Waste Management, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in millions of dollars except per-share figures. Waste Management provides collection, transfer, recycling, disposal and resource-recovery services across North America. The prior-year comparison includes Wheelabrator, sold in December 2014, and is therefore not fully comparable.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3,315 | $3,561 | $6,355 | $6,957 |
| Income from operations | $502 | $532 | $942 | $1,001 |
| Net income attributable to WM | $274 | $210 | $145 | $438 |
| Diluted EPS | $0.60 | $0.45 | $0.32 | $0.94 |
| Operating cash flow | $816 | $555 | $1,315 | $1,139 |
| Free cash flow | $579 | $447 | $864 | $931 |
- Revenue and operating results: Q2 revenue fell 6.9% year over year; six-month revenue fell 8.7%. Q2 operating margin was 15.1%, compared with 14.9% a year earlier. Operating expenses were $2,163 (65.2% of revenue) versus $2,301 (64.6%) in Q2 2014.
- Profit: Q2 net income and diluted EPS increased from the prior year, helped in part by lower income taxes and interest expense. Six-month net income fell substantially, primarily reflecting a $552 loss on early extinguishment of debt, including $555 of cash premiums paid.
- Cash flow: Six-month operating cash flow rose $176 year over year, mainly from lower tax and interest payments. Six-month free cash flow declined from $931 to $864, reflecting lower divestiture proceeds and higher capital expenditures; the company defines free cash flow as a non-GAAP liquidity measure.
- Debt and liquidity: Total debt was $9,106 at June 30, 2015, down from $9,435 at year-end 2014. Cash was $273, down from $1,307. The company had no borrowings under its $2.25 billion revolving facility and reported $1,420 of unused available capacity after letters of credit. Current debt was $196. In July 2015, the revolver was extended through July 2020.
- Other balance-sheet items: Total assets were $20,578 and total equity was $5,407. Landfill and environmental remediation liabilities totaled $1,736, including $231 of environmental remediation liabilities.
Material changes and management commentary
- Q2 revenue decreased $246 year over year. The main reductions were Wheelabrator and other divestitures ($193), lower volumes ($44), lower fuel surcharges and mandated fees ($45), lower recycling commodity prices ($40), and currency translation ($27). These were partly offset by $49 of collection and disposal yield growth and $54 from acquisitions, principally Deffenbaugh.
- Collection and disposal yield increased 1.7% in Q2, while reported volumes declined. Management said year-over-year collection volume declines were lessening sequentially, but pricing strategy and competition continued to weigh on volumes. Recycling commodity prices were down approximately 13% year over year in Q2.
- Deffenbaugh was acquired March 26 for total consideration of $416, including $413 cash. It contributed $48 of revenue in the quarter and had a net loss of less than $1.
- Q2 operating expenses included a $55 charge for withdrawals from certain underfunded multiemployer pension plans. Lower fuel, maintenance, subcontractor and cost-of-goods-sold expenses partly offset this and other pressures.
- The company issued $1.8 billion of senior notes and refinanced higher-coupon debt during the first half. Management reported a 1 percentage-point reduction in the weighted-average senior-note interest rate and a three-year extension in weighted-average duration.
- Capital allocation included $300 of Q2 share repurchases under an accelerated repurchase agreement and $351 of first-half dividends. The board had authorized up to $1 billion in repurchases; management anticipated repurchasing an additional $300 in Q3 2015.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue or earnings guidance. Management expected 2015 cash tax payments to be approximately $475 lower than in 2014, while noting bonus depreciation would increase 2015 cash taxes by approximately $90.
- Results are subject to seasonal demand, severe weather, waste volumes, pricing and competition, fuel and recycling commodity prices, and foreign currency movements. Management noted summer typically brings higher construction and demolition waste volumes.
- Environmental liabilities are estimation-sensitive. The company was identified as a potentially responsible party at 76 Superfund sites; it stated that using the high end of estimated remediation ranges would raise the recorded $231 environmental remediation liability by approximately $195.
- Multiemployer pension plan withdrawals, landfill closure and post-closure obligations, insurance claims, permits, regulation, and litigation are ongoing risks. Management said additional pension withdrawal charges could materially affect results or cash flows in a particular period.
- Subsequent to quarter-end, the company signed a $528,000 civil penalty assessment relating to operational issues at its Tullytown Landfill and Grows complex. A Hawaii subsidiary also entered a plea involving Clean Water Act violations and agreed to $400,000 in fines and $200,000 for restitution and environmental projects; possible related civil claims remained.
- Tax-exempt bond remarketings were described as successful to date. If remarketing fails, the company said it could use revolving-credit availability to fund the obligations. The filing also identifies cybersecurity, labor, regulatory, environmental and commodity-price risks.
Important facts for investors to verify
- How much of the revenue decline and margin performance reflects the Wheelabrator divestiture versus underlying volume, price and commodity trends.
- Whether collection-volume declines continue to ease and whether collection and disposal yield growth can be sustained without further volume losses.
- The recurring cash-earnings impact of the $55 pension charge and the potential for further multiemployer withdrawal liabilities.
- Post-refinancing interest savings relative to the $552 extinguishment loss and related cash premiums, as well as the company’s debt maturities and liquidity position.
- Deffenbaugh integration, acquisition purchase-price allocation and expected realization of synergies.
- Changes in environmental remediation estimates, Superfund exposure, and the resolution of the disclosed regulatory and litigation matters.
- Free cash flow trends after capital expenditures, dividends, repurchases and acquisition spending; free cash flow is non-GAAP and excludes some committed cash requirements.