UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12154
Waste Management, Inc.
(Exact name of registrant as specified in its charter)
Delaware
73-1309529
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1001 Fannin Street
Houston, Texas 77002
(Address of principal executive offices)
(713) 512-6200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
WM
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer ☐
Non-accelerated filer
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at July 22, 2019 was 424,232,181 (excluding treasury shares of 206,050,280).
PART I.
Item 1. Financial Statements.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Par Value Amounts)
June 30,
December 31,
2019
2018
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
2,250
61
Accounts receivable, net of allowance for doubtful accounts of $28 and $29, respectively
2,017
1,931
Other receivables
243
344
Parts and supplies
104
102
Other assets
222
207
Total current assets
4,836
2,645
Property and equipment, net of accumulated depreciation and amortization of $18,619 and $18,264, respectively
12,665
11,942
Goodwill
6,512
6,430
Other intangible assets, net
547
572
Restricted trust and escrow accounts
354
296
Investments in unconsolidated entities
333
406
739
359
Total assets
25,986
22,650
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
908
1,037
Accrued liabilities
1,296
1,117
Deferred revenues
526
522
Current portion of long-term debt
116
432
Total current liabilities
2,846
3,108
Long-term debt, less current portion
12,623
9,594
Deferred income taxes
1,289
1,291
Landfill and environmental remediation liabilities
1,900
1,828
Other liabilities
861
553
Total liabilities
19,519
16,374
Commitments and contingencies
Equity:
Waste Management, Inc. stockholders’ equity:
Common stock, $0.01 par value; 1,500,000,000 shares authorized; 630,282,461 shares issued
6
Additional paid-in capital
4,962
4,993
Retained earnings
10,088
9,797
Accumulated other comprehensive income (loss)
(22)
(87)
Treasury stock at cost, 206,481,746 and 206,299,352 shares, respectively
(8,568)
(8,434)
Total Waste Management, Inc. stockholders’ equity
6,466
6,275
Noncontrolling interests
1
Total equity
6,467
6,276
Total liabilities and equity
See Notes to Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except per Share Amounts)
Three Months Ended
Six Months Ended
Operating revenues
3,946
3,739
7,642
7,250
Costs and expenses:
Operating
2,443
2,313
4,741
4,497
Selling, general and administrative
391
365
800
738
Depreciation and amortization
409
384
775
731
Restructuring
—
3
(Gain) loss from divestitures, asset impairments and unusual items, net
7
(39)
(42)
3,250
3,024
6,325
5,927
Income from operations
696
715
1,317
1,323
Other income (expense):
Interest expense, net
(100)
(93)
(196)
(184)
Loss on early extinguishment of debt
(84)
Equity in net losses of unconsolidated entities
(16)
(13)
(25)
(20)
Other, net
(53)
(199)
(106)
(358)
(203)
Income before income taxes
497
609
959
1,120
Income tax expense
115
110
230
226
Consolidated net income
382
499
729
894
Less: Net income (loss) attributable to noncontrolling interests
(1)
Net income attributable to Waste Management, Inc.
381
728
895
Basic earnings per common share
0.90
1.16
1.71
2.07
Diluted earnings per common share
0.89
1.15
1.70
2.06
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
Other comprehensive income (loss), net of tax:
Derivative instruments, net
4
Available-for-sale securities, net
9
Foreign currency translation adjustments
25
(23)
53
(55)
Post-retirement benefit obligations, net
Other comprehensive income (loss), net of tax
31
(21)
65
(52)
Comprehensive income
413
478
794
842
Less: Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income attributable to Waste Management, Inc.
412
793
843
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Deferred income tax expense (benefit)
(12)
Interest accretion on landfill liabilities
47
Provision for bad debts
19
22
Equity-based compensation expense
43
41
Net gain on disposal of assets
(5)
(10)
(Gain) loss from divestitures, asset impairments and other, net
78
Equity in net losses of unconsolidated entities, net of dividends
20
84
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Receivables
202
Other current assets
(9)
(2)
Accounts payable and accrued liabilities
127
Deferred revenues and other liabilities
(28)
(120)
Net cash provided by operating activities
1,784
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired
(440)
(263)
Capital expenditures
(1,049)
(836)
Proceeds from divestitures of businesses and other assets (net of cash divested)
96
(96)
(7)
Net cash used in investing activities
(1,565)
(1,010)
Cash flows from financing activities:
New borrowings
3,971
83
Debt repayments
(385)
Premiums paid on early extinguishment of debt
Net commercial paper borrowings (repayments)
(1,001)
443
Common stock repurchase program
(248)
(550)
Cash dividends
(406)
Exercise of common stock options
45
33
Tax payments associated with equity-based compensation transactions
(30)
(6)
(26)
Net cash provided by (used in) financing activities
1,822
(647)
Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents
2,159
126
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period
183
293
Cash, cash equivalents and restricted cash and cash equivalents at end of period
2,342
419
Reconciliation of cash, cash equivalents and restricted cash and cash equivalents at end of period:
Restricted cash and cash equivalents included in other current assets
18
70
Restricted cash and cash equivalents included in restricted trust and escrow accounts
74
302
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In Millions, Except Shares in Thousands)
Waste Management, Inc. Stockholders’ Equity
Accumulated
Additional
Other
Common Stock
Paid-In
Retained
Comprehensive
Treasury Stock
Noncontrolling
Total
Shares
Amounts
Capital
Earnings
Income (Loss)
Interests
Three Months Ended June 30:
Balance, March 31, 2019
6,417
630,282
4,978
9,924
(205,556)
(8,440)
Cash dividends declared of $0.5125 per common share
(217)
Equity-based compensation transactions, net
36
387
16
(180)
(36)
(1,314)
(144)
Balance, June 30, 2019
(206,482)
Balance, March 31, 2018
6,065
4,916
8,867
(198,511)
(7,717)
21
Cash dividends declared of $0.465 per common share
(200)
24
141
5
(292)
(3,537)
Divestiture of noncontrolling interest
(19)
Balance, June 30, 2018
6,056
4,935
9,166
(49)
(201,906)
(8,004)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ─ (Continued)
Six Months Ended June 30:
Balance, December 31, 2018
(206,299)
Cash dividends declared of $1.025 per common share
82
1,808
(244)
(1,993)
(208)
Balance, December 31, 2017
6,042
4,933
8,588
8
(196,964)
(7,516)
23
Adoption of new accounting standards
80
85
Cash dividends declared of $0.93 per common share
68
1,624
62
(6,568)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements presented in this report represent the consolidation of Waste Management, Inc., a Delaware corporation; its wholly-owned and majority-owned subsidiaries; and certain variable interest entities for which Waste Management, Inc. or its subsidiaries are the primary beneficiaries as described in Note 14. Waste Management, Inc. is a holding company and all operations are conducted by its subsidiaries. When the terms “the Company,” “we,” “us” or “our” are used in this document, those terms refer to Waste Management, Inc., its consolidated subsidiaries and consolidated variable interest entities. When we use the term “WM,” we are referring only to Waste Management, Inc., the parent holding company.
We are North America’s leading provider of comprehensive waste management environmental services. We partner with our residential, commercial, industrial and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in the United States (“U.S.”).
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. We also provide additional services that are not managed through our Solid Waste business, which are presented in this report as “Other.” Additional information related to our segments is included in Note 8.
The Condensed Consolidated Financial Statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 are unaudited. In the opinion of management, these financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows, and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine, and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments and reserves associated with our insured and self-insured claims. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
Revenue Recognition
We generally recognize revenue as services are performed or products are delivered. For example, revenue typically is recognized as waste is collected, tons are received at our landfills or transfer stations, or recycling commodities are collected or delivered as product. We bill for certain services prior to performance. Such services include, among others, certain commercial and residential contracts and equipment rentals. These advance billings are included in deferred revenues and recognized as revenue in the period service is provided. Substantially all our deferred revenues during the reported periods are realized as revenues within one to three months when the related services are performed.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contract Acquisition Costs
Our incremental direct costs of obtaining a contract, which consist primarily of sales incentives, are generally deferred and amortized to selling, general and administrative expense over the estimated life of the relevant customer relationship, ranging from 5 to 13 years. Contract acquisition costs that are paid to the customer are deferred and amortized as a reduction in revenue over the contract life. Our contract acquisition costs are classified as current or noncurrent based on the timing of when we expect to recognize amortization and are included in other assets in our Condensed Consolidated Balance Sheet.
As of June 30, 2019 and December 31, 2018, we had $149 million and $145 million, respectively, of deferred contract costs, of which $113 million and $109 million, respectively, was related to deferred sales incentives. During the three and six months ended June 30, 2019, we amortized $6 million and $11 million of sales incentives to selling, general and administrative expense, and $5 million and $11 million of other contract acquisition costs as a reduction in revenue, respectively. During the three and six months ended June 30, 2018, we amortized $5 million and $11 million of sales incentives to selling, general and administrative expense, and $9 million and $19 million of other contract acquisition costs as a reduction in revenue, respectively.
Adoption of New Accounting Standard
Leases — In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 associated with lease accounting. There were further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018, ASU 2018-11 in July 2018 and ASU 2018-20 in December 2018. On January 1, 2019, we adopted these ASUs using the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption. Accordingly, our financial statements for the reported periods after January 1, 2019 are presented under this amended guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historical accounting guidance.
