UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
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, 2017
or
For the Quarterly Period Ended June 30, 2018 | |
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 |
For the transition period from to
Commission file number1-12154
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
(713) 512-6200
(Registrant’s telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-2 of the Exchange Act.
Large accelerated filer | ☑ |
| Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | 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 Rule12b-2 of the Act). Yes ☐ No ☒☑
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at July 20, 20172018 was 440,035,810428,716,960 (excluding treasury shares of 190,246,651)201,565,501).
PART I.
Item 1. Financial Statements.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Par Value Amounts)
|
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|
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|
|
|
| June 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
|
| (Unaudited) |
|
|
| |
ASSETS | ||||||
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 47 |
| $ | 22 |
Accounts receivable, net of allowance for doubtful accounts of $24 and $21, respectively |
|
| 1,838 |
|
| 1,805 |
Other receivables |
|
| 351 |
|
| 569 |
Parts and supplies |
|
| 100 |
|
| 96 |
Other assets |
|
| 135 |
|
| 132 |
Total current assets |
|
| 2,471 |
|
| 2,624 |
Property and equipment, net of accumulated depreciation and amortization of $18,050 and $17,704, respectively |
|
| 11,625 |
|
| 11,559 |
Goodwill |
|
| 6,346 |
|
| 6,247 |
Other intangible assets, net |
|
| 553 |
|
| 547 |
Restricted trust and escrow accounts |
|
| 419 |
|
| 319 |
Investments in unconsolidated entities |
|
| 254 |
|
| 269 |
Other assets |
|
| 346 |
|
| 264 |
Total assets |
| $ | 22,014 |
| $ | 21,829 |
LIABILITIES AND EQUITY | ||||||
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
| $ | 829 |
| $ | 1,040 |
Accrued liabilities |
|
| 1,131 |
|
| 980 |
Deferred revenues |
|
| 517 |
|
| 503 |
Current portion of long-term debt |
|
| 828 |
|
| 739 |
Total current liabilities |
|
| 3,305 |
|
| 3,262 |
Long-term debt, less current portion |
|
| 8,968 |
|
| 8,752 |
Deferred income taxes |
|
| 1,250 |
|
| 1,248 |
Landfill and environmental remediation liabilities |
|
| 1,810 |
|
| 1,770 |
Other liabilities |
|
| 625 |
|
| 755 |
Total liabilities |
|
| 15,958 |
|
| 15,787 |
Commitments and contingencies |
|
|
|
|
|
|
Equity: |
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|
|
Waste Management, Inc. stockholders’ equity: |
|
|
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|
|
Common stock, $0.01 par value; 1,500,000,000 shares authorized; 630,282,461 shares issued |
|
| 6 |
|
| 6 |
Additional paid-in capital |
|
| 4,935 |
|
| 4,933 |
Retained earnings |
|
| 9,166 |
|
| 8,588 |
Accumulated other comprehensive income (loss) |
|
| (49) |
|
| 8 |
Treasury stock at cost, 201,905,532 and 196,963,558 shares, respectively |
|
| (8,004) |
|
| (7,516) |
Total Waste Management, Inc. stockholders’ equity |
|
| 6,054 |
|
| 6,019 |
Noncontrolling interests |
|
| 2 |
|
| 23 |
Total equity |
|
| 6,056 |
|
| 6,042 |
Total liabilities and equity |
| $ | 22,014 |
| $ | 21,829 |
June 30, 2017 | December 31, 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 32 | $ | 32 | ||||
Accounts receivable, net of allowance for doubtful accounts of $25 and $24, respectively | 1,772 | 1,700 | ||||||
Other receivables | 305 | 432 | ||||||
Parts and supplies | 96 | 90 | ||||||
Other assets | 121 | 122 | ||||||
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|
|
| |||||
Total current assets | 2,326 | 2,376 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $17,572 and $17,152, respectively | 11,002 | 10,950 | ||||||
Goodwill | 6,248 | 6,215 | ||||||
Other intangible assets, net | 573 | 591 | ||||||
Investments in unconsolidated entities | 289 | 320 | ||||||
Other assets | 401 | 407 | ||||||
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|
|
| |||||
Total assets | $ | 20,839 | $ | 20,859 | ||||
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|
|
| |||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 808 | $ | 799 | ||||
Accrued liabilities | 1,075 | 1,085 | ||||||
Deferred revenues | 497 | 493 | ||||||
Current portion of long-term debt | 390 | 417 | ||||||
|
|
|
| |||||
Total current liabilities | 2,770 | 2,794 | ||||||
Long-term debt, less current portion | 8,667 | 8,893 | ||||||
Deferred income taxes | 1,487 | 1,482 | ||||||
Landfill and environmental remediation liabilities | 1,712 | 1,675 | ||||||
Other liabilities | 696 | 695 | ||||||
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|
|
| |||||
Total liabilities | 15,332 | 15,539 | ||||||
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|
|
| |||||
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 | 6 | ||||||
Additionalpaid-in capital | 4,828 | 4,850 | ||||||
Retained earnings | 7,671 | 7,388 | ||||||
Accumulated other comprehensive loss | (33 | ) | (80 | ) | ||||
Treasury stock at cost, 190,571,147 and 190,966,584 shares, respectively | (6,986 | ) | (6,867 | ) | ||||
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|
|
| |||||
Total Waste Management, Inc. stockholders’ equity | 5,486 | 5,297 | ||||||
Noncontrolling interests | 21 | 23 | ||||||
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| |||||
Total equity | 5,507 | 5,320 | ||||||
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| |||||
Total liabilities and equity | $ | 20,839 | $ | 20,859 | ||||
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|
|
See notesNotes to Condensed Consolidated Financial Statements.
2
2
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except per Share Amounts)
(Unaudited)
|
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Operating revenues |
| $ | 3,739 |
| $ | 3,677 |
| $ | 7,250 |
| $ | 7,117 |
Costs and expenses: |
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|
|
|
|
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|
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|
|
Operating |
|
| 2,313 |
|
| 2,290 |
|
| 4,497 |
|
| 4,456 |
Selling, general and administrative |
|
| 365 |
|
| 353 |
|
| 738 |
|
| 743 |
Depreciation and amortization |
|
| 384 |
|
| 356 |
|
| 731 |
|
| 684 |
Restructuring |
|
| 1 |
|
| 1 |
|
| 3 |
|
| 2 |
(Gain) loss from divestitures, asset impairments and unusual items, net |
|
| (39) |
|
| 4 |
|
| (42) |
|
| 1 |
|
|
| 3,024 |
|
| 3,004 |
|
| 5,927 |
|
| 5,886 |
Income from operations |
|
| 715 |
|
| 673 |
|
| 1,323 |
|
| 1,231 |
Other income (expense): |
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|
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|
|
|
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|
|
Interest expense, net |
|
| (93) |
|
| (90) |
|
| (184) |
|
| (182) |
Equity in net losses of unconsolidated entities |
|
| (13) |
|
| (13) |
|
| (20) |
|
| (45) |
Other, net |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
|
| (106) |
|
| (103) |
|
| (203) |
|
| (227) |
Income before income taxes |
|
| 609 |
|
| 570 |
|
| 1,120 |
|
| 1,004 |
Income tax expense |
|
| 110 |
|
| 209 |
|
| 226 |
|
| 346 |
Consolidated net income |
|
| 499 |
|
| 361 |
|
| 894 |
|
| 658 |
Less: Net loss attributable to noncontrolling interests |
|
| — |
|
| (1) |
|
| (1) |
|
| (2) |
Net income attributable to Waste Management, Inc. |
| $ | 499 |
| $ | 362 |
| $ | 895 |
| $ | 660 |
Basic earnings per common share |
| $ | 1.16 |
| $ | 0.82 |
| $ | 2.07 |
| $ | 1.49 |
Diluted earnings per common share |
| $ | 1.15 |
| $ | 0.81 |
| $ | 2.06 |
| $ | 1.49 |
Cash dividends declared per common share |
| $ | 0.465 |
| $ | 0.425 |
| $ | 0.93 |
| $ | 0.85 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Operating revenues | $ | 3,677 | $ | 3,425 | $ | 7,117 | $ | 6,601 | ||||||||
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| |||||||||
Costs and expenses: | ||||||||||||||||
Operating | 2,290 | 2,130 | 4,456 | 4,123 | ||||||||||||
Selling, general and administrative | 353 | 340 | 743 | 702 | ||||||||||||
Depreciation and amortization | 356 | 340 | 684 | 652 | ||||||||||||
Restructuring | 1 | 2 | 2 | 4 | ||||||||||||
Expense from divestitures, asset impairments and unusual items, net | 4 | 2 | 1 | 1 | ||||||||||||
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| |||||||||
3,004 | 2,814 | 5,886 | 5,482 | |||||||||||||
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| |||||||||
Income from operations | 673 | 611 | 1,231 | 1,119 | ||||||||||||
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| |||||||||
Other income (expense): | ||||||||||||||||
Interest expense, net | (90 | ) | (93 | ) | (182 | ) | (188 | ) | ||||||||
Equity in net losses of unconsolidated entities | (13 | ) | (16 | ) | (45 | ) | (23 | ) | ||||||||
Other, net | — | (43 | ) | — | (53 | ) | ||||||||||
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| |||||||||
(103 | ) | (152 | ) | (227 | ) | (264 | ) | |||||||||
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| |||||||||
Income before income taxes | 570 | 459 | 1,004 | 855 | ||||||||||||
Income tax expense | 209 | 173 | 346 | 313 | ||||||||||||
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| |||||||||
Consolidated net income | 361 | 286 | 658 | 542 | ||||||||||||
Less: Net loss attributable to noncontrolling interests | (1 | ) | (1 | ) | (2 | ) | (3 | ) | ||||||||
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| |||||||||
Net income attributable to Waste Management, Inc. | $ | 362 | $ | 287 | $ | 660 | $ | 545 | ||||||||
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| |||||||||
Basic earnings per common share | $ | 0.82 | $ | 0.65 | $ | 1.49 | $ | 1.22 | ||||||||
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| |||||||||
Diluted earnings per common share | $ | 0.81 | $ | 0.64 | $ | 1.49 | $ | 1.22 | ||||||||
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| |||||||||
Cash dividends declared per common share | $ | 0.425 | $ | 0.41 | $ | 0.85 | $ | 0.82 | ||||||||
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Consolidated net income |
| $ | 499 |
| $ | 361 |
| $ | 894 |
| $ | 658 |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, net |
|
| 2 |
|
| 2 |
|
| 4 |
|
| 4 |
Available-for-sale securities, net |
|
| — |
|
| 1 |
|
| (1) |
|
| 2 |
Foreign currency translation adjustments |
|
| (23) |
|
| 30 |
|
| (55) |
|
| 40 |
Post-retirement benefit obligation, net |
|
| — |
|
| — |
|
| — |
|
| 1 |
Other comprehensive income (loss), net of tax |
|
| (21) |
|
| 33 |
|
| (52) |
|
| 47 |
Comprehensive income |
|
| 478 |
|
| 394 |
|
| 842 |
|
| 705 |
Less: Comprehensive loss attributable to noncontrolling interests |
|
| — |
|
| (1) |
|
| (1) |
|
| (2) |
Comprehensive income attributable to Waste Management, Inc. |
| $ | 478 |
| $ | 395 |
| $ | 843 |
| $ | 707 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Consolidated net income | $ | 361 | $ | 286 | $ | 658 | $ | 542 | ||||||||
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| |||||||||
Other comprehensive income, net of tax expense: | ||||||||||||||||
Derivative instruments, net | 2 | 2 | 4 | 9 | ||||||||||||
Available-for-sale securities, net | 1 | 1 | 2 | 2 | ||||||||||||
Foreign currency translation adjustments | 30 | 6 | 40 | 67 | ||||||||||||
Post-retirement benefit obligation, net | — | — | 1 | — | ||||||||||||
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Other comprehensive income, net of tax expense | 33 | 9 | 47 | 78 | ||||||||||||
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Comprehensive income | 394 | 295 | 705 | 620 | ||||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | (1 | ) | (1 | ) | (2 | ) | (3 | ) | ||||||||
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Comprehensive income attributable to Waste Management, Inc. | $ | 395 | $ | 296 | $ | 707 | $ | 623 | ||||||||
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See notesNotes to Condensed Consolidated Financial Statements.
3
3
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Consolidated net income | $ | 658 | $ | 542 | ||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 684 | 652 | ||||||
Deferred income tax benefit | (3 | ) | (14 | ) | ||||
Interest accretion on landfill liabilities | 45 | 44 | ||||||
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets | 1 | 8 | ||||||
Provision for bad debts | 21 | 18 | ||||||
Equity-based compensation expense | 54 | 51 | ||||||
Net gain from disposal of assets | (5 | ) | (10 | ) | ||||
Expense from divestitures, asset impairments and other, net | 29 | 42 | ||||||
Equity in net losses of unconsolidated entities, net of dividends | 17 | 23 | ||||||
Change in operating assets and liabilities, net of effects of acquisitions and divestitures: | ||||||||
Receivables | 43 | 66 | ||||||
Other current assets | (3 | ) | (8 | ) | ||||
Other assets | (6 | ) | 75 | |||||
Accounts payable and accrued liabilities | 32 | 44 | ||||||
Deferred revenues and other liabilities | (33 | ) | (39 | ) | ||||
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| |||||
Net cash provided by operating activities | 1,534 | 1,494 | ||||||
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| |||||
Cash flows from investing activities: | ||||||||
Acquisitions of businesses, net of cash acquired | (51 | ) | (572 | ) | ||||
Capital expenditures | (631 | ) | (629 | ) | ||||
Proceeds from divestitures of businesses and other assets (net of cash divested) | 13 | 24 | ||||||
Other, net | (8 | ) | (9 | ) | ||||
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|
| |||||
Net cash used in investing activities | (677 | ) | (1,186 | ) | ||||
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|
|
| |||||
Cash flows from financing activities: | ||||||||
New borrowings | 86 | 2,094 | ||||||
Debt repayments | (627 | ) | (1,517 | ) | ||||
Net commercial paper borrowings | 253 | — | ||||||
Common stock repurchase program | (250 | ) | (500 | ) | ||||
Cash dividends | (381 | ) | (364 | ) | ||||
Exercise of common stock options | 86 | 44 | ||||||
Tax payments associated with equity-based compensation transactions | (47 | ) | (23 | ) | ||||
Other, net | 23 | (43 | ) | |||||
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|
|
| |||||
Net cash used in financing activities | (857 | ) | (309 | ) | ||||
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|
|
| |||||
Effect of exchange rate changes on cash and cash equivalents | — | 1 | ||||||
|
|
|
| |||||
Increase (decrease) in cash and cash equivalents | — | — | ||||||
Cash and cash equivalents at beginning of period | 32 | 39 | ||||||
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| |||||
Cash and cash equivalents at end of period | $ | 32 | $ | 39 | ||||
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| Six Months Ended | ||||
|
| June 30, | ||||
|
| 2018 |
| 2017 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Consolidated net income |
| $ | 894 |
| $ | 658 |
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 731 |
|
| 684 |
Deferred income tax benefit |
|
| (21) |
|
| (3) |
Interest accretion on landfill liabilities |
|
| 47 |
|
| 45 |
Provision for bad debts |
|
| 22 |
|
| 21 |
Equity-based compensation expense |
|
| 41 |
|
| 54 |
Net gain on disposal of assets |
|
| (10) |
|
| (5) |
(Gain) loss from divestitures, asset impairments and other, net |
|
| (42) |
|
| 29 |
Equity in net losses of unconsolidated entities, net of dividends |
|
| 20 |
|
| 17 |
Change in operating assets and liabilities, net of effects of acquisitions and divestitures: |
|
|
|
|
|
|
Receivables |
|
| 202 |
|
| 43 |
Other current assets |
|
| (9) |
|
| (3) |
Other assets |
|
| (2) |
|
| (5) |
Accounts payable and accrued liabilities |
|
| 31 |
|
| 32 |
Deferred revenues and other liabilities |
|
| (120) |
|
| (32) |
Net cash provided by operating activities |
|
| 1,784 |
|
| 1,535 |
Cash flows from investing activities: |
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired |
|
| (263) |
|
| (49) |
Capital expenditures |
|
| (836) |
|
| (631) |
Proceeds from divestitures of businesses and other assets (net of cash divested) |
|
| 96 |
|
| 13 |
Other, net |
|
| (7) |
|
| (6) |
Net cash used in investing activities |
|
| (1,010) |
|
| (673) |
Cash flows from financing activities: |
|
|
|
|
|
|
New borrowings |
|
| 83 |
|
| 86 |
Debt repayments |
|
| (196) |
|
| (627) |
Net commercial paper borrowings |
|
| 443 |
|
| 253 |
Common stock repurchase program |
|
| (550) |
|
| (250) |
Cash dividends |
|
| (406) |
|
| (381) |
Exercise of common stock options |
|
| 33 |
|
| 86 |
Tax payments associated with equity-based compensation transactions |
|
| (28) |
|
| (47) |
Other, net |
|
| (26) |
|
| 21 |
Net cash used in financing activities |
|
| (647) |
|
| (859) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents |
|
| (1) |
|
| — |
Increase in cash, cash equivalents and restricted cash and cash equivalents |
|
| 126 |
|
| 3 |
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
|
| 293 |
|
| 94 |
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 419 |
| $ | 97 |
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|
|
Reconciliation of cash, cash equivalents and restricted cash and cash equivalents at end of period: | ||||||
Cash and cash equivalents |
| $ | 47 |
| $ | 32 |
Restricted cash and cash equivalents included in restricted trust and escrow accounts |
|
| 372 |
|
| 65 |
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | 419 |
| $ | 97 |
See notesNotes to Condensed Consolidated Financial Statements.
4
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In Millions, Except Shares in Thousands)
(Unaudited)
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| Waste Management, Inc. Stockholders’ Equity |
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| Accumulated |
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| |
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| Additional |
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| Other |
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| Common Stock |
| Paid-In |
| Retained |
| Comprehensive |
| Treasury Stock |
| Noncontrolling | ||||||||||
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| Total |
| Shares |
| Amounts |
| Capital |
| Earnings |
| Income (Loss) |
| Shares |
| Amounts |
| Interests | |||||||
Balance, December 31, 2017 |
| $ | 6,042 |
| 630,282 |
| $ | 6 |
| $ | 4,933 |
| $ | 8,588 |
| $ | 8 |
| (196,964) |
| $ | (7,516) |
| $ | 23 |
Adoption of new accounting standards |
|
| 80 |
| — |
|
| — |
|
| — |
|
| 85 |
|
| (5) |
| — |
|
| — |
|
| — |
Consolidated net income |
|
| 894 |
| — |
|
| — |
|
| — |
|
| 895 |
|
| — |
| — |
|
| — |
|
| (1) |
Other comprehensive income (loss), net of tax |
|
| (52) |
| — |
|
| — |
|
| — |
|
| — |
|
| (52) |
| — |
|
| — |
|
| — |
Cash dividends |
|
| (406) |
| — |
|
| — |
|
| — |
|
| (406) |
|
| — |
| — |
|
| — |
|
| — |
Equity-based compensation transactions, net |
|
| 68 |
| — |
|
| — |
|
| 2 |
|
| 4 |
|
| — |
| 1,624 |
|
| 62 |
|
| — |
Common stock repurchase program |
|
| (550) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| (6,568) |
|
| (550) |
|
| — |
Divestiture of noncontrolling interest |
|
| (19) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (19) |
Other, net |
|
| (1) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 2 |
|
| — |
|
| (1) |
Balance, June 30, 2018 |
| $ | 6,056 |
| 630,282 |
| $ | 6 |
| $ | 4,935 |
| $ | 9,166 |
| $ | (49) |
| (201,906) |
| $ | (8,004) |
| $ | 2 |
Total | Waste Management, Inc. Stockholders’ Equity | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss |
Treasury Stock | ||||||||||||||||||||||||||||||||
Shares | Amounts | Shares | Amounts | |||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | $ | 5,320 | 630,282 | $ | 6 | $ | 4,850 | $ | 7,388 | $ | (80 | ) | (190,967 | ) | $ | (6,867 | ) | $ | 23 | |||||||||||||||||
Consolidated net income | 658 | — | — | — | 660 | — | — | — | (2 | ) | ||||||||||||||||||||||||||
Other comprehensive income, net of tax expense | 47 | — | — | — | — | 47 | — | — | — | |||||||||||||||||||||||||||
Cash dividends | (381 | ) | — | — | — | (381 | ) | — | — | — | — | |||||||||||||||||||||||||
Equity-based compensation transactions, net | 114 | — | — | (16 | ) | 4 | — | 3,519 | 126 | — | ||||||||||||||||||||||||||
Common stock repurchase program | (250 | ) | — | — | (5 | ) | — | — | (3,125 | ) | (245 | ) | — | |||||||||||||||||||||||
Other, net | (1 | ) | — | — | (1 | ) | — | — | 2 | — | — | |||||||||||||||||||||||||
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| |||||||||||||||||||
Balance, June 30, 2017 | $ | 5,507 | 630,282 | $ | 6 | $ | 4,828 | $ | 7,671 | $ | (33 | ) | (190,571 | ) | $ | (6,986 | ) | $ | 21 | |||||||||||||||||
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See notesNotes to Condensed Consolidated Financial Statements.
5
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 13. 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 provides collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfillgas-to-energy facilities in the United States.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 7.8.
The Condensed Consolidated Financial Statements as of June 30, 20172018 and for the three and six months ended June 30, 20172018 and 20162017 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 Form10-K 10‑K for the year ended December 31, 2016.2017.
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.
Adoption of New Accounting Standards
Equity-Based CompensationRevenue Recognition —In March 2016,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2016-09 2014-09 associated with equity-based compensation as partrevenue recognition. On January 1, 2018, we adopted ASU 2014-09 using the modified retrospective approach for all ongoing customer contracts. Our results of its simplification initiativeoperations for the reported periods after January 1, 2018 are presented under this amended guidance, while prior period amounts are not adjusted and continue to reduce the cost and complexity of compliancebe reported in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), while maintaining or improving the usefulness of the information provided.historical accounting guidance.
