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.
In an effort to keep our stockholders and the public informed about our business, we may make “forward-looking statements.” Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. 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 generally include statements containing:
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projections about accounting and finances;
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plans and objectives for the future;
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projections or estimates about assumptions relating to our performance; or
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our opinions, views or beliefs about the effects of current or future events, circumstances or performance.
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You should view these statements with caution. These statements are not guarantees of future performance, circumstances or events. They are based on facts and circumstances known to us as of the date the statements are made. All aspects of our business are subject to uncertainties, risks and other influences, many of which we do not control. Any of these factors, either alone or taken together, could have a material adverse effect on us and could change whether any forward-looking statement ultimately turns out to be true. Additionally, we assume no obligation to update any forward-looking statement as a result of future events, circumstances or developments.
Some of the risks that we believe could affect our business and financial statements for 2019 and beyond and that could cause actual results to be materially different from those that may be set forth in forward-looking statements made by the Company include the following:
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competition may negatively affect our profitability or cash flows, our pricing strategy may have negative effects on volumes, and inability to execute our pricing strategy while retaining and attracting customers may negatively affect our average yield on our collection and disposal business;
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we may fail in implementing or maintaining our cost saving, optimization and growth initiatives and overall business strategy, which could adversely impact our financial performance and growth, and implementation of our initiatives and strategy may have associated negative consequences, such as increased indebtedness, asset impairments, business disruption, exposure to purported class action lawsuits related to our customer service agreements and regulatory issues;
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a key element of our strategy is yield management through focus on pricing, which has presented challenges to keep existing business and win new business at reasonable returns; the loss of volumes as a result of price increases and our unwillingness to pursue lower margin volumes may negatively affect our cash flows or results of operations;
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we may be unable to identify desirable acquisition targets, negotiate advantageous transactions or realize the benefits expected from such transactions, including our planned acquisition of Advanced Disposal, which could adversely impact our growth strategy, earnings and cash flow;
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integration of acquisitions, including our planned acquisition of Advanced Disposal, and/or new service offerings could increase our exposure to environmental liabilities for past operations and the risk of inadvertent noncompliance with laws and regulations;
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legal, regulatory and other matters may affect the timing of our ability to complete our planned acquisition of Advanced Disposal, if at all, which may negatively affect the trading prices of our stock and our future business and financial results;
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compliance with existing or increased future regulations and/or enforcement of such regulations may restrict or change our operations, increase our operating costs or require us to make additional capital expenditures, and a decrease in regulation may lower barriers to entry for our competitors;
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possible changes in our estimates of costs for site remediation requirements, final capping, closure and post-closure obligations, compliance and regulatory developments may increase our expenses and future cash outflows;
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certain materials processed by our recycling operations are subject to significant commodity price fluctuations, as are methane gas, electricity and other energy-related products marketed and sold by our landfill gas recovery operations; fluctuations in commodity prices may have negative effects on our operating results;
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a significant portion of the recycled fiber we market has been shipped to export markets across the globe, particularly China; changes in international or domestic regulations and restrictions or tariffs on American or foreign imports and exports, including actions taken by the Chinese government, could continue to increase operating expense, result in excess supply and drive down prices;
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changes in oil and gas prices and drilling activity, and changes in applicable regulations, could adversely affect our EES organization;
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changes to the regulatory framework related to renewable fuel standards could affect our financial performance as a renewable fuel producer;
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increasing customer preference for alternatives to landfill disposal, government mandates supporting diversion of waste and recycling and prohibiting disposal of certain types of waste, and overall reduction of waste generated could continue to have a negative effect on volumes of waste going to our landfills;
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developments in technology could trigger a fundamental change in the waste management industry, as waste streams are increasingly viewed as a resource, which may adversely impact volumes at our landfills and our profitability;
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our existing and proposed service offerings to customers may require that we invest in, develop or license, and protect, new technologies; and our inability to obtain or protect new technologies could impact our services to customers and development of new revenue sources;
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acquisitions, investments and/or new service offerings may not increase our earnings in the timeframe anticipated, or at all, due to difficulties operating in new markets or providing new service offerings, failure of emerging technologies to perform as expected, failure to operate within budget, integration issues, or regulatory issues, among others;