We elected to apply the following package of practical expedients on a consistent basis permitting entities not to reassess: (i) whether any expired or existing contracts are or contain a lease; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance. In addition, we applied (i) the practical expedient for land easements, which allows the Company to not apply the lease standard to certain existing land easements at transition and (ii) the practical expedient to include both the lease and non-lease components as a single component and account for it as a lease.
The impact of adopting the amended guidance primarily relates to the recognition of lease assets and lease liabilities on the balance sheet for all leases previously classified as operating leases. We recognized $385 million of right-of-use assets and $385 million of related lease liabilities as of January 1, 2019 for our contracts that are classified as operating leases. Leases with an initial term of 12 months, which are not expected to be renewed beyond one year, are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. Our accounting for financing leases, which were formerly referred to as capital leases, remained substantially unchanged. There were no other material impacts on our consolidated financial statements. See Note 4 for additional information and disclosures related to our adoption of this amended guidance.
New Accounting Standard Pending Adoption
Financial Instrument Credit Losses — In June 2016, the FASB issued ASU 2016-13 associated with the measurement of credit losses on financial instruments. The amended guidance replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates.
The amended guidance is effective for the Company on January 1, 2020. We are assessing the provisions of this amended guidance and evaluating the impact on our consolidated financial statements.
Reclassifications
When necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation and are not material to our consolidated financial statements.
2. Landfill and Environmental Remediation Liabilities
Liabilities for landfill and environmental remediation costs are presented in the table below (in millions):
June 30, 2019
December 31, 2018
Environmental
Landfill
Remediation
Current (in accrued liabilities)
125
26
151
143
169
Long-term
1,685
215
1,617
211
1,810
241
2,051
1,760
237
1,997
The changes to landfill and environmental remediation liabilities for the six months ended June 30, 2019 are reflected in the table below (in millions):
Obligations incurred and capitalized
Obligations settled
(41)
Interest accretion
Revisions in estimates and interest rate assumptions (a)
10
Acquisitions, divestitures and other adjustments
At several of our landfills, we provide financial assurance by depositing cash into restricted trust funds or escrow accounts for purposes of settling our final capping, closure, post-closure and environmental remediation obligations. Generally, these trust funds are established to comply with statutory requirements and operating agreements. See Note 14 for additional information related to these trusts.
3. Debt
The following table summarizes the major components of debt as of each balance sheet date (in millions) and provides the maturities and interest rate ranges of each major category as of June 30, 2019:
$2.75 billion revolving credit facility (weighted average interest rate of 3.1% as of December 31, 2018)
11
Commercial paper program (weighted average interest rate of 2.9% as of December 31, 2018)
990
Senior notes, maturing through 2049, interest rates ranging from 2.4% to 7.75% (weighted average interest rate of 3.9% as of June 30, 2019 and 4.3% as of December 31, 2018)
9,965
6,222
Tax-exempt bonds, maturing through 2048, fixed and variable interest rates ranging from 1.35% to 4.3% (weighted average interest rate of 2.4% as of June 30, 2019 and 2.35% as of December 31, 2018)
2,294
2,388
Financing leases and other, maturing through 2056, interest rates up to 9%
563
467
Debt issuance costs, discounts and other
(83)
12,739
10,026
Debt Classification
As of June 30, 2019, we had $1.2 billion of debt maturing within the next 12 months, including (i) $600 million of 4.75% senior notes that mature in June 2020; (ii) $524 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities, and (iii) $116 million of other debt with scheduled maturities within the next 12 months, including $42 million of tax-exempt bonds. As of June 30, 2019, we have classified $1.1 billion of debt maturing in the next 12 months as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $2.75 billion long-term U.S. and Canadian revolving credit facility (“$2.75 billion revolving credit facility”), as discussed below. The remaining $116 million is classified as current obligations.
As of June 30, 2019, we also have $268 million of variable-rate tax-exempt bonds that are supported by letters of credit under our $2.75 billion revolving credit facility. The interest rates on our variable-rate tax-exempt bonds are generally reset on either a daily or weekly basis through a remarketing process. All recent tax-exempt bond remarketings have successfully placed Company bonds with investors at market-driven rates and we currently expect future remarketings to be successful. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the availability under our $2.75 billion revolving credit facility to fund these bonds until they are remarketed successfully. Accordingly, we have also classified these borrowings as long-term in our Condensed Consolidated Balance Sheet as of June 30, 2019.
Access to and Utilization of Credit Facilities and Commercial Paper Program
$2.75 Billion Revolving Credit Facility — Our $2.75 billion revolving credit facility provides us with credit capacity to be used for either cash borrowings or to support letters of credit or commercial paper. The rates we pay for outstanding U.S. or Canadian loans are generally based on LIBOR or CDOR, respectively, plus a spread depending on the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. As of June 30, 2019, we had no borrowings outstanding under this facility. We had $512 million of letters of credit issued and no outstanding borrowings under our commercial paper program, both supported by this facility, leaving unused and available credit capacity of $2.2 billion as
of June 30, 2019. WM Holdings, a wholly-owned subsidiary of WM, guarantees all of the obligations under the $2.75 billion revolving credit facility.
Commercial Paper Program — We have a commercial paper program that enables us to borrow funds for up to 397 days at competitive interest rates. The rates we pay for outstanding borrowings are based on the term of the notes. The commercial paper program is fully supported by our $2.75 billion revolving credit facility. As of June 30, 2019, we had no outstanding borrowings under our commercial paper program.
Other Letter of Credit Facilities — As of June 30, 2019, we utilized $542 million of other letter of credit facilities, which are both committed and uncommitted, with terms maturing through December 2020.
Debt Borrowings and Repayments
$2.75 Billion Revolving Credit Facility — During the six months ended June 30, 2019, we repaid C$15 million, or $11 million, of Canadian borrowings under our $2.75 billion revolving credit facility with available cash.
Senior Notes — In May 2019, WM issued $4.0 billion of senior notes consisting of:
The net proceeds from these debt issuances were $3.97 billion. Concurrently, we used $344 million of the net proceeds from the newly issued senior notes to retire $257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired, $84 million of related premiums, which are classified as loss on early extinguishment of debt in our Condensed Consolidated Statement of Operations, and $3 million of accrued interest. The principal amount of senior notes redeemed within each series was as follows:
We used a portion of the proceeds to repay our commercial paper borrowings as discussed further below. We intend to use the remaining net proceeds to pay a portion of the consideration related to our pending acquisition of Advanced Disposal Services, Inc. (“Advanced Disposal”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) which is discussed further in Note 9, and for general corporate purposes. The newly-issued senior notes due 2024, 2026, 2029 and 2039 include a special mandatory redemption feature, which provides that if the acquisition of Advanced Disposal is not completed on or prior to July 14, 2020, or if, prior to such date, the Merger Agreement is terminated for any reason, we will be required to redeem all of the outstanding notes equal to 101% of the aggregate principal amounts of such notes, plus accrued but unpaid interest on the principal amount of such notes.
Commercial Paper Program — During the six months ended June 30, 2019, we made net cash repayments of $1.0 billion (net of the related discount on issuance). During the first quarter of 2019, we had net cash borrowings of $357 million (net of the related discount on issuance), which were primarily used to support our acquisition of Petro Waste Environmental LP (“Petro Waste”), which is discussed further in Note 9, and for general corporate purposes. In the second quarter of 2019, we repaid the outstanding balance with proceeds from the May 2019 issuance of senior notes discussed above.
Tax-Exempt Bonds — During the six months ended June 30, 2019, we repaid $94 million of our tax-exempt bonds with available cash.
Financing Leases and Other — The change during the six months ended June 30, 2019, is due to an increase of $119 million primarily related to non-cash financing arrangements offset, in part, by $23 million of net cash repayments of debt at maturity.
4. Leases
Our operating lease activities primarily consist of leases for real estate, landfills and operating equipment. Our financing lease activities primarily consist of leases for operating equipment, railcars and landfill assets. Leases with an initial term of 12 months or less, which are not expected to be renewed beyond one year, are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms generally ranging from one to 10 years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain of our lease agreements include rental payments based on usage and other lease agreements include rental payments adjusted periodically for inflation; these payments are treated as variable lease payments. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
When the implicit interest rate is not readily available for our operating leases, we discount future cash flows of the remaining lease payments using the current interest rate that would be paid to borrow on collateralized debt over a similar term, or incremental borrowing rate, at the commencement date.
Supplemental balance sheet information for our leases is as follows (in millions):
Leases
Classification
Assets
Long-term:
378
Financing
Property and equipment, net of accumulated depreciation and amortization
349
Total lease assets
727
Liabilities
Current:
89
300
Total lease liabilities
718
12
Our operating lease expense for the three and six months ended June 30, 2019 was $31 million and $59 million, respectively, and is included in operating and selling, general and administrative expenses in our Condensed Consolidated Statement of Operations. Our financing lease expense for the three and six months ended June 30, 2019 was $11 million and $25 million, respectively, and is included in depreciation and amortization expense and interest expense, net in our Condensed Consolidated Statement of Operations.