The impact of adopting the amended guidance primarily relates to (i) the deferral of certain sales incentives, which previously were expensed as incurred, but under the new guidance are capitalized as other assets and amortized to selling,
6
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
This amendedgeneral and administrative expenses over the expected life of the customer relationship and (ii) the recognition of certain consideration payable to our customers as a reduction in operating revenues, which under historical guidance was effective for the Company on January 1, 2017 and required the following changes to the presentation of our financial statements:
Excess tax benefits or deficiencies for share-based payments are now recorded as operating expenses. We recognized a discrete item in the period shares vest or stock options are exercised as an adjustmentnet $80 million increase to income tax expense or benefit rather than additionalpaid-in capital. This change was applied prospectivelyour retained earnings as of January 1, 2017. The Company did not2018 for the cumulative impact of adopting the amended guidance associated with the capitalization of sales incentives as contract acquisition costs consisting of a $108 million asset and a related $28 million deferred tax liability. There were no material impacts on our consolidated financial statements, which include these changes, as a result of our adoption of this amended guidance.
For contracts with an effective term greater than one year, we applied the standard’s practical expedient that permits the exclusion of unsatisfied performance obligations as our right to consideration corresponds directly to the value provided to the customer for services completed to date and all future variable consideration is allocated to wholly unsatisfied performance obligations. We also applied the standard’s optional exemption for performance obligations related to contracts that have any excess tax benefits that were not previously recognized asan original expected duration of January 1, 2017.one year or less. See Note 4 for discussion of the current year impact;
As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change did not have a material impact on our current year diluted earnings per share;
Cash flowsadditional information and disclosures related to excess tax benefits or deficienciesthis amended guidance.
Financial Instruments — In January 2016, the FASB issued ASU 2016‑01 associated with the recognition and measurement of financial assets and liabilities with further clarifications made in February 2018 with the issuance of ASU 2018-03. The amended guidance requires certain equity investments that are includednot consolidated and not accounted for under the equity method to be measured at fair value with changes in fair value recognized in net cash provided by operating activitiesincome rather than as a financing activity.component of accumulated other comprehensive income (loss). It further states that an entity may choose to measure equity investments that do not have readily determinable fair values using a quantitative approach, or measurement alternative, which is equal to its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and a corresponding increase to net cash used in financing activities of $17 million for the six months ended June 30, 2016;
Cash paid to taxing authorities when withholding shares from an employee’s vesting or exercise of equity-based compensation awards fortax-withholding purposes is now considered a repurchase of the Company’s equity instruments and is classified as net cash used in financing activities rather than as an operating activity. The Company adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and a corresponding increase to net cash used in financing activities of $23 million for the six months ended June 30, 2016; and
The Company has elected to continue to estimate forfeitures rather than account for forfeitures as they occur.
Goodwill Impairment Testing —In January 2017, the FASB issued ASU2017-04 which simplifies the goodwill impairment test by eliminating Step 2 of the quantitative assessment and should reduce the cost and complexity of evaluating goodwill for impairment. Under the amended guidance when a quantitative assessment is required, an entity will perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be measured as the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of recorded goodwill. This amended guidance, effective for the Company on January 1, 2020, permits early adoption. The Company’s early adoption on January 1, 20172018 using a prospective transition approach, which did not have an impact on our consolidated financial statements.
We concluded that all equity investments within the scope of ASU 2016-01, which primarily relate to equity securities previously accounted for under the cost method, do not have readily determinable fair values. Accordingly, the value of these investments beginning January 1, 2018 has been measured using a quantitative approach, or the measurement alternative, as noted above. As of June 30, 2018, the carrying amount of our investments without readily determinable fair values was $84 million. During the three and six months ended June 30, 2018, we did not recognize any impairments or other adjustments.
Statement of Cash Flows — In August 2016, the FASB issued ASU 2016‑15 associated with the classification of certain cash receipts and cash payments in the statement of cash flows. In November 2016, the FASB issued ASU 2016‑18 associated with the presentation of restricted cash and cash equivalents in the statement of cash flows. The objective of the amended guidance was to reduce existing diversity in practice. This amended guidance was retrospectively adopted on January 1, 2018 and required the following disclosures and changes to the presentation of our financial statements:
· | Cash, cash equivalents and restricted cash and cash equivalents reported on the Condensed Consolidated Statements of Cash Flows now includes restricted cash and cash equivalents of $62 million, $65 million and $271 million as of December 31, 2016, June 30, 2017 and December 31, 2017, respectively, in restricted trust and escrow accounts in our Condensed Consolidated Balance Sheets as well as previously reported cash and cash equivalents. |
· | Cash payments made within 120 days of the acquisition date of a business combination to settle a contingent consideration liability are classified as cash outflows from investing activities. Thereafter, cash payments up to the amount of the contingent consideration liability recognized at the acquisition date (including measurement-period adjustments) are classified as cash outflows from financing activities and any excess is classified as cash outflows from operating activities. The adoption of this amended guidance did not have a material impact on our Condensed Consolidated Statements of Cash Flows. |
7
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our restricted cash and cash equivalents generally consist of funds deposited into specific accounts for purposes of funding insurance claims and demonstrating our ability to meet our landfill final capping, closure, post-closure and environmental remediation obligations.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income — In February 2018, the FASB issued ASU 2018-02 associated with the reclassification of certain tax effects from accumulated other comprehensive income (loss). This amended guidance allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) which was signed into law on December 22, 2017. We early adopted this amended guidance on January 1, 2018, and as a result, elected to reclassify $5 million of stranded tax effects from accumulated other comprehensive income (loss) to retained earnings using a specific identification approach. See Note 10 for additional disclosures related to this amended guidance.
Income Taxes — In March 2018, the FASB issued ASU 2018-05 associated with the accounting and disclosures around the enactment of the Act and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which the Company has adopted. See Note 5 for the disclosures related to this amended guidance.
New Accounting Standards 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, with early adoption permitted beginning January 1, 2019. We are assessing the provisions of this amended guidance and evaluating the impact on our consolidated financial statements.
Leases — In February 2016, the FASB issued ASU 2016‑02 associated with lease accounting. There have been further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018. The amended guidance requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. Disclosure of key information about leasing arrangements will also be required. The amended guidance is effective for the Company on January 1, 2019. We are assessing the provisions of this amended guidance and we have (i) formed an implementation work team; (ii) performed training for the various organizations that will be most affected by the new standard; (iii) acquired a software solution to manage and account for leases under the new standard and (iv) identified our initial lease population that will be impacted by the new standard. We are evaluating the impact of this amended guidance 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.
8 WASTE MANAGEMENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 2. Landfill and Environmental Remediation Liabilities |
Liabilities for landfill and environmental remediation costs are presented in the table below (in millions):
June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Landfill | Environmental Remediation | Total | Landfill | Environmental Remediation | Total | |||||||||||||||||||
Current (in accrued liabilities) | $ | 138 | $ | 26 | $ | 164 | $ | 119 | $ | 28 | $ | 147 | ||||||||||||
Long-term | 1,493 | 219 | 1,712 | 1,457 | 218 | 1,675 | ||||||||||||||||||
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|
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| |||||||||||||
$ | 1,631 | $ | 245 | $ | 1,876 | $ | 1,576 | $ | 246 | $ | 1,822 | |||||||||||||
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7
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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| June 30, 2018 |
| December 31, 2017 | ||||||||||||||
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|
| Environmental |
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|
|
| Environmental |
|
|
| ||
|
| Landfill |
| Remediation |
| Total |
| Landfill |
| Remediation |
| Total | ||||||
Current (in accrued liabilities) |
| $ | 130 |
| $ | 28 |
| $ | 158 |
| $ | 128 |
| $ | 28 |
| $ | 156 |
Long-term |
|
| 1,589 |
|
| 221 |
|
| 1,810 |
|
| 1,547 |
|
| 223 |
|
| 1,770 |
|
| $ | 1,719 |
| $ | 249 |
| $ | 1,968 |
| $ | 1,675 |
| $ | 251 |
| $ | 1,926 |
The changes to landfill and environmental remediation liabilities for the six months ended June 30, 20172018 are reflected in the table below (in millions):
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|
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|
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|
|
|
| Environmental | |
|
| Landfill |
| Remediation | ||
December 31, 2017 |
| $ | 1,675 |
| $ | 251 |
Obligations incurred and capitalized |
|
| 41 |
|
| — |
Obligations settled |
|
| (45) |
|
| (10) |
Interest accretion |
|
| 47 |
|
| 2 |
Revisions in estimates and interest rate assumptions |
|
| (7) |
|
| 6 |
Acquisitions, divestitures and other adjustments |
|
| 8 |
|
| — |
June 30, 2018 |
| $ | 1,719 |
| $ | 249 |
Landfill | Environmental Remediation | |||||||
December 31, 2016 | $ | 1,576 | $ | 246 | ||||
Obligations incurred and capitalized | 33 | — | ||||||
Obligations settled | (38 | ) | (10 | ) | ||||
Interest accretion | 45 | 2 | ||||||
Revisions in estimates and interest rate assumptions | 13 | 7 | ||||||
Acquisitions, divestitures and other adjustments | 2 | — | ||||||
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| |||||
June 30, 2017 | $ | 1,631 | $ | 245 | ||||
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At several of our landfills, we provide financial assurance by depositing cash into restricted trust funds or escrow accounts for purposes of settlingdemonstrating our ability to meet 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 13 for additional information related to these trusts.
3. Debt
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The following table summarizes the major components of debt atas of each balance sheet date (in millions) and provides the maturities and interest rate ranges of each major category as of June 30, 2017:2018:
|
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|
|
|
|
| June 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
Revolving credit facility |
| $ | — |
| $ | — |
Commercial paper program (weighted average interest rate of 2.4% as of June 30, 2018 and 1.9% as of December 31, 2017) |
|
| 968 |
|
| 515 |
Canadian term loan and revolving credit facility, maturing March 2019 (weighted average effective interest rate of 2.7% as of June 30, 2018 and 2.5% as of December 31, 2017) |
|
| 71 |
|
| 113 |
Senior notes, maturing through 2045, interest rates ranging from 2.4% to 7.75% (weighted average interest rate of 4.3% as of June 30, 2018 and December 31, 2017) |
|
| 6,222 |
|
| 6,222 |
Tax-exempt bonds, maturing through 2045, fixed and variable interest rates ranging from 1.35% to 5.7% (weighted average interest rate of 2.2% as of June 30, 2018 and 2.0% as of December 31, 2017) |
|
| 2,328 |
|
| 2,370 |
Capital leases and other, maturing through 2040, interest rates up to 12% |
|
| 260 |
|
| 327 |
Debt issuance costs, discounts and other |
|
| (53) |
|
| (56) |
|
|
| 9,796 |
|
| 9,491 |
Current portion of long-term debt |
|
| 828 |
|
| 739 |
|
| $ | 8,968 |
| $ | 8,752 |
June 30, 2017 | December 31, 2016 | |||||||
$2.25 billion revolving credit facility, maturing July 2020 (weighted average interest rate of 1.9% as of December 31, 2016) | $ | — | $ | 426 | ||||
Commercial paper program (weighted average interest rate of 1.4% as of June 30, 2017) | 253 | — | ||||||
Other letter of credit facilities, maturing through December 2018 | — | — | ||||||
Canadian term loan and revolving credit facility, maturing March 2019 (weighted average effective interest rate of 2.0% as of June 30, 2017 and 2.1% as of December 31, 2016) | 171 | 239 | ||||||
Senior notes maturing through 2045, interest rates ranging from 2.4% to 7.75% (weighted average interest rate of 4.6% as of June 30, 2017 and December 31, 2016) | 6,033 | 6,033 | ||||||
Tax-exempt bonds, maturing through 2045, fixed and variable interest rates ranging from 0.9% to 5.7% (weighted average interest rate of 1.9% as of June 30, 2017 and 1.8% as of December 31, 2016) | 2,305 | 2,304 | ||||||
Capital leases and other, maturing through 2055, interest rates up to 12% | 295 | 308 | ||||||
|
|
|
| |||||
9,057 | 9,310 | |||||||
Current portion of long-term debt | 390 | 417 | ||||||
|
|
|
| |||||
$ | 8,667 | $ | 8,893 | |||||
|
|
|
|
9
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt Classification
As of June 30, 2017,2018, we had $2.1 billion of debt maturing within the current portion of our long-term debt balance of $390 million includesnext 12 months, including (i) $184$968 million of short-term borrowings under our commercial paper program andprogram; (ii) $206$796 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (iii) $265 million of other debt with scheduled maturities within the next 12 months, including $148$219 million oftax-exempt bonds.
As of June 30, 2017, we have classified (i) $590 bonds and (iv) C$94 million, or $71 million, of 6.1% senior notes that mature in March 2018 and (ii) $69borrowings under our Canadian term loan. Of the $968 million of short-term borrowings outstanding under our commercial paper program as of June 30, 2018 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 $476 million of these borrowings on a long-term basis, and we have classified these amounts as long-term debt. As of June 30, 2018, we have classified an additional $796 million of debt as long-term because we have the
8
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our long-term U.S.$2.75 billion revolving credit facility, (“$2.25 billion revolving credit facility”), as discussed below. The remaining $828 million is classified as current obligations.
In addition,As of June 30, 2018, we also have $561 million oftax-exempt bonds with term interest rate periods that expire within the next 12 months and an additional $471$268 million of variable-ratetax-exempt bonds that are supported by letters of credit.credit under our $2.75 billion revolving credit facility. The interest rates on our variable-ratetax-exempt bonds are generally reset on either a daily or weekly basis through a remarketing process. All recenttax-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 intent and ability to refinance these bonds on a long-term basis as supported by the forecasted available capacityavailability under our $2.25$2.75 billion revolving credit facility as discussed below.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, 2017.2018.
Access to and Utilization of Credit Facilities and Commercial Paper Program
$2.252.75 Billion Revolving Credit Facility— Our $2.25 In June 2018, we entered into the $2.75 billion revolving credit facility, maturingwhich amended and restated our prior long-term U.S. revolving credit facility. Amendments to the credit agreement included (i) increasing total capacity under the facility from $2.25 billion to $2.75 billion; (ii) establishment of a $750 million accordion feature that may be used to increase total capacity in July 2020future periods; (iii) extending the term through June2023 and (iv) inclusion of two one-year extension options. Waste Management of Canada Corporation and WM Quebec Inc., each an indirect wholly-owned subsidiary of WM, were added as additional borrowers under the $2.75 billion revolving credit facility, and the agreement permits borrowing in Canadian dollars up to the U.S. dollar equivalent of $375 million, with such borrowings to be repaid in Canadian dollars. Waste Management Holdings, Inc., a wholly-owned subsidiary of WM, guarantees all of the obligations under the revolving credit facility.
The $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, 2017,2018, we had no outstanding borrowings under this facility. We had $780$603 million of letters of credit issued and $253$968 million of outstanding borrowings under our commercial paper program, both supported by this facility, leaving unused and available credit capacity of $1,217 million$1.2 billion as of June 30, 2017.2018.
Commercial Paper Program — In August 2016, we entered intoWe have a $1.5 billion commercial paper program that enables us to borrow funds for up to 397 days at competitive interest rates. The commercial paper program is fully supported by our $2.25$2.75 billion revolving credit facility. In the second quarter of 2018, we amended our commercial paper program, increasing our ability to borrow funds from $1.5 billion to $2.75 billion, provided that the aggregate outstanding amount of commercial paper borrowings, together with borrowings and issued letters of credit under the $2.75 billion revolving credit facility, shall not at any time exceed the aggregate authorized borrowing capacity of such facility. As of June 30, 2018, we had $968 million of outstanding borrowings under our commercial paper program.
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Canadian Term Loan and Revolving Credit Facility— We have a Canadian credit agreement (which includes a term loan and revolving credit facility) that matures in March 2019. This agreement provides the Company (i) C$50 million of revolving credit capacity, which can be used for borrowings or letters of credit, and (ii) C$460 million ofnon-revolving term credit that is prepayable without penalty and principal amounts repaid may not be reborrowed. As of June 30, 2017,2018, we had C$94 million, or $71 million, of outstanding borrowings under our Canadian term loan. During the third quarter of 2018, we expect to incur borrowings under our $2.75 billion revolving credit facility to repay the outstanding borrowings under our Canadian term loan. As of June 30, 2018, we had no borrowings or letters of credit outstanding under the Canadian revolving credit facility.
Other Letter of Credit Facilities— As of June 30, 2017,2018, we had utilized $461$503 million of other letter of credit facilities, which are both committed and uncommitted, with terms maturing through December 2018.June 2019.
Debt Borrowings and Repayments
$2.25 Billion Revolving Credit Facility— During the six months ended June 30, 2017,2018, we had net repayments of $426borrowed and repaid $28 million under our $2.25 billion revolving credit facility, with $253 million replaced with net borrowings under our commercial paper programwhich we amended and the remainder paid with available cash.restated in June 2018, as discussed above.
Canadian Term LoanCommercial Paper Program — During the six months ended June 30, 2017,2018, we repaidhad net cash borrowings of $443 million to support new business opportunities and for general corporate purposes.
Canadian Term Loan and Revolving Credit Facility — During the six months ended June 30, 2018, we had net repayments of C$9948 million, or $74$37 million, of net advances under our Canadian term loan and revolving credit facility with available cash. The remaining change in the carrying value of outstanding borrowings under our Canadian term loan is due to foreign currency translation.
Tax-Exempt Bonds — During the six months ended June 30, 2018, we repaid $42 million of our tax-exempt bonds with available cash.
Capital Leases and Other — During the six months ended June 30, 2018, capital leases and other debt had a net decrease of $67million, primarily due to divestitures and net cash repayments of debt at maturity.
4. Operating Revenues
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, 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cross-Currency Swaps
In March 2016, our Canadian subsidiaries repaid C$370 millionOur revenue from sources other than customer contracts primarily relates to lease revenue associated with compactors and balers. Revenue from these leasing arrangements was not material and represented approximately 1% of intercompany debt to WM Holdings with proceeds from our Canadian term loan. Concurrent with the repaymenttotal revenue for each of the intercompany debt, we terminatedreported periods.
See Note 8 for additional information related to revenue by reportable segment and major lines of business.
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 related cross-currency swaps and received $67 millionperiod service is provided.
Accounts Receivable
Accounts receivable, which are recorded when billed, when services are performed or when cash is advanced, are claims against third parties that will generally be settled in cash. The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. We estimate our allowance for doubtful accounts based on historical collection trends; type of customer, such as municipal or commercial; the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past-due receivable balances are written off when our internal collection efforts have been unsuccessful.
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance and classify them as current since they are earned within a year and there are no significant financing components. Substantially all our deferred revenues during the reported periods are realized as revenues within one to three months, when the related services are performed.
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 our termination of these swaps was5 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 a change in other current assetsor noncurrent based on the timing of when we expect to recognize amortization and other assets within net cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. In addition, we recognized $8 million of expense associated with the termination of these swaps during the three months ended March 31, 2016, which wasare included in other netassets in theour Condensed Consolidated StatementBalance Sheet.
As of Operations.June 30, 2018, we had $139 million of deferred contract costs, of which $108 million was related to deferred sales incentives. 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.
Long-Term Contracts
Approximately 30% of our total revenue is derived from contracts with an effective term greater than one year. The consideration for these contracts is variable in nature. The variable elements of these contracts primarily include the number of homes and businesses served and annual rate changes based on consumer price index, fuel prices or other
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WASTE MANAGEMENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) operating costs. Such contracts are generally within our collection, recycling and other lines of business and have a weighted average remaining contract life of approximately four years. We do not disclose the value of unsatisfied performance obligations for these contracts as our right to consideration corresponds directly to the value provided to the customer for services completed to date and all future variable consideration is allocated to wholly unsatisfied performance obligations. 5. Income Taxes |
Our effective income tax rate for the three and six months ended June 30, 20172018 was 36.6%18.1% and 34.4%20.2%, respectively, compared with 37.6%36.6% and 36.5%34.4%, respectively, for the comparable prior year periods. We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant. The decrease in the effective income tax rate for the three and six months ended June 30, 2018, compared with the prior year periods, was primarily due to the enactment of tax reform, as discussed below.
The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2018 was 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-month period was also favorably impacted by excess tax benefits related to equity-based compensation.
The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended June 30, 2017 was primarily due to the unfavorable impact of state and local income taxes offset, in part, by the favorable impact of federal tax credits. The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the six months ended June 30, 2017 was primarily due to the favorable impact of excess tax benefits related to equity-based compensation and federal tax credits offset, in part, by the unfavorable impact of state and local income taxes and the tax implications of impairments.
Enactment of Tax Reform —The difference between federal income taxes computed atAct was signed into law on December 22, 2017. The most significant impacts of the Act to the Company include a reduction in the federal statutorycorporate income tax rate from 35% to 21%, effective January 1, 2018, and reporteda one-time, mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings.
In accordance with ASU 2018-05 and SAB 118, the Company recognized the provisional tax impacts related to the re-measurement of our deferred income taxes fortax assets and liabilities and the three and six monthsone-time, mandatory transition tax on deemed repatriation during the year ended December 31, 2017. As of June 30, 2016 was primarily2018, we have not made any additional measurement-period adjustments related to these items. Such adjustments may be necessary in future periods due to, among other things, the unfavorablesignificant complexity of the Act and anticipated additional regulatory guidance that may be issued by the Internal Revenue Service (“IRS”), changes in analysis, interpretations and assumptions the Company has made and actions the Company may take as a result of the Act. We are continuing to gather information to assess the application of the Act and expect to complete our analysis with the filing of our 2017 income tax implications of impairmentsreturns during 2018.