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adverse publicity (whether or not justified) relating to activities by our operations, employees or agents could tarnish our reputation and reduce the value of our brand. Additionally, a major operational failure, even if suffered by a competitor, may bring enhanced scrutiny and regulation of our industry, with a corresponding increase in operating expense;
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there is risk of incurring significant environmental liabilities in the use, treatment, storage, transfer and disposal of waste materials; any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows;
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weak economic conditions may negatively affect the volumes of waste generated and demand for post-consumer fiber and metals processed by our recycling operations;
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some of our customers, including governmental entities, have suffered financial difficulties affecting their credit risk, which could negatively impact our operating results, due to their credit risk and the impact of the municipal debt market on remarketing of our tax-exempt bonds;
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we may be unable to obtain and maintain required permits or to expand existing permitted capacity of our landfills, which could decrease our revenue and increase our costs;
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diesel fuel price increases or diesel fuel supply shortages may increase our expenses and restrict our ability to operate;
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we are increasingly dependent on the availability of natural gas and fueling infrastructure and vulnerable to natural gas prices; difficulty obtaining natural gas and increases in natural gas prices could increase our operating costs;
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problems with the operation of our current information technology systems or the technology systems of third parties on which we rely as well as the development and deployment of new information technology systems could decrease our efficiencies and increase our costs;
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we must commit substantial resources to prevent, detect, and address the risk of cybersecurity incidents. Our preventative measures and incident response efforts may not be effective in all cases, and a cybersecurity incident could result in business disruption, direct financial loss, negative publicity, brand damage, violation of privacy laws, loss of customers, potential litigation and liability and competitive disadvantage;
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efforts by labor unions to organize our employees may increase operating expenses and we may be unable to negotiate acceptable collective bargaining agreements with those who have chosen to be represented by unions, which could lead to labor disruptions, including strikes and lock-outs, which could adversely affect our financial condition, results of operations and cash flows;
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we could face significant liabilities for withdrawal from multiemployer pension plans;
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we are subject to operational and safety risks; we closely monitor and manage landfills to minimize the risk of waste mass instability, releases of hazardous materials and odors that could be triggered by weather or natural disasters, as well as risks presented by the potential for subsurface heat reactions causing elevated landfill temperatures and increased production of leachate landfill gas and odor. These and other such risks could potentially result in injury or death of employees and others, a need to shut down or reduce operation of facilities, increased operating expense and exposure to liability for pollution and other environmental damage, and property damage or destruction;
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increased costs for financial assurance or the inadequacy of our insurance coverage could negatively impact our liquidity and increase our liabilities;
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possible charges as a result of shut-down operations, uncompleted development or expansion projects or other events may negatively affect earnings;
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we may reduce or suspend capital expenditures, growth and acquisition activity, implementation of our business strategy, dividend declarations or share repurchases if we suffer a significant reduction in cash flows;
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we may be unable to incur future indebtedness to support our growth and development plans or to refinance our debt obligations, including near-term maturities, on terms consistent with current borrowings, and higher interest rates and market conditions may increase our expense;
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climate change legislation, including possible limits on carbon emissions, may negatively impact our results of operations by increasing expenses;
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weather-related and other event driven special projects cause our results to fluctuate, and harsh weather or natural disasters may cause us to temporarily suspend operations; these seasonal or event driven items can result in interim variations in our results;
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we could be subject to significant fines and penalties, and our reputation could be adversely affected, if our businesses, or third parties with whom we have a relationship, were to fail to comply with United States (“U.S.”) or foreign laws or regulations;
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we are subject to various proceedings, lawsuits and disputes; claims asserted against us include personal injury, property damage, commercial, customer and employment-related matters, including purported state and national
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class action lawsuits related to: alleged environmental contamination, including releases of hazardous materials and odors; sales and marketing practices, customer service agreements, prices and fees; and federal and state wage and hour and other laws. Such lawsuits and proceedings may increase our costs, limit our ability to conduct or expand our operations, limit our ability to execute our business plans and strategies and adversely affect our liquidity; and
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the adoption of new accounting standards or interpretations may cause fluctuations in reported quarterly results of operations or adversely impact our reported results of operations.