Minimum contractual obligations for our leases (undiscounted) as of June 30, 2019 are as follows (in millions):
2019 (excluding six months ended June 30, 2019)
2020
87
42
2021
55
40
2022
39
2023
37
38
Thereafter
268
235
Total lease payments
537
416
Less: interest
(148)
Discounted lease liabilities
389
329
As of June 30, 2019, we entered into leases, primarily for real estate, that have not yet commenced with future lease payments of $167 million that are not reflected in the table above. These leases will commence through 2020 with non-cancelable lease terms up to 15 years.
Cash paid for our operating and financing leases was $44 million and $17 million, respectively, for the six months ended June 30, 2019. Right-of-use assets obtained in exchange for lease obligations for our operating and financing leases were $32 million and $110 million, respectively, for the six months ended June 30, 2019.
As of June 30, 2019, the weighted average remaining lease terms of our operating and financing leases were 16 years and 15 years, respectively. The weighted average discount rates used to determine the lease liabilities as of June 30, 2019 for our operating and financing leases were 3.79% and 4.16%, respectively.
5. Income Taxes
Our income tax expense was $115 million and $230 million for the three and six months ended June 30, 2019, respectively, compared to $110 million and $226 million for the three and six months ended June 30, 2018, respectively. Our effective income tax rate was 23.3% and 24.0% for the three and six months ended June 30, 2019, respectively, compared with 18.1% and 20.2% for the three and six months ended June 30, 2018, respectively. We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant. The increase in our effective income tax rate when comparing the three and six months ended June 30, 2019 with the prior year periods is due to a $33 million income tax benefit related to the settlement of various tax audits during 2018 and a $52 million impairment charge in the first quarter of 2019 which was not deductible for tax purposes.
The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2019 were primarily due to the unfavorable impact of state and local income taxes offset, in part, by the favorable impact of federal tax credits and excess tax benefits related to equity-based compensation. The six months ended June 30, 2019 was also unfavorably impacted by an impairment as discussed below.
13
The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2018 were primarily due to the favorable impact of tax audit settlements and federal tax credits offset, in part, by the unfavorable impact of state and local income taxes. The six months ended June 30, 2018 was also favorably impacted by excess tax benefits related to equity-based compensation.
Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties and a refined coal facility. We support the operations of these entities in exchange for a pro-rata share of the tax credits they generate. The low-income housing investments and the coal facility’s refinement processes qualify for federal tax credits that we expect to realize through 2030 under Sections 42 and 45D, and through the end of 2019 under Section 45, respectively, of the Internal Revenue Code. We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities, in our Condensed Consolidated Statements of Operations.
During the three and six months ended June 30, 2019, we recognized $12 million and $21 million of net losses and a reduction in our income tax expense of $18 million and $33 million, respectively, primarily due to tax credits realized from these investments. In addition, during the three and six months ended June 30, 2019, we recognized interest expense of $2 million and $4 million, respectively, associated with our investments in low-income housing properties.
During the three and six months ended June 30, 2018, we recognized $6 million and $12 million of net losses and a reduction in our income tax expense of $12 million and $22 million, respectively, primarily due to tax credits realized from these investments. Interest expense associated with our investments in low-income housing properties was not material for the three and six months ended June 30, 2018.
See Note 14 for additional information related to these unconsolidated variable interest entities.
Tax Audit Settlements — We are currently under audit by the IRS and various state and local taxing authorities and our audits are in various stages of completion. In June 2018, we settled various tax audits, which resulted in a reduction in our income tax expense of $33 million.
Equity-Based Compensation — During the three and six months ended June 30, 2019, we recognized a reduction in income tax expense of $5 million and $17 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards compared with $1 million and $12 million, respectively, for the comparable prior year periods.
Tax Implications of Impairment — We recognized a $52 million impairment charge in the first quarter of 2019 which was not deductible for tax purposes. See Note 10 for additional information.
14
6. Earnings Per Share
Basic and diluted earnings per share were computed using the following common share data (shares in millions):
Number of common shares outstanding at end of period
423.8
428.4
Effect of using weighted average common shares outstanding
1.0
1.5
0.8
3.2
Weighted average basic common shares outstanding
424.8
429.9
424.6
431.6
Dilutive effect of equity-based compensation awards and other contingently issuable shares
2.7
2.4
2.6
2.5
Weighted average diluted common shares outstanding
427.5
432.3
427.2
434.1
Potentially issuable shares
7.2
8.0
Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding
1.1
1.9
7. Commitments and Contingencies
Financial Instruments — We have obtained letters of credit, surety bonds and insurance policies and have established trust funds and issued financial guarantees to support tax-exempt bonds, contracts, performance of landfill final capping, closure and post-closure requirements, environmental remediation and other obligations. Letters of credit generally are supported by our $2.75 billion revolving credit facility and other credit facilities established for that purpose. These facilities are discussed further in Note 3. Surety bonds and insurance policies are supported by (i) a diverse group of third-party surety and insurance companies; (ii) an entity in which we have a noncontrolling financial interest or (iii) a wholly-owned insurance captive, the sole business of which is to issue surety bonds and/or insurance policies on our behalf.
Management does not expect that any claims against or draws on these instruments would have a material adverse effect on our financial condition, results of operations or cash flows. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, we continue to evaluate various options to access cost-effective sources of financial assurance.
Insurance — We carry insurance coverage for protection of our assets and operations from certain risks including general liability, automobile liability, workers’ compensation, real and personal property, directors’ and officers’ liability, pollution legal liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance claims is generally limited to the per incident deductible under the related insurance policy. Our exposure could increase if our insurers are unable to meet their commitments on a timely basis.
We have retained a significant portion of the risks related to our general liability, automobile liability and workers’ compensation claims programs. “General liability” refers to the self-insured portion of specific third-party claims made against us that may be covered under our commercial General Liability Insurance Policy. For our self-insured portions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation or internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from such valuations and estimates. We use a wholly-owned insurance captive to insure the deductibles for our general liability, automobile liability and workers’ compensation claims programs.
We do not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on our financial condition, results of operations or cash flows.
15
Guarantees — In the ordinary course of our business, WM and WM Holdings enter into guarantee agreements associated with their subsidiaries’ operations. Additionally, WM and WM Holdings have each guaranteed all of the senior debt of the other entity. No additional liabilities have been recorded for these intercompany guarantees because all of the underlying obligations are reflected in our Condensed Consolidated Balance Sheets. See Note 15 for additional information.
As of June 30, 2019, we have guaranteed the obligations and certain performance requirements of third parties in connection with both consolidated and unconsolidated entities, including (i) guarantees to cover certain market value losses for approximately 850 homeowners’ properties adjacent to or near 18 of our landfills and (ii) guarantees totaling $73 million for performance obligations of our Wheelabrator business, divested in 2014. In February 2019, Wheelabrator was acquired by a third party, at which time we agreed to continue to provide such guarantees through July 2019. We have also agreed to indemnify certain third-party purchasers against liabilities associated with divested operations prior to such sale. Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets or other market conditions are achieved post-closing, and we have recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition. We do not believe that these contingent obligations will have a material adverse effect on the Company’s financial condition, results of operations or cash flows, and we do not expect the financial impact of operational and financial performance guarantees to materially exceed the recorded fair value.
Environmental Matters — A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection. The nature of our operations, particularly with respect to the construction, operation and maintenance of our landfills, subjects us to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by our operations, or for damage caused by conditions that existed before we acquired a site. In addition to remediation activity required by state or local authorities, such liabilities include potentially responsible party (“PRP”) investigations. The costs associated with these liabilities can include settlements, certain legal and consultant fees, as well as incremental internal and external costs directly associated with site investigation and clean-up.
Estimating our degree of responsibility for remediation is inherently difficult. We recognize and accrue for an estimated remediation liability when we determine that such liability is both probable and reasonably estimable. Determining the method and ultimate cost of remediation requires that a number of assumptions be made. There can sometimes be a range of reasonable estimates of the costs associated with the likely site remediation alternatives identified in the environmental impact investigation. In these cases, we use the amount within the range that is our best estimate. If no amount within a range appears to be a better estimate than any other, we use the amount that is the low end of such range. If we used the high ends of such ranges, our aggregate potential liability would be approximately $145 million higher than the $241 million recorded in the Condensed Consolidated Balance Sheet as of June 30, 2019. Our ultimate responsibility may differ materially from current estimates. It is possible that technological, regulatory or enforcement developments, the results of environmental studies, the inability to identify other PRPs, the inability of other PRPs to contribute to the settlements of such liabilities, or other factors could require us to record additional liabilities. Our ongoing review of our remediation liabilities, in light of relevant internal and external facts and circumstances, could result in revisions to our accruals that could cause upward or downward adjustments to our balance sheet and income from operations. These adjustments could be material in any given period.
As of June 30, 2019, we have been notified by the government that we are a PRP in connection with 75 locations listed on the Environmental Protection Agency’s (“EPA’s”) Superfund National Priorities List (“NPL”). Of the 75 sites at which claims have been made against us, 15 are sites we own. Each of the NPL sites we own was initially developed by others as a landfill disposal facility. At each of these facilities, we are working in conjunction with the government to evaluate or remediate identified site problems, and we have either agreed with other legally liable parties on an arrangement for sharing the costs of remediation or are working toward a cost-sharing agreement. We generally expect to receive any amounts due from other participating parties at or near the time that we make the remedial expenditures. The other 60 NPL
sites, which we do not own, are at various procedural stages under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, known as CERCLA or Superfund.