Tax Audit Settlements — We are currently under audit by the IRS and the impact ofvarious state and local income taxes offset,taxing authorities and our audits are in part, by the favorable impactvarious stages of federalcompletion. In June 2018, we settled various tax credits and tax audit settlements.
Equity-Based Compensation — During the three and six months ended June 30, 2017, we recognizedaudits, which resulted in a reduction in our income tax expense of $2 million and $34 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards. See Note 1 for discussion of our adoption of ASU2016-09.$33 million.
Investments Qualifying for Federal Tax Credits— We have significant financial interests in entities established to invest in and managelow-income housing properties and a refined coal facility. We support the operations of these entities in exchange for apro-rata share of the tax credits they generate. Thelow-income housing investments and the coal facility’s refinement processes qualify for federal tax credits that we expect to realize through 2020 under Section 42 and through 2019 under Section 45, respectively, of the Internal Revenue Code.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, withinin our Condensed Consolidated Statements of Operations. 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 because of tax credits realized from these investments. During the three and six months ended June 30, 2017, we recognized $9 million and $15 million of net losses and a reduction in our income tax expense of $14 million and $25 million, respectively, primarily because of tax credits realized from these investments. During the three and six months ended June 30, 2016, we recognized $9 million and $15 million of net losses and a reduction in our income tax expense of $14 million and $25 million, respectively, primarily because of tax credits realized from these investments. Interest expense associated with our investment inlow-income housing properties was not material for the periods presented. See Note 13 for additional information related to these unconsolidated variable interest entities.
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WASTE MANAGEMENT, INC.Equity-Based Compensation — During the three and six months ended June 30, 2018, we recognized a reduction in our income tax expense of $1 million and $12 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards compared with $2 million and $34 million, respectively, for the comparable prior year periods.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)6. Earnings Per Share
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Basic and diluted earnings per share were computed using the following common share data (shares in millions):
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| Three Months Ended |
| Six Months Ended | ||||
|
| June 30, |
| June 30, | ||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
Number of common shares outstanding at end of period |
| 428.4 |
| 439.7 |
| 428.4 |
| 439.7 |
Effect of using weighted average common shares outstanding |
| 1.5 |
| 2.2 |
| 3.2 |
| 1.9 |
Weighted average basic common shares outstanding |
| 429.9 |
| 441.9 |
| 431.6 |
| 441.6 |
Dilutive effect of equity-based compensation awards and other contingently issuable shares |
| 2.4 |
| 2.5 |
| 2.5 |
| 2.8 |
Weighted average diluted common shares outstanding |
| 432.3 |
| 444.4 |
| 434.1 |
| 444.4 |
Potentially issuable shares |
| 8.0 |
| 8.4 |
| 8.0 |
| 8.4 |
Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding |
| 1.9 |
| 2.3 |
| 1.9 |
| 2.3 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Number of common shares outstanding at end of period | 439.7 | 441.7 | 439.7 | 441.7 | ||||||||||||
Effect of using weighted average common shares outstanding | 2.2 | 2.3 | 1.9 | 3.3 | ||||||||||||
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Weighted average basic common shares outstanding | 441.9 | 444.0 | 441.6 | 445.0 | ||||||||||||
Dilutive effect of equity-based compensation awards and other contingently issuable shares (a) | 2.5 | 2.7 | 2.8 | 2.5 | ||||||||||||
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Weighted average diluted common shares outstanding | 444.4 | 446.7 | 444.4 | 447.5 | ||||||||||||
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Potentially issuable shares | 8.4 | 10.1 | 8.4 | 10.1 | ||||||||||||
Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding | 2.3 | 0.5 | 2.3 | 0.8 |
7. Commitments and Contingencies
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Financial Instruments— We have obtained letters of credit, surety bonds and insurance policies and have established trust funds and issued financial guarantees to supporttax-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 $2.25$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 companies,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, workers’ compensation, directors’ and officers’ liability, pollution legal liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
our self-insured retentions,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. In December 2017, we elected to 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.
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 14 for further information.discussion.
WeAs of June 30, 2018, we have also guaranteed the obligations and certain performance requirements of and provided indemnification to, third parties as of June 30, 2017 in connection with both consolidated and unconsolidated entities, including agreements guaranteeing(i) guarantees to cover certain market value losses for approximately 850775 homeowners’ properties adjacent to or near 2219 of our landfills. Our indemnificationlandfills and (ii) guarantees totaling $85 million for performance obligations generally arise from divestitures and provide that we will be responsible forof our Wheelabrator business, divested in 2014. We have also agreed to indemnify certain third-party purchasers against liabilities associated with ourdivested operations for events that occurred prior to the sale of the operations.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 currently believe that these contingent obligations to provide indemnification or pay additional post-closing consideration in connection with our divestitures or acquisitions will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
In December 2014,flows, and we sold our Wheelabrator business, which provideswaste-to-energy services and manageswaste-to-energy facilities and independent power production plants. Before the divestiture of our Wheelabrator business, WM had guaranteed certain operational and financial performance obligations of Wheelabrator and its subsidiaries in the ordinary course of business. In conjunction with the divestiture, certain WM guarantees of Wheelabrator obligations were terminated, but others continued and are now guarantees of third-party obligations. When possible, Wheelabrator seeks to have the applicable third-party beneficiaries release WM from these guarantees, but until such efforts are successful or the underlying financial commitments are restructured, WM has agreed to retain the guarantees and, in exchange, receive a credit support fee or other financial assurances guaranteed by a third-party financial institution to protect WM in the event ofnon-compliance by Wheelabrator. The most significant of these guarantees specifically define WM’s maximum financial obligation over the course of the relevant agreements. As of June 30, 2017 and December 31, 2016, WM’s maximum future payments under these guarantees was $96 million. WM’s exposure under certain of the performance guarantees is variable and a maximum exposure is not defined. We have recorded the fair value of the operational and financial performance guarantees, some of which could extend through 2038, if not terminated, in our Condensed Consolidated Balance Sheets. The estimated fair value of WM’s potential obligation associated with guarantees of Wheelabrator’s obligations (net of credit support fee or indemnification asset) as of June 30, 2017 and December 31, 2016 was $9 million and $11 million, respectively. We currently do not expect the financial impact of such 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 andclean-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 $115$145 million higher than the $245$249 million recorded in the Condensed Consolidated Balance Sheet as of June 30, 2017.2018. 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2017,2018, we have been notified by the government that we are a PRP in connection with 7675 locations listed on the Environmental Protection Agency’s (“EPA’s”) Superfund National Priorities List (“NPL”). Of the 7675 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 6160 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.
In September 2016,On October 11, 2017, the EPA announced aissued its Record of Decision (“ROD”) with respect to the previously proposed remediation plan for the San Jacinto waste pits in Harris County, Texas, namingTexas. McGinnes Industrial Maintenance Corporation (“MIMC”), aan indirect wholly-owned subsidiary of WM, as a PRP. MIMC operated some of the waste pits from 1965 to 1966.1966 and has been named as a site PRP. In 1998, WM acquired the stock of the parent entity of MIMC. The remedy and remedial design plan for the site are not yet final. A notice and comment periodMIMC has been working with respect to the remedy closed on January 12, 2017. MIMC filed comments, detailing its disagreement with the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
proposed remedy put forth by the EPA and is continuingother 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 focus ondevelop a solution that it believes best protectsremedial design for the environmentEPA’s selected remedy for the site. Allocation of responsibility among the PRPs for the selected remedy has not been established. As of June 30, 2018 and public health.December 31, 2017, the recorded liability for MIMC’s estimated potential share of the EPA’s selected remedy and related costs was $55 million. MIMC’s ultimate liability could be materially different from current estimates. We remain an active participant in the EPA’s process established to evaluate and determine the appropriate remedy and remedial design plan for this site. As of June 30, 2017 and December 31, 2016, our recorded liability for MIMC’s estimated share of the EPA’s proposed remedy was $45 million and $46 million, respectively.
Item 103 of the SEC’s RegulationS-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 January 10, 2017, the Pennsylvania Department of Environmental Protection (“DEP”) solid waste program advised us that it intends to seek civil penalties against the Grows North and Tullytown Landfills (“Grows/Tullytown”), located in southeast Pennsylvania and owned by indirect wholly-owned subsidiaries of WM, related to operational issues, including litter and leachate discharges. Additionally, we received notice on March 15, 2017 that the DEP clean water program also intends to seek civil penalties related to similar underlying events and operational issues at Grows/Tullytown. Our internal review of these matters is in process.
Waste Management of Hawaii, Inc. (“WMHI”), an indirect wholly-owned subsidiary of WM, may face civil claims from the Hawaii Department of Health and/or the EPA based upon water discharges at the Waimanalo Gulch Sanitary Landfill, which WMHI operates for the city and county of Honolulu, following three major rainstorms in December 2010 and January 2011.
On July 10, 2013, the EPA issued a Notice of Violation (“NOV”("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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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 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 ofco-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 United StatesU.S. and Canada, we are subject to various proceedings, lawsuits, disputes and claims arising in the ordinary course of our business. Many of these
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 United StatesU.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
17
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, liabilitiesliability 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 and 2018 tax years 2014, 2015, 2016 and 2017 and expect these audits to be completed within the next nine, 12, 18 and 30 months, respectively.21 months. We are also currently undergoing audits by various state and local jurisdictions for tax years that date back to 2009, with the exception of affirmative claims in a limited number of jurisdictions that date back to 2000.2011. We maintain a liability for uncertain tax positions, the
15
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 none of the Areas individually meet the quantitative criteria to be a separate reportable segment. Wewe 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.
Annually, we analyze the Areas’ income from operations margins for purposes of segment reporting and in the fourth quarter of 2017, we realigned our Solid Waste tiers to reflect changes in their relative economic characteristics and prospects. These changes are the results of various factors including acquisitions, divestments, business mix and the economic climate of various geographies. Reclassifications have been made to our prior period consolidated financial information to conform to the current year presentation.
Tier 1 is comprised of our operations across the Southern United States,U.S., with the exception of Southern California and the Florida peninsula, and also includes the New England states, thetri-state area of Michigan, Indiana and Ohio, and Western Canada. Tier 2 now includes Southern California, Eastern Canada, Wisconsin Minnesota and a portion of the lowerMid-Atlantic region of the United States.Minnesota. Tier 3 now encompasses all the remaining operations including the Pacific Northwest and Northern California, the majority of theMid-Atlantic region of the United States,U.S., the Florida peninsula, Illinois and Missouri.
18
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
16
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized financial information concerning our reportable segments is shown in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Intercompany |
| Net |
| Income | ||||
|
| Operating |
| Operating |
| Operating |
| from | ||||
|
| Revenues |
| Revenues |
| Revenues |
| Operations | ||||
Three Months Ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Solid Waste: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
| $ | 1,485 |
| $ | (269) |
| $ | 1,216 |
| $ | 395 |
Tier 2 |
|
| 663 |
|
| (123) |
|
| 540 |
|
| 141 |
Tier 3 |
|
| 1,776 |
|
| (350) |
|
| 1,426 |
|
| 295 |
Solid Waste |
|
| 3,924 |
|
| (742) |
|
| 3,182 |
|
| 831 |
Other |
|
| 613 |
|
| (56) |
|
| 557 |
|
| 13 |
|
|
| 4,537 |
|
| (798) |
|
| 3,739 |
|
| 844 |
Corporate and Other |
|
| — |
|
| — |
|
| — |
|
| (129) |
Total |
| $ | 4,537 |
| $ | (798) |
| $ | 3,739 |
| $ | 715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Solid Waste: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
| $ | 1,417 |
| $ | (258) |
| $ | 1,159 |
| $ | 395 |
Tier 2 |
|
| 651 |
|
| (114) |
|
| 537 |
|
| 142 |
Tier 3 |
|
| 1,691 |
|
| (311) |
|
| 1,380 |
|
| 296 |
Solid Waste |
|
| 3,759 |
|
| (683) |
|
| 3,076 |
|
| 833 |
Other |
|
| 657 |
|
| (56) |
|
| 601 |
|
| (18) |
|
|
| 4,416 |
|
| (739) |
|
| 3,677 |
|
| 815 |
Corporate and Other |
|
| — |
|
| — |
|
| — |
|
| (142) |
Total |
| $ | 4,416 |
| $ | (739) |
| $ | 3,677 |
| $ | 673 |
Gross Operating Revenues | Intercompany Operating Revenues | Net Operating Revenues | Income from Operations | |||||||||||||
Three Months Ended June 30: | ||||||||||||||||
2017 | ||||||||||||||||
Solid Waste: | ||||||||||||||||
Tier 1 | $ | 1,417 | $ | (258 | ) | $ | 1,159 | $ | 395 | |||||||
Tier 2 | 916 | (169 | ) | 747 | 190 | |||||||||||
Tier 3 | 1,426 | (256 | ) | 1,170 | 248 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Solid Waste | 3,759 | (683 | ) | 3,076 | 833 | |||||||||||
Other | 657 | (56 | ) | 601 | (18 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
4,416 | (739 | ) | 3,677 | 815 | ||||||||||||
Corporate and Other | — | — | — | (142 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 4,416 | $ | (739 | ) | $ | 3,677 | $ | 673 | |||||||
|
|
|
|
|
|
|
| |||||||||
2016 | ||||||||||||||||
Solid Waste: | ||||||||||||||||
Tier 1 | $ | 1,316 | $ | (229 | ) | $ | 1,087 | $ | 362 | |||||||
Tier 2 | 856 | (158 | ) | 698 | 157 | |||||||||||
Tier 3 | 1,347 | (233 | ) | 1,114 | 235 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Solid Waste | 3,519 | (620 | ) | 2,899 | 754 | |||||||||||
Other | 572 | (46 | ) | 526 | (20 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
4,091 | (666 | ) | 3,425 | 734 | ||||||||||||
Corporate and Other | — | — | — | (123 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 4,091 | $ | (666 | ) | $ | 3,425 | $ | 611 | |||||||
|
|
|
|
|
|
|
|
19
17
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Intercompany |
| Net |
| Income | ||||
|
| Operating |
| Operating |
| Operating |
| from | ||||
|
| Revenues |
| Revenues |
| Revenues |
| Operations | ||||
Six Months Ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Solid Waste: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
| $ | 2,858 |
| $ | (510) |
| $ | 2,348 |
| $ | 760 |
Tier 2 |
|
| 1,276 |
|
| (234) |
|
| 1,042 |
|
| 263 |
Tier 3 |
|
| 3,409 |
|
| (659) |
|
| 2,750 |
|
| 586 |
Solid Waste |
|
| 7,543 |
|
| (1,403) |
|
| 6,140 |
|
| 1,609 |
Other |
|
| 1,220 |
|
| (110) |
|
| 1,110 |
|
| (10) |
|
|
| 8,763 |
|
| (1,513) |
|
| 7,250 |
|
| 1,599 |
Corporate and Other |
|
| — |
|
| — |
|
| — |
|
| (276) |
Total |
| $ | 8,763 |
| $ | (1,513) |
| $ | 7,250 |
| $ | 1,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Solid Waste: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
| $ | 2,757 |
| $ | (496) |
| $ | 2,261 |
| $ | 761 |
Tier 2 |
|
| 1,243 |
|
| (215) |
|
| 1,028 |
|
| 258 |
Tier 3 |
|
| 3,268 |
|
| (596) |
|
| 2,672 |
|
| 564 |
Solid Waste |
|
| 7,268 |
|
| (1,307) |
|
| 5,961 |
|
| 1,583 |
Other |
|
| 1,260 |
|
| (104) |
|
| 1,156 |
|
| (50) |
|
|
| 8,528 |
|
| (1,411) |
|
| 7,117 |
|
| 1,533 |
Corporate and Other |
|
| — |
|
| — |
|
| — |
|
| (302) |
Total |
| $ | 8,528 |
| $ | (1,411) |
| $ | 7,117 |
| $ | 1,231 |
Gross Operating Revenues | Intercompany Operating Revenues | Net Operating Revenues | Income from Operations | |||||||||||||
Six Months Ended June 30: | ||||||||||||||||
2017 | ||||||||||||||||
Solid Waste: | ||||||||||||||||
Tier 1 | $ | 2,757 | $ | (496 | ) | $ | 2,261 | $ | 761 | |||||||
Tier 2 | 1,758 | (322 | ) | 1,436 | 347 | |||||||||||
Tier 3 | 2,753 | (489 | ) | 2,264 | 475 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Solid Waste | 7,268 | (1,307 | ) | 5,961 | 1,583 | |||||||||||
Other | 1,260 | (104 | ) | 1,156 | (50 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
8,528 | (1,411 | ) | 7,117 | 1,533 | ||||||||||||
Corporate and Other | — | — | — | (302 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 8,528 | $ | (1,411 | ) | $ | 7,117 | $ | 1,231 | |||||||
|
|
|
|
|
|
|
| |||||||||
2016 | ||||||||||||||||
Solid Waste: | ||||||||||||||||
Tier 1 | $ | 2,557 | $ | (441 | ) | $ | 2,116 | $ | 696 | |||||||
Tier 2 | 1,637 | (300 | ) | 1,337 | 302 | |||||||||||
Tier 3 | 2,607 | (445 | ) | 2,162 | 443 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Solid Waste | 6,801 | (1,186 | ) | 5,615 | 1,441 | |||||||||||
Other | 1,072 | (86 | ) | 986 | (56 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
7,873 | (1,272 | ) | 6,601 | 1,385 | ||||||||||||
Corporate and Other | — | — | — | (266 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 7,873 | $ | (1,272 | ) | $ | 6,601 | $ | 1,119 | |||||||
|
|
|
|
|
|
|
|
The mix of operating revenues from our major lines of business are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Commercial |
| $ | 986 |
| $ | 917 |
| $ | 1,941 |
| $ | 1,828 |
Residential |
|
| 632 |
|
| 632 |
|
| 1,246 |
|
| 1,253 |
Industrial |
|
| 708 |
|
| 654 |
|
| 1,345 |
|
| 1,257 |
Other |
|
| 115 |
|
| 123 |
|
| 216 |
|
| 223 |
Total collection |
|
| 2,441 |
|
| 2,326 |
|
| 4,748 |
|
| 4,561 |
Landfill |
|
| 915 |
|
| 864 |
|
| 1,720 |
|
| 1,603 |
Transfer |
|
| 437 |
|
| 414 |
|
| 812 |
|
| 780 |
Recycling |
|
| 305 |
|
| 375 |
|
| 617 |
|
| 747 |
Other (a) |
|
| 439 |
|
| 437 |
|
| 866 |
|
| 837 |
Intercompany (b) |
|
| (798) |
|
| (739) |
|
| (1,513) |
|
| (1,411) |
Total |
| $ | 3,739 |
| $ | 3,677 |
| $ | 7,250 |
| $ | 7,117 |
(a) | 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, net of intercompany activity. |
(b) | Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report. |
20
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fluctuations in our operating results may be caused by many factors, includingperiod-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 conditions that tend to occur during the second half of the year, such as the hurricanes that most often impact our operations in the Southern and Eastern United States,U.S., can increase our revenues in the Areas affected. While weather conditionsweather-related and other event driven special projects can boost revenues through additional work for a limited time, as a result of significantstart-up costs and other factors, such revenue can generate earnings at comparatively lower margins.
9. Acquisitions |
Southern Waste Systems/Sun Recycling (“SWS”) — On January 8, 2016, Waste Management Inc. of Florida, an indirect wholly-owned subsidiary of WM, acquired certain operations and business assets of SWS in
18
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Southern Florida for total consideration of $525 million. The acquired business assets include residential, commercial and industrial solid waste collection, processing/recycling and transfer operations, equipment, vehicles, real estate and customer agreements.
|
Equity in net losses of unconsolidated entitiesAcquisitions
During the six months ended June 30, 2017,2018, we recognized $28acquired 12 solid waste businesses. Total consideration, net of cash acquired, for these acquisitions was $266 million, which included $256 million in cash paid and $10 million of chargespurchase price holdbacks. The businesses acquired provide collection, transfer and disposal services. As of June 30, 2018, the allocation of the purchase price for these acquisitions is preliminary; fair value estimates of identifiable assets acquired and liabilities assumed are based on management’s estimates, judgments and assumptions and are subject to write down equity method investments in waste diversion technology companies to their estimated fair values.change until finalized.
Other, netDivestitures
During the threesix months ended June 30, 2016,2018, we sold certain ancillary operations and received cash proceeds from these divestitures of $86 million and recognized $41net gains of $42 million, which are included in (gain) loss from divestitures, asset impairments and unusual items, net in the Condensed Consolidated Statement of impairments to write down minority-owned investments in waste diversion technology companies to their estimated fair values.Operations.
