Waste Management, Inc. — 2010 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2010; quarterly figures are unaudited. Waste Management provides collection, transfer, recycling, disposal and waste-to-energy services, principally in North America. It reported five operating segments: Eastern, Midwest, Southern, Western and Wheelabrator.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Revenue | $12.515bn | $11.791bn | +6.1% |
| Operating income | $2.116bn | $1.887bn | +12.1%; operating margin 16.9% vs. 16.0% |
| Net income attributable to Waste Management | $953m | $994m | −4.1% |
| Diluted EPS | $1.98 | $2.01 | −1.5% |
| Operating cash flow | $2.275bn | $2.362bn | −$87m |
| Free cash flow | $1.215bn | $1.211bn | Nearly flat; company-defined non-GAAP measure |
| Capital expenditures | $1.104bn | $1.179bn | −$75m |
| Total debt at year-end | $8.907bn | $8.873bn | Up $34m |
| Cash and cash equivalents at year-end | $539m | $1.140bn | Down $601m |
Operating expenses rose 8.1% to $7.824bn and increased to 62.5% of revenue from 61.4%. SG&A rose 7.1% to $1.461bn (11.7% of revenue vs. 11.6%). Interest expense increased 11.0% to $473m. The effective tax rate was 38.5%, compared with 28.1% in 2009.
Working capital was a $3m deficit at year-end, compared with $109m positive in 2009. The company had a $2.0bn revolving facility, with no borrowings and $862m of available capacity after letters of credit, at December 31, 2010. A total of $502m of debt matured within 12 months, and $405m of tax-exempt bonds faced repricing during that period; the company said it intended and was able to refinance $674m of relevant near-term amounts on a long-term basis.
Material changes and unusual items
- Revenue rose mainly with a $423m increase from recycling commodity prices, $240m from acquisitions, $239m from collection-and-disposal yield, $69m from fuel surcharges and $66m from foreign currency translation. Volume remained a headwind: internal volume growth was −2.6%, improved from −8.1% in 2009. Gulf Coast oil-spill cleanup contributed revenue, including $99m of collection revenue.
- Higher commodity prices also raised customer rebates and costs of goods sold; fuel costs increased 19.1% as average diesel prices rose 21%. Operating expenses also included higher landfill costs, including $50m of additional estimated remediation expense at four closed sites.
- Reported 2010 operating income included a $77m favorable cash settlement of litigation concerning abandoned revenue-management software. Other notable items included $55m of remediation and closure charges at five closed sites, $26m of multiemployer pension withdrawal charges, and net tax charges of $32m from tax estimate refinements and return finalization, partly offset by favorable settlements. Management cited a net favorable $46m pre-tax litigation benefit among the year’s nonrepresentative items.
- In 2009, results included an $83m impairment charge, $50m of restructuring charges and a $130m tax benefit. These items affect year-over-year earnings comparability.
- Fourth-quarter 2010 revenue was $3.187bn, operating income $574m, net income attributable to the company $281m and diluted EPS $0.59. Compared with fourth-quarter 2009, revenue and operating income increased from $3.006bn and $456m, while attributable net income and EPS decreased from $315m and $0.64. Q4 2010 included favorable landfill estimate adjustments and tax benefits, partly offset by $31m of litigation charges.
Outlook, management commentary and risks
Management described 2010 as reflecting pricing discipline, cost control, strategic investment and an improving economy. For 2011, it expected revenue growth from yield of approximately 2.0%, based on anticipated CPI of 1.0%, and volume growth ranging from flat to slightly positive. It expected a recurring effective tax rate of approximately 35.7%. The Board expected a quarterly dividend of $0.34 per share in 2011, subject to declaration, and authorized up to $575m of share repurchases.
- Commodity and energy exposure: recycling commodity prices materially affected revenue and margins. About 47% of Wheelabrator electricity revenue was exposed to market prices in 2010, expected to reach nearly 54% by the end of 2011 as contracts expire. Electricity swaps are used to hedge part of merchant sales.
- Demand, pricing and competition: weak economic activity, competition, customer price sensitivity, and waste reduction or diversion may constrain volumes and landfill utilization. Summer seasonality and severe weather can also affect results.
- Environmental and permitting obligations: recorded landfill and environmental remediation liabilities totaled $1.550bn. Management said using the high end of remediation cost ranges would increase the recorded remediation liability by approximately $150m. Expansion permits, regulatory changes and landfill estimates could materially affect costs, asset values and results.
- Legal and pension contingencies: matters include a pending class action challenging fuel and environmental charges, wage-and-hour litigation, environmental proceedings and unresolved multiemployer pension withdrawal liabilities that could exceed charges recognized. The company was identified as a potentially responsible party at 75 EPA National Priorities List sites.
- Funding and interest rates: total debt was $8.907bn; management estimated a 100-basis-point rise in variable rates would increase 2011 interest expense by about $13m. Financial assurance instruments totaled $6.559bn, including letters of credit, surety bonds and insurance policies.
The company reported effective disclosure controls and internal control over financial reporting, with no material weaknesses identified; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether volume recovery and the 2011 yield and volume outlook were realized, and how much growth depended on commodity prices, acquisitions and temporary cleanup work.
- Underlying earnings and cash generation excluding the $77m software-litigation settlement, remediation estimates, pension charges, tax adjustments and other unusual items.
- Near-term debt refinancing and tax-exempt bond repricing, available revolver capacity, and the sustainability of dividends and repurchases relative to free cash flow.
- Changes in environmental remediation estimates, landfill expansion permitting, and exposure to the cited lawsuits and pension withdrawal liabilities.
- How expiring energy contracts and recycling commodity-price swings affect margins, and whether hedges adequately limit volatility.