Waste Management, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless noted, dollar amounts are in millions. The company provides collection, transfer, disposal, recycling and renewable-energy services across the U.S. and Canada.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $5,119 | $5,027 | $10,011 | $9,688 |
| Operating income | $944 | $890 | $1,769 | $1,658 |
| Operating margin | 18.4% | 17.7% | 17.7% | 17.1% |
| Net income attributable to WM | $615 | $587 | $1,148 | $1,100 |
| Diluted EPS | $1.51 | $1.41 | $2.81 | $2.64 |
| Operating cash flow | $1,030 | $1,047 | $2,074 | $2,305 |
| Free cash flow (non-GAAP) | $545 | $503 | $940 | $1,348 |
Q2 revenue rose 1.8%; operating income increased 6.1%, with margin up 0.7 percentage points. Collection and disposal yield growth and lower SG&A supported operating results. Higher interest and tax expense partly offset the operating-income improvement. Q2 basic EPS was $1.52.
For the first half, operating cash flow declined 10.0% and free cash flow declined 30.3%. Capital expenditures increased to $1,180 from $968, including $217 of sustainability growth investments, versus $112 a year earlier. The company defines free cash flow as operating cash flow less capital expenditures plus divestiture proceeds; it cautions that this non-GAAP measure excludes required uses such as dividends and debt service.
Operating trends and material changes
- Collection and disposal revenue growth was driven mainly by pricing: average yield increased 5.8% in Q2 and 6.0% for the first half. Total volume contributed 0.2% and 0.7%, respectively.
- Recycling and WM Renewable Energy revenue fell $150 in Q2 and $291 in the first half. Single-stream recycling commodity prices were down about 55% year over year in the first half; lower renewable fuel credit values and lower electricity and natural-gas prices also weighed on renewable-energy results.
- Q2 operating costs increased $44, chiefly from inflation in maintenance, repairs and subcontracting, and wage increases. Lower fuel costs and lower recycling rebates in cost of goods sold partly offset these pressures. SG&A fell $20, reflecting lower incentive compensation and digital-project professional fees.
- Net interest expense rose to $125 in Q2 and $245 for the first half, from $93 and $178, respectively, reflecting higher average debt and higher floating-rate borrowing costs.
- First-half Solid Waste operating income increased to $2,365 from $2,269. “Other” operating results turned to a loss of $17 from income of $19, primarily due to weaker renewable-energy and recycling-brokerage profitability.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $144; current assets were $3,480 and current liabilities $4,251. Total debt was $15,368, including $513 classified as current. Restricted funds were $539.
- About $3.6 billion of debt comes due or has interest-rate periods expiring within 12 months. WM classified $3.1 billion as long-term based on its intent and ability to refinance; it cited $2.0 billion of unused capacity under its $3.5 billion revolving credit facility, which matures in May 2027. Commercial paper outstanding was $1.3 billion and the $1.0 billion term loan matures in May 2024.
- First-half cash dividends were $572 and stock repurchases were $620. The quarterly dividend increased to $0.70 per share from $0.65 a year earlier. The company had $878 of remaining share-repurchase authorization at June 30.
- In February, WM issued $1.25 billion of senior notes at 4.625%, due in 2030 and 2033. Proceeds were used in part to reduce commercial paper and repay $500 of notes at maturity.
Outlook, risks and contingencies
- No specific numerical earnings or revenue guidance is provided in the filing. Management describes priorities including pricing to offset inflation, operating efficiency, automation, cost control, and investment in recycling and renewable energy.
- Management says inflation, labor and supply-chain constraints, delayed fleet deliveries, transportation costs and higher interest rates have affected results. Commodity-price weakness remains a pressure on recycling and WM Renewable Energy; pricing recovery may be delayed by contract terms and market conditions.
- Seasonality typically supports higher second- and third-quarter activity. Severe weather can disrupt operations and customers, while storms, wildfires and other events can increase waste volumes, sometimes at lower margins.
- Landfill and environmental remediation liabilities totaled $2,905, including $196 for remediation. Management states that using the high end of estimated remediation ranges would increase the recorded remediation liability by approximately $125. WM is identified as a potentially responsible party at 73 EPA Superfund sites; its recorded estimated share for the San Jacinto River Waste Pits matter was $69.
- The company is defending a securities class-action lawsuit relating to 2019 senior notes and says it believes insurance will cover any recovery above applicable deductibles. It does not expect known contingencies to have a material adverse effect, but notes that environmental and litigation outcomes are uncertain.
- WM deposited approximately $103 with the IRS concerning a dispute over its 2017 tax year and expects to seek a refund and litigate any denial. It says the deposit, net of reserves, is included in other long-term assets.
- Forward-looking risks include regulation and permitting, landfill capacity, labor availability and costs, climate events, commodity prices, economic weakness, competition, cybersecurity, technology execution and failure to achieve sustainability initiatives.
Most important facts for investors to verify
- Whether pricing and collection/disposal yield continue to offset wage, maintenance, subcontractor and other inflationary costs.
- Whether recycling commodity prices and renewable-energy credit and power prices recover, and how continued weakness affects segment profitability.
- Progress in refinancing the approximately $3.6 billion of near-term maturities and the effect of higher interest rates on interest expense and cash flow.
- Capital-spending plans and returns from sustainability growth investments, alongside the decline in first-half free cash flow.
- Developments in Superfund and other remediation matters, including the San Jacinto River Waste Pits estimate, and the IRS refund dispute.