21 WASTE MANAGEMENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 10. Accumulated Other Comprehensive Income (Loss) |
The changes in the balances of each component of accumulated other comprehensive loss,income (loss), net of tax, benefit, which is included as a component of Waste Management, Inc. stockholders’ equity, are as follows (in millions, with amounts in parentheses representing increasesdecreases to accumulated other comprehensive loss)income):
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|
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|
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|
|
|
|
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|
|
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|
|
| Foreign |
| Post- |
|
|
| ||
|
|
|
|
| Available- |
| Currency |
| Retirement |
|
|
| |||
|
| Derivative |
| for-Sale |
| Translation |
| Benefit |
|
|
| ||||
|
| Instruments |
| Securities |
| Adjustments |
| Obligations |
| Total | |||||
Balance, December 31, 2017 |
| $ | (33) |
| $ | 15 |
| $ | 29 |
| $ | (3) |
| $ | 8 |
Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $0, $0, $0 and $0, respectively |
|
| — |
|
| (1) |
|
| (55) |
|
| — |
|
| (56) |
Amounts reclassified from accumulated other comprehensive (income) loss, net of tax (expense) benefit of $2, $0, $0 and $0, respectively |
|
| 4 |
|
| — |
|
| — |
|
| — |
|
| 4 |
Net current period other comprehensive income (loss) |
|
| 4 |
|
| (1) |
|
| (55) |
|
| — |
|
| (52) |
Adoption of new accounting standard (a) |
|
| (7) |
|
| 3 |
|
| — |
|
| (1) |
|
| (5) |
Balance, June 30, 2018 |
| $ | (36) |
| $ | 17 |
| $ | (26) |
| $ | (4) |
| $ | (49) |
(a) | As of January 1, 2018, we adopted ASU 2018-02 and reclassified stranded tax effects to retained earnings. See Note 1 for further discussion of ASU 2018-02. |
Derivative Instruments | Available- for-Sale Securities | Foreign Currency Translation Adjustments | Post- Retirement Benefit Obligation | Total | ||||||||||||||||
Balance, December 31, 2016 | $ | (40 | ) | $ | 13 | $ | (47 | ) | $ | (6 | ) | $ | (80 | ) | ||||||
Other comprehensive income before reclassifications, net of tax expense of $0, $1, $0 and $0, respectively | — | 2 | 40 | 1 | 43 | |||||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax benefit of $2, $0, $0 and $0, respectively | 4 | — | — | — | 4 | |||||||||||||||
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|
| |||||||||||
Net current period other comprehensive income | 4 | 2 | 40 | 1 | 47 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance, June 30, 2017 | $ | (36 | ) | $ | 15 | $ | (7 | ) | $ | (5 | ) | $ | (33 | ) | ||||||
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|
|
There have beenWe had no active derivatives outstanding subsequent to March 31, 2016. Forduring the three months ended March 31, 2016, other comprehensive loss before reclassifications associated with the effective portion of derivatives designated as cash flow hedges for foreign currency derivatives was $7 million, net of tax benefit of $4 million.
19
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The significant amountsreported periods. Amounts reclassified out of each component of accumulated other comprehensive lossincome (loss) associated with our previously terminated cash flow hedges are as follows (in millions, with amounts in parentheses representing debits towere not material for the statement of operations classification):periods presented.
Three Months Ended June 30, | Six Months Ended June 30, | Statement of Operations Classification | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||
Forward-starting interest rate swaps | $ | (3 | ) | $ | (3 | ) | $ | (6 | ) | $ | (6 | ) | Interest expense, net | |||||
Foreign currency derivatives | — | — | — | (20 | ) | Other, net | ||||||||||||
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|
| |||||||||||
(3 | ) | (3 | ) | (6 | ) | (26 | ) | Total before tax | ||||||||||
1 | 1 | 2 | 10 | Tax benefit | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||
Total reclassifications for the period | $ | (2 | ) | $ | (2 | ) | $ | (4 | ) | $ | (16 | ) | Net of tax | |||||
|
|
|
|
|
|
|
|
11. Common Stock Repurchase Program
|
Our shareThe Company repurchases have beenshares of its common stock as part of capital allocation programs authorized by our Board of Directors. In November 2016,During the six months ended June 30, 2018, we entered into anand completed two accelerated share repurchase (“ASR”) agreementagreements to repurchase $225$450 million of our common stock. At the beginning of the repurchase period, we delivered $225 million in cashstock and received 2.85.4 million shares based on a stock price of $63.41. The ASR agreement completed in February 2017, at which time we received 0.4 million additional shares based on a final weighted average per share purchase price during the repurchase period of $69.43.$83.87.
In June 2017,From March 2018 through May 2018, we entered intorepurchased an ASR agreement to repurchase $250additional 1.2 million of our common stock. At the beginningshares in open market transactions in compliance with Rule 10b5-1 and Rule 10b-18 of the repurchase period, we delivered $250Exchange Act for $100 million, in cash and received 2.7 million shares based oninclusive of per-share commissions, at a stockweighted average per share price of $73.46. 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 in August 2017.
We account for ASR agreements as two separate transactions: (i) as shares of reacquired common stock for the shares delivered to us upon effectiveness of the ASR agreement and (ii) as a forward contract indexed to our own common stock for the undelivered shares. The initial delivery of shares is included in treasury stock at cost and results in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share. The forward contracts indexed to our own common stock meet the criteria for equity classification, and these amounts are initially recorded in additionalpaid-in capital and reclassified to treasury stock upon completion of the ASR agreement.$83.20.
As of June 30, 2017,2018, the Company has authorization for $500$700 million of future share repurchases. Any future share repurchases pursuant to thethis 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 and cash required for future business plans.
22
20
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. 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 as of June 30, 2017 Using | ||||||||||||||||
Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3)(a) | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 37 | $ | 37 | $ | — | $ | — | ||||||||
Available-for-sale securities | 52 | — | 52 | — | ||||||||||||
Fixed-income securities | 41 | — | 41 | — | ||||||||||||
Redeemable preferred stock | 54 | — | — | 54 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 184 | $ | 37 | $ | 93 | $ | 54 | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2016 Using | ||||||||||||||||
Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3)(a) | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 35 | $ | 35 | $ | — | $ | — | ||||||||
Available-for-sale securities | 46 | — | 46 | — | ||||||||||||
Fixed-income securities | 39 | — | 39 | — | ||||||||||||
Redeemable preferred stock | 54 | — | — | 54 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 174 | $ | 35 | $ | 85 | $ | 54 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (Unaudited) |
|
|
|
| |
Fair Value Measurements Using: |
|
|
|
|
|
|
|
Quoted prices in active markets (Level 1): |
|
|
|
|
|
|
|
Money market funds |
| $ | 109 |
| $ | 225 |
|
|
|
| 109 |
|
| 225 |
|
|
|
|
|
|
|
|
|
Significant other observable inputs (Level 2): |
|
|
|
|
|
|
|
Available-for-sale securities |
|
| 49 |
|
| 49 |
|
Fixed-income securities |
|
| 46 |
|
| 47 |
|
|
|
| 95 |
|
| 96 |
|
|
|
|
|
|
|
|
|
Significant unobservable inputs (Level 3): |
|
|
|
|
|
|
|
Redeemable preferred stock (a) |
|
| 55 |
|
| 55 |
|
|
|
| 55 |
|
| 55 |
|
|
|
|
|
|
|
|
|
Total Assets |
| $ | 259 |
| $ | 376 |
|
(a) | When available, Level 3 investments have been measured based on third-party investors’ recent or pending transactions in these securities, which are considered the best evidence of fair value. When this evidence is not available, we use other valuation techniques as appropriate and available. These valuation methodologies may include transactions in similar instruments, discounted cash flow |
Fair Value of Debt
As of June 30, 20172018 and December 31, 2016,2017, the carrying value of our debt was approximately $9.1$9.8 billion and $9.3$9.5 billion, respectively. The estimated fair value of our debt was approximately $9.7$9.9 billion as of June 30, 20172018 and December 31, 2016. The fair value of our fixed-rate debt is estimated by using a discounted cash flow approach and current market rates for similar types of instruments. The carrying value of our variable-rate debt approximates fair value due to the short-term nature of the interest rates.
21
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2017.
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, 20172018 and December 31, 2016.2017. These amounts have not been revalued since those dates, and current estimates of fair value could differ significantly from the amounts presented.
23 WASTE MANAGEMENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 13. Variable Interest Entities |
Following is a description of our financial interests in both unconsolidated and consolidated variable interest entities that we consider significant:
Low-Income Housing Properties and Refined Coal Facility Investments
We havedo not consolidate our investments in entities established to managelow-income housing properties and a refined coal facility. We support the operations of these entities in exchange for apro-rata share of the tax credits they generate. We do not consolidate these entitiesfacility as we have determined 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 two entities was $72$48 million and $84$59 million as of June 30, 20172018 and December 31, 2016,2017, respectively. The debt balance related to our investment inlow-income housing properties was $45$23 million and $57$34 million as of June 30, 20172018 and December 31, 2016,2017, respectively. Additional information related to these investments is discussed in Note 4.5.
Trust Funds for Final Capping, Closure, Post-Closure or Environmental Remediation Obligations
We have significant financial interests in trust funds that were created to settle certain of our final capping, closure, post-closure or environmental remediation obligations. These trust funds are established such that we are either the sole beneficiary of these restricted balances or we share benefit with the host community in which we operate. We have determined that these trust funds are variable interest entities; however, we are not the primary beneficiary of certain of these entities, as described further below. As the party with primary responsibility to fund the related final capping, closure, post-closure or environmental remediation activities for these trust funds, we are exposed to risk of loss if there are declines in the fair value of the assets of the trust. We currently expect the trust funds to continue to meet the statutory requirements for which they were established.
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 onavailable-for-sale securities held by these trusts as a component of our accumulated other comprehensive income or loss.(loss). Our investments and receivables related to these trusts had an aggregate carrying value of $98 million and $93$99 million as of June 30, 20172018 and December 31, 2016, respectively.2017.
Consolidated Variable Interest Entities— Trust funds offor which we are the sole beneficiary are consolidated because we are the primary beneficiary. We account for theseThese trust funds as long-term other assetsare recorded in restricted trust and escrow accounts in our
22
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidated Balance Sheets. Unrealized gains and losses onavailable-for-sale securities held by these trusts are recorded as a component of our accumulated other comprehensive income or loss.(loss). These trusts had a fair value of $99$102 million and $95$101 million as of June 30, 20172018 and December 31, 2016,2017, respectively.
24 WASTE MANAGEMENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 14. 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
June 30, 20172018
(Unaudited)
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | 32 | $ | — | $ | 32 | ||||||||||
Other current assets | 3 | 5 | 2,286 | — | 2,294 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
3 | 5 | 2,318 | — | 2,326 | ||||||||||||||||
Property and equipment, net | — | — | 11,002 | — | 11,002 | |||||||||||||||
Investments in affiliates | 20,673 | 21,127 | — | (41,800 | ) | — | ||||||||||||||
Advances to affiliates | — | — | 13,791 | (13,791 | ) | — | ||||||||||||||
Other assets | 13 | 37 | 7,461 | — | 7,511 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets | $ | 20,689 | $ | 21,169 | $ | 34,572 | $ | (55,591 | ) | $ | 20,839 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Current portion of long-term debt | $ | 250 | $ | — | $ | 140 | $ | — | $ | 390 | ||||||||||
Accounts payable and other current liabilities | 77 | 9 | 2,294 | — | 2,380 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
327 | 9 | 2,434 | — | 2,770 | ||||||||||||||||
Long-term debt, less current portion | 6,075 | 304 | 2,288 | — | 8,667 | |||||||||||||||
Due to affiliates | 14,088 | 184 | 5,299 | (19,571 | ) | — | ||||||||||||||
Other liabilities | 12 | — | 3,883 | — | 3,895 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities | 20,502 | 497 | 13,904 | (19,571 | ) | 15,332 | ||||||||||||||
Equity: | ||||||||||||||||||||
Stockholders’ equity | 5,486 | 20,672 | 21,128 | (41,800 | ) | 5,486 | ||||||||||||||
Advances to affiliates | (5,299 | ) | — | (481 | ) | 5,780 | — | |||||||||||||
Noncontrolling interests | — | — | 21 | — | 21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
187 | 20,672 | 20,668 | (36,020 | ) | 5,507 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities and equity | $ | 20,689 | $ | 21,169 | $ | 34,572 | $ | (55,591 | ) | $ | 20,839 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
ASSETS | |||||||||||||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | — |
| $ | — |
| $ | 47 |
| $ | — |
| $ | 47 |
Other current assets |
|
| 91 |
|
| 7 |
|
| 2,326 |
|
| — |
|
| 2,424 |
|
|
| 91 |
|
| 7 |
|
| 2,373 |
|
| — |
|
| 2,471 |
Property and equipment, net |
|
| — |
|
| — |
|
| 11,625 |
|
| — |
|
| 11,625 |
Investments in affiliates |
|
| 23,466 |
|
| 23,921 |
|
| — |
|
| (47,387) |
|
| — |
Advances to affiliates |
|
| — |
|
| — |
|
| 15,969 |
|
| (15,969) |
|
| — |
Other assets |
|
| 8 |
|
| 31 |
|
| 7,879 |
|
| — |
|
| 7,918 |
Total assets |
| $ | 23,565 |
| $ | 23,959 |
| $ | 37,846 |
| $ | (63,356) |
| $ | 22,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY | |||||||||||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | 491 |
| $ | — |
| $ | 337 |
| $ | — |
| $ | 828 |
Accounts payable and other current liabilities |
|
| 84 |
|
| 9 |
|
| 2,384 |
|
| — |
|
| 2,477 |
|
|
| 575 |
|
| 9 |
|
| 2,721 |
|
| — |
|
| 3,305 |
Long-term debt, less current portion |
|
| 6,936 |
|
| 304 |
|
| 1,728 |
|
| — |
|
| 8,968 |
Due to affiliates |
|
| 16,069 |
|
| 181 |
|
| 6,073 |
|
| (22,323) |
|
| — |
Other liabilities |
|
| 4 |
|
| — |
|
| 3,681 |
|
| — |
|
| 3,685 |
Total liabilities |
|
| 23,584 |
|
| 494 |
|
| 14,203 |
|
| (22,323) |
|
| 15,958 |
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
| 6,054 |
|
| 23,465 |
|
| 23,922 |
|
| (47,387) |
|
| 6,054 |
Advances to affiliates |
|
| (6,073) |
|
| — |
|
| (281) |
|
| 6,354 |
|
| — |
Noncontrolling interests |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| 2 |
|
|
| (19) |
|
| 23,465 |
|
| 23,643 |
|
| (41,033) |
|
| 6,056 |
Total liabilities and equity |
| $ | 23,565 |
| $ | 23,959 |
| $ | 37,846 |
| $ | (63,356) |
| $ | 22,014 |
23
25
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
ASSETS | |||||||||||||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | — |
| $ | — |
| $ | 22 |
| $ | — |
| $ | 22 |
Other current assets |
|
| 5 |
|
| 5 |
|
| 2,592 |
|
| — |
|
| 2,602 |
|
|
| 5 |
|
| 5 |
|
| 2,614 |
|
| — |
|
| 2,624 |
Property and equipment, net |
|
| — |
|
| — |
|
| 11,559 |
|
| — |
|
| 11,559 |
Investments in affiliates |
|
| 22,393 |
|
| 22,893 |
|
| — |
|
| (45,286) |
|
| — |
Advances to affiliates |
|
| — |
|
| — |
|
| 15,349 |
|
| (15,349) |
|
| — |
Other assets |
|
| 9 |
|
| 31 |
|
| 7,606 |
|
| — |
|
| 7,646 |
Total assets |
| $ | 22,407 |
| $ | 22,929 |
| $ | 37,128 |
| $ | (60,635) |
| $ | 21,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY | |||||||||||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | 537 |
| $ | — |
| $ | 202 |
| $ | — |
| $ | 739 |
Accounts payable and other current liabilities |
|
| 55 |
|
| 9 |
|
| 2,459 |
|
| — |
|
| 2,523 |
|
|
| 592 |
|
| 9 |
|
| 2,661 |
|
| — |
|
| 3,262 |
Long-term debt, less current portion |
|
| 6,457 |
|
| 304 |
|
| 1,991 |
|
| — |
|
| 8,752 |
Due to affiliates |
|
| 15,404 |
|
| 224 |
|
| 6,073 |
|
| (21,701) |
|
| — |
Other liabilities |
|
| 8 |
|
| — |
|
| 3,765 |
|
| — |
|
| 3,773 |
Total liabilities |
|
| 22,461 |
|
| 537 |
|
| 14,490 |
|
| (21,701) |
|
| 15,787 |
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
| 6,019 |
|
| 22,392 |
|
| 22,894 |
|
| (45,286) |
|
| 6,019 |
Advances to affiliates |
|
| (6,073) |
|
| — |
|
| (279) |
|
| 6,352 |
|
| — |
Noncontrolling interests |
|
| — |
|
| — |
|
| 23 |
|
| — |
|
| 23 |
|
|
| (54) |
|
| 22,392 |
|
| 22,638 |
|
| (38,934) |
|
| 6,042 |
Total liabilities and equity |
| $ | 22,407 |
| $ | 22,929 |
| $ | 37,128 |
| $ | (60,635) |
| $ | 21,829 |
December 31, 2016
26
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | 32 | $ | — | $ | 32 | ||||||||||
Other current assets | 5 | 5 | 2,334 | — | 2,344 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
5 | 5 | 2,366 | — | 2,376 | ||||||||||||||||
Property and equipment, net | — | — | 10,950 | — | 10,950 | |||||||||||||||
Investments in affiliates | 19,924 | 20,331 | — | (40,255 | ) | — | ||||||||||||||
Advances to affiliates | — | — | 13,000 | (13,000 | ) | — | ||||||||||||||
Other assets | 14 | 30 | 7,489 | — | 7,533 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets | $ | 19,943 | $ | 20,366 | $ | 33,805 | $ | (53,255 | ) | $ | 20,859 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Current portion of long-term debt | $ | 269 | $ | — | $ | 148 | $ | — | $ | 417 | ||||||||||
Accounts payable and other current liabilities | 81 | 9 | 2,287 | — | 2,377 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
350 | 9 | 2,435 | — | 2,794 | ||||||||||||||||
Long-term debt, less current portion | 6,229 | 304 | 2,360 | — | 8,893 | |||||||||||||||
Due to affiliates | 13,350 | 128 | 5,299 | (18,777 | ) | — | ||||||||||||||
Other liabilities | 16 | — | 3,836 | — | 3,852 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities | 19,945 | 441 | 13,930 | (18,777 | ) | 15,539 | ||||||||||||||
Equity: | ||||||||||||||||||||
Stockholders’ equity | 5,297 | 19,925 | 20,330 | (40,255 | ) | 5,297 | ||||||||||||||
Advances to affiliates | (5,299 | ) | — | (478 | ) | 5,777 | — | |||||||||||||
Noncontrolling interests | — | — | 23 | — | 23 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
(2 | ) | 19,925 | 19,875 | (34,478 | ) | 5,320 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities and equity | $ | 19,943 | $ | 20,366 | $ | 33,805 | $ | (53,255 | ) | $ | 20,859 | |||||||||
|
|
|
|
|
|
|
|
|
|
24
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
Operating revenues |
| $ | — |
| $ | — |
| $ | 3,783 |
| $ | (44) |
| $ | 3,739 |
Costs and expenses |
|
| 44 |
|
| — |
|
| 3,024 |
|
| (44) |
|
| 3,024 |
Income from operations |
|
| (44) |
|
| — |
|
| 759 |
|
| — |
|
| 715 |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (78) |
|
| (4) |
|
| (11) |
|
| — |
|
| (93) |
Equity in earnings of subsidiaries, net of tax |
|
| 588 |
|
| 591 |
|
| — |
|
| (1,179) |
|
| — |
Other, net |
|
| — |
|
| — |
|
| (13) |
|
| — |
|
| (13) |
|
|
| 510 |
|
| 587 |
|
| (24) |
|
| (1,179) |
|
| (106) |
Income before income taxes |
|
| 466 |
|
| 587 |
|
| 735 |
|
| (1,179) |
|
| 609 |
Income tax expense (benefit) |
|
| (33) |
|
| (1) |
|
| 144 |
|
| — |
|
| 110 |
Consolidated net income |
|
| 499 |
|
| 588 |
|
| 591 |
|
| (1,179) |
|
| 499 |
Less: Net loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Net income attributable to Waste Management, Inc. |
| $ | 499 |
| $ | 588 |
| $ | 591 |
| $ | (1,179) |
| $ | 499 |
Three Months Ended June 30, 2017
(Unaudited)
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenues | $ | — | $ | — | $ | 3,677 | $ | — | $ | 3,677 | ||||||||||
Costs and expenses | — | — | 3,004 | — | 3,004 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from operations | — | — | 673 | — | 673 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense, net | (74 | ) | (5 | ) | (11 | ) | — | (90 | ) | |||||||||||
Equity in earnings of subsidiaries, net of tax expense | 406 | 409 | — | (815 | ) | — | ||||||||||||||
Other, net | — | — | (13 | ) | — | (13 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
332 | 404 | (24 | ) | (815 | ) | (103 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income before income taxes | 332 | 404 | 649 | (815 | ) | 570 | ||||||||||||||
Income tax expense (benefit) | (30 | ) | (2 | ) | 241 | — | 209 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Consolidated net income | 362 | 406 | 408 | (815 | ) | 361 | ||||||||||||||
Less: Net loss attributable to noncontrolling interests | — | — | (1 | ) | — | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to Waste Management, Inc. | $ | 362 | $ | 406 | $ | 409 | $ | (815 | ) | $ | 362 | |||||||||
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
(Unaudited)
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenues | $ | — | $ | — | $ | 3,425 | $ | — | $ | 3,425 | ||||||||||
Costs and expenses | — | — | 2,814 | — | 2,814 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from operations | — | — | 611 | — | 611 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense, net | (76 | ) | (5 | ) | (12 | ) | — | (93 | ) | |||||||||||
Equity in earnings of subsidiaries, net of tax expense | 333 | 336 | — | (669 | ) | — | ||||||||||||||
Other, net | — | — | (59 | ) | — | (59 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
257 | 331 | (71 | ) | (669 | ) | (152 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income before income taxes | 257 | 331 | 540 | (669 | ) | 459 | ||||||||||||||
Income tax expense (benefit) | (30 | ) | (2 | ) | 205 | — | 173 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Consolidated net income | 287 | 333 | 335 | (669 | ) | 286 | ||||||||||||||
Less: Net loss attributable to noncontrolling interests | — | — | (1 | ) | — | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to Waste Management, Inc. | $ | 287 | $ | 333 | $ | 336 | $ | (669 | ) | $ | 287 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
Operating revenues |
| $ | — |
| $ | — |
| $ | 3,677 |
| $ | — |
| $ | 3,677 |
Costs and expenses |
|
| — |
|
| — |
|
| 3,004 |
|
| — |
|
| 3,004 |
Income from operations |
|
| — |
|
| — |
|
| 673 |
|
| — |
|
| 673 |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (74) |
|
| (5) |
|
| (11) |
|
| — |
|
| (90) |
Equity in earnings of subsidiaries, net of tax |
|
| 406 |
|
| 409 |
|
| — |
|
| (815) |
|
| — |
Other, net |
|
| — |
|
| — |
|
| (13) |
|
| — |
|
| (13) |
|
|
| 332 |
|
| 404 |
|
| (24) |
|
| (815) |
|
| (103) |
Income before income taxes |
|
| 332 |
|
| 404 |
|
| 649 |
|
| (815) |
|
| 570 |
Income tax expense (benefit) |
|
| (30) |
|
| (2) |
|
| 241 |
|
| — |
|
| 209 |
Consolidated net income |
|
| 362 |
|
| 406 |
|
| 408 |
|
| (815) |
|
| 361 |
Less: Net loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| (1) |
Net income attributable to Waste Management, Inc. |
| $ | 362 |
| $ | 406 |
| $ | 409 |
| $ | (815) |
| $ | 362 |
25
27
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Continued)
Six Months Ended June 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non‑Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
Operating revenues |
| $ | — |
| $ | — |
| $ | 7,338 |
| $ | (88) |
| $ | 7,250 |
Costs and expenses |
|
| 88 |
|
| — |
|
| 5,927 |
|
| (88) |
|
| 5,927 |
Income from operations |
|
| (88) |
|
| — |
|
| 1,411 |
|
| — |
|
| 1,323 |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (154) |
|
| (9) |
|
| (21) |
|
| — |
|
| (184) |
Equity in earnings of subsidiaries, net of tax |
|
| 1,073 |
|
| 1,080 |
|
| — |
|
| (2,153) |
|
| — |
Other, net |
|
| — |
|
| — |
|
| (19) |
|
| — |
|
| (19) |
|
|
| 919 |
|
| 1,071 |
|
| (40) |
|
| (2,153) |
|
| (203) |
Income before income taxes |
|
| 831 |
|
| 1,071 |
|
| 1,371 |
|
| (2,153) |
|
| 1,120 |
Income tax expense (benefit) |
|
| (64) |
|
| (2) |
|
| 292 |
|
| — |
|
| 226 |
Consolidated net income |
|
| 895 |
|
| 1,073 |
|
| 1,079 |
|
| (2,153) |
|
| 894 |
Less: Net loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| (1) |
Net income attributable to Waste Management, Inc. |
| $ | 895 |
| $ | 1,073 |
| $ | 1,080 |
| $ | (2,153) |
| $ | 895 |
Six Months Ended June 30, 2017
(Unaudited)
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenues | $ | — | $ | — | $ | 7,117 | $ | — | $ | 7,117 | ||||||||||
Costs and expenses | — | — | 5,886 | — | 5,886 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from operations | — | — | 1,231 | — | 1,231 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense, net | (148 | ) | (10 | ) | (24 | ) | — | (182 | ) | |||||||||||
