Waste Management, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; dollar amounts in millions except per-share data. Waste Management provides collection, transfer, disposal, recycling and related environmental services across North America.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3,716 | $3,548 | $10,833 | $10,149 |
| Income from operations | $701 | $560 | $1,932 | $1,679 |
| Operating margin | 18.9% | 15.8% | 17.8% | 16.5% |
| Net income attributable to Waste Management | $386 | $302 | $1,046 | $847 |
| Diluted EPS | $0.87 | $0.68 | $2.36 | $1.89 |
| Operating cash flow | $856 | $758 | $2,390 | $2,252 |
| Free cash flow (non-GAAP) | $512 | $433 | $1,428 | $1,322 |
Q3 operating expenses were $2,302 (61.9% of revenue), versus $2,216 (62.5%). SG&A was $356 (9.6% of revenue), versus $330 (9.3%). Nine-month capital expenditures were $981, compared with $962. Free cash flow is defined by the company as operating cash flow less capital expenditures plus divestiture proceeds; it excludes, among other items, dividends and debt service.
At September 30, 2017, cash was $35; total debt was $9,345, comprising $850 current and $8,495 long-term. Debt was $9,310 at December 31, 2016. The company reported $1,821 of debt maturing or requiring rate-period renewal within 12 months; $971 was classified as long-term based on planned refinancing capacity. Its $2.25 billion revolver had no direct borrowings, but supported $777 of letters of credit and $502 of commercial paper, leaving $971 of available capacity. Dividends declared were $0.425 per share for Q3 and $1.275 for the nine-month period.
Changes versus comparable periods
- Q3 revenue increased 4.7%; nine-month revenue rose 6.7%. Company-reported drivers included collection and disposal yield, higher volumes, and improved recycling commodity prices.
- Q3 operating income increased 25.2%; nine-month operating income increased 15.1%. Solid Waste operating income rose 17.2% for the quarter and 12.3% year to date.
- Q3 revenue growth included $93 from yield and volume in collection and disposal and $60 from recycling commodity prices. For the nine months, average yield contributed $473 and volume $198.
- Operating costs increased, including labor, maintenance, fuel and cost of goods sold. Higher recycling commodity prices boosted recycling revenue but also raised related costs. Lower landfill leachate-management costs partly offset cost increases.
- Q3 2017 included an $11 pension-plan withdrawal charge and a $9 environmental remediation charge, with a combined after-tax impact of $12, or $0.03 per diluted share. Q3 2016 included $106 of unusual charges, with an after-tax impact of $72, or $0.16 per diluted share, including landfill and goodwill impairments and remediation costs.
Outlook, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided in the filing. Management said recycling-market disruptions were expected to continue into Q4 2017 and through the first half of 2018, putting downward pressure on average commodity prices. Prices had retreated from earlier 2017 levels to roughly Q3 2016 levels by quarter-end.
- Management cited disciplined pricing, profitable growth, cost control, process improvement and operational efficiency as priorities. It cautioned that pricing actions can affect customer retention and volumes. Seasonal conditions and severe weather can disrupt operations or change volumes and margins; hurricane-related disruptions affected recycling activity in Q3.
- Environmental liabilities are significant and estimation-dependent: recorded landfill and remediation liabilities totaled $1,890, including $250 for environmental remediation. The company estimated that using high-end remediation estimates would raise the recorded remediation liability by about $140. A subsidiary’s estimated share of the San Jacinto waste-pits remedy was $54 after a $9 Q3 increase; responsibility allocation remained unresolved and the company disputed the EPA’s selected remedy.
- The company had been identified as a potentially responsible party at 75 EPA Superfund sites. It also disclosed ongoing environmental, customer, employment and other litigation, while stating it did not expect the disclosed matters to have a material adverse effect. Future remediation costs, insurance and self-insured claims, pension-plan withdrawals, permits, regulation, fuel and commodity prices, competition, labor, technology, cyber incidents and refinancing are among the stated risks.
- Debt refinancing and remarketing are important liquidity considerations. Management expected future tax-exempt bond remarketings to succeed, but failed remarketing could require the company to refinance or repay bonds. Cash and cash equivalents were low relative to debt, and the company relied on revolver capacity and continued access to capital markets.
- The company repurchased $750 of stock and paid $566 of dividends in the first nine months. A $500 accelerated share repurchase agreement entered in August was expected to complete in December 2017; the company reported no remaining board authorization after that agreement was entered.
Important facts for investors to verify
- Progress on the $1,821 of near-term maturities and rate-period renewals, and continued availability of the $971 revolver capacity.
- Whether recycling commodity prices and market disruptions develop as management expected, and the resulting effect on revenue and margins.
- Underlying collection and disposal pricing and volume trends, including residential volume declines and the sustainability of recent growth.
- Updates to the San Jacinto remediation estimate, allocation among responsible parties, and the broader environmental liability estimate.
- Completion and final cost of the August $500 accelerated share repurchase, and capital allocation after the remaining authorization was exhausted.