Waste Management, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in millions of dollars except per-share data. The company provides waste collection, transfer, disposal, recycling and resource-recovery services, primarily through its Solid Waste operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3,677 | $3,425 | $7,117 | $6,601 |
| Income from operations | $673 | $611 | $1,231 | $1,119 |
| Net income attributable to WM | $362 | $287 | $660 | $545 |
| Diluted EPS | $0.81 | $0.64 | $1.49 | $1.22 |
| Operating cash flow | $813 | $762 | $1,534 | $1,494 |
| Free cash flow (non-GAAP) | $520 | $461 | $916 | $889 |
- Q2 revenue increased 7.4%; first-half revenue increased 7.8%. Management attributed growth chiefly to collection and disposal pricing and volumes, alongside stronger recycling commodity prices.
- Q2 operating margin was 18.3%, up from 17.8%. Operating expenses rose 7.5% in Q2, slightly faster than revenue; higher recycling cost of goods sold, volumes, maintenance, fuel and labor costs were key factors. SG&A was 9.6% of revenue versus 9.9%.
- Q2 diluted EPS increased from $0.64 to $0.81. The prior-year quarter included $45 million of pre-tax charges, primarily investment impairments, with a reported $0.10 per-share negative impact.
- First-half operating cash flow increased $40 million. Capital expenditures were $631 million; free cash flow, as defined by the company, rose to $916 million. The company cautions that free cash flow is non-GAAP and excludes items such as dividends and debt service.
- Cash was $32 million at June 30, unchanged from year-end. Total debt was $9.057 billion, down from $9.310 billion at December 31, 2016. Stockholders’ equity was $5.486 billion, compared with $5.297 billion.
- The $2.25 billion revolving credit facility had no direct borrowings; after $780 million of letters of credit and $253 million of commercial paper, reported available capacity was $1.217 billion. First-half dividends paid were $381 million and share repurchases were $250 million.
Changes, outlook and management commentary
- Solid Waste operating income increased 10.5% in Q2 and 9.9% in the first half. Collection and disposal yield growth was 1.9% in both periods; total volume growth contributed $115 million in Q2 and $174 million in the first half.
- Recycling revenue benefited from higher commodity prices, but those prices also raised cost of goods sold. Fuel expense increased, partly reflecting higher prices and the expiration of certain natural-gas fuel excise tax credits.
- Management reaffirmed its focus on pricing discipline, profitable growth, cost control, process improvement and operational efficiency. The filing provides no quantified earnings or revenue guidance.
- Management noted typical seasonal strength in the second and third quarters. Severe weather can disrupt service, while storms or event-driven work can increase revenue but may carry comparatively lower margins.
- Revenue recognition guidance was planned for adoption in 2018 using the modified retrospective method. Management did not expect a material impact on operating revenue but was still assessing potential presentation changes, capitalization of sales incentives and disclosure effects; it expected to provide an impact estimate in the Q3 2017 filing.
Risks, contingencies and unusual items
- Landfill liabilities were $1.631 billion and environmental remediation liabilities were $245 million at June 30. The company said using the high end of remediation cost ranges would raise its aggregate potential liability by approximately $115 million above the recorded amount.
- The company was identified as a potentially responsible party at 76 EPA Superfund sites. At the San Jacinto waste pits, its recorded estimate for its subsidiary’s share of the proposed remedy was $45 million; the remedy was not final and ultimate liability could differ materially.
- Disclosed matters include potential civil penalties concerning Pennsylvania landfill operations, possible claims over water discharges at a Hawaii landfill and an EPA notice alleging waste-acceptance violations at a Wisconsin facility. The company stated it did not currently expect the disclosed matters, individually or collectively, to have a material adverse effect.
- Other risks include commodity-price volatility, regulatory and permit requirements, environmental liabilities, fuel and labor costs, customer and volume trends, weather, cybersecurity, litigation and possible multiemployer pension-plan withdrawal liabilities. Management reported no material change to previously disclosed risk factors.
- Variable-rate tax-exempt bonds depend on successful remarketing; a failed remarketing could allow bonds to be put to the company. Management expected future remarketings to succeed and cited revolving-credit capacity as refinancing support. Some 2018 notes and borrowings were classified as long-term based on intent and ability to refinance.
- The company recognized $28 million of first-half charges to write down equity-method investments in waste-diversion technology companies. The Q2 2017 $250 million accelerated share repurchase was expected to be completed in August 2017.
Important facts for investors to verify
- Whether revenue growth and Solid Waste margin improvement persist as recycling commodity prices and related costs fluctuate.
- How the $1.631 billion landfill and $245 million remediation liabilities develop, particularly the San Jacinto matter and other Superfund exposures.
- Debt refinancing and tax-exempt bond remarketing needs, and the adequacy of the reported $1.217 billion available revolving-credit capacity.
- The eventual impact of the 2018 revenue-recognition standard on sales incentives and gross-versus-net revenue presentation.
- Whether cash generation continues to cover capital investment, dividends and repurchases; free cash flow is a company-defined non-GAAP measure.