Equity in earnings of subsidiaries, net of tax expense | 749 | 755 | — | (1,504 | ) | — | ||||||||||||||
Other, net | — | — | (45 | ) | — | (45 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
601 | 745 | (69 | ) | (1,504 | ) | (227 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income before income taxes | 601 | 745 | 1,162 | (1,504 | ) | 1,004 | ||||||||||||||
Income tax expense (benefit) | (59 | ) | (4 | ) | 409 | — | 346 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Consolidated net income | 660 | 749 | 753 | (1,504 | ) | 658 | ||||||||||||||
Less: Net loss attributable to noncontrolling interests | — | — | (2 | ) | — | (2 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to Waste Management, Inc. | $ | 660 | $ | 749 | $ | 755 | $ | (1,504 | ) | $ | 660 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Six Months Ended June 30, 2016 (Unaudited) |
| |||||||||||||||||||
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenues | $ | — | $ | — | $ | 6,601 | $ | — | $ | 6,601 | ||||||||||
Costs and expenses | — | — | 5,482 | — | 5,482 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from operations | — | — | 1,119 | — | 1,119 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense, net | (150 | ) | (10 | ) | (28 | ) | — | (188 | ) | |||||||||||
Equity in earnings of subsidiaries, net of tax expense | 637 | 643 | — | (1,280 | ) | — | ||||||||||||||
Other, net | (1 | ) | — | (75 | ) | — | (76 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
486 | 633 | (103 | ) | (1,280 | ) | (264 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income before income taxes | 486 | 633 | 1,016 | (1,280 | ) | 855 | ||||||||||||||
Income tax expense (benefit) | (59 | ) | (4 | ) | 376 | — | 313 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Consolidated net income | 545 | 637 | 640 | (1,280 | ) | 542 | ||||||||||||||
Less: Net loss attributable to noncontrolling interests | — | — | (3 | ) | — | (3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to Waste Management, Inc. | $ | 545 | $ | 637 | $ | 643 | $ | (1,280 | ) | $ | 545 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non‑Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
Operating revenues |
| $ | — |
| $ | — |
| $ | 7,117 |
| $ | — |
| $ | 7,117 |
Costs and expenses |
|
| — |
|
| — |
|
| 5,886 |
|
| — |
|
| 5,886 |
Income from operations |
|
| — |
|
| — |
|
| 1,231 |
|
| — |
|
| 1,231 |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (148) |
|
| (10) |
|
| (24) |
|
| — |
|
| (182) |
Equity in earnings of subsidiaries, net of tax |
|
| 749 |
|
| 755 |
|
| — |
|
| (1,504) |
|
| — |
Other, net |
|
| — |
|
| — |
|
| (45) |
|
| — |
|
| (45) |
|
|
| 601 |
|
| 745 |
|
| (69) |
|
| (1,504) |
|
| (227) |
Income before income taxes |
|
| 601 |
|
| 745 |
|
| 1,162 |
|
| (1,504) |
|
| 1,004 |
Income tax expense (benefit) |
|
| (59) |
|
| (4) |
|
| 409 |
|
| — |
|
| 346 |
Consolidated net income |
|
| 660 |
|
| 749 |
|
| 753 |
|
| (1,504) |
|
| 658 |
Less: Net loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| (2) |
|
| — |
|
| (2) |
Net income attributable to Waste Management, Inc. |
| $ | 660 |
| $ | 749 |
| $ | 755 |
| $ | (1,504) |
| $ | 660 |
26
28
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
Three Months Ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 501 |
| $ | 588 |
| $ | 568 |
| $ | (1,179) |
| $ | 478 |
Less: Comprehensive loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Comprehensive income attributable to Waste Management, Inc. |
| $ | 501 |
| $ | 588 |
| $ | 568 |
| $ | (1,179) |
| $ | 478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 364 |
| $ | 406 |
| $ | 439 |
| $ | (815) |
| $ | 394 |
Less: Comprehensive loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| (1) |
Comprehensive income attributable to Waste Management, Inc. |
| $ | 364 |
| $ | 406 |
| $ | 440 |
| $ | (815) |
| $ | 395 |
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Three Months Ended June 30: | ||||||||||||||||||||
2017 | ||||||||||||||||||||
Comprehensive income | $ | 364 | $ | 406 | $ | 439 | $ | (815 | ) | $ | 394 | |||||||||
Less: Comprehensive loss attributable to noncontrolling interests | — | — | (1 | ) | — | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income attributable to Waste Management, Inc. | $ | 364 | $ | 406 | $ | 440 | $ | (815 | ) | $ | 395 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
2016 | ||||||||||||||||||||
Comprehensive income | $ | 289 | $ | 333 | $ | 342 | $ | (669 | ) | $ | 295 | |||||||||
Less: Comprehensive loss attributable to noncontrolling interests | — | — | (1 | ) | — | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income attributable to Waste Management, Inc. | $ | 289 | $ | 333 | $ | 343 | $ | (669 | ) | $ | 296 | |||||||||
|
|
|
|
|
|
|
|
|
|
WM | WM Holdings | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Six Months Ended June 30: | ||||||||||||||||||||
2017 | ||||||||||||||||||||
Comprehensive income | $ | 664 | $ | 749 | $ | 796 | $ | (1,504 | ) | $ | 705 | |||||||||
Less: Comprehensive loss attributable to noncontrolling interests | — | — | (2 | ) | — | (2 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income attributable to Waste Management, Inc. | $ | 664 | $ | 749 | $ | 798 | $ | (1,504 | ) | $ | 707 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
2016 | ||||||||||||||||||||
Comprehensive income | $ | 549 | $ | 637 | $ | 714 | $ | (1,280 | ) | $ | 620 | |||||||||
Less: Comprehensive loss attributable to noncontrolling interests | — | — | (3 | ) | — | (3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Comprehensive income attributable to Waste Management, Inc. | $ | 549 | $ | 637 | $ | 717 | $ | (1,280 | ) | $ | 623 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM |
| Holdings |
| Subsidiaries |
| Eliminations |
| Consolidated | |||||
Six Months Ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 899 |
| $ | 1,073 |
| $ | 1,023 |
| $ | (2,153) |
| $ | 842 |
Less: Comprehensive loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| (1) |
Comprehensive income attributable to Waste Management, Inc. |
| $ | 899 |
| $ | 1,073 |
| $ | 1,024 |
| $ | (2,153) |
| $ | 843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 664 |
| $ | 749 |
| $ | 796 |
| $ | (1,504) |
| $ | 705 |
Less: Comprehensive loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| (2) |
|
| — |
|
| (2) |
Comprehensive income attributable to Waste Management, Inc. |
| $ | 664 |
| $ | 749 |
| $ | 798 |
| $ | (1,504) |
| $ | 707 |
27
29
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM(a) |
| Holdings(a) |
| Subsidiaries(a) |
| Eliminations |
| Consolidated | |||||
Cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | — |
| $ | — |
| $ | 1,784 |
| $ | — |
| $ | 1,784 |
Investing activities |
|
| — |
|
| — |
|
| (1,010) |
|
| — |
|
| (1,010) |
Financing activities |
|
| — |
|
| — |
|
| (647) |
|
| — |
|
| (647) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| (1) |
Intercompany activity |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Increase in cash, cash equivalents and restricted cash and cash equivalents |
|
| — |
|
| — |
|
| 126 |
|
| — |
|
| 126 |
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
|
| — |
|
| — |
|
| 293 |
|
| — |
|
| 293 |
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | — |
| $ | — |
| $ | 419 |
| $ | — |
| $ | 419 |
Six Months Ended June 30, 2017
(Unaudited)
WM(a) | WM Holdings(a) | Non-Guarantor Subsidiaries(a) | Eliminations | Consolidated | ||||||||||||||||
Cash flows provided by (used in): | ||||||||||||||||||||
Operating activities | $ | — | $ | — | $ | 1,534 | $ | — | $ | 1,534 | ||||||||||
Investing activities | — | — | (677 | ) | — | (677 | ) | |||||||||||||
Financing activities | — | — | (857 | ) | — | (857 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | — | — | |||||||||||||||
Intercompany activity | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Increase (decrease) in cash and cash equivalents | — | — | — | — | — | |||||||||||||||
Cash and cash equivalents at beginning of period | — | — | 32 | — | 32 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash and cash equivalents at end of period | $ | — | $ | — | $ | 32 | $ | — | $ | 32 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
(Unaudited)
WM(a) | WM Holdings(a) | Non-Guarantor Subsidiaries(a) | Eliminations | Consolidated | ||||||||||||||||
Cash flows provided by (used in): | ||||||||||||||||||||
Operating activities | $ | — | $ | — | $ | 1,494 | $ | — | $ | 1,494 | ||||||||||
Investing activities | — | — | (1,186 | ) | — | (1,186 | ) | |||||||||||||
Financing activities | — | — | (309 | ) | — | (309 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 1 | — | 1 | |||||||||||||||
Intercompany activity | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Increase (decrease) in cash and cash equivalents | — | — | — | — | — | |||||||||||||||
Cash and cash equivalents at beginning of period | — | — | 39 | — | 39 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash and cash equivalents at end of period | $ | — | $ | — | $ | 39 | $ | — | $ | 39 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WM |
| Non-Guarantor |
|
|
|
|
|
| ||
|
| WM(a) |
| Holdings(a) |
| Subsidiaries(a) |
| Eliminations |
| Consolidated | |||||
Cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | — |
| $ | — |
| $ | 1,535 |
| $ | — |
| $ | 1,535 |
Investing activities |
|
| — |
|
| — |
|
| (673) |
|
| — |
|
| (673) |
Financing activities |
|
| — |
|
| — |
|
| (859) |
|
| — |
|
| (859) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Intercompany activity |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Increase in cash, cash equivalents and restricted cash and cash equivalents |
|
| — |
|
| — |
|
| 3 |
|
| — |
|
| 3 |
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
|
| — |
|
| — |
|
| 94 |
|
| — |
|
| 94 |
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | — |
| $ | — |
| $ | 97 |
| $ | — |
| $ | 97 |
(a) | Cash receipts and payments of WM and WM Holdings are transacted byNon-Guarantor Subsidiaries. |
|
Income Taxes — In October 2016, the FASB issued ASU2016-16 associated with the timing of recognition of income taxes for intra-entity transfers of assets other than inventory. The amended guidance requires the
28
30
WASTE MANAGEMENT, INC.Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognition of income taxes when the transfer of the asset occurs, which replaces current GAAP that defers the recognition of income taxes until the transferred asset is sold to a third party or otherwise recovered through use. The amended guidance is effective for the Company on January 1, 2018. We are assessing the provisions of this amended guidance; however, we currently do not expect that the adoption of this amended guidance will have a material impact on our consolidated financial statements.
Statement of Cash Flows —In August 2016, the FASB issued ASU2016-15 associated with the classification of certain cash receipts and cash payments in the statement of cash flows. In November 2016, the FASB issued ASU2016-18 associated with the presentation of restricted cash and cash equivalents in the statement of cash flows. The objective of both amendments was to reduce existing diversity in practice. The amended guidance is effective for the Company on January 1, 2018. We are assessing the provisions of this amended guidance; however, we currently do not expect that the adoption of this amended guidance will have a material impact on our consolidated financial statements.
Financial Instrument Credit Losses —In June 2016, the FASB issued ASU2016-13 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, with early adoption permitted beginning January 1, 2019. We are assessing the provisions of this amended guidance and evaluating the impact on our consolidated financial statements.
Leases—In February 2016, the FASB issued ASU2016-02 associated with lease accounting. The amended guidance requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. The disclosure of key information about leasing arrangements will also be required. The amended guidance is effective for the Company on January 1, 2019, with early adoption permitted. We are assessing the provisions of this amended guidance and we have (i) formed an implementation work team; (ii) performed training for the various organizations that will be most affected by the new standard and (iii) evaluated certain software solutions available to manage and account for leases under the new standard. We are still evaluating the impact of this amended guidance on our consolidated financial statements.
Financial Instruments — In January 2016, the FASB issued ASU2016-01 associated with the recognition and measurement of financial assets and liabilities. The amended guidance will require certain equity investments that are not consolidated to be measured at fair value with changes in fair value recognized in net income rather than as a component of accumulated other comprehensive income. The amended guidance is effective for the Company on January 1, 2018. We are assessing the provisions of this amended guidance; however, we currently do not expect that the adoption of this amended guidance will have a material impact on our consolidated financial statements.
Revenue Recognition— In May 2014, the FASB issued ASU2014-09 associated with revenue recognition. The amended guidance requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the amendments will require enhanced qualitative and quantitative disclosures regarding customer contracts. The amended guidance associated with revenue recognition is effective for the Company on January 1, 2018. The amended guidance may be applied retrospectively for all periods presented (“full retrospective method”) or retrospectively with the cumulative effect of initially applying the amended guidance recognized at the date of initial adoption (“modified retrospective method”). The Company is currently planning to adopt the amended guidance using the modified retrospective method as of January 1, 2018.
29
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
To assess the impact of the standard, we utilized internal resources to lead the implementation effort and supplemented them with external resources. Our internal resources read the amended guidance, attended trainings and consulted with other accounting professionals to assist with interpretation of the amended guidance. Surveys were sent to and returned by all operating segments to assess the potential impact of the amended guidance and to tailor specific procedures to evaluate the potential impact. Based on the results of these surveys, we judgmentally selected a sample of contracts based on size and specifically identified contract traits that could be accounted for differently under the amended guidance. We also selected a representative sample of contracts to corroborate the survey results. We have completed our preliminary review and analysis of all contracts selected for testing and we are in the process of performing additional analysis on certain contractual provisions, including provisions that could impact the classification of certain revenue streams and costs that are currently reported on a gross basis.
Based on our work to date, we believe we have identified all material contract types and costs that may be impacted by this amended guidance. We expect to quantify and disclose the expected impact, if any, of adopting this amended guidance in the Quarterly Report onForm 10-Q for the third quarter of 2017. While we are still evaluating the impact of the amended guidance, we currently do not expect it to have a material impact on operating revenues. However, upon adoption of the amended guidance, we anticipate recognizing an asset from the capitalization of sales incentives as contract acquisitions costs. Under the amended guidance, sales incentives will be capitalized and amortized to selling, general and administrative expense over the expected life of the customer relationship.
As noted above, we are still evaluating the possible impacts on our consolidated financial statements, including (i) potential changes in the classification of certain revenue streams and costs currently reported on a gross basis (e.g., franchise fees paid to municipalities); (ii) the amount of sales incentives that will be capitalized and (iii) additional disclosure requirements.
30
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 Form10-K 10‑K for the year ended December 31, 2016.2017.
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:
· | projections about accounting and finances; |
· | plans and objectives for the future; |
· | projections or estimates about assumptions relating to our performance; or |
· | our opinions, views or beliefs about the effects of current or future events, circumstances or performance. |
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 20172018 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:
· | 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; |
· | 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; |
· | a key element of our strategy is yield management through focus on price leadership, 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; |
· | we may be unable to identify desirable acquisition targets, negotiate advantageous transactions or realize the benefits expected from such transactions, which could adversely impact our growth strategy, earnings and cash flow; |
· | integration of acquisitions 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; |
31
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 collection and disposal lines of business;
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;
· | 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; |
· | 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; |
· | 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; |
· | a significant portion of the recycled fiber we market is shipped to export markets across the globe, particularly China; changes in international or domestic regulations and restrictions or tariffs on American or Chinese imports and exports, including actions taken by the Chinese government, could increase operating expense, result in excess supply and drive down prices; |
· | changes in oil and gas prices and drilling activity, and changes in applicable regulations, could adversely affect our EES organization; |
· | 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; |
· | 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; |
· | 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; |
· | 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; |
· | 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; |
· | 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; |
· | weak economic conditions may negatively affect the volumes of waste generated and demand for post-consumer fiber and metals processed by our recycling operations; |
· | 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; |
· | 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; |
· | diesel fuel price increases or diesel fuel supply shortages may increase our expenses and restrict our ability to operate; |
32
a key element of our strategy is yield management through focus on price leadership, 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;
we may be unable to identify desirable acquisition targets, negotiate advantageous transactions or realize the benefits expected from such transactions, which could adversely impact our growth strategy, earnings and cash flow;
· | 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; |
· | 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; |
· | a cybersecurity incident could negatively impact our business and our relationships with customers and expose us to litigation risk; |
· | 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; |
· | we could face significant liabilities for withdrawal from multiemployer pension plans; |
· | 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; |
· | increased costs for financial assurance or the inadequacy of our insurance coverage could negatively impact our liquidity and increase our liabilities; |
· | possible charges as a result of shut-down operations, uncompleted development or expansion projects or other events may negatively affect earnings; |
· | 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; |
· | 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; |
· | climate change legislation, including possible limits on carbon emissions, may negatively impact our results of operations by increasing expenses; |
· | 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; |
· | 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; |
· | 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 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 |
· | 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. |
33
integration of acquisitions 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;
compliance with existing or increased future regulations may impact our business by, among other things, restricting our operations, increasing operating costs or requiring additional capital expenditures, and a decrease in regulation may lower barriers to entry for our competitors;
Overview
31
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;
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;
a significant portion of the recycled fiber we market is shipped to export markets across the globe, particularly China; changes in international or domestic regulations, restrictions or tariffs on exports could increase operating expense;
changes in oil and gas prices and drilling activity, and changes in applicable regulations, could adversely affect our Energy and Environmental Services organization;
increasing customer preference for alternatives to traditional 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;
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;
our existing and proposed service offerings to customers may require that we 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;
we are investing in technologies to provide enhanced customer service and/or disposal alternatives; such technologies may not perform as intended or may experience other difficulties or delays that prevent us from realizing a return on our investment;
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;
thereWaste Management, Inc. is a 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 and cash flows;
weak economic conditions may negatively affect the volumes of waste generated and demand for post-consumer fiber and metals processed by our recycling operations;
some of our customers, including governmental entities, have suffered financial difficulties that could affect our business and operating results, due to their credit risk and the impact of the municipal debt market on remarketing of ourtax-exempt bonds;
if we are unable to obtain and maintain permits needed to open, operate, and/or expand our facilities, our results of operations will be negatively impacted;
diesel fuel price increases or diesel fuel supply shortages may increase our expenses and restrict our ability to operate;
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;
32
problems with the operation of current information technology or the development and deployment of new information systems could decrease our efficiencies and increase our costs;
a cybersecurity incident could negatively impact our business and our relationships with customers and expose us to litigation risk;
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 results of operations and cash flows;
we could face significant liability for our past and current participation in multiemployer pension plans;
we are subject to operational and safety risks; we closely monitor and manage landfills to minimize the risk of waste mass instability and releases of hazardous materials and odors, as well as risks presented by the potential for subsurface heat reactions causing elevated temperatures and increased production of leachate. 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;
increased costs for financial assurance or the inadequacy of our insurance coverage could negatively impact our liquidity and increase our liabilities;
possible charges as a result of shut-down operations, uncompleted development or expansion projects or other events may negatively affect earnings;
we may reduce or suspend capital expenditures, acquisition activity, dividend declarations or share repurchases if we suffer a significant reduction in cash flows;
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;
climate change legislation, including possible limits on carbon emissions, may negatively impact our results of operations by increasing expenses;
weather conditions 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;
we could be subject to significant fines and penalties, and our reputation could be adversely affected, if our business, or third parties with whom we have relationships, were to fail to comply with United States or foreign laws or regulations;
we are subject to various lawsuits, proceedings and disputes; claims asserted against us include property damage, commercial, customer and employment-related matters, including purported class action lawsuits related to alleged environmental contamination, sales and marketing practices, customer service agreements, prices and fees and federal and state wage and hour 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
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.
