Waste Management, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. Dollar amounts are in millions unless stated otherwise. Waste Management provides collection, transfer, landfill, recycling and waste-to-energy services across North America.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $3,347 | $3,158 | $6,450 | $6,093 |
| Income from operations | $506 | $586 | $933 | $998 |
| Operating margin | 15.1% | 18.6% | 14.5% | 16.4% |
| Net income attributable to Waste Management | $237 | $246 | $423 | $428 |
| Diluted EPS | $0.50 | $0.51 | $0.89 | $0.88 |
| Operating cash flow | $478 | $480 | $1,078 | $976 |
| Free cash flow (non-GAAP) | $206 | $275 | $495 | $528 |
- Q2 revenue rose 6.0%; six-month revenue increased 5.9%. Q2 drivers included $74 million from higher recycling commodity prices, $53 million from fuel surcharges and mandated fees, $57 million from acquisitions, and $43 million from collection and disposal yield. Volume reduced Q2 revenue by $52 million.
- Operating expenses grew 7.2% in Q2, faster than revenue; as a share of revenue they increased to 63.9% from 63.2%. Higher recycling rebates, fuel, maintenance, risk-management costs and acquisition-related costs contributed.
- For the first half, capital expenditures were $596 million, acquisitions $157 million, and cash dividends $323 million. Free cash flow is a company-defined non-GAAP measure: operating cash flow less capital expenditures plus proceeds from asset sales.
- At June 30, cash was $371 million, total debt $9.037 billion, and current debt $198 million. Current assets were $2.374 billion and current liabilities $2.295 billion. Debt fair value was estimated at $9.6 billion.
Material changes versus the prior period
- Reported Q2 operating income declined $80 million, and attributable net income fell $9 million. Comparability is affected by a $77 million lawsuit settlement benefit included in Q2 2010 operating income, as well as a $37 million 2010 tax charge and $39 million of 2010 environmental-reserve charges.
- Six-month operating cash flow increased $102 million, mainly because income-tax payments were lower; the comparison was partly offset by the prior-year $77 million litigation settlement. Capital expenditures rose $121 million, largely due to timing of cash payments for prior-year spending.
- Q2 internal revenue growth from collection and disposal yield was 1.6%, below the six-month rate of 2.2%. Volume declines improved to 1.7% from 2.9% in Q2 2010, but remained negative.
- Wheelabrator operating income was $42 million in Q2 versus $47 million, and $55 million for the first half versus $83 million. The filing cites expiration of a power-capacity agreement, facility maintenance and litigation/compliance costs.
Outlook, risks and unusual items
- Management continued to target approximately 2.0% full-year revenue growth from yield, while revising its expected full-year volume change to negative 1.5% to negative 2.5%. It said pricing actions were being taken after Q2 yield growth fell more than expected. Management expected cost-savings program benefits to begin in Q3 and accelerate thereafter.
- Management expected accelerated tax depreciation to reduce 2011 cash taxes by approximately $190 million, with higher cash taxes in future periods as deductions are used earlier.
- On July 28, 2011, after quarter-end, the company acquired Oakleaf Global Holdings for $425 million, subject to adjustments, funded with cash and revolver borrowings. Oakleaf reported approximately $580 million of 2010 revenue.
- The $2.0 billion revolving credit facility was amended in May, with lower cost and a term extended to May 2016. At June 30 there were no borrowings under the credit facilities; $1.5 billion of letters of credit were outstanding, including about $1.1 billion under the revolver.
- Landfill and environmental remediation liabilities totaled $1.582 billion, including $275 million for remediation. The company estimated that using high-end remediation cost ranges would raise recorded remediation liabilities by approximately $150 million.
- Key exposures include environmental claims, landfill closure obligations, self-insured casualty claims, litigation and multiemployer pension withdrawals. The company was identified as a potentially responsible party at 79 EPA Superfund sites. It reported active environmental enforcement matters and stated that outcomes of certain litigation and remediation matters remain uncertain.
- Business risks identified include economic weakness and lower waste volumes, competition and pricing pressure, waste diversion, fuel and commodity-price swings, regulation and permitting, weather, financial-assurance availability, labor and pension obligations, and refinancing conditions. Results are seasonal, with summer volumes typically stronger.
Most important facts for investors to verify
- Whether management’s full-year yield and volume expectations, and anticipated cost-savings benefits, materialize.
- Whether revenue growth from recycling prices and fuel surcharges can offset continuing volume declines and higher operating costs.
- The cash-flow and leverage effects of the Oakleaf acquisition, including revolver borrowing and integration performance.
- Future capital spending, dividends, share repurchases and debt maturities; the company reported $321 million of debt maturing within twelve months, with $123 million classified as long-term based on refinancing intent and ability.
- Developments in environmental remediation estimates, Superfund proceedings, enforcement matters, litigation and multiemployer pension withdrawal liabilities.
- The sustainability of free cash flow, which was lower year over year for the first half despite higher operating cash flow, and which excludes dividends and debt-service requirements.