Waste Management, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Waste Management provides collection, transfer, disposal, recycling and resource-recovery services across North America. Interim results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $3,440 million | $3,176 million | +8.3% |
| Income from operations | $558 million | $508 million | +9.8% |
| Operating margin | 16.2% | 16.0% | +0.2 percentage points |
| Net income attributable to Waste Management | $298 million | $258 million | +15.5% |
| Diluted EPS | $0.67 | $0.58 | +$0.09 |
| Operating cash flow | $721 million | $732 million | −$11 million |
| Free cash flow (non-GAAP) | $396 million | $428 million | −$32 million |
| Capital expenditures | $332 million | $317 million | +$15 million |
Revenue increased by $264 million, with reported drivers including $187 million from average yield, $59 million from volume, $12 million from acquisitions and $6 million from foreign currency translation. Higher recycling commodity prices contributed $111 million of revenue growth; collection and disposal yield and volume growth together contributed $113 million. Recycling commodity prices were 56% higher year over year.
Operating costs rose 8.7% to $2,166 million; operating costs were 63.0% of revenue versus 62.8%. Higher recycling-related cost of goods sold, fuel costs, volumes, labor and maintenance costs weighed on expenses. SG&A increased to $390 million, mainly reflecting executive severance, incentive compensation and merit increases.
Balance sheet, debt and liquidity
- At March 31, cash was $30 million; total assets were $20.650 billion and total equity was $5.538 billion.
- Total debt was $9.042 billion, down from $9.310 billion at December 31, 2016. This included $396 million classified as current and $8.646 billion as long-term.
- The company reported $1.257 billion of unused capacity under its $2.25 billion revolving credit facility, after letters of credit and commercial paper borrowings. Commercial paper outstanding was $210 million.
- Landfill and environmental remediation liabilities totaled $1.851 billion, including $243 million for environmental remediation.
- Cash dividends paid were $194 million; the declared quarterly dividend was $0.425 per share, up from $0.41. No cash was paid for share repurchases during the quarter; the company received 0.4 million shares in February to complete a prior $225 million accelerated repurchase agreement.
Changes, outlook and significant items
- Solid Waste operating income increased to $750 million from $687 million; all three reported tiers improved. Other segment operating loss narrowed to $32 million from $36 million.
- Operating cash flow declined year over year, partly because Q1 2016 included $67 million of proceeds from terminating cross-currency swaps and Q1 2017 had $41 million higher annual incentive payments. Investing cash outflow was $340 million versus $847 million, largely reflecting the prior-year $525 million Southern Waste Systems/Sun Recycling acquisition.
- Q1 2017 included a $25 million write-down of an equity-method investment in a waste-diversion technology company and a $32 million reduction in income tax expense from excess tax benefits on equity compensation. The filing says these items had a combined favorable impact of $0.01 on diluted EPS.
- Management described its strategy as focused differentiation and continuous improvement, emphasizing disciplined pricing, operational efficiency, existing recycling technologies and profitable growth. It reported improved sales performance and market conditions, while noting residential volume declines tied to contract repricing and pursuit of reasonable returns.
- No specific full-year financial guidance is provided in the supplied filing text. Management notes typical higher revenue and results in Q2 and Q3 from seasonal waste volumes; weather and special projects can also cause variability and may carry lower margins.
- Key risks include competition and customer retention amid pricing actions; fuel and recycling commodity price volatility; environmental, landfill closure and remediation obligations; regulation and permitting; weather; labor and multiemployer pension exposure; cybersecurity and operational risks; and refinancing or remarketing needs. Management said it did not expect known contingencies to materially affect results, but outcomes remain uncertain.
- Environmental matters include 76 Superfund locations where the company had been identified as a potentially responsible party. The EPA’s proposed San Jacinto waste-pits remedy was not final; the recorded liability for the subsidiary’s estimated share was $45 million. The filing states that using high-end estimates for environmental remediation ranges would raise the recorded $243 million liability by approximately $118 million. The company also disclosed potential civil penalties concerning Grows/Tullytown Landfills and other environmental proceedings.
Important facts for investors to verify
- Whether revenue and earnings growth persists if recycling commodity prices moderate, and how much growth comes from underlying collection and disposal pricing and volumes.
- Whether operating cash flow and free cash flow recover, given the year-over-year declines and ongoing capital expenditure and dividend requirements.
- Debt refinancing and liquidity assumptions, including the company’s stated intent and ability to refinance $590 million of 6.1% notes due March 2018 and its exposure to tax-exempt bond remarketing.
- Potential changes in environmental remediation estimates, particularly the San Jacinto matter and the disclosed $118 million high-end estimate sensitivity.
- The eventual accounting and presentation effects of the revenue-recognition standard, which the company planned to adopt January 1, 2018; management anticipated capitalizing sales incentives currently expensed at approximately $65 million annually.