General
Our principal executive offices are located at 1001 Fannin Street, Houston, Texas 77002. Our telephone number is (713)512-6200. Our website address is www.wm.com. Our annual reports on Form10-K, quarterly
33
reports on Form10-Q and current reports on Form8-K are all available, free of charge, on our website as soon as practicable after we file the reports with the SEC. Our stock is tradedholding company listed on the New York Stock Exchange under the symbol “WM.”
“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, and 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. Ourservices, and our “Traditional Solid Waste” business excludes our recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfillgas-to-energy facilities in the United States.U.S.
Overview
Our Company’s goalsSolid Waste operating revenues are targeted at servingprimarily generated from fees charged for our customers,collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our employees,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 environment,waste collected, distance to the communities in which we workdisposal facility or material recovery facility and our stockholders. Increasingly, customers want moredisposal costs. Revenues from our landfill operations consist of theirtipping fees, which are generally based on the type and weight or volume of waste materials recovered, whilebeing disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste streams are becoming more complex,deposited, taking into account our cost of loading, transporting and our aim is to address the current needs, while anticipating the expanding and evolving needs, of our customers.
We believe we are uniquely equipped to meet the challengesdisposing of the changingsolid waste industryat 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 customers’ waste management needs, both todayservices generally include our environmental fee, fuel surcharge and as we work togetherregulatory recovery fee which are intended to envisionpass through to customers direct and create a more sustainable future. As the waste industry leader, we have the expertise necessary to collect and handleindirect costs incurred. We also provide additional services that are not managed through our customers’ waste efficiently and responsibly by delivering environmental performance — maximizing resource value, while minimizing environmental impact — so that both our economy and our environment can thrive.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, withimprovement. Our strategic planning processes appropriately consider that the current statefuture of our strategy taking into accountbusiness and the industry can be influenced by changes in economic conditions, the competitive landscape, the regulatory environment, asset and resource availability and current technology. We believe that focused differentiation, in our industry,which is driven by capitalizing on our unique and extensive well-placed 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 want more of their waste materials recovered, and 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, and 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.
34
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. Our industry is directly affected by changes in general economic factors, as increases and decreases in consumer spending and construction starts generally correlate to volumes of waste generated and our revenues. Negative economic conditions, in addition to price competition, can make it more challenging to negotiate and renew service contracts with acceptable margins. 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, and we are not expecting any significant shift in the near term. However, we have seen disruption and downward price pressure in the global market for recycling commodities, due in part to actions by the Chinese government that have restricted our ability to sell recycled fiber to Chinese paper mills. We and others in the industry continue to work to adapt to the Chinese government’s regulations and identify alternative markets.
Current Quarter Financial Results
During the second quarter of 2018, we produced strong operating results from our Traditional Solid Waste business, driven by strong yield and volume growth in our collection and disposal business. Net income and earnings per diluted share growth was even more pronounced given the reduction in our effective tax rate due to the enactment of tax reform and tax audit settlements. The Company continued its commitment to supporting both organic and inorganic growth during the second quarter of 2018, allocating $436 million of available cash to capital expenditures and $21 million to the acquisition of solid waste businesses. We also allocated $500 million to our shareholders during the second quarter of 2018 through common stock repurchases and dividends.
Key itemselements of our financial results for the current quarter include:
· | Revenues were $3,739 million compared with $3,677 million in the prior year period, an increase of $62 million, or 1.7%. The increase is primarily attributable to yield and volume growth in our collection and disposal business, partially offset by lower market prices for recycling commodities; |
· | Operating expenses were $2,313 million, or 61.9% of revenues, compared with $2,290 million, or 62.3% of revenues, in the prior year period. The $23 million increase is primarily attributable to higher volumes in the current year period, partially offset by decreased cost of goods sold due to lower market prices for recycling commodities; |
· | Selling, general and administrative expenses were $365 million, or 9.8% of revenues, compared with $353 million, or 9.6% or revenues. The $12 million increase is primarily attributable to higher litigation settlement costs in the current year period; |
· | Income from operations was $715 million, or 19.1% of revenues, compared with $673 million, or 18.3% of revenues, in the prior year period; |
· | Net income attributable to Waste Management, Inc. was $499 million, or $1.15 per diluted share, compared with $362 million, or $0.81 per diluted share, in the prior year period. The increase is primarily attributable (i) the tax reform enacted in December 2017 which decreased the federal corporate income tax rate; (ii) improved operating results in our Traditional Solid Waste business; (iii) net gains associated with the sale of certain ancillary operations and (iv) the settlement of various tax audits, which resulted in a reduction in our income tax expense. Partially offsetting the increase is lower earnings from our recycling line of business due to lower market prices for recycling commodities; |
· | Net cash provided by operating activities was $975 million compared with $813 million in the prior year period; and |
35
Revenues
· | Free cash flow was $621 million compared with $520 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. |
Results of $3,677 million compared with $3,425 millionOperations
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 prior yeartable below. The following table summarizes revenues during each period an increase(in millions):
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|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Solid Waste |
| $ | 3,924 |
| $ | 3,759 |
| $ | 7,543 |
| $ | 7,268 |
Other |
|
| 613 |
|
| 657 |
|
| 1,220 |
|
| 1,260 |
Intercompany |
|
| (798) |
|
| (739) |
|
| (1,513) |
|
| (1,411) |
Total |
| $ | 3,739 |
| $ | 3,677 |
| $ | 7,250 |
| $ | 7,117 |
The mix of $252operating revenues from our major lines of business is reflected in the table below (in millions):
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|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Commercial |
| $ | 986 |
| $ | 917 |
| $ | 1,941 |
| $ | 1,828 |
Residential |
|
| 632 |
|
| 632 |
|
| 1,246 |
|
| 1,253 |
Industrial |
|
| 708 |
|
| 654 |
|
| 1,345 |
|
| 1,257 |
Other |
|
| 115 |
|
| 123 |
|
| 216 |
|
| 223 |
Total collection |
|
| 2,441 |
|
| 2,326 |
|
| 4,748 |
|
| 4,561 |
Landfill |
|
| 915 |
|
| 864 |
|
| 1,720 |
|
| 1,603 |
Transfer |
|
| 437 |
|
| 414 |
|
| 812 |
|
| 780 |
Recycling |
|
| 305 |
|
| 375 |
|
| 617 |
|
| 747 |
Other (a) |
|
| 439 |
|
| 437 |
|
| 866 |
|
| 837 |
Intercompany (b) |
|
| (798) |
|
| (739) |
|
| (1,513) |
|
| (1,411) |
Total |
| $ | 3,739 |
| $ | 3,677 |
| $ | 7,250 |
| $ | 7,117 |
(a) | 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, net of intercompany activity. |
(b) | Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report. |
36
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 |
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| Period-to-Period Change for the |
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| As a % of |
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| As a % of |
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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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| Related |
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| Total |
|
|
| Amount |
| Business(a) |
|
| Amount |
| Company(b) |
|
| Amount |
| Business(a) |
|
| Amount |
| Company(b) |
| ||||
Collection and disposal |
| $ | 72 |
| 2.3 | % |
|
|
|
|
|
|
| $ | 140 |
| 2.3 | % |
|
|
|
|
|
|
Recycling commodities |
|
| (88) |
| (23.4) |
|
|
|
|
|
|
|
|
| (161) |
| (21.6) |
|
|
|
|
|
|
|
Fuel surcharges and mandated fees |
|
| 32 |
| 24.1 |
|
|
|
|
|
|
|
|
| 56 |
| 22.3 |
|
|
|
|
|
|
|
Total average yield (c) |
|
|
|
|
|
|
| $ | 16 |
| 0.4 | % |
|
|
|
|
|
|
| $ | 35 |
| 0.5 | % |
Volume |
|
|
|
|
|
|
|
| 66 |
| 1.8 |
|
|
|
|
|
|
|
|
| 154 |
| 2.2 |
|
Internal revenue growth |
|
|
|
|
|
|
|
| 82 |
| 2.2 |
|
|
|
|
|
|
|
|
| 189 |
| 2.7 |
|
Acquisitions |
|
|
|
|
|
|
|
| 61 |
| 1.7 |
|
|
|
|
|
|
|
|
| 89 |
| 1.2 |
|
Divestitures |
|
|
|
|
|
|
|
| (29) |
| (0.8) |
|
|
|
|
|
|
|
|
| (38) |
| (0.5) |
|
Foreign currency translation and other |
|
|
|
|
|
|
|
| (52) |
| (1.4) |
|
|
|
|
|
|
|
|
| (107) |
| (1.5) |
|
Total |
|
|
|
|
|
|
| $ | 62 |
| 1.7 | % |
|
|
|
|
|
|
| $ | 133 |
| 1.9 | % |
(a) | 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. |
(b) | 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. |
(c) | The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company. |
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.
37
Revenue growth from collection and disposal average yield was $72 million, or 7.4%. This increase is primarily attributable to (i) yield2.3%, and volume$140 million, or 2.3%, for the three and six months ended June 30, 2018, respectively. We experienced growth in our collection and disposal linesbusiness in the current year periods. The details are as follows (dollars in millions):
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| Period-to-Period Change for the |
| Period-to-Period Change for the |
| ||||||
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| Three Months Ended |
| Six Months Ended |
| ||||||
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|
| June 30, 2018 vs. 2017 |
| June 30, 2018 vs. 2017 |
| ||||||
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| As a % of |
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| As a % of |
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| Related |
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| Related |
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| Amount |
| Business |
| Amount |
| Business |
| ||
Commercial |
|
| $ | 24 |
| 2.8 | % | $ | 52 |
| 3.0 | % |
Industrial |
|
|
| 28 |
| 4.7 |
|
| 47 |
| 4.1 |
|
Residential |
|
|
| 10 |
| 1.6 |
|
| 22 |
| 1.8 |
|
Total collection |
|
|
| 62 |
| 2.9 |
|
| 121 |
| 2.8 |
|
Landfill |
|
|
| 6 |
| 1.1 |
|
| 13 |
| 1.3 |
|
Transfer |
|
|
| 4 |
| 1.8 |
|
| 6 |
| 1.6 |
|
Total collection and disposal |
|
| $ | 72 |
| 2.3 | % | $ | 140 |
| 2.3 | % |
Our increase in collection and disposal yield for the three and six months ended June 30, 2018, compared to the prior year periods, includes increased revenues of $19 million and $36 million, respectively, from our environmental fees.
Recycling Commodities — Decreases in the market prices for recycling commodities resulted in revenue decline of $88 million and $161 million for the three and six months ended June 30, 2018, respectively, as compared with the prior year periods. Disruptions in the global movement of recycling commodities continued to reduce market prices in the current year periods. Average market prices for recycling commodities at the Company’s facilities were 43% and 40% lower for the three and six months ended June 30, 2018, respectively, compared with the prior year periods. We expect these disruptions in the market to extend through the remainder of 2018, and likely beyond, 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 $32 million and $56 million for the three and six months ended June 30, 2018, respectively, as compared with the prior year periods. These revenues fluctuate in response to changes in the national average prices for diesel fuel on which our surcharge is based. Market prices for diesel fuel increased 25% and 21% for the three and six months ended June 30, 2018, respectively, compared with the prior year periods. The mandated fees included in this line item are primarily related to pass-through 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 $66 million, or 1.8%, and $154 million, or 2.2%, for the three and six months ended June 30, 2018, respectively, as compared with the prior year periods, excluding volumes from acquisitions and divestitures.
We experienced higher volumes due to improving market conditions in our Traditional Solid Waste business and strong sales performance. Our focus on customer service and disciplined growth delivered consistent operating results throughout 2017 and into the first half of 2018. Two large new contract additions in the second half of 2017 favorably impacted volume growth for our commercial collection and transfer stations. Additionally, clean-up efforts of natural disasters throughout the U.S. in the second half of 2017 continued to favorably affect our landfill volumes through the first quarter of 2018. Our residential collection experienced volume declines in the first six months of 2018 because of our continued focus on renegotiating existing contracts and only entering into new contracts with a reasonable rate of return.
38
Foreign Currency Translation and Other
Revenue increases from foreign currency translation, which affects revenues from our Canadian operations, were more than offset by the revenue decline associated with the adoption of Accounting Standards Update (“ASU”) 2014-09 and other changes. See Notes 1 and 4 to the Condensed Consolidated Financial Statements for further discussion of ASU 2014‑09.
Operating Expenses
The following table summarizes the major components of our operating expenses (dollars in millions):
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| Three Months Ended |
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| Six Months Ended |
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| ||||||||||||||
|
| June 30, |
| Period-to-Period |
| June 30, |
| Period-to-Period |
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|
| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change |
| ||||||||||
Labor and related benefits |
| $ | 674 |
| $ | 614 |
| $ | 60 |
| 9.8 | % | $ | 1,327 |
| $ | 1,224 |
| $ | 103 |
| 8.4 | % |
Transfer and disposal costs |
|
| 282 |
|
| 257 |
|
| 25 |
| 9.7 |
|
| 539 |
|
| 490 |
|
| 49 |
| 10.0 |
|
Maintenance and repairs |
|
| 312 |
|
| 288 |
|
| 24 |
| 8.3 |
|
| 614 |
|
| 567 |
|
| 47 |
| 8.3 |
|
Subcontractor costs |
|
| 337 |
|
| 320 |
|
| 17 |
| 5.3 |
|
| 651 |
|
| 605 |
|
| 46 |
| 7.6 |
|
Cost of goods sold |
|
| 189 |
|
| 255 |
|
| (66) |
| (25.9) |
|
| 380 |
|
| 494 |
|
| (114) |
| (23.1) |
|
Fuel |
|
| 112 |
|
| 91 |
|
| 21 |
| 23.1 |
|
| 188 |
|
| 183 |
|
| 5 |
| 2.7 |
|
Disposal and franchise fees and taxes |
|
| 155 |
|
| 194 |
|
| (39) |
| (20.1) |
|
| 289 |
|
| 368 |
|
| (79) |
| (21.5) |
|
Landfill operating costs |
|
| 80 |
|
| 88 |
|
| (8) |
| (9.1) |
|
| 160 |
|
| 169 |
|
| (9) |
| (5.3) |
|
Risk management |
|
| 53 |
|
| 60 |
|
| (7) |
| (11.7) |
|
| 105 |
|
| 112 |
|
| (7) |
| (6.3) |
|
Other |
|
| 119 |
|
| 123 |
|
| (4) |
| (3.3) |
|
| 244 |
|
| 244 |
|
| — |
| — |
|
|
| $ | 2,313 |
| $ | 2,290 |
| $ | 23 |
| 1.0 | % | $ | 4,497 |
| $ | 4,456 |
| $ | 41 |
| 0.9 | % |
Percentage of revenues |
|
| 61.9 | % |
| 62.3 | % |
|
|
|
|
|
| 62.0 | % |
| 62.6 | % |
|
|
|
|
|
The increase in volumes in the current year periods, as compared to the prior year periods, as discussed above in Operating Revenues, affects the comparability of operating expenses for the periods presented.
Other significant items affecting the comparability of operating expenses for the periods include:
Labor and Related Benefits — The increase in labor and related benefits costs was driven by (i) volume growth in our collection business, which led to increased our revenuestraining costs; (ii) a bonus plan established in early 2018 targeted at improving employee retention and (iii) merit increases.
Maintenance and Repairs — The increase in maintenance and repairs costs was driven by $158 million(i) higher labor costs and (ii) higher parts and third-party service costs.
Cost of Goods Sold — The decrease in cost of goods sold was primarily driven by (i) lower market prices for recycling commodities and volume growth, which contributed $90(ii) a change in accounting for certain customer rebates due to the adoption of ASU 2014-09 in the current year periods. See Notes 1 and 4 to the Condensed Consolidated Financial Statements for further discussion of ASU 2014‑09.
Fuel — The increase in fuel costs was due tohigher market prices for diesel fuel. This increase was offset, in part, by the recognition of a $28 million benefit from the extension of revenue growthfederal natural gas fuel credits. We recognized the benefit in our recycling linethe first quarter of business;2018 when the legislation was passed, though the credits relate to 2017 business activity and these credits were not extended into 2018.
Operating expensesDisposal and Franchise Fees and Taxes — The decrease in disposal and franchise fees and taxes was driven by the adoption of $2,290 million, or 62.3% of revenues, compared with $2,130 million, or 62.2% of revenues,ASU 2014-09 in the current year periods; specifically, certain franchise fees were treated as disposal fees and taxes in the prior year period. This increaseperiods and were treated as a reduction to revenue in the current year periods. See Notes 1 and 4 to the Condensed Consolidated Financial Statements for further discussion of $160 million is primarily attributable to (i) increased costASU 2014-09.
39
Selling, General and Administrative Expenses
The following table summarizes the major components of goods sold primarily related to higher market prices for recycling commodities; (ii) higher volumes; (iii) increased maintenance and repair costs; (iv) increased fuel costs due to higher fuel prices and the expiration of certain natural gas fuel excise tax credits and (v) merit increases;
Selling,our selling, general and administrative expenses of $353 million, or 9.6% of revenues,(dollars in millions):
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| Three Months Ended |
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| Six Months Ended |
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| ||||||||
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| June 30, |
| Period-to-Period |
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| June 30, |
| Period-to-Period |
| ||||||||||||||
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| 2018 |
| 2017 |
| Change |
|
| 2018 |
| 2017 |
| Change |
| ||||||||||
Labor and related benefits |
| $ | 240 |
| $ | 241 |
| $ | (1) |
| (0.4) | % |
| $ | 492 |
| $ | 517 |
| $ | (25) |
| (4.8) | % |
Professional fees |
|
| 29 |
|
| 25 |
|
| 4 |
| 16.0 |
|
|
| 53 |
|
| 46 |
|
| 7 |
| 15.2 |
|
Provision for bad debts |
|
| 10 |
|
| 10 |
|
| — |
| — |
|
|
| 21 |
|
| 20 |
|
| 1 |
| 5.0 |
|
Other |
|
| 86 |
|
| 77 |
|
| 9 |
| 11.7 |
|
|
| 172 |
|
| 160 |
|
| 12 |
| 7.5 |
|
|
| $ | 365 |
| $ | 353 |
| $ | 12 |
| 3.4 | % |
| $ | 738 |
| $ | 743 |
| $ | (5) |
| (0.7) | % |
Percentage of revenues |
|
| 9.8 | % |
| 9.6 | % |
|
|
|
|
|
|
| 10.2 | % |
| 10.4 | % |
|
|
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|
|
The decrease in our labor and related benefits costs during the three and six months ended June 30, 2018, compared with $340 million, or 9.9% of revenues, into the prior year period. Thisperiods, is largely due to lower incentive compensation accruals in the current year periods. Other items affecting the comparability of our labor and related benefits costs for the reported periods include (i) severance costs for former executives incurred during the first quarter of 2017; (ii) merit increases and (iii) a bonus plan established in early 2018 targeted at improving employee retention. Increases in our other expenses are a result of higher litigation settlement costs in the current year periods.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and amortization expenses (dollars in millions):
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| Three Months Ended |
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| Six Months Ended |
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| June 30, |
| Period-to-Period |
| June 30, |
| Period-to-Period |
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| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change |
| ||||||||||
Depreciation of tangible property and equipment |
| $ | 212 |
| $ | 195 |
| $ | 17 |
| 8.7 | % | $ | 416 |
| $ | 386 |
| $ | 30 |
| 7.8 | % |
Amortization of landfill airspace |
|
| 146 |
|
| 137 |
|
| 9 |
| 6.6 |
|
| 266 |
|
| 251 |
|
| 15 |
| 6.0 |
|
Amortization of intangible assets |
|
| 26 |
|
| 24 |
|
| 2 |
| 8.3 |
|
| 49 |
|
| 47 |
|
| 2 |
| 4.3 |
|
|
| $ | 384 |
| $ | 356 |
| $ | 28 |
| 7.9 | % | $ | 731 |
| $ | 684 |
| $ | 47 |
| 6.9 | % |
Percentage of revenues |
|
| 10.3 | % |
| 9.7 | % |
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|
|
|
|
| 10.1 | % |
| 9.6 | % |
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|
|
The increase in depreciation of tangible property and equipment during the three and six months ended June 30, 2018, compared to the prior year periods, was primarily due to increased capital expenditures to support organic growth in our business. The increase in amortization of landfill airspace during the three and six months ended June 30, 2018, compared to the prior year periods, was primarily due to increased volumes at our landfills and changes in estimates.
Gain (Loss) from Divestitures, Asset Impairments and Unusual Items, Net
We recognized net gains from divestitures of $39 million and $42 million during the three and six months ended June 30, 2018, respectively, due to the sale of certain ancillary operations.
40
Income from Operations
The following table summarizes income from operations for our reportable segments (dollars in millions):
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| Three Months Ended |
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| Six Months Ended |
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| June 30, |
| Period-to-Period |
| June 30, |
| Period-to-Period |
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| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change |
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Solid Waste: |
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Tier 1 |
| $ | 395 |
| $ | 395 |
| $ | — |
| — | % | $ | 760 |
| $ | 761 |
| $ | (1) |
| (0.1) | % |
Tier 2 |
|
| 141 |
|
| 142 |
|
| (1) |
| (0.7) |
|
| 263 |
|
| 258 |
|
| 5 |
| 1.9 |
|
Tier 3 |
|
| 295 |
|
| 296 |
|
| (1) |
| (0.3) |
|
| 586 |
|
| 564 |
|
| 22 |
| 3.9 |
|
Solid Waste |
|
| 831 |
|
| 833 |
|
| (2) |
| (0.2) |
|
| 1,609 |
|
| 1,583 |
|
| 26 |
| 1.6 |
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Other |
|
| 13 |
|
| (18) |
|
| 31 |
| * |
|
| (10) |
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| (50) |
|
| 40 |
| (80.0) |
|
Corporate and Other |
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| (129) |
|
| (142) |
|
| 13 |
| (9.2) |
|
| (276) |
|
| (302) |
|
| 26 |
| (8.6) |
|
Total |
| $ | 715 |
| $ | 673 |
| $ | 42 |
| 6.2 | % | $ | 1,323 |
| $ | 1,231 |
| $ | 92 |
| 7.5 | % |
Percentage of revenues |
|
| 19.1 | % |
| 18.3 | % |
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|
|
|
| 18.2 | % |
| 17.3 | % |
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* Percentage change does not provide a meaningful comparison.
