Waste Management, Inc. (WMI) - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. Waste Management, Inc. is the leading provider of integrated waste services in North America, offering collection, transfer, recycling, disposal, and waste-to-energy services. The company operates through six reportable segments: Eastern, Midwest, Southern, Western, Wheelabrator (waste-to-energy), and WMRA (recycling).
Key Financial Metrics (Nine Months Ended Sept 30, 2008)
| Metric | 2008 (YTD) | 2007 (YTD) | Change |
|---|---|---|---|
| Operating Revenues | $10,280 million | $9,949 million | +3.3% |
| Income from Operations | $1,775 million | $1,679 million | +5.7% |
| Net Income | $869 million | $854 million | +1.8% |
| Diluted EPS | $1.75 | $1.62 | +8.0% |
| Operating Cash Flow | $1,902 million | $1,846 million | +3.0% |
| Free Cash Flow | $1,207 million | $1,360 million | -11.3% |
| Total Debt | $8,429 million | $8,337 million | +1.1% |
| Cash & Equivalents | $504 million | $614 million (Dec 31, 2007) | N/A |
Note: Free Cash Flow is a non-GAAP measure calculated as Operating Cash Flow less Capital Expenditures plus Proceeds from Divestitures.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 3.0% increase in base business yield (pricing) and a 1.8% increase in commodity prices (recycling). This was partially offset by a 3.6% decline in volumes due to economic slowdown and construction downturns.
- Operating Expenses: Increased 3.6% year-over-year. Primary drivers were a 39.6% increase in fuel costs (diesel prices rose ~50%) and a 19.7% increase in cost of goods sold due to higher commodity prices.
- Unusual Items:
- Labor Disruption: A labor dispute in Milwaukee, Wisconsin, resulted in $26 million in additional operating expenses in Q3 2008, including an $18 million charge for withdrawing a bargaining unit from the Central States Pension Fund.
- Divestitures: Recognized $28 million in net gains from divestitures in 2008 (vs. $44 million in 2007).
- Tax Credits: The expiration of Section 45K tax credits at the end of 2007 significantly reduced tax benefits in 2008, increasing the effective tax rate from 31.5% (2007 YTD) to 38.5% (2008 YTD).
- Interest Expense: Decreased 13.7% due to refinancing higher-rate debt and a decline in market interest rates.
Guidance, Outlook, and Risks
- Republic Services Proposal: WMI withdrew its proposal to acquire Republic Services, Inc. in October 2008 due to the state of financial markets. Consequently, share repurchases were suspended in July 2008.
- Commodity Markets: Significant dislocation in recyclable commodities markets in October 2008 (reduced Asian demand) is expected to reduce revenues and negatively affect earnings for the remainder of the year.
- Liquidity: The company holds $504 million in cash and has $897 million available under its revolving credit facility. Management expects to rely on operating cash flow and existing facilities to meet debt obligations if credit markets remain tight.
- Debt Maturities: $1.3 billion of debt is scheduled to mature in the next 12 months. The company intends to refinance $886 million of senior notes maturing in late 2008 and mid-2009.
- Legal Proceedings: Pending litigation includes a lawsuit against SAP AG regarding a revenue management system (potential abandonment charge of $45-$55 million) and various environmental and wage/hour class actions.
Investor Verification Checklist
- Debt Refinancing: Verify the company's ability to refinance $1.3 billion in debt maturing within 12 months given current credit market volatility.
- Recycling Margins: Monitor the impact of the October 2008 collapse in recyclable commodity prices on Q4 2008 and 2009 earnings.
- Capital Allocation: Confirm the status of the share repurchase program and dividend sustainability following the suspension of buybacks.
- Legal Exposure: Assess the potential financial impact of the SAP AG lawsuit and the likelihood of a $45-$55 million impairment charge.
- Volume Trends: Track waste volume trends, particularly in construction and demolition, to gauge the severity of the economic downturn's impact on core operations.