WASTE MANAGEMENT INC quarterly report, Q2 FY2018

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Waste Management, Inc. — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018; comparative periods are the corresponding 2017 periods. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Waste Management provides collection, transfer, disposal, recycling and resource-recovery services across North America.

Financial performance and liquidity

  • Q2 revenue: $3.739 billion, up 1.7% from $3.677 billion. Collection and disposal yield and volume growth contributed; lower recycling commodity prices partially offset gains.
  • Q2 operating income and margin: $715 million, up 6.2%; operating margin was 19.1%, versus 18.3% a year earlier.
  • Q2 net income and diluted EPS: Net income attributable to Waste Management was $499 million, versus $362 million; diluted EPS was $1.15, versus $0.81. The lower effective tax rate and stronger Traditional Solid Waste results were key contributors.
  • First-half results: Revenue was $7.250 billion versus $7.117 billion; operating income was $1.323 billion versus $1.231 billion; net income attributable to Waste Management was $895 million versus $660 million; diluted EPS was $2.06 versus $1.49.
  • Cash flow: First-half operating cash flow was $1.784 billion, up from $1.535 billion. Capital expenditures were $836 million versus $631 million. Free cash flow, a company-defined non-GAAP measure, was $1.044 billion versus $917 million. Q2 operating cash flow was $975 million and free cash flow was $621 million.
  • Margins and costs: Q2 operating expenses were 61.9% of revenue, compared with 62.3%. SG&A was 9.8% of revenue, versus 9.6%; depreciation and amortization was 10.3%, versus 9.7%.
  • Debt and liquidity: Total debt was $9.796 billion at June 30, up from $9.491 billion at year-end 2017. Cash and cash equivalents were $47 million; restricted trust and escrow accounts were $419 million and are not equivalent to unrestricted cash. The company reported $1.2 billion of unused availability under its $2.75 billion revolving credit facility after commercial paper and letters of credit.
  • Capital returns and investment: First-half share repurchases were $550 million and cash dividends were $406 million. The declared dividend was $0.465 per share for Q2, up from $0.425. The company spent $263 million on acquisitions, net of cash acquired, and acquired 12 solid-waste businesses.

Changes versus the prior comparable period

  • Q2 collection and disposal revenue increased $72 million, while recycling commodity revenue declined $88 million. Average recycling commodity prices at company facilities were 43% lower year over year in Q2 and 40% lower for the first half.
  • Q2 volume added $66 million of revenue, excluding acquisitions and divestitures; first-half volume added $154 million. Management attributed growth to improving market conditions and sales performance, while residential collection volumes declined in the first half.
  • First-half operating cash flow increased by $249 million, which management attributed to lower tax payments and improved operating results, partly offset by weaker recycling earnings.
  • Q2 net gains of $39 million from sales of ancillary operations benefited operating results; first-half net gains were $42 million. The 2018 revenue presentation reflects adoption of new revenue-recognition guidance, while 2017 amounts were not adjusted, limiting direct comparability for certain classifications.

Outlook, commentary, risks and unusual items

  • Outlook: Management expected recycling-market disruption and downward price pressure to continue through the remainder of 2018 and likely beyond. It did not provide specific numerical full-year earnings or revenue guidance in the supplied filing text. Management said it was not expecting a significant near-term shift in the generally favorable macroeconomic environment.
  • Tax and unusual items: The effective tax rate was 18.1% for Q2 and 20.2% for the first half, versus 36.6% and 34.4%, respectively, in 2017. The reduction primarily reflected federal tax reform; Q2 also benefited from $33 million of tax-audit settlement reductions in income tax expense. First-half results included a $28 million benefit from an extension of federal natural-gas fuel credits relating to 2017 activity.
  • Debt refinancing: The company cited $2.1 billion of debt maturing or requiring refinancing within 12 months, including commercial paper and tax-exempt bonds whose interest-rate periods expire. It classified portions as long-term based on intent and ability to refinance. Management expected to borrow under the revolving facility in Q3 to repay the Canadian term loan.
  • Environmental and legal exposure: Recorded environmental remediation liabilities were $249 million; management stated that using the high end of estimated remediation ranges would increase this amount by approximately $145 million. A subsidiary’s estimated share of the San Jacinto waste-pits remedy was $55 million, with ultimate liability potentially materially different. The company reported PRP involvement at 75 Superfund sites and described ongoing environmental, litigation, insurance and guarantee exposures; management did not expect identified matters to have a material adverse effect.
  • Other risks: The filing highlights competition and pricing, commodity-market volatility, fuel costs, regulation and permits, landfill capacity and environmental obligations, severe weather, labor and multiemployer pensions, cybersecurity, and the ability to refinance debt. The company noted that seasonality and severe weather can affect quarterly results and that event-driven work may carry lower margins.
  • Accounting and controls: The company adopted revenue-recognition guidance in 2018; adoption increased opening retained earnings by $80 million, with no material impact on reported financial statements. It was assessing the impact of lease-accounting guidance effective in 2019. Management reported disclosure controls were effective as of June 30, 2018 and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether recycling commodity prices and restrictions affecting export markets continue to pressure revenue and margins as management anticipated.
  • How much of reported earnings growth reflects lower taxes, the $33 million audit settlement benefit, divestiture gains and other one-time items versus recurring operations.
  • The refinancing and repayment outcome for near-term commercial paper, tax-exempt bonds and the Canadian term loan, and the availability of revolving credit.
  • Whether operating cash flow continues to cover capital spending, acquisitions, dividends and share repurchases as these uses of cash increased.
  • Developments in environmental remediation estimates, particularly the San Jacinto matter and the potential $145 million increase if high-end estimates were used.
  • The effect of revenue-accounting changes on comparisons, and the eventual balance-sheet effect of the upcoming lease-accounting standard.