Waste Management, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; amounts in U.S. dollars unless noted.
Business context
Waste Management provides collection, transfer, disposal, recycling and resource-recovery services, primarily through its North American Solid Waste operations. It also operates landfill gas-to-energy and other environmental-services businesses.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $3.946B | $3.739B | $7.642B | $7.250B |
| Operating income | $696M | $715M | $1.317B | $1.323B |
| Operating margin | 17.6% | 19.1% | 17.2% | 18.2% |
| Net income attributable to WM | $381M | $499M | $728M | $895M |
| Diluted EPS | $0.89 | $1.15 | $1.70 | $2.06 |
| Operating cash flow | $1.010B | $975M | $1.900B | $1.784B |
| Free cash flow (non-GAAP) | $440M | $621M | $871M | $1.044B |
- Q2 operating expenses were $2.443B, or 61.9% of revenue, unchanged as a share of revenue year over year. SG&A was $391M, or 9.9% of revenue, versus $365M, or 9.8%.
- Solid Waste operating income increased to $921M from $831M in Q2. Consolidated operating income declined partly because Q2 2018 included $39M of divestiture gains.
- At June 30, cash and cash equivalents were $2.250B, versus $61M at December 31, 2018. Total debt was $12.739B, up from $10.026B; stockholders’ equity was $6.466B.
- The $2.75B revolving credit facility had no borrowings and $2.2B of unused capacity after letters of credit. The company reported $1.2B of debt maturing within 12 months, classifying $1.1B as long-term based on its intent and ability to refinance.
- For the first six months, capital expenditures were $1.049B, acquisitions were $440M, dividends paid were $440M, and stock repurchases were $244M.
Material changes versus prior comparable periods
- Q2 revenue rose 5.5%; management attributed growth mainly to higher collection and disposal volumes and yield, partly offset by lower recycling commodity prices. Internal revenue growth was 5.3%, including 4.0% from volume and 1.3% from average yield.
- Average recycling commodity prices at WM facilities were 33% lower in Q2 and 30% lower for the first half year over year. Recycling commodity revenue declined $41M in Q2 and $66M in the first half.
- Net income and EPS fell in part due to an $84M pretax loss on early extinguishment of debt. Prior-year results benefited from divestiture gains and a $33M tax benefit from audit settlements. Q1 2019 also included a nondeductible $52M impairment of a minority investment in waste-conversion technology.
- First-half operating cash flow increased $116M, but free cash flow fell $173M, primarily due to higher capital expenditures and lower divestiture proceeds.
- Debt increased following a May $4.0B senior-note issuance. Proceeds funded repayment of commercial paper and some high-coupon notes, and were intended in part for the pending Advanced Disposal acquisition.
Outlook, commentary and risks
- Management described favorable market conditions, strong collection and disposal performance, volume growth, and progress in passing higher recycling-processing costs to customers. Its stated strategy emphasizes customer experience, growth, operational efficiency and improvement of existing recycling operations.
- No specific full-year earnings, revenue or cash-flow guidance is provided in the supplied filing text. Management expects slower global demand for recycling commodities to continue through 2019, putting downward pressure on prices.
- WM agreed to acquire Advanced Disposal for $33.15 per share in cash, with an enterprise value of $4.9B including approximately $1.9B of target net debt. Closing was expected in Q1 2020, subject to customary conditions, including regulatory approvals. Certain newly issued notes require redemption at 101% plus accrued interest if the transaction is not completed by July 14, 2020, or the merger agreement is terminated earlier.
- Management cites risks including competition, economic and waste-volume changes, commodity prices, regulation and permits, labor, weather and climate events, technology and cybersecurity, acquisitions, litigation and environmental liabilities. Results are seasonal, with summer generally stronger, and severe weather can disrupt operations or create lower-margin cleanup work.
- Landfill and environmental remediation liabilities totaled $2.051B, including $241M for environmental remediation. The filing says the environmental liability could be approximately $145M higher using the high end of estimated ranges. WM was identified as a potentially responsible party at 75 Superfund sites; the recorded estimate for its San Jacinto waste-pits exposure was $56M, with ultimate liability potentially materially different.
- Management stated it did not expect known contingencies or current litigation to have a material adverse effect, while noting that estimates and outcomes remain uncertain. A Hawaii landfill stormwater matter was resolved in July 2019 with a $300,000 payment.
Most important facts for investors to verify
- Advanced Disposal closing status, regulatory conditions, financing use and any effect of the special mandatory redemption terms.
- Whether growth in collection and disposal volumes and pricing offsets operating-cost inflation and weaker recycling commodity markets.
- Capital spending trajectory and conversion of operating cash flow into free cash flow, noting that free cash flow is a non-GAAP measure and excludes items such as dividends and debt service.
- Debt levels, refinancing plans and liquidity after acquisition funding; the large cash balance at quarter-end partly reflects recent note proceeds.
- Changes in landfill, environmental remediation and self-insured claims estimates, including developments at San Jacinto and other Superfund sites.