The majority of proceedings involving NPL sites that we do not own are based on allegations that certain of our subsidiaries (or their predecessors) transported hazardous substances to the sites, often prior to our acquisition of these subsidiaries. CERCLA generally provides for liability for those parties owning, operating, transporting to or disposing at the sites. Proceedings arising under Superfund typically involve numerous waste generators and other waste transportation and disposal companies and seek to allocate or recover costs associated with site investigation and remediation, which costs could be substantial and could have a material adverse effect on our consolidated financial statements. At some of the sites at which we have been identified as a PRP, our liability is well defined as a consequence of a governmental decision and an agreement among liable parties as to the share each will pay for implementing that remedy. At other sites, where no remedy has been selected or the liable parties have been unable to agree on an appropriate allocation, our future costs are uncertain.
On October 11, 2017, the EPA issued its Record of Decision (“ROD”) with respect to the previously proposed remediation plan for the San Jacinto waste pits in Harris County, Texas. McGinnes Industrial Maintenance Corporation (“MIMC”), an indirect wholly-owned subsidiary of WM, operated some of the waste pits from 1965 to 1966 and has been named as a site PRP. In 1998, WM acquired the stock of the parent entity of MIMC. MIMC has been working with the EPA and other named PRPs as the process of addressing the site proceeds. On April 9, 2018, MIMC and International Paper Company entered into an Administrative Order on Consent agreement with the EPA to develop a remedial design for the EPA’s selected remedy for the site. Allocation of responsibility among the PRPs for the selected remedy has not been established. As of June 30, 2019 and December 31, 2018, the recorded liability for MIMC’s estimated potential share of the EPA’s selected remedy and related costs was $56 million and $55 million, respectively. MIMC’s ultimate liability could be materially different from current estimates.
Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings, or such proceedings are known to be contemplated, unless we reasonably believe that the matter will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $100,000. The following matters are disclosed in accordance with that requirement. We do not currently believe that the eventual outcome of any such matters, individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
On July 10, 2013, the EPA issued a Notice of Violation ("NOV") to Waste Management of Wisconsin, Inc., an indirect wholly-owned subsidiary of WM, alleging violations of the Resource Conservation Recovery Act concerning acceptance of certain waste that was not permitted to be disposed of at the Metro Recycling & Disposal Facility in Franklin, Wisconsin. The parties are exchanging information and working to resolve the NOV.
The Hawaii Department of Health and the EPA have asserted civil penalty claims against Waste Management of Hawaii, Inc. (“WMHI”), an indirect wholly-owned subsidiary of WM, based on stormwater discharges at the Waimanalo Gulch Sanitary Landfill following two major rainstorms in December 2010 and January 2011 and alleged violations of stormwater permit requirements prior to and after the storms. WMHI operates the landfill for the City and County of Honolulu. On July 3, 2019, this matter was resolved through a consent decree, and WMHI subsequently made payment of $300,000.
From time to time, we are also named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of having owned, operated or transported waste to a disposal facility that is alleged to have contaminated the environment or, in certain cases, on the basis of having conducted environmental remediation activities at sites. Some of the lawsuits may seek to have us pay the costs of monitoring of allegedly affected sites and health care examinations of allegedly affected persons for a substantial period of time even where no actual damage is proven. While we believe we have meritorious defenses to these lawsuits, the ultimate resolution is often substantially
17
uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs’ circumstances, and the potential contribution or indemnification obligations of co-defendants or other third parties, among other factors. Additionally, we often enter into agreements with landowners imposing obligations on us to meet certain regulatory or contractual conditions upon site closure or upon termination of the agreements. Compliance with these agreements inherently involves subjective determinations and may result in disputes, including litigation.
Litigation — As a large company with operations across the U.S. and Canada, we are subject to various proceedings, lawsuits, disputes and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions that have been filed against us, and that may be filed against us in the future, include personal injury, property damage, commercial, customer, and employment-related claims, including purported state and national class action lawsuits related to: alleged environmental contamination, including releases of hazardous material and odors; sales and marketing practices, customer service agreements and prices and fees; and federal and state wage and hour and other laws. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered, in part, by insurance. We currently do not believe that the eventual outcome of any such actions will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
WM’s charter and bylaws provide that WM shall indemnify against all liabilities and expenses, and upon request shall advance expenses to any person, who is subject to a pending or threatened proceeding because such person is or was a director or officer of the Company. Such indemnification is required to the maximum extent permitted under Delaware law. Accordingly, the director or officer must execute an undertaking to reimburse the Company for any fees advanced if it is later determined that the director or officer was not permitted to have such fees advanced under Delaware law. Additionally, the Company has direct contractual obligations to provide indemnification to each of the members of WM’s Board of Directors and each of WM’s executive officers. The Company may incur substantial expenses in connection with the fulfillment of its advancement of costs and indemnification obligations in connection with actions or proceedings that may be brought against its former or current officers, directors and employees.
Multiemployer Defined Benefit Pension Plans — About 20% of our workforce is covered by collective bargaining agreements with various local unions across the U.S. and Canada. As a result of some of these agreements, certain of our subsidiaries are participating employers in a number of trustee-managed multiemployer defined benefit pension plans (“Multiemployer Pension Plans”) for the covered employees. In connection with our ongoing renegotiation of various collective bargaining agreements, we may discuss and negotiate for the complete or partial withdrawal from one or more of these Multiemployer Pension Plans. A complete or partial withdrawal from a Multiemployer Pension Plan may also occur if employees covered by a collective bargaining agreement vote to decertify a union from continuing to represent them. Any other circumstance resulting in a decline in Company contributions to a Multiemployer Pension Plan through a reduction in the labor force, whether through attrition over time or through a business event (such as the discontinuation or nonrenewal of a customer contract, the decertification of a union, or relocation, reduction or discontinuance of certain operations) may also trigger a complete or partial withdrawal from one or more of these pension plans.
We do not believe that any future liability relating to our past or current participation in, or withdrawals from, the Multiemployer Pension Plans to which we contribute will have a material adverse effect on our business, financial condition or liquidity. However, liability for future withdrawals could have a material adverse effect on our results of operations or cash flows for a particular reporting period, depending on the number of employees withdrawn and the financial condition of the Multiemployer Pension Plan(s) at the time of such withdrawal(s).
Tax Matters — We participate in the IRS’s Compliance Assurance Process, which means we work with the IRS throughout the year towards resolving any material issues prior to the filing of our annual tax return. Any unresolved issues as of the tax return filing date are subject to routine examination procedures. We are currently in the examination phase of IRS audits for the 2017 through 2019 tax years and expect these audits to be completed within the next 21 months. We are
also currently undergoing audits by various state and local jurisdictions for tax years that date back to 2013. Additionally, we are under audit by the Canada Revenue Agency for the 2014 tax year. We maintain a liability for uncertain tax positions, the balance of which management believes is adequate. Results of audit assessments by taxing authorities are not currently expected to have a material adverse effect on our financial condition, results of operations or cash flows.
8. Segment and Related Information
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. The 17 Areas constitute our operating segments and we have evaluated the aggregation criteria and concluded that, based on the similarities between our Areas, including the fact that our Solid Waste business is homogenous across geographies with the same services offered across the Areas, aggregation of our Areas is appropriate for purposes of presenting our reportable segments. Accordingly, we have aggregated our 17 Areas into three tiers that we believe have similar economic characteristics and future prospects based in large part on a review of the Areas’ income from operations margins. The economic variations experienced by our Areas are attributable to a variety of factors, including regulatory environment of the Area; economic environment of the Area, including level of commercial and industrial activity; population density; service offering mix and disposal logistics, with no one factor being singularly determinative of an Area’s current or future economic performance.
Tier 1 is comprised of our operations across the Southern U.S., with the exception of Southern California and the Florida peninsula, and also includes the New England states, the tri-state area of Michigan, Indiana and Ohio, and Western Canada. Tier 2 includes Southern California, Eastern Canada, Wisconsin and Minnesota. Tier 3 encompasses all the remaining operations including the Pacific Northwest and Northern California, the Mid-Atlantic region of the U.S., the Florida peninsula, Illinois and Missouri.
The operating segments not evaluated and overseen through the 17 Areas are presented herein as “Other” as these operating segments do not meet the criteria to be aggregated with other operating segments and do not meet the quantitative criteria to be separately reported.
Summarized financial information concerning our reportable segments is shown in the following table (in millions):
Gross
Intercompany
Net
Income
from
Revenues
Operations
Solid Waste:
Tier 1
1,608
(298)
1,310
Tier 2
703
(134)
569
148
Tier 3
1,888
(371)
1,517
341
Solid Waste
4,199
(803)
3,396
921
Other (a)
580
550
(60)
4,779
(833)
Corporate and Other
(165)
1,485
(269)
1,216
395
663
(123)
540
1,776
(350)
1,426
295
3,924
(742)
3,182
831
613
(56)
557
4,537
(798)
844
(129)
3,094
(569)
2,525
826
1,346
(255)
1,091
284
3,624
(705)
2,919
654
8,064
(1,529)
6,535
1,764
1,168
(61)
1,107
(88)
9,232
(1,590)
1,676
(359)
2,858
(510)
2,348
760
1,276
(234)
1,042
263
3,409
(659)
2,750
586
7,543
(1,403)
6,140
1,609
1,220
(110)
1,110
8,763
(1,513)
1,599
(276)
The mix of operating revenues from our major lines of business are as follows (in millions):
Commercial
1,052
986
2,078
1,941
Residential
655
632
1,295
1,246
Industrial
744
708
1,424
1,345
122
231
216
Total collection
2,573
2,441
5,028
4,748
1,023
915
1,887
1,720
Transfer
474
437
886
812
Recycling
264
305
555
617
445
439
876
866
Intercompany (b)
Fluctuations in our operating results may be caused by many factors, including period-to-period changes in the relative contribution of revenue by each line of business, changes in commodity prices and general economic conditions. In addition, our revenues and income from operations typically reflect seasonal patterns. Our operating revenues tend to be somewhat higher in summer months, primarily due to the higher construction and demolition waste volumes. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.