All information presented has been updated to reflect our realigned segments which are discussed further in Note 8 to the Condensed Consolidated Financial Statements.
The significant items affecting income from operations for our segments during the three and six months ended June 30, 2018, as compared with the prior year periods, are summarized below:
· | Solid Waste — Our Traditional Solid Waste business benefited from internal revenue growth, primarily in Tier 3, and certain natural gas fuel credits in the first quarter of 2018 offset, in part, by (i) lower market prices for recycling commodities; (ii) a bonus plan established in early 2018 targeted at improving employee retention; (iii) merit increases and (iv) increased maintenance and repair costs. |
· | Other — Net gains from divestitures of certain ancillary operations in the current year periods. |
· | Corporate and Other — Decreased expenses as a result of lower incentive compensation accruals in the current year periods and severance costs for former executives during the first quarter of 2017. |
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of $13 million is primarily due to higher incentive compensation costs and certain other variable costs due to revenue growth;
34
Income from operations of $673$20 million or 18.3% of revenues,during the three and six months ended June 30, 2018, respectively, compared with $611$13 million or 17.8% of revenues, in the prior year period; and
Net income attributable to Waste Management, Inc. of $362 million, or $0.81 per diluted share, compared with $287 million, or $0.64 per diluted share, in the prior year period.
Our second quarter 2016 results were affected by the recognition ofpre-tax charges of $45 million primarily relatedduring the three and six months ended June 30, 2017, respectively. During the six months ended June 30, 2017, we recognized $28 million of impairment charges to impairments of minority-ownedwrite down equity method investments in waste diversion technology companies. These impairmentscompanies to their estimated fair values. The remaining losses for each period are primarily related to our noncontrolling interests in entities established to invest in and manage low-income housing properties and a refined coal facility.Refer to Notes 5 and 13 to the Condensed Consolidated Financial Statements for more information related to these investments.
Income Tax Expense
Our income tax expense was $110 million and $226 million for the three and six months ended June 30, 2018, respectively, compared to $209 million and $346 million for the three and six months ended June 30, 2017, respectively. Our effective income tax rate was 18.1% and 20.2% for the three and six months ended June 30, 2018, respectively, compared with 36.6% and 34.4% for the three and six months ended June 30, 2017, respectively. The decrease in our income tax expense and effective income tax rates for the three and six months ended June 30, 2018, compared with the prior year periods, was primarily due to the enactment of tax reform, which reduced the federal corporate income tax rate
41
from 35% to 21% effective January 1, 2018. Refer to Note 5 to the Condensed Consolidated Financial Statements for more 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):
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| June 30, |
| December 31, | ||
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| 2018 |
| 2017 | ||
Cash and cash equivalents |
| $ | 47 |
| $ | 22 |
Restricted trust and escrow accounts: |
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Insurance reserves |
| $ | 304 |
| $ | 203 |
Final capping, closure, post-closure and environmental remediation funds |
|
| 102 |
|
| 101 |
Other |
|
| 13 |
|
| 15 |
Total restricted trust and escrow accounts |
| $ | 419 |
| $ | 319 |
Debt: |
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Current portion |
| $ | 828 |
| $ | 739 |
Long-term portion |
|
| 8,968 |
|
| 8,752 |
Total debt |
| $ | 9,796 |
| $ | 9,491 |
As of June 30, 2018, we had $2.1 billion of debt maturing within the next 12 months, including (i) $968 million of short-term borrowings under our commercial paper program; (ii) $796 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (iii) $265 million of other debt with scheduled maturities within the next 12 months, including $219 million of tax-exempt bonds and (iv) C$94 million, or $71 million, of borrowings under our Canadian term loan. Of the $968 million of short-term borrowings outstanding under our commercial paper program as of June 30, 2018 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 $476 million of these borrowings on a long-term basis, and we have classified these amounts as long-term debt. As of June 30, 2018, we have classified an additional $796 million of debt 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. The remaining $828 million is classified as current obligations.
Refinancing of Revolving Credit Facility
In June 2018, we entered into the $2.75 billion revolving credit facility, which amended and restated our prior long-term U.S. revolving credit facility. Amendments to the credit agreement included (i) increasing total capacity under the facility from $2.25 billion to $2.75 billion; (ii) establishment of a $750 million accordion feature that may be used to increase total capacity in future periods; (iii) extending the term through June2023 and (iv) inclusion of two one-year extension options. Waste Management of Canada Corporation and WM Quebec Inc., each an indirect wholly-owned subsidiary of WM, were substantially nondeductible for income taxesadded as additional borrowers under the $2.75 billion revolving credit facility, and hadthe agreement permits borrowing in Canadian dollars up to the U.S. dollar equivalent of $375 million, with such borrowings to be repaid in Canadian dollars. Waste Management Holdings, Inc., a negative impactwholly-owned subsidiary of $0.10 onWM, guarantees all of the
42
obligations under the revolving credit facility. During the third quarter of 2018, we expect to incur borrowings under our diluted earnings per share.$2.75 billion revolving credit facility to repay the outstanding borrowings under our Canadian term loan.
Free Cash Flow
As is our practice, we are presenting free cash flow, which is anon-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. However, weWe believe free cash flow gives investors useful insight into how we view our liquidity. Nonetheless,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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net cash provided by operating activities (a) | $ | 813 | $ | 762 | $ | 1,534 | $ | 1,494 | ||||||||
Capital expenditures | (299 | ) | (312 | ) | (631 | ) | (629 | ) | ||||||||
Proceeds from divestitures of businesses and other assets (net of cash divested) | 6 | 11 | 13 | 24 | ||||||||||||
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Free cash flow (a) | $ | 520 | $ | 461 | $ | 916 | $ | 889 | ||||||||
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| Three Months Ended |
| Six Months Ended | ||||||||
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| June 30, |
| June 30, | ||||||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net cash provided by operating activities (a) |
| $ | 975 |
| $ | 813 |
| $ | 1,784 |
| $ | 1,535 |
Capital expenditures |
|
| (436) |
|
| (299) |
|
| (836) |
|
| (631) |
Proceeds from divestitures of businesses and other assets (net of cash divested) |
|
| 82 |
|
| 6 |
|
| 96 |
|
| 13 |
Free cash flow (a) |
| $ | 621 |
| $ | 520 |
| $ | 1,044 |
| $ | 917 |
(a) | Prior year information has been revised to reflect the adoption of |
Our netSummary of Cash Flow Activity
The following is a summary of our cash provided by operating activities increased by $51 million and $40 millionflows for the three and six months ended June 30 2017, respectively, as compared with the prior year periods. The three and six months ended June 30, 2017 were impacted(in millions):
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| 2018 |
| 2017(a) | ||
Net cash provided by operating activities |
| $ | 1,784 |
| $ | 1,535 |
Net cash used in investing activities |
| $ | (1,010) |
| $ | (673) |
Net cash used in financing activities |
| $ | (647) |
| $ | (859) |
(a) | Prior year information has been revised to reflect the adoption of ASU 2016‑15 and ASU 2016-18 and conform to our current year presentation. See Note 1 to the Condensed Consolidated Financial Statements for further discussion. |
Net Cash Provided by (i) higher earnings from our Traditional Solid Waste and recycling businesses; (ii) net favorable changes in our assets and liabilities, net of effects from business acquisitions and divestitures, exclusive of items noted separately and (iii) higher income tax payments. The six months ended June 30, 2017 was further impactedOperating Activities — Our operating cash flows increased by (i) cash proceeds of $67 million from the termination of our cross-currency swaps during the three months ended March 31, 2016 and (ii) higher annual incentive plan cash payments of $41 million in the current year period.
Capital expenditures for the three and six months ended June 30, 2017 were comparable to the prior year periods. The Company continues to maintain a disciplined focus on capital management, and fluctuations in our
35
capital expenditures are a result of new business opportunities, growth in our existing business and timing of replacement of aging assets.
Acquisitions
Southern Waste Systems/Sun Recycling (“SWS”) — On January 8, 2016, Waste Management Inc. of Florida, an indirect wholly-owned subsidiary of WM, acquired certain operations and business assets of SWS in Southern Florida for total consideration of $525 million. The acquired business assets include residential, commercial and industrial solid waste collection, processing/recycling and transfer operations, equipment, vehicles, real estate and customer agreements.
Adoption of New Accounting Standards
Equity-Based Compensation —In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU2016-09 associated with equity-based compensation as part of its simplification initiative to reduce the cost and complexity of compliance with U.S. Generally Accepted Accounting Principles (“GAAP”), while maintaining or improving the usefulness of the information provided. This amended guidance was effective for the Company on January 1, 2017 and required the following changes to the presentation of our financial statements:
Excess tax benefits or deficiencies for share-based payments are now recorded as a discrete item in the period shares vest or stock options are exercised as an adjustment to income tax expense or benefit rather than additionalpaid-in capital. This change was applied prospectively as of January 1, 2017. The Company did not have any excess tax benefits that were not previously recognized as of January 1, 2017. See Note 4 to the Condensed Consolidated Financial Statements for discussion of the current year impact;
As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change did not have a material impact on our current year diluted earnings per share;
Cash flows related to excess tax benefits or deficiencies are included in net cash provided by operating activities rather than as a financing activity. The Company adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and a corresponding increase to net cash used in financing activities of $17$249 million for the six months ended June 30, 2016;
Cash paid to taxing authorities when withholding shares from an employee’s vesting or exercise2018, as compared with the prior year period, as a result of equity-based compensation awards fortax-withholding purposes is now considered a repurchase of the Company’s equity instruments(i) lower tax payments and is classified as net cash used in financing activities rather than as an operating activity. The Company adopted this change retrospectively, which resulted in(ii) an increase in income from operations, excluding depreciation and amortization and (gain) loss from divestitures, asset impairments and unusual items, net primarily attributable to nethigher earnings from our Traditional Solid Waste business, partially offset by lower earnings from our recycling line of business.
Net Cash Used in Investing Activities — The most significant items included in our investing cash provided by operating activities and a corresponding increase to net cash used in financing activities of $23 millionflows for the six months ended June 30, 2016;2018 and 2017 are summarized below:
· | Acquisitions — We spent $263 million and $49 million on acquisitions during the six months ended June 30, 2018 and 2017, respectively, related to our Solid Waste business. |
43
The Company has elected to continue to estimate forfeitures rather than account for forfeitures as they occur.
· | Capital Expenditures — We used $836 million and $631 million for capital expenditures during the six months ended June 30, 2018 and 2017, 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 and the timing of replacement of aging assets. |
Goodwill Impairment TestingNet Cash Used in Financing Activities —In January 2017,The most significant items affecting the FASB issued ASU2017-04 which simplifies the goodwill impairment test by eliminating Step 2comparison of the quantitative assessment and should reduce the cost and complexity of evaluating goodwill for impairment. Under the amended guidance, when a quantitative assessment is required, an entity will perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be measured as the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of recorded goodwill. This amended guidance, effectiveour financing cash flows for the Company on January 1, 2020, permits early adoption. The Company’s early adoption on January 1,six months ended June 30, 2018 and 2017 did not have an impact onare summarized below:
· | Debt Borrowings (Repayments) — The following summarizes our cash borrowings and repayments of debt (excluding our commercial paper program discussed below) for the six months ended June 30 (in millions): |
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| 2018 |
| 2017 | ||
Borrowings: |
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|
|
Revolving credit facility (a) |
| $ | 28 |
| $ | 25 |
Canadian term loan and revolving credit facility |
|
| 8 |
|
| 5 |
Other debt |
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| 47 |
|
| 56 |
|
| $ | 83 |
| $ | 86 |
Repayments: |
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|
|
Revolving credit facility (a) |
| $ | (28) |
| $ | (451) |
Canadian term loan and revolving credit facility |
|
| (45) |
|
| (79) |
Tax-exempt bonds |
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| (42) |
|
| — |
Other debt |
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| (81) |
|
| (97) |
|
| $ | (196) |
| $ | (627) |
Net cash repayments |
| $ | (113) |
| $ | (541) |
(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 consolidated financial statements.debt borrowings and repayments.
· | Commercial Paper Program — During the six months ended June 30, 2018 and 2017, we had net cash borrowings of $443 million and $253 million, respectively, under our commercial paper program. Borrowings were primarily to support new business opportunities and for general corporate purposes. |
· | Common Stock Repurchase Program — We paid $550 million and $250 million for share repurchases during the six months ended June 30, 2018 and 2017, respectively. See Note 11 to the Condensed Consolidated Financial Statements for additional information. |
· | Cash Dividends — We paid cash dividends of $406 million and $381 million during the six months ended June 30, 2018 and 2017, respectively. The increase in dividend payments is primarily due to our quarterly per share dividend increasing from $0.425 in 2017 to $0.465 in 2018 and has been offset, in part, by a reduction in our common stock outstanding during 2018 as a result of our common stock repurchase program. |
36
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 Form10-K 10‑K for the year ended December 31, 2016.2017. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
44
New Accounting Standard Pending Adoption
Results of OperationsLeases
Operating Revenues
We evaluate, oversee and manage— In February 2016, 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 services provided by our Strategic Business Solutions (“WMSBS”) and Energy and Environmental Services organizations, recycling brokerage services, landfillgas-to-energy services and expanded service offerings and solutions. Our expanded service offerings and solutions include (i) portable self-storage and long distance moving services; (ii) fluorescent bulb and universal waste mail-back through our LampTracker® program; (iii) portable restroom servicing under the namePort-o-Let® and (iv) street and parking lot sweeping services. In addition, we hold interests in oil and gas producing properties. These operations are presented as “Other” in the table below. The following table summarizes revenues during each period (in millions):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Solid Waste | $ | 3,759 | $ | 3,519 | $ | 7,268 | $ | 6,801 | ||||||||
Other | 657 | 572 | 1,260 | 1,072 | ||||||||||||
Intercompany | (739 | ) | (666 | ) | (1,411 | ) | (1,272 | ) | ||||||||
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Total | $ | 3,677 | $ | 3,425 | $ | 7,117 | $ | 6,601 | ||||||||
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|
37
The mix of operating revenues from our major lines of business is reflected in the table below (in millions):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Commercial | $ | 917 | $ | 865 | $ | 1,828 | $ | 1,711 | ||||||||
Residential | 632 | 622 | 1,253 | 1,232 | ||||||||||||
Industrial | 654 | 613 | 1,257 | 1,174 | ||||||||||||
Other | 123 | 111 | 223 | 207 | ||||||||||||
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| |||||||||
Total collection | 2,326 | 2,211 | 4,561 | 4,324 | ||||||||||||
Landfill | 864 | 792 | 1,603 | 1,499 | ||||||||||||
Transfer | 414 | 391 | 780 | 737 | ||||||||||||
Recycling | 375 | 290 | 747 | 558 | ||||||||||||
Other | 437 | 407 | 837 | 755 | ||||||||||||
Intercompany | (739 | ) | (666 | ) | (1,411 | ) | (1,272 | ) | ||||||||
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|
|
| |||||||||
Total | $ | 3,677 | $ | 3,425 | $ | 7,117 | $ | 6,601 | ||||||||
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|
The following table provides detailsFinancial Accounting Standards Board issued ASU 2016‑02 associated with theperiod-to-period change in revenues (dollars in millions):
Period-to-Period Change for the Three Months Ended June 30, 2017 vs. 2016 | Period-to-Period Change for the Six Months Ended June 30, 2017 vs. 2016 | |||||||||||||||
Amount | As a % of Total Company(a) | Amount | As a % of Total Company(a) | |||||||||||||
Average yield (b) | $ | 153 | 4.5 | % | $ | 340 | 5.2 | % | ||||||||
Volume | 115 | 3.4 | 174 | 2.6 | ||||||||||||
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|
| |||||||||
Internal revenue growth | 268 | 7.9 | 514 | 7.8 | ||||||||||||
Acquisitions | 9 | 0.2 | 21 | 0.3 | ||||||||||||
Divestitures | (17 | ) | (0.5 | ) | (17 | ) | (0.3 | ) | ||||||||
Foreign currency translation | (8 | ) | (0.2 | ) | (2 | ) | — | |||||||||
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|
|
|
| |||||||||
Total | $ | 252 | 7.4 | % | $ | 516 | 7.8 | % | ||||||||
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|
38
|
Period-to-Period Change for the Three Months Ended June 30, 2017 vs. 2016 | Period-to-Period Change for the Six Months Ended June 30, 2017 vs. 2016 | |||||||||||||||
Amount | As a % of Related Business(i) | Amount | As a % of Related Business(i) | |||||||||||||
Collection and disposal | $ | 57 | 1.9 | % | $ | 114 | 1.9 | % | ||||||||
Recycling commodities | 76 | 27.4 | 187 | 35.0 | ||||||||||||
Fuel surcharge and mandated fees | 20 | 18.2 | 39 | 18.6 | ||||||||||||
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| |||||||||||||
Total | $ | 153 | 4.5 | % | $ | 340 | 5.2 | % | ||||||||
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Our revenues increased $252 million, or 7.4%, and $516 million, or 7.8%, for the three and six months ended June 30, 2017, respectively, as comparedlease accounting. There have been further amendments, including practical expedients, with the prior year periods, driven by (i) higher volumes; (ii) higher market pricesissuance of ASU 2018-01 in January 2018. The amended guidance requires the recycling commodities we sell; (iii) revenue growth from yield on our collectionrecognition of lease assets and disposal lines of business; (iv) higher revenues from our fuel surcharge program due to higher diesel fuel prices and (v) acquisitions. Partially offsetting these revenue increases were (i) divestitures and (ii) foreign currency translation, which affects revenues from our Canadian operations.
The following provides further details associated with ourperiod-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.
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Revenue growth from collection and disposal average yield was $57 million, or 1.9%, and $114 million, or 1.9%, for the three and six months ended June 30, 2017, respectively. We experienced growth in all of our collection and disposal lines of business in the current year periods. The details are as follows (dollars in millions):
Period-to-Period Change for the Three Months Ended June 30, 2017 | Period-to-Period Change for the Six Months Ended June 30, 2017 | |||||||||||||||
Amount | As a % of Related Business | Amount | As a % of Related Business | |||||||||||||
Commercial | $ | 22 | 2.7 | % | $ | 50 | 3.1 | % | ||||||||
Industrial | 17 | 3.0 | 30 | 2.7 | ||||||||||||
Residential | 10 | 1.5 | 20 | 1.6 | ||||||||||||
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Total collection | 49 | 2.4 | 100 | 2.4 | ||||||||||||
Landfill | 5 | 0.8 | 7 | 0.7 | ||||||||||||
Transfer | 3 | 1.5 | 7 | 1.9 | ||||||||||||
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Total collection and disposal | $ | 57 | 1.9 | % | $ | 114 | 1.9 | % | ||||||||
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Revenues from our environmental fee contributed $17 million and $34 million for the three and six months ended June 30, 2017, respectively, to our collection and disposal average yield.
Recycling Commodities— Our revenues increased $76 million and $187 million for the three and six months ended June 30, 2017, respectively, as compared with the prior year periods, due to the continued strong year-over-year increase in the market prices of the recycling commodities we sell at our recycling facilities and through our recycling brokerage business.
Fuel Surcharge and Mandated Fees —These revenues, which are predominantly generated by our fuel surcharge program, increased $20 million and $39 million for the three and six months ended June 30, 2017, respectively, as compared with the prior year periods. These revenues fluctuate in response to changes in the national average prices for diesel fuel on which our surcharge is based. Market prices for diesel fuel increased approximately 11% and 17% for the three and six months ended June 30, 2017, respectively, as compared with the prior year periods, which contributed to the revenue growth in our fuel surcharge program. The mandated fees included in this line item are primarily related to pass-through 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 impactlease liabilities on the comparabilitybalance sheet for those leases with terms in excess of the periods.
Volume
Our revenues increased $115 million, or 3.4%, and $174 million, or 2.6%, for the three and six months ended June 30, 2017, respectively, as compared with the prior year periods, due to higher volumes. The year-over-year comparison does not include volumes from acquisitions.
We experienced higher volumes in all of our lines of business, except for our residential line of business, due to (i) reduced customer churn and improved sales performance supported by our focus on disciplined growth; (ii) improving market conditions and (iii) an additional workday for the six months ended June 30, 2017. The most significant contributors to our volume growth in the current year periods were commercial and industrial collection; municipal solid waste and construction and demolition landfills; transfer stations; our recycling brokerage business and our WMSBS organization. Our residential line of business experienced volume declines in the current year periods because of our continued focus on renegotiating existing contracts and winning new contracts with reasonable rates of returns.
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Acquisitions and Divestitures
Revenues increased $9 million and $21 million for the three and six months ended June 30, 2017, respectively, as compared with the prior year periods, due to acquisitions. These revenues were offset by revenue decreases due to divestitures of $17 million for both the three and six months ended June 30, 2017 as compared with the prior year periods.
