Waste Management, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. Waste Management provides waste collection, transfer, recycling, disposal and related environmental services, primarily through its Solid Waste business.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $3.176 billion | $3.040 billion |
| Income from operations | $508 million; 16.0% margin | $440 million; 14.5% margin |
| Net income (loss) attributable to WM | $258 million; $0.58 diluted EPS | $(129) million; $(0.28) diluted EPS |
| Operating cash flow | $706 million | $499 million |
| Capital expenditures | $317 million | $233 million |
| Free cash flow (company-defined, non-GAAP) | $402 million | $285 million |
| Cash and cash equivalents | $104 million at March 31 | $39 million at December 31, 2015 |
| Total debt | $9.596 billion at March 31 | $8.929 billion at December 31, 2015 |
Revenue increased 4.5%. Operating expenses were $1.993 billion, or 62.8% of revenue, versus $1.946 billion, or 64.0%; SG&A was $362 million, or 11.4% of revenue in both periods. Dividends declared were $0.41 per share, up from $0.385. At quarter-end, $524 million of debt was classified current, and $977 million of capacity remained available under the $2.25 billion revolving credit facility after borrowings and letters of credit.
Material changes versus Q1 2015
- Revenue rose $136 million: acquisitions contributed $92 million, higher volume $57 million, and collection and disposal yield $69 million; lower fuel surcharges and mandated fees reduced revenue by $32 million, weaker recycling commodity prices by $21 million, foreign exchange by $18 million, and divestitures by $11 million. These drivers include differing revenue categories and should not be summed as a simple reconciliation.
- Solid Waste operating income rose to $687 million from $613 million. Management cited internal growth in collection, landfill and transfer, operating efficiencies, and accretive acquired operations.
- Net income improved substantially, but the comparison is heavily affected by Q1 2015’s $550 million pretax loss on early debt extinguishment. That refinancing replaced nearly $2 billion of high-coupon notes with lower-coupon debt and extended their weighted-average duration. Q1 2015 also included $13 million of divestiture, impairment and unusual-item charges.
- Operating cash flow increased $207 million. Management attributed the increase partly to improved Solid Waste earnings, $67 million received on termination of currency swaps, and $46 million lower incentive-plan cash payments.
Outlook, commentary and risks
- The filing provides no specific numeric earnings or revenue guidance. Management describes priorities of customer service, operational improvement, growth, yield management and cost control. It notes that revenue and results are typically higher in the second and third quarters due to seasonality.
- In January, WM acquired SWS operations and assets in Southern Florida for $525 million, funded primarily with revolving-credit borrowings. SWS contributed $37 million revenue and $1 million net income in the quarter. The purchase-price allocation, including $250 million of goodwill, was preliminary.
- Debt increased by $667 million from year-end, reflecting net borrowings, including financing for SWS. Management intends to refinance $500 million of senior notes due September 2016 and expects to remarket $381 million of tax-exempt bonds with rate periods expiring within 12 months; it says the revolver could support these obligations if refinancing or remarketing is not completed.
- Environmental remediation liabilities totaled $207 million. The company estimates that using the high end of reasonable remediation-cost ranges would increase the aggregate liability by approximately $190 million. WM was identified as a potentially responsible party at 75 EPA Superfund sites; ultimate costs remain uncertain.
- Other disclosed exposures include landfill closure and post-closure obligations, self-insured claims, litigation, multiemployer pension withdrawal risk, and guarantees related to the divested Wheelabrator business. The estimated fair value of Wheelabrator-related guarantees was $13 million; certain performance guarantees have no defined maximum exposure.
- Key business risks include competition and pricing/volume trade-offs, commodity and fuel prices, regulation and permits, environmental liabilities, weather, labor, customer credit, cybersecurity, insurance and financial-assurance costs, and access to refinancing. Management states that no material changes were made to previously disclosed risk factors.
Important facts for investors to verify
- Assess whether reported cash-flow strength is repeatable: Q1 operating cash flow included the $67 million swap termination receipt and benefited from lower incentive-plan payments.
- Review the September 2016 note refinancing and tax-exempt bond remarketing plans, as well as remaining revolver availability and debt maturities.
- Track SWS integration, final purchase-price allocation, goodwill and acquired-business profitability.
- Monitor recycling commodity prices, fuel-related surcharge revenue, landfill leachate costs, and whether pricing and volume gains continue.
- Review developments in remediation estimates and Superfund matters, alongside guarantee, litigation and pension exposures.
Management cautions that interim results are not necessarily indicative of full-year results; free cash flow is a non-GAAP measure and excludes items such as dividends and debt service.