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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. 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 are not expecting any significant shift in the near term, but there is increased market volatility and uncertainty about longer-term macro-economic indicators. Continued disruptions in the global movement of recycling commodities resulted in significantly lower average market prices in 2018 which have continued to decline in 2019. Export demand has remained stagnant driven primarily by the tariff on recovered fiber into China and its continued limit on imports, as well as slower-growing economies in Europe, China and Mexico. The recycling industry is continuing to adapt to the heightened quality standards and regulations. Despite these events, our focus on developing a sustainable business model that meets customers’ environmental needs by passing through the increasing cost of processing and the cost of higher contamination rates led to improved operating results in the first quarter of 2019. We continue to focus on developing alternative markets and educating customers to reduce contamination in the recycling stream.
Current Quarter Financial Results
During the first quarter of 2019, we continued to produce strong operating results from our collection and disposal business, driven by 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 first quarter of 2019, allocating $471 million of available cash to capital expenditures and $394 million to the acquisition of solid waste businesses. We also allocated $291 million to our shareholders during the first quarter of 2019 through dividends and common stock repurchases.
Key elements of our financial results for the current quarter include:
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Revenues of
$3,696 million, compared with $3,511 million in the prior year period, an increase of $185 million, or 5.3%. The increase is primarily attributable to (i) higher volumes from favorable market conditions and strong landfill volume growth and (ii) increased yield in our collection and disposal business, partially offset by lower market prices for recycling commodities;
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Operating expenses of
$2,298 million, compared with $2,184 million in the prior year period, remained flat as a percentage of revenue at 62.2% in both periods. The $114 million increase is primarily attributable to higher volumes and cost inflation in the current year period and increased fuel costs primarily associated with federal natural gas fuel credits received in 2018 that did not extend into 2019, partially offset by decreased cost of goods sold primarily due to lower market prices for recycling commodities;
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Selling, general and administrative expenses of $409 million, or 11.1% of revenues, compared with $373 million, or 10.6% of revenues, in the prior year period. This increase of $36 million is primarily attributable to higher incentive compensation accruals, additional litigation reserves and higher consulting fees primarily associated with investments in technology;
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Income from operations of $621 million, or 16.8% of revenues, compared with $608 million, or 17.3% of revenues, in the prior year period.
The current year period is favorably impacted by strong operating results primarily in our collection and disposal business
. These results were partially offset by an increase in fuel costs primarily associated with federal natural gas fuel credits received in 2018 that did not extend into 2019 and higher selling, general and administrative expenses;
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Net income attributable to Waste Management, Inc. of $347 million, or $0.81 per diluted share, compared with $396 million, or $0.91 per diluted share, in the prior year period.
The current year period was impacted by a $52 million impairment charge related to our minority-owned investment in a waste conversion technology business which was not deductible for tax purposes;
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Net cash provided by operating activities was $890 million compared with $809 million in the prior year period; and
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Free cash flow was $431 million compared with $423 million in the prior year period. Free cash flow is a non-GAAP measure of liquidity. Refer to
Free Cash Flow
below for our definition of free cash flow, additional information about our use of this measure, and a reconciliation to net cash provided by operating activities, which is the most comparable GAAP measure.
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Results of Operations
Operating Revenues
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. We also provide additional services that are not managed through our Solid Waste business, including operations managed by both our Strategic Business Solutions (“WMSBS”) and Energy and Environmental Services (“EES”) organizations, recycling brokerage services, landfill gas-to-energy services and certain other expanded service offerings and solutions. These operations are presented in our “Other” segment in the table below. The following table summarizes revenues for the three months ended March 31 (in millions):
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2019
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2018
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Solid Waste
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$
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3,865
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$
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3,619
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Other
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588
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607
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Intercompany
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(757)
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(715)
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Total
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$
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3,696
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$
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3,511
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The mix of operating revenues from our major lines of business for the three months ended March 31 is reflected in the table below (in millions):
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2019
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2018
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Commercial
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$
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1,026
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$
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955
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Residential
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640
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614
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Industrial
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680
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637
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Other
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109
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101
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Total collection
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2,455
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2,307
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Landfill
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864
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805
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Transfer
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412
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375
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Recycling
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291
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312
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Other (a)
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431
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427
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Intercompany (b)
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(757)
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(715)
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Total
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$
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3,696
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$
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3,511
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(a)
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The “Other” line of business includes (i) our WMSBS organization; (ii) our landfill gas-to-energy operations; (iii) certain services within our EES organization, including our construction and remediation services and our services associated with the disposal of fly ash and (iv) certain other expanded service offerings and solutions. In addition, our “Other” line of business reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity.