Operating Expenses
The following table summarizes the major components of our operating expenses (dollars in millions):
Three Months Ended June 30, | Period-to- Period Change | Six Months Ended June 30, | Period-to- Period Change | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
Labor and related benefits | $ | 614 | $ | 598 | $ | 16 | 2.7 | % | $ | 1,224 | $ | 1,177 | $ | 47 | 4.0 | % | ||||||||||||||||
Transfer and disposal costs | 257 | 252 | 5 | 2.0 | 490 | 483 | 7 | 1.4 | ||||||||||||||||||||||||
Maintenance and repairs | 288 | 269 | 19 | 7.1 | 567 | 525 | 42 | 8.0 | ||||||||||||||||||||||||
Subcontractor costs | 320 | 298 | 22 | 7.4 | 605 | 571 | 34 | 6.0 | ||||||||||||||||||||||||
Cost of goods sold | 255 | 210 | 45 | 21.4 | 494 | 391 | 103 | 26.3 | ||||||||||||||||||||||||
Fuel | 91 | 74 | 17 | 23.0 | 183 | 138 | 45 | 32.6 | ||||||||||||||||||||||||
Disposal and franchise fees and taxes | 194 | 177 | 17 | 9.6 | 368 | 340 | 28 | 8.2 | ||||||||||||||||||||||||
Landfill operating costs | 88 | 95 | (7 | ) | (7.4 | ) | 169 | 173 | (4 | ) | (2.3 | ) | ||||||||||||||||||||
Risk management | 60 | 51 | 9 | 17.6 | 112 | 107 | 5 | 4.7 | ||||||||||||||||||||||||
Other | 123 | 106 | 17 | 16.0 | 244 | 218 | 26 | 11.9 | ||||||||||||||||||||||||
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$ | 2,290 | $ | 2,130 | $ | 160 | 7.5 | % | $ | 4,456 | $ | 4,123 | $ | 333 | 8.1 | % | |||||||||||||||||
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Our operating expenses increased $160 million, or 7.5%, and $333 million, or 8.1%, for the three and six months ended June 30, 2017, respectively, as compared with the prior year periods. Our operating expenses as a percentage of revenues increased slightly to 62.3% for the three months ended June 30, 2017 from 62.2% for the three months ended June 30, 2016, and to 62.6% for the six months ended June 30, 2017 from 62.5% for the six months ended June 30, 2016.
We experienced higher operating costs for the three and six months ended June 30, 2017 when compared to the prior year periods, primarily related to:
Higher market prices for recycling commodities, which increased cost of goods sold; and
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Other significant items affecting the comparability of operating expenses for the periods presented include:
Labor and Related Benefits— The increase in labor and related benefits costs was also due to merit increases.
Maintenance and Repairs — The increase in maintenance and repairs costs was also due to (i) higher labor costs due to increased headcount, merit increases, and retention and training efforts and (ii) higher third-party repairs and parts costs.
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Fuel — The increase in fuel costs was primarily due to (i) higher fuel prices and (ii) the expiration of certain natural gas fuel excise tax credits as of December 31, 2016. These cost increases were offset, in part, by lower costs resulting from the ongoing conversion of our fleet to natural gas vehicles.
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and administrative expenses (dollars in millions):
Three Months Ended June 30, | Period-to- Period Change | Six Months Ended June 30, | Period-to- Period Change | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
Labor and related benefits | $ | 241 | $ | 233 | $ | 8 | 3.4 | % | $ | 517 | $ | 476 | $ | 41 | 8.6 | % | ||||||||||||||||
Professional fees | 25 | 24 | 1 | 4.2 | 46 | 46 | — | — | ||||||||||||||||||||||||
Provision for bad debts | 10 | 7 | 3 | 42.9 | 20 | 18 | 2 | 11.1 | ||||||||||||||||||||||||
Other | 77 | 76 | 1 | 1.3 | 160 | 162 | (2 | ) | (1.2 | ) | ||||||||||||||||||||||
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$ | 353 | $ | 340 | $ | 13 | 3.8 | % | $ | 743 | $ | 702 | $ | 41 | 5.8 | % | |||||||||||||||||
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Our selling, general and administrative expenses increased by $13 million, or 3.8%, and $41 million, or 5.8%, for the three and six months ended June 30, 2017, respectively, as compared with the prior year periods. As a percentage of revenue, our selling, general and administrative expenses decreased to 9.6% for the three months ended June 30, 2017 from 9.9% for the three months ended June 30, 2016, and decreased to 10.4% for the six months ended June 30, 2017 from 10.6% for the six months ended June 30, 2016.
Selling, general and administrative expenses increased primarily due to (i) higher incentive compensation costs and certain other variable costs due to revenue growth and (ii) merit increases. Additionally, severance costs for former executives contributed to the increase in labor and related benefits costs for the six months ended June 30, 2017 compared to the prior year period.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and amortization expenses (dollars in millions):
Three Months Ended June 30, | Period-to- Period Change | Six Months Ended June 30, | Period-to- Period Change | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
Depreciation of tangible property and equipment | $ | 195 | $ | 198 | $ | (3 | ) | (1.5 | )% | $ | 386 | $ | 388 | $ | (2 | ) | (0.5 | )% | ||||||||||||||
Amortization of landfill airspace | 137 | 116 | 21 | 18.1 | 251 | 215 | 36 | 16.7 | ||||||||||||||||||||||||
Amortization of intangible assets | 24 | 26 | (2 | ) | (7.7 | ) | 47 | 49 | (2 | ) | (4.1 | ) | ||||||||||||||||||||
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$ | 356 | $ | 340 | $ | 16 | 4.7 | % | $ | 684 | $ | 652 | $ | 32 | 4.9 | % | |||||||||||||||||
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The increase in amortization of landfill airspace during the three and six months ended June 30, 2017, compared to the prior year periods, was primarily due to increased volumes at our landfills and changes in our landfill estimates.
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Income from Operations
The following table summarizes income from operations for our reportable segments (dollars in millions):
Three Months Ended June 30, | Period-to- Period Change | Six Months Ended June 30, | Period-to- Period Change | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
Solid Waste: | ||||||||||||||||||||||||||||||||
Tier 1 | $ | 395 | $ | 362 | $ | 33 | 9.1 | % | $ | 761 | $ | 696 | $ | 65 | 9.3 | % | ||||||||||||||||
Tier 2 | 190 | 157 | 33 | 21.0 | 347 | 302 | 45 | 14.9 | ||||||||||||||||||||||||
Tier 3 | 248 | 235 | 13 | 5.5 | 475 | 443 | 32 | 7.2 | ||||||||||||||||||||||||
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Solid Waste | 833 | 754 | 79 | 10.5 | 1,583 | 1,441 | 142 | 9.9 | ||||||||||||||||||||||||
Other | (18 | ) | (20 | ) | 2 | (10.0 | ) | (50 | ) | (56 | ) | 6 | (10.7 | ) | ||||||||||||||||||
Corporate and Other | (142 | ) | (123 | ) | (19 | ) | 15.4 | (302 | ) | (266 | ) | (36 | ) | 13.5 | ||||||||||||||||||
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Total | $ | 673 | $ | 611 | $ | 62 | 10.1 | % | $ | 1,231 | $ | 1,119 | $ | 112 | 10.0 | % | ||||||||||||||||
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Our reportable segments are discussed further in Note 7 to the Condensed Consolidated Financial Statements.
Solid Waste — The most significant items affecting the results of operations of our Solid Waste business during the three and six months ended June 30, 2017 as compared with the prior year periods are summarized below:
Our Traditional Solid Waste business benefited from internal revenue growth;
Our recycling line of business was favorable compared to the prior year periods principally due to higher market prices for recycling commodities;
Higher labor and related benefits costs in the current year periods primarily due to merit increases;
Higher landfill amortization expense related to increased volumes at our landfills and changes in our landfill estimates, primarily in Tiers 1 and 3;
Lower leachate management expenses in Tier 2; and
Increased maintenance and repair costs.
Significant items affecting the comparison of the remaining components of our results of operations for the three and six months ended June 30, 2017 with the comparable prior year periods are summarized below:
Corporate and Other— Higher labor and related benefits costs in the current year periods were primarily related to higher incentive compensation costs. In addition, severance costs for former executives contributed to the higher costs for the six months ended June 30, 2017, compared to the prior year period.
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of $13 million and $45 million during the three and six months ended June 30, 2017, respectively, compared with $16 million and $23 million during the three and six months ended June 30, 2016, respectively. During the six months ended June 30, 2017, we recognized $28 million of charges to write down equity method investments in waste diversion technology companies to their estimated fair values. The remaining losses for each period are primarily related to our noncontrolling interests in entities established to invest in and managelow-income housing properties and a refined coal facility. The tax impacts realized as a result of these investments are discussed below inIncome Tax Expense.Refer to Notes 4 and 13 to the Condensed Consolidated Financial Statements for more information related to these investments.
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Other, Net
We recognized other, net expense of $43 million and $53 million for the three and six months ended June 30, 2016, respectively, primarily related to impairment charges of $41 million to write down minority-owned investments in waste diversion technology companies to their estimated fair values during the three months ended June 30, 2016. In addition, we recognized $8 million of expense during the three months ended March 31, 2016 associated with the termination of our cross-currency swaps, which is discussed further in Note 3 to the Condensed Consolidated Financial Statements.
Income Tax Expense
We recorded income tax expense of $209 million and $346 million during the three and six months ended June 30, 2017, respectively, compared with $173 million and $313 million during the three and six months ended June 30, 2016, respectively. Our effective income tax rate was 36.6% and 34.4% for the three and six months ended June 30, 2017, respectively, compared with 37.6% and 36.5% for the three and six months ended June 30, 2016, respectively.
Our income tax expense and effective income tax rate for the three months ended June 30, 2017 was unfavorably impacted primarily by state and local income taxes offset, in part, by the favorable impact of federal tax credits. Our income tax expense and effective income tax rate for the six months ended June 30, 2017 was favorably impacted primarily by excess tax benefits related to equity-based compensation and federal tax credits offset, in part, by the unfavorable impact of state and local income taxes and the tax implications of impairments.Our income tax expense and effective income tax rate for the three and six months ended June 30, 2016 was unfavorably impacted primarily by the tax implications of impairments and state and local income taxes offset, in part, by the favorable impact of federal tax credits and tax audit settlements.
The excess tax benefits related to the vesting or exercise of equity-based compensation awards reduced our income tax expense by $2 million and $34 million for the three and six months ended June 30, 2017, respectively. See Note 1 to the Condensed Consolidated Financial Statements for discussion of our adoption of ASU2016-09.
Our investments inlow-income housing properties and the refined coal facility reduced our income tax expense by $14 million for the three months ended June 30, 2017 and 2016 and by $25 million for the six months ended June 30, 2017 and 2016. Refer to Note 4 to the Condensed Consolidated Financial Statements for more information related to these investments.
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Liquidity and Capital Resources
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):
June 30, 2017 | December 31, 2016 | |||||||
Cash and cash equivalents | $ | 32 | $ | 32 | ||||
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Final capping, closure, post-closure and environmental remediation funds | $ | 99 | $ | 95 | ||||
Other | 9 | 10 | ||||||
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Total restricted trust and escrow accounts | $ | 108 | $ | 105 | ||||
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Current portion | $ | 390 | $ | 417 | ||||
Long-term portion | 8,667 | 8,893 | ||||||
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Total debt | $ | 9,057 | $ | 9,310 | ||||
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As of June 30, 2017, the current portion of our long-term debt balance of $390 million includes (i) $184 million of short-term borrowings under our commercial paper program and (ii) $206 million of other debt with scheduled maturities within the next 12 months, including $148 million oftax-exempt bonds.
As of June 30, 2017, we have classified (i) $590 million of 6.1% senior notes that mature in March 2018 and (ii) $69 million of short-term borrowings under our commercial paper program 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 long-term U.S. revolving credit facility (“$2.25 billion revolving credit facility”).
In addition, we have $561 million oftax-exempt bonds with term interest rate periods that expire within the next 12 months and currently classified as operating leases. Disclosure of key information about leasing arrangements will also be required. The amended guidance is effective for the Company on January 1, 2019. We are assessing the provisions of this amended guidance and we have (i) formed an additional $471 millionimplementation work team; (ii) performed training for the various organizations that will be most affected by the new standard; (iii) acquired a software solution to manage and account for leases under the new standard and (iv) identified our initial lease population that will be impacted by the new standard. We are evaluating the impact of variable-ratetax-exempt bonds that are supported by letters of credit. The interest ratesthis amended guidance on our variable-ratetax-exemptconsolidated financial statements. bonds are generally reset on either a daily or weekly basis through a remarketing process. All recenttax-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 intent and ability to refinance these bonds on a long-term basis as supported by the forecasted available capacity under our $2.25 billion revolving credit facility. Accordingly, we have also classified these borrowings as long-term in our Condensed Consolidated Balance
Off-Balance Sheet as of June 30, 2017.
Summary of Cash Flow Activity
The following is a summary of our cash flows for the six months ended June 30 (in millions):
2017 | 2016 | |||||||
Net cash provided by operating activities (a) | $ | 1,534 | $ | 1,494 | ||||
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Net cash used in investing activities | $ | (677 | ) | $ | (1,186 | ) | ||
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Net cash used in financing activities (a) | $ | (857 | ) | $ | (309 | ) | ||
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Net Cash Provided by Operating Activities— The most significant items affecting the comparison of our operating cash flows for the six months ended June 30, 2017, compared with the prior year period, are summarized below:
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Net Cash Used in Investing Activities— The most significant items included in our investing cash flows for the six months ended June 30, 2017 and 2016 are summarized below:
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Net Cash Used in Financing Activities — The most significant items affecting the comparison of our financing cash flows for the six months ended June 30, 2017 and 2016 are summarized below:
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Borrowings: | ||||||||
$2.25 billion revolving credit facility | $ | 25 | $ | 1,008 | ||||
Canadian term loan and revolving credit facility | 5 | 347 | ||||||
Senior notes | — | 496 | ||||||
Tax-exempt bonds | — | 143 | ||||||
Other debt | 56 | 100 | ||||||
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$2.25 billion revolving credit facility | $ | (451 | ) | $ | (1,028 | ) | ||
Canadian term loan and revolving credit facility | (79 | ) | (129 | ) | ||||
Senior notes | — | (10 | ) | |||||
Tax-exempt bonds | — | (241 | ) | |||||
Other debt | (97 | ) | (109 | ) | ||||
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Net borrowings (repayments) | $ | (541 | ) | $ | 577 | |||
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Refer to Note 3 to the Condensed Consolidated Financial Statements for additional information related to our debt borrowings and repayments.
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Off-Balance Sheet Arrangements
We have financial interests in unconsolidated variable interest entities as discussed in Note 13 to the Condensed Consolidated Financial Statements. Additionally, we are party to guarantee arrangements with unconsolidated entities as discussed in theGuaranteessection of Note 67 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, 2017,2018, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
New Accounting Standards Pending Adoption
Income Taxes — In October 2016, the FASB issued ASU2016-16 associated with the timing of recognition of income taxes for intra-entity transfers of assets other than inventory. The amended guidance requires the
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recognition of income taxes when the transfer of the asset occurs, which replaces current GAAP that defers the recognition of income taxes until the transferred asset is sold to a third party or otherwise recovered through use. The amended guidance is effective for the Company on January 1, 2018. We are assessing the provisions of this amended guidance; however, we currently do not expect that the adoption of this amended guidance will have a material impact on our consolidated financial statements.
Statement of Cash Flows —In August 2016, the FASB issued ASU2016-15 associated with the classification of certain cash receipts and cash payments in the statement of cash flows. In November 2016, the FASB issued ASU2016-18 associated with the presentation of restricted cash and cash equivalents in the statement of cash flows. The objective of both amendments was to reduce existing diversity in practice. The amended guidance is effective for the Company on January 1, 2018. We are assessing the provisions of this amended guidance; however, we currently do not expect that the adoption of this amended guidance will have a material impact on our consolidated financial statements.
Financial Instrument Credit Losses —In June 2016, the FASB issued ASU2016-13 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, with early adoption permitted beginning January 1, 2019. We are assessing the provisions of this amended guidance and evaluating the impact on our consolidated financial statements.
Leases—In February 2016, the FASB issued ASU2016-02 associated with lease accounting. The amended guidance requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. The disclosure of key information about leasing arrangements will also be required. The amended guidance is effective for the Company on January 1, 2019, with early adoption permitted. We are assessing the provisions of this amended guidance and we have (i) formed an implementation work team; (ii) performed training for the various organizations that will be most affected by the new standard and (iii) evaluated certain software solutions available to manage and account for leases under the new standard. We are still evaluating the impact of this amended guidance on our consolidated financial statements.
Financial Instruments — In January 2016, the FASB issued ASU2016-01 associated with the recognition and measurement of financial assets and liabilities. The amended guidance will require certain equity investments that are not consolidated to be measured at fair value with changes in fair value recognized in net income rather than as a component of accumulated other comprehensive income. The amended guidance is effective for the Company on January 1, 2018. We are assessing the provisions of this amended guidance; however, we currently do not expect that the adoption of this amended guidance will have a material impact on our consolidated financial statements.
Revenue Recognition— In May 2014, the FASB issued ASU2014-09 associated with revenue recognition. The amended guidance requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the amendments will require enhanced qualitative and quantitative disclosures regarding customer contracts. The amended guidance associated with revenue recognition is effective for the Company on January 1, 2018. The amended guidance may be applied retrospectively for all periods presented (“full retrospective method”) or retrospectively with the cumulative effect of initially applying the amended guidance recognized at the date of initial adoption (“modified retrospective method”). The Company is currently planning to adopt the amended guidance using the modified retrospective method as of January 1, 2018.
To assess the impact of the standard, we utilized internal resources to lead the implementation effort and supplemented them with external resources. Our internal resources read the amended guidance, attended
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trainings and consulted with other accounting professionals to assist with interpretation of the amended guidance. Surveys were sent to and returned by all operating segments to assess the potential impact of the amended guidance and to tailor specific procedures to evaluate the potential impact. Based on the results of these surveys, we judgmentally selected a sample of contracts based on size and specifically identified contract traits that could be accounted for differently under the amended guidance. We also selected a representative sample of contracts to corroborate the survey results. We have completed our preliminary review and analysis of all contracts selected for testing and we are in the process of performing additional analysis on certain contractual provisions, including provisions that could impact the classification of certain revenue streams and costs that are currently reported on a gross basis.
Based on our work to date, we believe we have identified all material contract types and costs that may be impacted by this amended guidance. We expect to quantify and disclose the expected impact, if any, of adopting this amended guidance in the Quarterly Report onForm 10-Q for the third quarter of 2017. While we are still evaluating the impact of the amended guidance, we currently do not expect it to have a material impact on operating revenues. However, upon adoption of the amended guidance, we anticipate recognizing an asset from the capitalization of sales incentives as contract acquisitions costs. Under the amended guidance, sales incentives will be capitalized and amortized to selling, general and administrative expense over the expected life of the customer relationship.
As noted above, we are still evaluating the possible impacts on our consolidated financial statements, including (i) potential changes in the classification of certain revenue streams and costs currently reported on a gross basis (e.g., franchise fees paid to municipalities); (ii) the amount of sales incentives that will be capitalized and (iii) additional disclosure requirements.
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 collection 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 conditions that tend to occur during the second half of the year, such as the hurricanes that most often impact our operations in the Southern and Eastern United States,U.S., can increase our revenues in the Areas affected. While weather conditionsweather-related and other event driven special projects can boost revenues through additional work for a limited time, as a result of significantstart-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 June 30, 2017,2018 does not differ materially from that discussed under Item 7A in our Annual Report on Form10-K 10‑K for the year ended December 31, 2016.2017.
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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, 20172018 (the end of the period covered by this Quarterly Report on Form10-Q) 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, 2017.2018. We determined that there were no changes in our internal control over financial reporting during the quarter ended June 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II.
Item 1.Legal Proceedings.
Information regarding our legal proceedings can be found under theEnvironmental MattersandLitigationsections of Note 67 to the Condensed Consolidated Financial Statements.
Item 1A.Risk Factors.
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form10-K 10‑K for the year ended December 31, 20162017 in response to Item 1A to Part I of Form10-K. 10‑K.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
The following table summarizes common stock repurchases made during the second quarter of 20172018 (shares in millions):
Issuer Purchases of Equity Securities
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| Approximate Maximum |
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| Part of Publicly |
| Dollar Value of Shares that |
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| Price Paid |
| Announced Plans or |
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| per Share |
| Programs |
| the Plans or Programs |
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April 1 — 30 |
| 1.0 |
| $ | 83.34 |
| 1.0 |
| $ | 908 million |
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May 1 — 31 |
| 2.1 |
| $ | 80.86 |
| 2.1 |
| $ | 700 million |
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June 1 — 30 |
| 0.5 |
| $ | 82.32 |
| 0.5 |
| $ | 700 million |
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Total |
| 3.6 |
| $ | 82.58 |
| 3.6 |
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
April 1 — 30 | — | $ | — | — | $ | 750 million | ||||||||||
May 1 — 31 | — | $ | — | — | $ | 750 million | ||||||||||
June 1 — 30 | 2.7 | $ | 73.46 | 2.7 | $ | 500 million | ||||||||||
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Total | 2.7 | $ | 73.46 | 2.7 | ||||||||||||
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During the second quarter of 2018, we repurchased 1.1 million shares of our common stock in open market transactions in compliance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act for $92 million, inclusive of per-share commissions, at a weighted average per share price of $83.14.
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In June 2017,May 2018, we entered intoin to an accelerated share repurchase (“ASR”) agreement to repurchase $250$200 million of our common stock. At the beginning of the repurchase period, we delivered $250$200 million in cash and received 2.72.0 million shares based on a stock price of $73.46.$80.84. This agreement was completed in June 2018 and we received 0.5 million additional shares. The final number of shares to be repurchased and the final average price per share underprice for the completed ASR agreement will depend onwas $82.32, which is 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 in August 2017.
Any future share repurchases pursuant to the 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 and cash required“Average Price Paid per Share” shown for future business plans.June 2018.
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 RegulationS-K is included in Exhibit 95 to this quarterly report.
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Item 6.Exhibits.
* Filed herewith. ** Furnished herewith.
47 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.
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