 billion, including $989 million outstanding under the commercial-paper program. The $2.25 billion revolving facility had $629 million of unused available capacity after outstanding borrowings, letters of credit and commercial paper support.
- $2.180 billion of debt was due or subject to rate-period expiration within 12 months. The company classified $1.124 billion as long-term based on its stated intent and ability to refinance; $1.056 billion remained current.
- Landfill and environmental remediation liabilities totaled $1.952 billion, including $1.701 billion for landfill obligations and $251 million for environmental remediation.
- Free cash flow is management’s non-GAAP measure, defined as operating cash flow less capital expenditures plus divestiture proceeds. The filing cautions that it excludes committed items such as dividends and debt service.
Outlook, risks and unusual items
- Management described the macroeconomic environment as generally favorable and said it did not expect a significant near-term shift. It highlighted continued execution of focused differentiation, cost control, process improvement and operational efficiency; no specific numerical earnings or revenue guidance was provided in the filing text.
- Management expects seasonal revenue and operating patterns, with higher activity typically in the second and third quarters. Severe weather can disrupt operations; storm-related projects may boost revenue but can carry comparatively lower margins.
- Key risks include recycling and energy commodity-price volatility, competitive pricing and customer retention, regulatory and permit constraints, fuel and labor costs, acquisition execution, cybersecurity, insurance and financial-assurance costs, and environmental remediation and landfill obligations.
- The company is a potentially responsible party at 75 EPA Superfund sites. At the San Jacinto waste pits, responsibility among parties for the selected remedy had not been allocated; the recorded estimate for the subsidiary’s potential share was $55 million, and actual liability could differ materially. The filing states that using high-end remediation estimates would raise aggregate potential liability by about $145 million above the $251 million recorded.
- The company adopted the new revenue standard on January 1, 2018, including deferral and amortization of certain sales incentives and reclassification of some customer consideration as a reduction of revenue. It recorded an $80 million increase to retained earnings on adoption; prior-period amounts were not adjusted, affecting comparability.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated that risk factors had not materially changed from the 2017 Form 10-K.
Important facts for investors to verify
- Whether recycling commodity prices and Chinese market restrictions continue to pressure revenue and margins beyond 2018.
- The refinancing and remarketing plans for near-term debt, including commercial paper and tax-exempt bonds, and available revolver capacity.
- Developments in the San Jacinto matter, allocation among potentially responsible parties, and changes to remediation estimates across the company’s sites.
- How acquisition integration, higher capital spending and shareholder returns affect debt, liquidity and future free cash flow.
- How revenue-standard adoption and the one-time $28 million fuel-credit benefit affect year-over-year comparisons and recurring earnings.