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(b)
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Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report.
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The following table provides details associated with the period-to-period changes in revenues and average yield (dollars in millions):
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Period-to-Period Change for the
Three Months Ended
March 31, 2019 vs. 2018
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As a % of
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As a % of
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Related
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Total
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Amount
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Business(a)
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Amount
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Company(b)
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Collection and disposal
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$
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82
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2.7
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%
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Recycling commodities
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(25)
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(8.4)
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Fuel surcharges and mandated fees
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5
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3.7
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Total average yield (c)
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$
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62
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1.8
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%
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Volume
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117
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3.4
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Internal revenue growth
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179
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5.2
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Acquisitions
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57
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1.6
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Divestitures
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(42)
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(1.2)
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Foreign currency translation
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(9)
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(0.3)
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Total
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$
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185
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5.3
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%
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(a)
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Calculated by dividing the increase or decrease for the current year period by the prior year period’s related business revenue adjusted to exclude the impacts of divestitures for the current year period.
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(b)
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Calculated by dividing the increase or decrease for the current year period by the prior year period’s total Company revenue adjusted to exclude the impacts of divestitures for the current year period.
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(c)
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The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company.
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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):
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Period-to-Period Change for the
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Three Months Ended
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March 31, 2019 vs. 2018
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As a % of
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|
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Related
|
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Amount
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Business
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Commercial
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$
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20
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2.3
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%
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Industrial
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25
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4.2
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Residential
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23
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3.8
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Total collection
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|
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68
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|
3.2
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Landfill
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|
|
9
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1.8
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Transfer
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5
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|
2.7
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Total collection and disposal
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$
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82
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2.7
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%
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Our strategic pricing efforts focus on ensuring we overcome inflationary cost pressures and grow margins. This strategy has been most successful in our collection line of business. We are also experiencing solid growth in our transfer business and our landfill business, with our municipal solid waste business experiencing 3.4% average yield growth.
Recycling Commodities
— Decreases in the market prices for recycling commodities resulted in revenue decline of $25 million for the three months ended March 31, 2019, as compared with the prior year period. Our revenue decline has been offset to a certain extent by assessing fees to cover the higher costs of handling contaminated recycling materials. Recent oversupply of recycling commodities has driven down market prices. Average market prices for recycling commodities at the Company’s facilities were 28% lower for the three months ended March 31, 2019, as compared with the prior year period. 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 revenues, which are predominantly generated by our fuel surcharge program, increased as compared with the prior year period. These revenues fluctuate in response to changes in the national average prices for diesel fuel on which our surcharge is based. The mandated fees included in this line item are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations. These fees did not have a significant impact on the comparability of the periods.
Volume
Our revenues from volumes increased $117 million, or 3.4%, for the three months ended March 31, 2019, as compared with the prior year period, excluding volumes from acquisitions and divestitures.
We experienced higher volumes due to our focus on customer service and disciplined growth, combined with favorable market conditions in our collection and disposal business. 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. We also experienced strong landfill volume growth primarily due to event-driven projects in our special waste business coupled with 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 and our recycling brokerage services for the three months ended March 31, 2019, as compared with the prior year period.
