WASTE MANAGEMENT INC quarterly report, Q1 FY2012

Waste Management, Inc. — Q1 2012 10-Q

Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012. Financial statements are unaudited. Waste Management provides collection, transfer, recycling and disposal services, alongside waste-to-energy and related operations, primarily in North America.

Financial performance

MetricQ1 2012Q1 2011
Operating revenue$3,295 million$3,103 million
Income from operations$401 million$427 million
Operating margin12.2%13.8%
Net income attributable to Waste Management$171 million$186 million
Diluted EPS$0.37$0.39
Cash from operating activities$475 million$600 million
Capital expenditures$379 million$316 million
Free cash flow, company-defined non-GAAP$102 million$289 million
  • Revenue rose 6.2%, with acquisitions contributing $196 million, including $131 million from Oakleaf. Excluding acquisitions and foreign currency, volume added $39 million while average yield reduced revenue by $40 million.
  • Collection, landfill and transfer yield increased $22 million, but recycling commodity prices reduced revenue by $74 million and electricity pricing by $6 million. Fuel surcharges and mandated fees added $18 million.
  • Operating expenses increased 8.6%, faster than revenue, to 65.7% of revenue from 64.3%. Higher subcontractor costs, fuel, labor, and maintenance contributed. SG&A increased 6.5% to $407 million.
  • Interest expense was $122 million, versus $121 million. The effective tax rate declined to 32.8% from 35.9%. Cash dividends declared were $0.355 per share, versus $0.34.

Balance sheet, debt and liquidity

  • Cash and cash equivalents were $189 million, down from $258 million at year-end 2011. Total debt was $9.849 billion, up from $9.756 billion; $860 million was classified as current.
  • The company reported $1.005 billion of debt maturing within 12 months, including $400 million of senior notes due November 2012. It classified $145 million of borrowings as long-term based on intent and ability to refinance. Another $429 million of fixed-rate tax-exempt borrowings are subject to repricing within 12 months and were classified as long-term based on expected revolving-credit capacity.
  • The revolving facility had $300 million drawn and matures in May 2016. The company had $2.5 billion of committed letter-of-credit capacity, with $1.5 billion outstanding under various facilities.
  • Operating cash flow fell $125 million year over year, primarily due to working-capital movements, particularly accounts payable and accrued liabilities. Investing cash outflow was $503 million, including $379 million of capital expenditures and $129 million for acquisitions. Financing cash outflow was $42 million; no shares were repurchased in the quarter.

Material changes and management commentary

  • Acquisitions drove much of revenue growth, led by Oakleaf, acquired in July 2011. Oakleaf generated $148 million of Q1 2012 revenue and a net loss of less than $1 million. The company also spent $94 million on oil and gas property interests during the quarter.
  • Management reported an improvement in volumes, particularly landfill and recycling brokerage activity, while collection volumes remained pressured by competition, pricing and weak economic conditions. Management said pricing discipline remains a priority.
  • Management attributed the decline in Wheelabrator operating income to contract expirations, lower merchant electricity prices and maintenance costs. Management also described continued cost-saving initiatives and said expected benefits should increase through the rest of 2012.
  • Q1 results include $4 million of restructuring charges. The company said restructuring and Oakleaf integration costs reduced 2012 EPS by $0.01. Its cost-saving reorganization eliminated more than 700 positions, including approximately 300 open positions.
  • The company cited seasonal patterns: revenues typically rise in the second and third quarters, while Q1 often includes higher waste-to-energy maintenance. Weather and one-time projects can affect revenue and margins.

Outlook, risks and contingencies

  • The filing provides no specific full-year revenue, earnings or cash-flow guidance. Management expects cost-saving benefits to increase during the remainder of the year and estimates that 2012 bonus depreciation may reduce cash taxes by approximately $90 million; it cautions that accelerated deductions increase taxes in later periods.
  • Environmental and landfill liabilities totaled $1.586 billion, including $267 million for environmental remediation. The company estimated that using the high end of its remediation-cost ranges would add approximately $150 million to the recorded remediation liability. It was identified as a potentially responsible party at 79 Superfund sites.
  • Disclosed proceedings include environmental and water-related matters in Hawaii, California and Texas; a Pennsylvania matter resolved for $114,000; and customer class actions challenging fuel and environmental charges. For several cases and an ongoing Hawaii investigation, the company said a loss range could not currently be estimated. Management did not expect the disclosed matters to have a material adverse effect, but outcomes remain uncertain.
  • Other risks highlighted include competitive pressure on pricing and customer retention, weak waste volumes, recycling and energy commodity-price volatility, fuel costs, regulation and permitting, environmental obligations, labor and multiemployer-pension exposure, refinancing and interest rates, weather, and execution of growth and efficiency initiatives.
  • A new England waste-to-energy and recycling joint venture is expected to cost about $320 million in total; Waste Management committed up to approximately $91 million of funding. The company also disclosed that its maximum potential exposure under related construction and operating contracts could not be quantified.

Important facts for investors to verify

  • Whether revenue growth translates into improved operating margins, particularly as commodity prices, fuel costs and competitive pricing change.
  • Whether operating cash flow and free cash flow recover from the year-over-year decline, and how much capital spending and working-capital timing affect those measures.
  • How the company addresses the $1.005 billion of near-term debt maturities and tax-exempt bond repricing requirements.
  • Whether Oakleaf and other growth investments deliver expected strategic and cost benefits, and whether restructuring savings offset integration and operating costs.
  • Developments in remediation estimates, Superfund matters, litigation and the England project’s funding and contract exposures.