Waste Management, Inc. — Q3 2019 Form 10-Q
Business context and period. Waste Management provides collection, transfer, disposal, recycling and resource-recovery services across North America. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Dollar amounts are in millions except per-share data.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $3,967 | $3,822 | $11,609 | $11,072 |
| Income from operations | $734 | $699 | $2,051 | $2,022 |
| Operating margin | 18.5% | 18.3% | 17.7% | 18.3% |
| Net income attributable to WM | $495 | $499 | $1,223 | $1,394 |
| Diluted EPS | $1.16 | $1.16 | $2.86 | $3.22 |
| Cash from operating activities | $952 | $874 | $2,852 | $2,658 |
| Free cash flow (non-GAAP) | $478 | $480 | $1,349 | $1,524 |
Costs and margins. Q3 operating expenses were $2,441, or 61.5% of revenue, versus $2,373, or 62.1%, a favorable ratio change despite higher costs. SG&A rose to $386 from $345 (9.7% versus 9.0% of revenue), partly reflecting investment in people and technology, acquisition costs and litigation reserves. Nine-month operating margin declined to 17.7% from 18.3%.
Cash, debt and liquidity. At September 30, cash and cash equivalents were $2,915, total debt was $13,358 and equity was $6,787. Debt was up from $10,026 at year-end 2018; cash was up from $61, largely reflecting debt-issuance proceeds. The company had $2.3 billion of unused capacity under its $2.75 billion revolving credit facility, after $412 million of letters of credit. About $1.3 billion of debt matures or has rate periods expiring within 12 months; $1.1 billion was classified as long-term based on management’s stated intent and ability to refinance. Nine-month capital expenditures were $1,532, up from $1,240.
Material changes and management commentary
- Q3 revenue increased 3.8%; management attributed growth mainly to collection and landfill volumes, improved collection and disposal yield, and acquisitions. Nine-month revenue rose 4.9%.
- Q3 collection and disposal average yield increased 2.6%, while volume contributed 2.6% to company revenue growth. Recycling commodity prices were nearly 40% lower in Q3, reducing revenue by $73; the nine-month revenue impact was $139. Recycling revenue also reflected lower prices and fees charged to offset processing and contamination costs.
- Q3 operating income increased $35, but net income declined $4. Higher interest expense following the 2019 note issuance and higher Q3 income tax expense weighed on net income. Nine-month net income was lower year over year, including an $85 loss on early debt extinguishment and a $52 first-quarter impairment of a minority-owned waste-conversion investment.
- Nine-month operating cash flow improved by $194, while free cash flow fell by $175, principally as capital expenditures increased. Management said spending was accelerated on collection fleet and landfill assets to support growth. Free cash flow is a company-defined non-GAAP measure and excludes certain required or committed outlays, including dividends and debt service.
- Management described the first nine months’ macroeconomic environment as generally favorable, with collection and disposal growth. It said industrial-sector growth was moderating and expected 2019 recycling operating results to be below 2018 because of commodity-price pressure. No numerical full-year earnings or revenue guidance is provided in the supplied filing text.
Outlook, transactions and risks
- WM agreed to acquire Advanced Disposal for $33.15 per share in cash, with stated enterprise value of $4.9 billion including approximately $1.9 billion of its net debt. Closing was expected in Q1 2020, subject to customary conditions including regulatory approvals. The 2019 senior-note proceeds were intended partly to fund the acquisition; specified notes require redemption at 101% if the deal is not completed by July 14, 2020, or the agreement is terminated earlier.
- WM issued $4.0 billion of senior notes in May and C$500 million of Canadian notes in September. It used proceeds in part to retire $257 million of high-coupon notes, paying $84 million in premiums, and to repay commercial paper. Interest expense rose to $301 for the nine months from $277.
- Management said it did not expect further 2019 share repurchases given the pending acquisition; 2019 repurchases totaled $244 million. Nine-month dividends paid were $658 million, up from $605 million.
- Key exposures include environmental and landfill obligations, litigation and self-insurance claims, regulatory and permitting requirements, labor matters, commodity prices, waste volumes, severe weather, and acquisition execution and regulatory approval. Environmental remediation liabilities totaled $239; management disclosed that using the high end of estimated remediation ranges could increase the recorded liability by approximately $145. A $56 liability was recorded for WM’s estimated potential share of the San Jacinto waste-pits remedy, whose allocation among potentially responsible parties remains unresolved.
- Operations are seasonal, with typically higher summer volumes; severe weather can disrupt service, while disaster-related cleanup can temporarily boost revenue, sometimes at lower margins. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Advanced Disposal received required regulatory approvals and closed on the expected terms and schedule, including any financing or mandatory-redemption implications.
- How much of the unusually high cash balance represents proceeds reserved for the acquisition, and the company’s post-transaction debt and liquidity position.
- Whether collection and disposal pricing and volume growth can offset cost inflation, higher capital spending and moderating industrial activity.
- Recycling commodity-price trends and the extent to which customer fees continue to offset processing costs and contamination.
- Developments in remediation estimates, including the San Jacinto allocation, and any material changes in environmental, litigation or self-insurance exposures.