Operating Expenses
The following table summarizes the major components of our operating expenses for the three months ended March 31 (dollars in millions):
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Period-to-Period
|
|
|
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2019
|
|
2018
|
|
Change
|
|
Labor and related benefits
|
|
$
|
667
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|
$
|
653
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$
|
14
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|
2.1
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%
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Transfer and disposal costs
|
|
|
263
|
|
|
257
|
|
|
6
|
|
2.3
|
|
Maintenance and repairs
|
|
|
323
|
|
|
302
|
|
|
21
|
|
7.0
|
|
Subcontractor costs
|
|
|
348
|
|
|
314
|
|
|
34
|
|
10.8
|
|
Cost of goods sold
|
|
|
170
|
|
|
191
|
|
|
(21)
|
|
(11.0)
|
|
Fuel
|
|
|
101
|
|
|
76
|
|
|
25
|
|
32.9
|
|
Disposal and franchise fees and taxes
|
|
|
143
|
|
|
134
|
|
|
9
|
|
6.7
|
|
Landfill operating costs
|
|
|
91
|
|
|
80
|
|
|
11
|
|
13.8
|
|
Risk management
|
|
|
64
|
|
|
52
|
|
|
12
|
|
23.1
|
|
Other
|
|
|
128
|
|
|
125
|
|
|
3
|
|
2.4
|
|
|
|
$
|
2,298
|
|
$
|
2,184
|
|
$
|
114
|
|
5.2
|
%
|
Percentage of revenues
|
|
|
62.2
|
%
|
|
62.2
|
%
|
|
|
|
|
|
The increase in volumes in the current year period, as discussed above in
Operating Revenues,
affect 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 in labor and related benefits costs was driven by volume growth in our collection line of 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 current year period.
Maintenance and Repairs
— The increase in maintenance and repairs costs was primarily driven by cost inflation noted above which primarily impacted labor, parts, third-party services, tires and building costs.
Cost of Goods Sold
—
The decrease in cost of goods sold was primarily driven by lower market prices for recycling commodities and lower costs associated with a divestiture in the second quarter of 2018.
Fuel
— The increase in fuel costs was primarily driven by a $28 million benefit from federal natural gas fuel credits received in 2018 that did not extend into 2019.
Landfill Operating Costs
—
The increase in landfill operating costs is primarily driven by higher leachate management costs driven primarily by inclement weather.
Risk Management
—
The increase in risk management costs is primarily the result of higher claims.
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and administrative expenses for the three months ended March 31 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Labor and related benefits
|
|
$
|
265
|
|
$
|
252
|
|
$
|
13
|
|
5.2
|
%
|
Professional fees
|
|
|
35
|
|
|
24
|
|
|
11
|
|
45.8
|
|
Provision for bad debts
|
|
|
9
|
|
|
11
|
|
|
(2)
|
|
(18.2)
|
|
Other
|
|
|
100
|
|
|
86
|
|
|
14
|
|
16.3
|
|
|
|
$
|
409
|
|
$
|
373
|
|
$
|
36
|
|
9.7
|
%
|
Percentage of revenues
|
|
|
11.1
|
%
|
|
10.6
|
%
|
|
|
|
|
|
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 accruals in the current year period.
Professional Fees
—
The increase was primarily
due to higher consulting fees, largely due to the 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 additional litigation reserves.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and amortization expenses for the three months ended March 31 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Depreciation of tangible property and equipment
|
|
$
|
213
|
|
$
|
204
|
|
$
|
9
|
|
4.4
|
%
|
Amortization of landfill airspace
|
|
|
127
|
|
|
120
|
|
|
7
|
|
5.8
|
|
Amortization of intangible assets
|
|
|
26
|
|
|
23
|
|
|
3
|
|
13.0
|
|
|
|
$
|
366
|
|
$
|
347
|
|
$
|
19
|
|
5.5
|
%
|
Percentage of revenues
|
|
|
9.9
|
%
|
|
9.9
|
%
|
|
|
|
|
|
The increase in depreciation of tangible property and equipment during the three months ended March 31, 2019, compared to the prior year period, was primarily due to increased capital expenditures to support organic growth in our business. The increase in amortization of landfill airspace during the three months ended March 31, 2019, compared to the prior year period, was primarily due to increased volumes.
