Waste Management, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Waste Management provides collection, transfer, recycling, disposal and related environmental services. Its 2014 sale of Wheelabrator reduced the scope of reported operations; the sale was not treated as discontinued operations.
Key financial metrics
Amounts in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $3,360 | $3,602 | $9,715 | $10,559 |
| Income from operations | $601 | $546 | $1,543 | $1,547 |
| Operating margin | 17.9% | 15.2% | 15.9% | 14.7% |
| Net income attributable to Waste Management | $335 | $270 | $480 | $708 |
| Diluted earnings per share | $0.74 | $0.58 | $1.05 | $1.52 |
| Cash from operating activities | $657 | $672 | $1,972 | $1,811 |
| Free cash flow (non-GAAP) | $358 | $418 | $1,222 | $1,349 |
- Operating expenses were $2,095 million in Q3, or 62.4% of revenue, versus $2,299 million, or 63.8%, a year earlier. Selling, general and administrative expense was $330 million, or 9.8% of revenue, versus $377 million, or 10.5%.
- At September 30, cash was $113 million, down from $1,307 million at December 31, 2014. Total debt was $9,050 million, versus $9,435 million; total liabilities were $15,145 million and equity $5,257 million.
- The $2.25 billion revolving credit facility had no borrowings and $1,418 million of unused available capacity. The company reported $701 million of debt maturing within 12 months, but classified $973 million of debt as long-term based on its intent and ability to refinance.
- Declared dividends were $0.385 per share for Q3, compared with $0.375. Cash dividends paid in the first nine months totaled $523 million; share repurchases totaled $600 million.
Material changes versus prior comparable periods
- Q3 revenue declined 6.7%; nine-month revenue declined 8.0%. Management attributed the declines chiefly to divestitures—primarily Wheelabrator—along with lower volumes, reduced fuel surcharges, weaker recycling commodity prices and Canadian currency translation. Q3 divestitures reduced revenue by $186 million; acquisitions added $53 million.
- Despite lower Q3 revenue, operating income rose $55 million and operating margin improved to 17.9%. Lower fuel and other costs, reduced SG&A, and the absence of prior-year restructuring charges and litigation reserves contributed. Nine-month operating income was nearly flat.
- Nine-month net income fell to $480 million from $708 million, primarily reflecting a $552 million loss on early extinguishment of debt. The company refinanced high-coupon notes; management said this reduced the senior-note portfolio’s weighted average rate by 1% and extended its weighted average duration by three years. Interest expense declined to $294 million from $352 million.
- Nine-month operating cash flow increased by $161 million, but free cash flow declined by $127 million as capital spending increased and divestiture proceeds fell. Acquisition spending was $473 million, including the March 2015 Deffenbaugh acquisition for approximately $416 million.
Outlook, management commentary, risks and unusual items
- The filing provides no quantified earnings, revenue or cash-flow guidance. Management’s stated priorities include customer service, operational improvement, growth, yield management and cost control. It highlighted collection-and-disposal yield growth of 1.8% for both Q3 and the first nine months, while warning of continued volume pressure and weaker recycling prices.
- Management noted seasonal strength in the second and third quarters and exposure to severe weather, fuel and compressed natural gas costs, commodity prices, competition, economic conditions, regulation, permitting, technology shifts and lower landfill volumes.
- Landfill and environmental remediation liabilities totaled $1,749 million at September 30, including $229 million for environmental remediation. The filing estimates that using the high ends of remediation-cost ranges would raise the recorded environmental liability by approximately $195 million. The company had been identified as a potentially responsible party at 76 Superfund sites.
- The company recorded $51 million of charges associated with multiemployer pension withdrawals and paid approximately $40 million in Q3 following its Central States Pension Plan settlement. It said the settlement did not exceed previously recognized charges; other withdrawal matters remain under negotiation or litigation.
- Reported environmental matters included a $528,000 Pennsylvania civil penalty and a Hawaii Clean Water Act resolution involving $400,000 in fines and $200,000 for restitution and environmental projects. Management did not expect these matters to materially affect the company.
- Key unusual items included the $552 million debt-extinguishment loss, $7 million of nine-month restructuring charges, and $17 million of net charges for impairments, divestitures and other unusual items. Environmental, landfill, insurance and self-insurance estimates involve significant judgment and may change.
- The filing says financial assurance instruments and guarantees are not expected to have a material adverse effect. However, certain Wheelabrator-related guarantees remain outstanding; their estimated fair value was $16 million, and some could extend through 2041.
Important facts for investors to verify
- How much of the revenue and volume decline reflects ongoing business trends versus the Wheelabrator and other divestitures, currency effects and commodity prices.
- Whether operating-margin improvement is sustainable after adjusting for lower fuel costs, prior-year restructuring and litigation charges, and the change in business mix.
- Cash requirements for debt maturities and refinancing, and the effects of the debt tender premiums, share repurchases, dividends and acquisition spending on liquidity.
- Future exposure from environmental remediation, landfill obligations, multiemployer pensions, litigation and outstanding guarantees, including potential changes to management’s estimates.
- The filing’s non-GAAP free cash flow definition and reconciliation; it excludes certain committed or required cash uses, including dividends and debt service.