Waste Management, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Waste Management provides collection, transfer, disposal, recycling and resource-recovery services, principally in North America.
Financial performance
- Revenue: $3.696 billion, up 5.3% from $3.511 billion. Growth reflected higher volumes and collection/disposal pricing, partly offset by weaker recycling commodity prices. Organic volume growth was 3.4%; average yield increased 1.8%.
- Profit and margins: Operating income was $621 million, up 2.1%; operating margin declined to 16.8% from 17.3%. Net income attributable to WM was $347 million, or $0.81 diluted EPS, versus $396 million, or $0.91. The 2019 result included a $52 million impairment charge.
- Costs: Operating expenses rose 5.2% to $2.298 billion but remained 62.2% of revenue. SG&A increased to $409 million, or 11.1% of revenue, from $373 million, or 10.6%. Fuel costs rose 32.9%, primarily because $28 million of federal natural-gas fuel credits received in 2018 did not recur.
- Cash flow: Operating cash flow was $890 million versus $809 million. Capital expenditures were $471 million; free cash flow, a company-defined non-GAAP measure, was $431 million versus $423 million. Acquisitions used $394 million, compared with $246 million in Q1 2018.
- Debt and liquidity: Total debt was $10.366 billion at March 31, up from $10.026 billion at year-end. Cash and cash equivalents were $57 million. The $2.75 billion revolver had no direct borrowings, but supported $1.4 billion of commercial paper and $572 million of letters of credit, leaving $824 million available. About $1.0 billion of debt was classified as current; the company reported $2.2 billion maturing or requiring refinancing within 12 months, including amounts classified as long-term based on refinancing intent and capacity.
- Other balance-sheet items: Total assets were $23.373 billion and equity was $6.417 billion. Landfill and environmental remediation liabilities totaled $2.024 billion, including $233 million for remediation.
Changes and notable items
- Solid Waste revenue increased to $3.139 billion from $2.958 billion; Solid Waste operating income rose to $843 million from $778 million. Company-wide operating margin nevertheless declined, with higher fuel, inflation, claims, and corporate expenses offsetting operating growth.
- Recycling commodity prices at company facilities averaged 28% below the prior-year period; the company said slower global demand was expected to continue pressuring prices through 2019. Recycling revenue declined $25 million.
- The $52 million impairment related to a minority-owned waste-conversion technology investment was not tax-deductible. The effective tax rate increased to 24.8% from 22.7%.
- WM adopted the new lease standard on January 1, 2019, recognizing $385 million each of operating-lease right-of-use assets and liabilities at adoption. At March 31, total lease assets were $616 million and lease liabilities were $595 million.
- On March 8, WM acquired Petro Waste Environmental LP, an oilfield environmental services and disposal business in Texas’s Permian Basin and Eagle Ford Shale. The purchase-price allocation remained preliminary; the acquisition’s Q1 impact was not material.
Outlook, risks and contingencies
- Outlook: No specific company-wide revenue, earnings or cash-flow guidance is provided in the filing. Management cited favorable market conditions and strong collection and disposal performance, while noting market volatility and continued pressure on recycling commodity prices. Results are seasonal, typically stronger in the second and third quarters.
- Advanced Disposal transaction: On April 14, 2019, 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 net debt. Closing was expected by Q1 2020, subject to approvals and other conditions. WM expected to reduce 2019 share repurchases to an amount sufficient to offset stock-based compensation dilution. Risks include regulatory or shareholder approval, financing, integration, synergies, possible divestitures and a potential $150 million termination fee in specified circumstances.
- Environmental and legal exposure: WM was identified as a potentially responsible party at 75 EPA Superfund sites. The recorded liability for its estimated share of the San Jacinto waste pits remedy was $55 million, but ultimate responsibility remains uncertain. Using the high end of remediation cost ranges would increase aggregate potential liability by approximately $140 million over the $233 million recorded. The company stated it did not currently expect the disclosed proceedings to have a material adverse effect, while acknowledging estimates and outcomes could change.
- Other risks: Disclosed risks include pricing and volume competition, cost inflation and fuel prices, recycling-market and export restrictions, permitting and regulation, weather-related disruption, landfill and environmental obligations, labor and multiemployer pension exposure, cybersecurity, and the ability to refinance debt. Management said financial-assurance claims were not expected to materially affect results; tax audits were also not expected to have a material adverse effect.
Key facts for investors to verify
- Whether revenue and volume growth persist while operating margin recovers from 16.8%, given higher operating and corporate costs.
- The durability of free cash flow after capital spending, dividends, acquisitions and debt service; free cash flow excludes certain committed expenditures.
- Refinancing of near-term maturities and continued access to commercial paper and the revolver, particularly in light of the Advanced Disposal transaction.
- Recycling commodity prices, export demand and the effectiveness of customer fees in offsetting higher processing and contamination costs.
- Advanced Disposal closing conditions, financing, integration costs, synergies and any required divestitures.
- Changes in environmental-remediation estimates, including Superfund and San Jacinto exposure, and the adequacy of recorded reserves.