Income from Operations
The following table summarizes income from operations for our reportable segments for the three months ended March 31 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Solid Waste:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
|
|
$
|
394
|
|
$
|
365
|
|
$
|
29
|
|
7.9
|
%
|
Tier 2
|
|
|
136
|
|
|
122
|
|
|
14
|
|
11.5
|
|
Tier 3
|
|
|
313
|
|
|
291
|
|
|
22
|
|
7.6
|
|
Solid Waste
|
|
|
843
|
|
|
778
|
|
|
65
|
|
8.4
|
|
Other
|
|
|
(28)
|
|
|
(23)
|
|
|
(5)
|
|
21.7
|
|
Corporate and Other
|
|
|
(194)
|
|
|
(147)
|
|
|
(47)
|
|
32.0
|
|
Total
|
|
$
|
621
|
|
$
|
608
|
|
$
|
13
|
|
2.1
|
%
|
Percentage of revenues
|
|
|
16.8
|
%
|
|
17.3
|
%
|
|
|
|
|
|
The significant items affecting income from operations for our segments during the three months ended March 31, 2019, as compared with the prior year period, are summarized below:
|
·
|
|
Solid Waste
— Our collection and disposal business benefited from internal revenue growth. This increase to income from operations was offset, in part, by (i) federal natural gas fuel credits received in 2018 that did not extend into 2019 and (ii) higher operating costs, driven by cost inflation, and leachate management costs primarily in Tier 3.
|
|
·
|
|
Corporate and Other
— Increased expenses as a result of (i) higher incentive compensation accruals; (ii) additional litigation reserves and (iii) higher consulting fees, largely due to the investments we are making in operating, customer facing and back-office technologies.
|
Other, Net
During the three months ended March 31, 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).
Income Tax Expense
Our income tax expense and effective income tax rates were $115 million, or 24.8%, and $116 million, or 22.7%, for the three months ended March 31, 2019 and 2018, respectively.
The current year period was impacted by a $52 million impairment charge 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):
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
|
$
|
57
|
|
$
|
61
|
Restricted trust and escrow accounts:
|
|
|
|
|
|
|
Insurance reserves
|
|
$
|
322
|
|
$
|
252
|
Final capping, closure, post-closure and environmental remediation funds
|
|
|
105
|
|
|
103
|
Other
|
|
|
36
|
|
|
11
|
Total restricted trust and escrow accounts (a)
|
|
$
|
463
|
|
$
|
366
|
Debt:
|
|
|
|
|
|
|
Current portion
|
|
$
|
1,043
|
|
$
|
432
|
Long-term portion
|
|
|
9,323
|
|
|
9,594
|
Total debt
|
|
$
|
10,366
|
|
$
|
10,026
|
|
(a)
|
|
Includes $97 million and $70 million as of March 31, 2019 and December 31, 2018, respectively, in other current assets in our Condensed Consolidated Balance Sheets.
|
As of March 31, 2019, we had $2.2 billion of debt maturing within the next 12 months, including (i) $1.4 billion of short-term borrowings under our commercial paper program; (ii) $680 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) $139 million of other debt with scheduled maturities within the next 12 months, including $72 million of tax-exempt bonds. Of the $1.4 billion of short-term borrowings outstanding under our commercial paper program as of March 31, 2019 that are supported by our long-term U.S. and Canadian revolving credit facility (“$2.75 billion revolving credit facility”), we have the intent and ability to refinance or maintain approximately $450 million of these borrowings on a long-term basis, and we have classified these amounts as long-term debt. As of March 31, 2019, we have classified an additional $680 million 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 revolving credit facility, as discussed below. The remaining $1.0 billion is classified as current obligations.
Summary of Cash Flow Activity
The following is a summary of our cash flows for the three months ended March 31 (in millions):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Net cash provided by operating activities
|
|
$
|
890
|
|
$
|
809
|
Net cash used in investing activities
|
|
$
|
(800)
|
|
$
|
(637)
|
Net cash provided by (used in) financing activities
|
|
$
|
42
|
|
$
|
(38)
|
Net Cash Provided by Operating Activities —
Our operating cash flows increased by $81 million for the three months ended March 31, 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.