Service disruptions caused by severe storms, extended periods of inclement weather or climate extremes resulting from climate change can significantly affect the operating results of the Areas affected. On the other hand, certain destructive weather and climate conditions, such as wildfires in the Western U.S. and hurricanes that most often impact our operations in the Southern and Eastern U.S. during the second half of the year, can increase our revenues in the Areas affected. While weather-related and other event driven special projects can boost revenues through additional work for a limited time, as a result of significant start-up costs and other factors, such revenue can generate earnings at comparatively lower margins.
9. Acquisitions
Pending Acquisition
On April 14, 2019, we entered into the Merger Agreement to acquire all outstanding shares of Advanced Disposal for $33.15 per share in cash, representing a total enterprise value of $4.9 billion when including approximately $1.9 billion of Advanced Disposal’s net debt. Advanced Disposal’s solid waste network includes 95 collection operations, 73 transfer stations, 41 owned or operated landfills and 22 owned or operated recycling facilities. The transaction is expected to close during the first quarter of 2020, subject to the satisfaction of customary closing conditions, including regulatory approvals. On June 28, 2019, Advanced Disposal announced that 85.9% of the outstanding shares of its common stock entitled to vote were voted in favor of the proposal to adopt the Merger Agreement at a special meeting of stockholders held that day.
Acquisition
Petro Waste — On March 8, 2019, Waste Management Energy Services Holdings, LLC, an indirect wholly-owned subsidiary of WM, acquired Petro Waste. The acquired business provides comprehensive oilfield environmental services and solid waste disposal facilities in the Permian Basin and The Eagle Ford Shale. The acquisition is intended to expand our offerings and enhance the quality of solid waste disposal services for oil and gas exploration and production operations in Texas. Our purchase price is expected to be primarily allocated to seven landfills, which are included in our property and equipment. The allocation of purchase price for Petro Waste is preliminary and is subject to standard post-closing adjustments. The acquisition was funded with borrowings under our commercial paper program. For the three and six months ended June 30, 2019, the impact of the acquisition was not material to our consolidated financial statements.
10. Asset Impairments and Unusual Items
(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
During the six months ended June 30, 2018, we sold certain ancillary operations resulting in net gains of $42 million.
Other, Net
During the first quarter of 2019, we recognized a $52 million impairment charge related to our minority-owned investment in a waste conversion technology business. We wrote down our investment to its estimated fair value as the result of recent third-party investor’s transactions in these securities. The fair value of our investment was not readily determinable; thus, we determined the fair value utilizing a combination of quoted price inputs for the equity in our investment (Level 2) and certain management assumptions pertaining to investment value (Level 3).
11. Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, which is included as a component of Waste Management, Inc. stockholders’ equity, are as follows (in millions, with amounts in parentheses representing decreases to accumulated other comprehensive income):
Foreign
Post-
Available-
Currency
Retirement
Derivative
for-Sale
Translation
Benefit
Instruments
Securities
Adjustments
Obligations
(32)
(76)
Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $0, $2, $0 and $0, respectively
Amounts reclassified from accumulated other comprehensive (income) loss, net of tax (expense) benefit of $1, $0, $0 and $0, respectively
Net current period other comprehensive income (loss)
32
(3)
We had no active derivatives outstanding during the reported period. Amounts reclassified out of accumulated other comprehensive income (loss) associated with our previously terminated cash flow hedges were not material for the periods presented.
12. Common Stock Repurchase Program
The Company repurchases shares of its common stock as part of capital allocation programs authorized by our Board of Directors. In January 2019, we paid $4 million in cash for share repurchases executed in December 2018. In addition, during the first quarter of 2019, we repurchased 0.7 million shares of our common stock in open market transactions in compliance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act. Cash paid for these share repurchases was $64 million, inclusive of per-share commissions, which represents a weighted average price per share of $94.35. These repurchases were made under our prior $1.25 billion Board of Directors authorization announced in December 2017.
We announced in December 2018 that the Board of Directors authorized up to $1.5 billion in future share repurchases, which superseded and replaced remaining authority under any prior Board of Directors authorization for share repurchases after the completion of our open market repurchases noted above. As a result of the pending acquisition of Advanced Disposal discussed in Note 9, we decided to limit 2019 share repurchases to an amount sufficient to offset dilution impacts from our stock-based compensation plans. In May 2019, we entered into an accelerated share repurchase (“ASR”) agreement to repurchase $180 million of our common stock. At the beginning of the repurchase period, we delivered $180 million cash and received 1.3 million shares based on a stock price of $109.59. The final number of shares to be repurchased and the final average price per share under the ASR agreement will depend on the volume-weighted average price of our stock, less a discount, during the term of the agreement. Purchases under the ASR agreement are expected to be completed by September 2019.
As of June 30, 2019, the Company has authorization for $1.3 billion of future share repurchases. Any future share repurchases pursuant to this authorization of our Board of Directors will be made at the discretion of management and will depend on factors similar to those considered by the Board of Directors in making dividend declarations, including our net earnings, financial condition, cash required for future business plans, growth and acquisitions and other factors the Board of Directors may deem relevant. As a result of the pending acquisition discussed in Note 9, we do not expect additional share repurchases in 2019.
13. Fair Value Measurements
Assets and Liabilities Accounted for at Fair Value
Our assets and liabilities that are measured at fair value on a recurring basis include the following (in millions):
Fair Value Measurements Using:
Quoted prices in active markets (Level 1):
Money market funds (a)
2,249
Significant other observable inputs (Level 2):
Available-for-sale securities (b)
288
Significant unobservable inputs (Level 3):
Redeemable preferred stock (c)
46
66
Total Assets
2,677
424
Fair Value of Debt
As of June 30, 2019 and December 31, 2018, the carrying value of our debt was $12.7 billion and $10.0 billion, respectively. The estimated fair value of our debt was approximately $13.6 billion and $10.1 billion as of June 30, 2019 and December 31, 2018, respectively. The increase in the fair value of our debt when comparing June 30, 2019 with December 31, 2018 is due to $2.6 billion of net borrowings (inclusive of net commercial paper repayments) which are discussed further in Note 3.
Although we have determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The use of different assumptions or estimation methodologies could have a material effect on the estimated fair values. The fair value estimates are based on Level 2 inputs of the fair value hierarchy
available as of June 30, 2019 and December 31, 2018. These amounts have not been revalued since those dates, and current estimates of fair value could differ significantly from the amounts presented.
14. Variable Interest Entities
Following is a description of our financial interests in unconsolidated and consolidated variable interest entities that we consider significant:
Low-Income Housing Properties and Refined Coal Facility Investments
We do not consolidate our investments in entities established to manage low-income housing properties and a refined coal facility because we are not the primary beneficiary of these entities as we do not have the power to individually direct the activities of these entities. Accordingly, we account for these investments under the equity method of accounting. Our aggregate investment balance in these entities was $172 million and $189 million as of June 30, 2019 and December 31, 2018, respectively. The debt balance related to our investments in low-income housing properties was $147 million and $151 million as of June 30, 2019 and December 31, 2018, respectively. Additional information related to these investments is discussed in Note 5.
Trust Funds for Final Capping, Closure, Post-Closure or Environmental Remediation Obligations
Unconsolidated Variable Interest Entities — Trust funds that are established for both the benefit of the Company and the host community in which we operate are not consolidated because we are not the primary beneficiary of these entities as we either do not have the (i) power to direct the significant activities of the trusts or (ii) power over the trusts’ significant activities is shared. Our interests in these trusts are accounted for as investments in unconsolidated entities and receivables. These amounts are recorded in other receivables, investments in unconsolidated entities and long-term other assets in our Condensed Consolidated Balance Sheets, as appropriate. We also reflect our share of the unrealized gains and losses on available-for-sale securities held by these trusts as a component of our accumulated other comprehensive income (loss). Our investments and receivables related to these trusts had an aggregate carrying value of $98 million and $92 million as of June 30, 2019 and December 31, 2018, respectively.
Consolidated Variable Interest Entities — Trust funds for which we are the sole beneficiary are consolidated because we are the primary beneficiary. These trust funds are recorded in restricted trust and escrow accounts in our Condensed Consolidated Balance Sheets. Unrealized gains and losses on available-for-sale securities held by these trusts are recorded as a component of our accumulated other comprehensive income (loss). These trusts had a fair value of $107 million and $103 million as of June 30, 2019 and December 31, 2018, respectively.
