Waste Management, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. Amounts are in millions, except per-share data.
Business context
Waste Management provides collection, transfer, disposal, recycling and resource-recovery services across the U.S. and Canada, alongside landfill-gas-to-energy and other sustainability businesses. Solid Waste operations are reported in East and West tiers. Results are seasonal, with activity generally stronger in the second and third quarters.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5,075 | $4,665 | $14,763 | $13,253 |
| Income from operations | $942 | $806 | $2,600 | $2,247 |
| Operating margin | 18.6% | 17.3% | 17.6% | 17.0% |
| Net income attributable to WM | $639 | $538 | $1,739 | $1,310 |
| Diluted EPS | $1.54 | $1.28 | $4.18 | $3.09 |
| Operating cash flow | $1,182 | $1,184 | $3,487 | $3,347 |
| Free cash flow (non-GAAP) | $432 | $773 | $1,780 | $2,287 |
Q3 revenue rose 8.8%; operating income increased 16.9% and diluted EPS increased 20.3%. Management attributed revenue growth mainly to pricing/yield in collection and disposal, fuel surcharges and volume. Q3 collection and disposal yield rose 7.1%; collection and disposal volumes grew 1.4%. Solid Waste operating income increased 12.8%.
Q3 operating expenses were $3,156, or 62.2% of revenue, versus $2,906, or 62.3%. SG&A was $473, or 9.3% of revenue, versus $469, or 10.1%. Operating margin improved as pricing and operating efficiencies helped offset higher costs.
Cash, debt and liquidity
- Nine-month operating cash flow increased to $3,487 from $3,347. Capital expenditures rose to $1,725 from $1,130, including $322 of sustainability growth investments; free cash flow consequently declined to $1,780 from $2,287.
- At September 30, cash and cash equivalents were $137; total debt was $14,063, up from $13,405 at year-end 2021. Current debt was $258 and long-term debt was $13,805.
- The $3.5 billion revolving credit facility was extended to May 2027. The company reported no revolver borrowings, $2.5 billion of unused available capacity, and $839 of commercial paper borrowings supported by the facility.
- About $2.2 billion of debt was due or subject to rate-period expiry within 12 months; $2.0 billion was classified as long-term based on management’s intent and ability to refinance. The filing notes that higher floating rates are expected to meaningfully increase interest expense in 2023.
- Nine-month cash returned to shareholders included $811 of dividends and $1,061 of share repurchases. The quarterly dividend was $0.65 per share.
Changes, outlook and risks
- Inflation, wage adjustments, maintenance and repair costs, subcontractor expenses and fuel pressured expenses. Management cited pricing, efficiency and technology investments as responses; some customer contracts have price-escalation lags that limit the speed of cost recovery.
- Recycling commodity prices at company facilities were approximately 30% lower in Q3 year over year. Management expected continued significant market-price headwinds through the rest of 2022 and into 2023. Recycling revenue fell $54 in Q3, although it rose $158 for the first nine months.
- A $26 Q3 catch-up benefit from the extension of alternative fuel tax credits supported results. The Inflation Reduction Act is expected to secure approximately $55 of annual alternative-fuel tax-credit benefit through 2024; the company also expects a 1% excise tax on future share repurchases.
- Q3 free cash flow fell primarily because of higher capital spending, including sustainability investments, and lower divestiture proceeds. Management reported no formal numerical earnings or cash-flow guidance in the supplied filing text.
- Landfill and environmental remediation liabilities totaled $2,589 at September 30, including $202 for environmental remediation. The company said using the high end of reasonably possible remediation estimates would add approximately $140 to the recorded environmental remediation liability. Its estimated share of the proposed San Jacinto River Waste Pits remedy was $68, and ultimate responsibility could differ materially.
- Other stated risks include labor and supply-chain constraints, fuel and commodity-price changes, severe weather, regulatory and permitting requirements, environmental claims, litigation, cybersecurity and execution of acquisitions and technology initiatives. The company reported no material change to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether collection and disposal pricing and efficiency gains continue to offset wage, fuel, maintenance and other inflationary costs.
- Recycling commodity-price trends and their impact on revenue and margins, particularly in 2023.
- Capital-spending plans, sustainability-project returns and free-cash-flow conversion; the company’s free-cash-flow measure excludes dividends and debt service.
- Refinancing and rate exposure for near-term maturities, commercial paper and variable-rate debt, including the expected 2023 interest-cost increase.
- Changes in landfill closure and environmental remediation estimates, including developments at the San Jacinto site and potential additional remediation costs.