Net Cash Used in Investing Activities —
The most significant items included in our investing cash flows for the three months ended March 31, 2019 and 2018 are summarized below:
|
·
|
|
Acquisitions
— We spent $394 million and $246 million for acquisitions during the three months ended March 31, 2019 and 2018, respectively, related to our Solid Waste business. Our acquisitions in 2019 are primarily related to Petro Waste Environmental LP, which is discussed further in Note 9 to the Condensed Consolidated Financial Statements.
|
|
·
|
|
Capital Expenditures —
We used $471 million and $400 million for capital expenditures during the three months ended March 31, 2019 and 2018, respectively. The Company continues to maintain a disciplined focus on capital management and fluctuations in our capital expenditures are a result of new business opportunities, growth in our existing business, the timing of replacement of aging assets and investment in assets that support our strategy of continuous improvement through efficiency and innovation.
|
|
·
|
|
Other, Net —
Cash flows from investing activities provided $53 million during the three months ended March 31, 2019 primarily related to (i) changes in our investments portfolio associated with our wholly-owned insurance captive from available-for-sale securities to restricted cash and cash equivalents and (ii) the redemption of our preferred stock received in conjunction with the 2014 sale of our Puerto Rico operations as discussed in Note 13 to the Condensed Consolidated Financial Statements.
|
Net Cash Provided by (Used in) Financing Activities —
The most significant items affecting the comparison of our financing cash flows for the three months ended March 31, 2019 and 2018 are summarized below:
|
·
|
|
Debt Borrowings (Repayments) —
The following summarizes our cash borrowings and repayments of debt (excluding our commercial paper program discussed below) for the three months ended March 31 (in millions):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Borrowings
:
|
|
|
|
|
|
|
Revolving credit facility (a)
|
|
$
|
—
|
|
$
|
28
|
Canadian term loan and revolving credit facility
|
|
|
—
|
|
|
8
|
Other debt
|
|
|
—
|
|
|
25
|
|
|
$
|
—
|
|
$
|
61
|
Repayments
:
|
|
|
|
|
|
|
Revolving credit facility (a)
|
|
$
|
(11)
|
|
$
|
—
|
Canadian term loan and revolving credit facility
|
|
|
—
|
|
|
(19)
|
Tax-exempt bonds
|
|
|
(34)
|
|
|
(20)
|
Other debt
|
|
|
(11)
|
|
|
(41)
|
|
|
$
|
(56)
|
|
$
|
(80)
|
Net cash repayments
|
|
$
|
(56)
|
|
$
|
(19)
|
|
(a)
|
|
Our revolving credit facility was amended and restated in June 2018.
|
Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information related to our debt borrowings and repayments.
|
·
|
|
Commercial Paper Program —
During the three months ended March 31, 2019 and 2018, we had net cash borrowings of $357 million and $471 million (net of the related discount on issuance), respectively, under our commercial paper program. Borrowings were primarily to support acquisitions and for general corporate purposes.
|
|
·
|
|
Common Stock Repurchase Program —
During the three months ended March 31, 2019, we repurchased $64 million of common stock and paid $4 million related to our December 2018 share repurchases. During the three months ended March 31, 2018, we repurchased $258 million of common stock, of which $8 million was paid in April 2018. See Note 12 to the Condensed Consolidated Financial Statements for additional information.
|
As a result of the pending acquisition discussed in
Subsequent Event
below, we expect to scale back our share repurchases in 2019 to a level sufficient to offset dilution from
stock-based compensation plans.
|
·
|
|
Cash Dividends —
For the periods presented, all dividends have been declared by our Board of Directors.
|
We paid cash dividends of $223 million and $206 million during the three months ended March 31, 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 2018 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 for the three months ended March 31 is shown in the table below (in millions), and may not be calculated the same as similarly-titled measures presented by other companies:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Net cash provided by operating activities
|
|
$
|
890
|
|
$
|
809
|
Capital expenditures
|
|
|
(471)
|
|
|
(400)
|
Proceeds from divestitures of businesses and other assets (net of cash divested)
|
|
|
12
|
|
|
14
|
Free cash flow
|
|
$
|
431
|
|
$
|
423
|
Subsequent Event
On April 14, 2019, we entered into an Agreement and Plan of Merger to acquire all outstanding shares of Advanced Disposal Services, Inc. (“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 94 collection operations, 73 transfer stations, 41 landfills and 22 owned or operated recycling facilities.
The transaction is expected to close by the first quarter of 2020, subject to the satisfaction of customary closing conditions, including regulatory approvals.
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 three months ended March 31, 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.
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.
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 March 31, 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 March 31, 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 March 31, 2019. We determined that there were no changes in our internal control over financial reporting during the quarter ended March 31,2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.