15. Condensed Consolidating Financial Statements
WM Holdings has fully and unconditionally guaranteed all of WM’s senior indebtedness. WM has fully and unconditionally guaranteed all of WM Holdings’ senior indebtedness. None of WM’s other subsidiaries have guaranteed any of WM’s or WM Holdings’ debt. As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information (in millions):
CONDENSED CONSOLIDATING BALANCE SHEETS
Non-Guarantor
Holdings
Subsidiaries
Eliminations
Consolidated
2,200
50
94
2,578
(92)
2,586
2,628
Property and equipment, net
Investments in affiliates
25,646
26,150
(51,796)
Advances to affiliates
17,651
(17,651)
8,470
8,485
27,945
26,166
41,414
(69,539)
Accounts payable and other current liabilities
92
2,721
2,730
2,837
10,412
248
1,963
Due to affiliates
17,680
265
6,709
(24,654)
4,046
4,050
28,188
15,555
(24,746)
Stockholders’ equity
25,644
26,152
(6,709)
(294)
7,003
(243)
25,859
(44,793)
27
CONDENSED CONSOLIDATING BALANCE SHEETS (Continued)
2,577
2,584
2,638
24,676
25,097
(49,773)
17,258
(17,258)
8,024
8,063
24,686
25,133
39,862
(67,031)
258
174
2,585
2,676
340
2,759
7,377
304
1,913
17,398
146
(24,253)
3,667
3,672
25,120
459
15,048
24,674
25,099
(286)
6,995
(434)
24,814
(42,778)
28
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2019
3,992
(46)
Costs and expenses
742
(86)
(70)
(14)
Equity in earnings of subsidiaries, net of tax
530
545
(1,075)
(15)
374
525
328
719
Income tax expense (benefit)
173
546
Three Months Ended June 30, 2018
3,783
(44)
44
759
(78)
(4)
(11)
588
591
(1,179)
510
587
(24)
466
735
(33)
144
29
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Continued)
Six Months Ended June 30, 2019
Non‑Guarantor
7,734
1,409
(166)
970
992
(1,962)
(74)
734
964
(94)
642
1,315
322
993
Six Months Ended June 30, 2018
7,338
88
1,411
(154)
1,073
1,080
(2,153)
919
1,071
(40)
1,371
(64)
292
1,079
30
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
383
575
574
501
568
732
1,054
1,053
899
1,024
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
WM(a)
Holdings(a)
Subsidiaries(a)
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Intercompany activity
(2,200)
142
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included under Item 1 and our Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018.
This Quarterly Report on Form 10-Q contains certain forward-looking statements that are made subject to the safe harbor protections provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “forecast,” “project,” “estimate,” “intend,” and words of a similar nature and include estimates or projections of financial and other data; comments on expectations relating to future periods; plans or objectives for the future; and statements of opinion, view or belief about current and future events, circumstances or performance. You should view these statements with caution. They are based on the facts and circumstances known to us as of the date the statements are made. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those set forth in such forward-looking statements, including but not limited to, increased competition; pricing actions; failure to implement our optimization, growth, and cost savings initiatives and overall business strategy; failure to identify acquisition targets and negotiate attractive terms; failure to consummate or integrate the acquisition of Advanced Disposal Services, Inc. or other acquisitions; failure to obtain the results anticipated from the acquisition of Advanced Disposal Services, Inc. or other acquisitions; environmental and other regulations; commodity price fluctuations; international trade restrictions; disposal alternatives and waste diversion; declining waste volumes; failure to develop and protect new technology; failure of technology to perform as expected; preventing, detecting and addressing cybersecurity incidents; significant environmental or other incidents resulting in liabilities and brand damage; weakness in economic conditions; failure to obtain and maintain necessary permits; labor disruptions; impairment charges; negative outcomes of litigation or governmental proceedings; and other risks discussed in our filings with the SEC, including Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, as updated by our subsequent quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement, including financial estimates and forecasts, whether as a result of future events, circumstances or developments or otherwise.
Overview
Waste Management, Inc. is a holding company listed on the New York Stock Exchange under the symbol “WM” and all operations are conducted by its subsidiaries. We are North America’s leading provider of comprehensive waste management environmental services. We partner with our residential, commercial, industrial and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. We own or operate the largest network of landfills in North America. In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. We also use waste to create energy, recovering the gas produced naturally as waste decomposes in landfills and using the gas in generators to make electricity. Additionally, we are a leading recycler in North America, handling materials that include paper, cardboard, glass, plastic and metal. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provides collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in the U.S.
Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. Revenues from our collection operations are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility or material recovery facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenues generally consist of tipping fees and
the sale of recycling commodities to third parties. The fees we charge for our services generally include our environmental fee, fuel surcharge and regulatory recovery fee which are intended to pass through to customers direct and indirect costs incurred. We also provide additional services that are not managed through our Solid Waste business, described under Results of Operations below.
Strategy
Our fundamental strategy has not changed; we remain dedicated to providing long-term value to our stockholders by successfully executing our core strategy of focused differentiation and continuous improvement. We are enabling a people-first, technology-led focus, that leverages and sustains the strongest asset network in the industry to drive best-in-class customer experience and growth. Our strategic planning processes appropriately consider that the future of our business and the industry can be influenced by changes in economic conditions, the competitive landscape, the regulatory environment, asset and resource availability and technology. We believe that focused differentiation, which is driven by capitalizing on our unique and extensive network of assets, will deliver profitable growth and position us to leverage competitive advantages. Simultaneously, we believe the combination of cost control, process improvement and operational efficiency will deliver on the Company’s strategy of continuous improvement and yield an attractive total cost structure and enhanced service quality. While we will continue to monitor emerging diversion technologies that may generate additional value and related market dynamics, our current attention will be on improving existing diversion technologies, such as our recycling operations. We believe that execution of our strategy will deliver shareholder value and leadership in a dynamic industry.
Business Environment
The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. Due to this, we monitor these developments to adapt our services offerings. As companies, individuals and communities look for ways to be more sustainable, we are promoting our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs.
Despite some industry consolidation in recent years, we encounter intense competition from governmental, quasi-governmental and private service providers based on pricing, service quality, customer experience and breadth of service offerings. We also encounter competition for acquisitions and growth opportunities. Our industry is directly affected by changes in general economic factors, as increases and decreases in consumer spending, business expansions and construction starts generally correlate to volumes of waste generated and our revenues. Negative economic conditions, in addition to competitor actions, can make it more challenging to negotiate, renew or expand service contracts with acceptable margins and customers may reduce their service needs. General economic factors and the market for consumer goods, in addition to regulatory developments, can also significantly impact commodity prices for recyclable materials we sell. Our operating expenses are directly impacted by volume levels; as volume levels shift, due to economic and other factors, we must manage our network capacity and cost structure accordingly.
The generally favorable macro-economic environment, including steady spending by consumers and businesses and construction starts, has benefited our volume growth and gross margins in recent quarters. We have experienced significant volume growth with existing customers, particularly in our commercial collection business. The volume growth is the result of proactive efforts taken to work with our customers as their needs expand to identify service upgrade opportunities. Our landfill volumes during the first half of 2019 have been favorably impacted by clean-up efforts from natural disasters in California, event-driven projects in our special waste business and growth in our municipal solid waste business. Additionally, our continued focus on developing a sustainable recycling business model that meets customers’ environmental needs by passing through the increasing cost of processing and higher contamination rates led to improved operating results in the second quarter of 2019.
34
Current Quarter Financial Results
During the second quarter of 2019, we continued to produce strong operating results from our collection and disposal business, driven by favorable market conditions and our continued focus on delivering an outstanding customer experience and continuous improvement. The Company continued its commitment to supporting both organic and inorganic growth during the second quarter of 2019, allocating $578 million of available cash to capital expenditures and $48 million to the acquisition of solid waste businesses. We also allocated $397 million to our shareholders during the second quarter of 2019 through dividends and common stock repurchases.
Key elements of our financial results for the current quarter include:
Results of Operations
Operating Revenues
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. We also provide additional services that are not managed through our Solid Waste business, including operations managed by both our Strategic Business Solutions (“WMSBS”) and Energy and Environmental Services (“EES”)
35
organizations, recycling brokerage services, landfill gas-to-energy services and certain other expanded service offerings and solutions. These operations are presented in our “Other” segment in the table below. The following table summarizes revenues during each period (in millions):
The mix of operating revenues from our major lines of business is reflected in the table below (in millions):
The following table provides details associated with the period-to-period changes in revenues and average yield (dollars in millions):
Period-to-Period Change for theThree Months EndedJune 30, 2019 vs. 2018
Period-to-Period Change for theSix Months EndedJune 30, 2019 vs. 2018
As a % of
Related
Amount
Business(a)
Company(b)
Collection and disposal
%
Recycling commodities
(14.2)
(66)
(11.3)
Fuel surcharges and mandated fees
2.3
Total average yield (c)
48
1.3
Volume
4.0
3.7
Internal revenue growth
194
5.3
373
5.2
Acquisitions
59
1.6
Divestitures
(1.2)
(82)
Foreign currency translation
(0.2)
5.5
392
5.4
The following provides further details associated with our period-to-period change in revenues:
Average Yield
Collection and Disposal Average Yield — This measure reflects the effect on our revenue from the pricing activities of our collection, transfer and landfill lines of business, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes and environmental and service fee increases, but also (i) certain average price changes related to the overall mix of services, which are due to the types of services provided; (ii) changes in average price from new and lost business and (iii) price decreases to retain customers.
The details of our revenue growth from collection and disposal average yield are as follows (dollars in millions):
Period-to-Period Change for the
June 30, 2019 vs. 2018
Business
4.2
52
3.3
3.5
3.0
136
3.1
2.0
3.4
Total collection and disposal
Our strategic pricing efforts focus on ensuring we overcome inflationary cost pressures and grow margins. This strategy has been most successful in our collection business. We are also experiencing solid growth in our landfill and transfer businesses, with our municipal solid waste business experiencing 3.6% and 3.5% average yield growth for the three and six months ended June 30, 2019, respectively, as compared with the prior year periods.
Recycling Commodities — Decreases in the market prices for recycling commodities resulted in revenue decline of $41 million and $66 million for the three and six months ended June 30, 2019, respectively, as compared with the prior year periods. We partially offset our revenue decline from market prices for recycling commodities by assessing fees to cover the higher costs of handling contaminated recycling materials. Average market prices for recycling commodities at the Company’s facilities were 33% and 30% lower for the three and six months ended June 30, 2019, respectively, as compared with the prior year periods. We have seen a decreased demand from paper mills around the world which has driven prices to historical low averages. The cardboard packaging industry has been impacted by slower global demand, retail store closures and e-commerce packaging efficiency. We expect slower global demand to remain through 2019, which will continue to put downward pressure on average market prices for recycling commodities.
Fuel Surcharges and Mandated Fees — These fees, which are predominantly generated by our fuel surcharge program, were flat for the three months and increased for the six months ended June 30, 2019 as compared with the prior year periods. These revenues are based on and fluctuate in response to changes in the national average prices for diesel fuel. The mandated fees are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations. These fees also favorably contributed to our year-over-year revenue growth.
Our revenues from volumes increased $146 million, or 4.0%, and $263 million, or 3.7%, for the three and six months ended June 30, 2019, respectively, as compared with the prior year periods, excluding volumes from acquisitions and divestitures.
We experienced higher volumes due to favorable market conditions in our collection and disposal business and our focus on customer service and disciplined growth. We have experienced significant volume growth with existing customers, particularly in our commercial collection business. The volume growth is the result of proactive efforts taken to work with our customers as their needs expand to identify service upgrade opportunities. Our landfill volumes during the first half of 2019 have been favorably impacted by clean-up efforts from natural disasters in California, event-driven projects in our special waste business and growth in our municipal solid waste business. Additionally, a large contract executed in the second half of 2017 continues to favorably contribute to increased volume additions at our transfer stations in 2019. Furthermore, we experienced favorable volume growth from our WMSBS organization.
Operating Expenses
The following table summarizes the major components of our operating expenses (in millions of dollars and as a percentage of revenues):
Labor and related benefits
17.8
674
18.0
1,370
17.9
1,327
18.3
Transfer and disposal costs
7.6
282
7.5
7.4
539
Maintenance and repairs
8.7
312
8.4
667
614
8.5
Subcontractor costs
388
9.8
337
9.0
736
9.6
651
Cost of goods sold
3.6
189
5.1
4.1
380
Fuel
112
205
188
Disposal and franchise fees and taxes
164
155
307
289
Landfill operating costs
100
2.1
191
160
2.2
Risk management
71
1.8
1.4
135
105
119
255
244
61.9
62.0
The increase in volumes in the current year periods, as discussed above in Operating Revenues, affects the comparability of operating expenses primarily in transfer and disposal, subcontractor, and disposal and franchise fees and taxes for the periods presented. In addition, cost inflation affects the comparability of operating expenses.
Other significant items affecting the comparability of operating expenses for the reported periods include:
Labor and Related Benefits — The increase was driven by volume growth in our collection business as well as cost inflation noted above. These cost increases were offset, in part, by lower bonus costs related to a plan established in early 2018 targeted at improving employee retention and one less workday during the first quarter of 2019.
Maintenance and Repairs — The increase was largely driven by cost inflation noted above which primarily impacted labor, parts, third-party services, tires and building costs. In addition, for the three and six months ended June 30, 2019, these costs include a $16 million non-cash charge to write off certain equipment costs related to our Other segment.
Cost of Goods Sold — The decrease was primarily driven by lower market prices for recycling commodities and lower costs due to the sale of certain ancillary operations in the second quarter of 2018.
Fuel — The increase during the six months ended June 30, 2019 was primarily driven by a $28 million benefit from federal natural gas fuel credits received in the first quarter of 2018 that did not extend into 2019, partially offset by lower fuel costs.
Landfill Operating Costs — The increase was primarily due to higher leachate management costs driven largely by heavy snow and rain in certain parts of North America. For the three and six months ended June 30, 2019, these costs also include a $7 million charge for the remeasurement of our environmental remediation obligations and recovery assets due to a decrease in U.S. treasury rates, which are used in determining the risk-free discount rate for these balances. See Note 2 to the Condensed Consolidated Financial Statements for additional information.
Risk Management — The increase was primarily the result of higher claims costs in our collection business.
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and administrative expenses (in millions of dollars and as a percentage of revenues):
250
6.3
240
6.4
515
6.7
492
6.8
Professional fees
0.7
0.3
86
172
9.9
10.5
10.2
Significant items affecting the comparison of our selling, general and administrative expenses between reported periods include:
Labor and Related Benefits — The increase was primarily due to higher incentive compensation in the current year periods.
Professional Fees — The increase was primarily driven by higher consulting fees, largely due to investments we are making in operating, customer facing and back-office technologies, in addition to acquisition-related costs.
Other — The increase was principally driven by higher litigation reserves in the first quarter of 2019.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and amortization expenses (in millions of dollars and as a percentage of revenues):
Depreciation of tangible property and equipment
221
5.6
212
5.7
434
Amortization of landfill airspace
161
3.9
266
Amortization of intangible assets
49
10.4
10.3
10.1
The increase in depreciation of tangible property and equipment during the three and six months ended June 30, 2019, compared to the prior year periods, was primarily due to higher capital expenditures in the current year periods due to an intentional focus on accelerating certain fleet and landfill spending to support the Company’s strong collection and disposal growth. The increase in amortization of landfill airspace during the three and six months ended June 30, 2019, compared to the prior year periods, was primarily driven by increased volumes.
Income from Operations
The following table summarizes income from operations for our reportable segments (dollars in millions):
Period-to-Period
Change
9.4
5.0
15.6
11.6
90
10.8
(73)
*
27.9
30.1
(2.7)
(0.5)
Percentage of revenues
17.6
19.1
17.2
18.2
* Percentage change does not provide a meaningful comparison.
The significant items affecting income from operations for our segments during the three and six months ended June 30, 2019, as compared with the prior year periods, are summarized below:
Interest Expense, Net
Our interest expense, net was $100 million and $196 million during the three and six months ended June 30, 2019, respectively, compared to $93 million and $184 million during the three and six months ended June 30, 2018, respectively. The increases are due to $2.6 billion of net borrowings (inclusive of net commercial paper repayments), primarily attributable to our issuance of new senior notes, partially offset by related increases in interest income as a result of higher cash and cash equivalents balances. These items are discussed further below in Liquidity and Capital Resources. Also contributing to the year-over-year increases were increased commercial paper borrowings during the first half of 2019 and interest expense related to a low-income housing investment.
Loss on Early Extinguishment of Debt
In May 2019, WM issued $4.0 billion of senior notes, which are discussed further below in Summary of Cash and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations. Concurrently, we used $344 million of the net proceeds from the newly issued senior notes to retire $257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired, $84 million of related premiums, which are classified as loss on early
extinguishment of debt in our Condensed Consolidated Statement of Operations, and $3 million of accrued interest. The principal amount of senior notes redeemed within each series was as follows:
Income Tax Expense
Our income tax expense was $115 million and $230 million for the three and six months ended June 30, 2019, respectively, compared to $110 million and $226 million for the three and six months ended June 30, 2018, respectively. Our effective income tax rate was 23.3% and 24.0% for the three and six months ended June 30, 2019, respectively, compared to 18.1% and 20.2% for the three and six months ended June 30, 2018, respectively. The increase in our effective income tax rate when comparing the three and six months ended June 30, 2019 with the prior year periods is due to a $33 million income tax benefit related to the settlement of various tax audits during 2018 and a $52 million impairment charge in the first quarter of 2019 which was not deductible for tax purposes. See Other, Net above for additional information.
Liquidity and Capital Resources
The Company consistently generates cash flow from operations that meets and exceeds its working capital needs, the payments of its dividend and investment in the business through capital expenditures and acquisitions. We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources, enabling us to plan for our present needs and fund unbudgeted business activities that may arise during the year as a result of changing business conditions or new opportunities. The Company believes that its investment grade credit ratings, large value of unencumbered assets and modest leverage enable it to obtain adequate financing to meet its ongoing capital, operating and other liquidity requirements.
Summary of Cash and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations
The following is a summary of our cash and cash equivalents, restricted trust and escrow accounts and debt balances (in millions):
Restricted trust and escrow accounts:
Insurance reserves
308
252
Final capping, closure, post-closure and environmental remediation funds
107
103
Total restricted trust and escrow accounts (a)
366
Debt:
Current portion
Long-term portion
Total debt
Cash and cash equivalents — Cash and cash equivalents at June 30, 2019, include a portion of proceeds from the May 2019 issuance of $4.0 billion of senior notes, which is discussed further below and in Note 3 to the Condensed Consolidated Financial Statements.
Debt — As of June 30, 2019, we had $1.2 billion of debt maturing within the next 12 months, including (i) $600 million of 4.75% senior notes that mature in June 2020; (ii) $524 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities, and (iii) $116 million of other debt with scheduled maturities within the next 12 months, including $42 million of tax-exempt bonds. As of June 30, 2019, we have classified $1.1 billion of debt maturing in the next 12 months as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $2.75 billion long-term U.S. and Canadian revolving credit facility (“$2.75 billion revolving credit facility”). The remaining $116 million is classified as current obligations.
In May 2019, WM issued $4.0 billion of senior notes consisting of:
The net proceeds from these debt issuances were $3.97 billion. Concurrently, we used $344 million of the net proceeds from the newly issued senior notes to retire $257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired, $84 million of related premiums and $3 million of accrued interest as discussed above in Loss on Early Extinguishment of Debt. We used a portion of the proceeds to repay our commercial paper borrowings. We intend to use the remaining net proceeds to pay a portion of the consideration related to our pending acquisition of Advanced Disposal, which is discussed in Pending Acquisition below, and for general corporate purposes.
See Note 3 to the Condensed Consolidated Financial Statements for more information related to the debt transactions.
Summary of Cash Flow Activity
The following is a summary of our cash flows (in millions):
Net Cash Provided by Operating Activities — Our operating cash flows increased by $116 million for the six months ended June 30, 2019, as compared with the prior year period, as a result of (i) higher earnings primarily associated with our collection and disposal business in the current year period and (ii) net favorable changes in our operating assets and liabilities, net of effects of acquisitions and divestitures; offset slightly by higher tax and interest payments in the current year period.
Net Cash Used in Investing Activities — The most significant items included in our investing cash flows for the six months ended June 30, 2019 and 2018 are summarized below:
Net Cash Provided by (Used in) Financing Activities — The most significant items affecting the comparison of our financing cash flows for the six months ended June 30, 2019 and 2018 are summarized below:
Borrowings:
Revolving credit facility (a)
Canadian term loan and revolving credit facility
Senior notes
Other debt
Repayments:
(45)
(257)
Tax-exempt bonds
(81)
Net cash borrowings (repayments)
3,586
(113)
Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information related to our debt borrowings and repayments.
As a result of the pending acquisition of Advanced Disposal discussed in Pending Acquisition below, we do not expect additional share repurchases in 2019.
We paid cash dividends of $440 million and $406 million during the six months ended June 30, 2019 and 2018, respectively. The increase in dividend payments is primarily due to our quarterly per share dividend increasing from $0.465 in 2018 to $0.5125 in 2019 offset, in part, by a reduction in our common stock outstanding during 2019 as a result of our common stock repurchase program.
Free Cash Flow
As is our practice, we are presenting free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We define free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses and other assets (net of cash divested). We believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace net cash provided by operating activities, which is the most comparable GAAP measure. We believe free cash flow gives investors useful insight into how we view our liquidity, but the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements.
Our calculation of free cash flow and reconciliation to net cash provided by operating activities is shown in the table below (in millions), and may not be calculated the same as similarly-titled measures presented by other companies:
1,010
975
(578)
(436)
Free cash flow
440
621
871
1,044
On April 14, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire all outstanding shares of Advanced Disposal for $33.15 per share in cash, representing a total enterprise value of $4.9 billion when including approximately $1.9 billion of Advanced Disposal’s net debt. Advanced Disposal’s solid waste network includes 95 collection operations, 73 transfer stations, 41 owned or operated landfills and 22 owned or operated recycling facilities. The transaction is expected to close during the first quarter of 2020, subject to the satisfaction of customary closing conditions, including regulatory approvals. On June 28, 2019, Advanced Disposal announced that 85.9% of the outstanding shares of its common stock entitled to vote were voted in favor of the proposal to adopt the Merger Agreement at a special meeting of stockholders held that day.
Critical Accounting Estimates and Assumptions
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments and reserves associated with our insured and self-insured claims, as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
Off-Balance Sheet Arrangements
We have financial interests in unconsolidated variable interest entities as discussed in Note 14 to the Condensed Consolidated Financial Statements. Additionally, we are party to guarantee arrangements with unconsolidated entities as discussed in the Guarantees section of Note 7 to the Condensed Consolidated Financial Statements. These arrangements have not materially affected our financial position, results of operations or liquidity during the six months ended
June 30, 2019, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
Seasonal Trends
Our operating revenues tend to be somewhat higher in summer months, primarily due to the higher construction and demolition waste volumes. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.
Inflation
While inflationary increases in costs can affect our income from operations margins, we believe that inflation generally has not had, and in the near future is not expected to have, any material adverse effect on our results of operations. However, a portion of our collection revenues are generated under long-term agreements with price adjustments based on various indices intended to measure inflation. Additionally, management’s estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information about market risks as of June 30, 2019 does not differ materially from that discussed under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 4. Controls and Procedures.
Effectiveness of Controls and Procedures
Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to management (including the principal executive and financial officers) as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of June 30, 2019 (the end of the period covered by this Quarterly Report on Form 10-Q).
Changes in Internal Control over Financial Reporting
Management, together with our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended June 30, 2019. We determined that there were no changes in our internal control over financial reporting during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.
Item 1. Legal Proceedings.
Information regarding our legal proceedings can be found under the Environmental Matters and Litigation sections of Note 7 to the Condensed Consolidated Financial Statements.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table summarizes common stock repurchases made during the second quarter of 2019 (shares in millions):
Issuer Purchases of Equity Securities
Total Number of
Shares Purchased as
Approximate Maximum
Number of
Average
Part of Publicly
Dollar Value of Shares that
Price Paid
Announced Plans or
May Yet be Purchased Under
Period
Purchased
per Share
Programs
the Plans or Programs
April 1 — 30
1.5 billion
May 1 — 31
109.59
1.3 billion
June 1 — 30
In May 2019, we entered into an accelerated share repurchase (“ASR”) agreement to repurchase $180 million of our common stock. At the beginning of the repurchase period, we delivered $180 million cash and received 1.3 million shares based on a stock price of $109.59. The final number of shares to be repurchased and the final average price per share under the ASR agreement will depend on the volume-weighted average price of our stock, less a discount, during the term of the agreement. Purchases under the ASR agreement are expected to be completed by September 2019.
Item 4. Mine Safety Disclosures.
Information concerning mine safety and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this quarterly report.
Item 6. Exhibits.
Exhibit No.
Description
Agreement and Plan of Merger dated April 14, 2019 by and among WM, Everglades Merger Sub Inc., and Advanced Disposal Services, Inc. [incorporated by reference to Exhibit 2.1 to Form 8-K filed April 15, 2019] (pursuant to Item 601(b)(2) of Regulation S-K, exhibits and schedules to the Agreement and Plan of Merger have been omitted and will be supplementally provided to the SEC upon request).
Voting Agreement dated April 14, 2019 by and between WM and Canada Pension Plan Investment Board [incorporated by reference to Exhibit 2.2 to Form 8-K filed April 15, 2019].
4.1*
Officers’ Certificate delivered pursuant to Section 301 of the Indenture establishing the terms and form of the 2.950% Senior Notes due 2024.
4.2*
Officers’ Certificate delivered pursuant to Section 301 of the Indenture establishing the terms and form of the 3.200% Senior Notes due 2026.
4.3*
Officers’ Certificate delivered pursuant to Section 301 of the Indenture establishing the terms and form of the 3.450% Senior Notes due 2029.
4.4*
Officers’ Certificate delivered pursuant to Section 301 of the Indenture establishing the terms and form of the 4.000% Senior Notes due 2039.
4.5*
Officers’ Certificate delivered pursuant to Section 301 of the Indenture establishing the terms and form of the 4.150% Senior Notes due 2049.
4.6*
Guarantee Agreement by WM Holdings in favor of the holders of WM’s 2.950% Senior Notes due 2024.
4.7*
Guarantee Agreement by WM Holdings in favor of the holders of WM’s 3.200% Senior Notes due 2026.
4.8*
Guarantee Agreement by WM Holdings in favor of the holders of WM’s 3.450% Senior Notes due 2029.
4.9*
Guarantee Agreement by WM Holdings in favor of the holders of WM’s 4.000% Senior Notes due 2039.
4.10*
Guarantee Agreement by WM Holdings in favor of the holders of WM’s 4.150% Senior Notes due 2049.
31.1*
Certification Pursuant to Rules 13a14(a) and 15d14(a) under the Securities Exchange Act of 1934, as amended, of James C. Fish, Jr., President and Chief Executive Officer.
31.2*
Certification Pursuant to Rules 13a14(a) and 15d14(a) under the Securities Exchange Act of 1934, as amended, of Devina A. Rankin, Senior Vice President and Chief Financial Officer.
32.1**
Certification Pursuant to 18 U.S.C. §1350 of James C. Fish, Jr., President and Chief Executive Officer.
32.2**
Certification Pursuant to 18 U.S.C. §1350 of Devina A. Rankin, Senior Vice President and Chief Financial Officer.
95*
Mine Safety Disclosures.
101.INS*
XBRL Instance Document – The Instance Document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
/s/ DEVINA A. RANKIN
Devina A. Rankin
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: July 25, 2019