Waste Management, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Waste Management provides collection, transfer, recycling and disposal services, along with waste-to-energy and related services, primarily in North America. This unaudited filing covers the quarter and nine months ended September 30, 2012; financial amounts below are in millions except per-share data. Comparisons are with the corresponding 2011 periods unless noted.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $3,461 | $3,522 | $10,215 | $9,972 |
| Income from operations | $500 | $543 | $1,367 | $1,476 |
| Operating margin | 14.4% | 15.4% | 13.4% | 14.8% |
| Net income attributable to Waste Management | $214 | $272 | $593 | $695 |
| Diluted EPS | $0.46 | $0.58 | $1.28 | $1.46 |
| Operating cash flow | $574 | $659 | $1,718 | $1,737 |
| Capital expenditures | $402 | $313 | $1,132 | $909 |
| Free cash flow, company-defined non-GAAP | $180 | $372 | $614 | $867 |
- Revenue and operating performance: Q3 revenue fell 1.7%. Lower recyclable commodity prices reduced revenue by $176; acquisitions added $95, while collection and disposal yield contributed $22. For the nine months, revenue rose 2.4%, largely reflecting acquisitions, including Oakleaf.
- Profitability: Q3 operating income declined $43 and attributable net income fell $58. Nine-month operating income declined $109. Q3 operating costs were 64.4% of revenue versus 64.2%; SG&A was $335, down $45, primarily due to lower bonus and long-term incentive expenses.
- Cash flow: Nine-month free cash flow decreased to $614 from $867, as capital expenditures rose $223 and operating cash flow edged lower. Management notes that its free-cash-flow measure excludes items such as dividends and debt service.
- Debt and liquidity: At September 30, cash was $398, total debt $9,992 (including $826 current), and current liabilities $3,187 versus current assets of $2,659. Debt increased from $9,756 at December 31, 2011. The company had $708 of debt maturing within 12 months and $663 of tax-exempt borrowings subject to repricing in that period; it classified $545 of the latter as long-term based on expected revolving-credit capacity. A $500 issuance of 2.9% notes due 2022 was intended in part to repay $400 of 6.375% notes due November 2012.
- Dividends and repurchases: Cash dividends were $493 in the first nine months, and declared dividends per share increased to $0.355 for Q3 from $0.34. There were no share repurchases in the first nine months of 2012; the company repurchased shares for $528 in the prior-year period.
Material changes, outlook and risks
- Commodity pressure and segments: Lower recycling commodity prices reduced Q3 and nine-month revenue by $176 and $345, respectively, and management estimated corresponding operating-income impacts of about $60 and $100. Wheelabrator operating income declined to $43 in Q3 from $57 and to $62 year to date from $112, reflecting contract expirations, lower merchant electricity prices and international development costs.
- Restructuring: The July 2012 reorganization is intended to streamline management and support functions and reduce costs. It involves eliminating the four geographic management groups, reducing operating areas from 22 to 17, and an estimated 700 positions. Q3 restructuring charges were $44; the company expected an additional $20–$30 of charges in Q4 and completion by year-end 2012. Execution, savings and disruption remain uncertain.
- Management outlook: Management anticipated continued improvement in pricing and cost-saving initiatives, while expecting further year-over-year declines in recyclable commodity prices and waste-to-energy results for the remainder of 2012. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- Impairments and valuation: Q3 results included impairment charges and unusual items, including a $21 charge principally tied to a note receivable, related assets and an oil-and-gas well; a $10 guarantee-related charge for an unconsolidated entity; and a $14 write-down of an investment. Management also disclosed $45 of impairment charges affecting Q3 diluted EPS by $0.08 in its discussion of comparability. Wheelabrator goodwill passed its interim impairment test, but estimated fair value headroom had narrowed to slightly more than 10%, from about 30% at the 2011 annual test. Further weakness in electricity prices, disposal rates, costs or capital spending could lead to a future impairment.
- Environmental and legal exposures: Recorded environmental remediation liabilities were $264; management estimated that using the high end of reasonable remediation cost ranges would increase the amount by approximately $150. The company was identified as a potentially responsible party at 80 Superfund sites. Disclosed matters include regulatory proceedings and investigations, customer-charge class actions, and other litigation; some outcomes or loss ranges could not be estimated. Management did not expect known contingencies to materially affect the company overall, but actual costs could differ from estimates.
- Other risks and unusual items: Management identified competition and pricing, economic and waste-volume trends, regulation and permits, fuel and commodity volatility, weather, environmental obligations, labor relations and multiemployer pension withdrawals, financial assurance, and debt refinancing as risks. The filing states that the Wheelabrator impairment headroom is sensitive to market assumptions. The company also reported seasonal revenue patterns and expected full-year 2012 cash tax payments to be about $100 higher than in 2011, notwithstanding an estimated $90 cash-tax reduction from 2012 bonus depreciation.
Important facts for investors to verify
- Whether recycling commodity prices and Wheelabrator contract and power-market conditions recover or weaken further, and the resulting effect on revenue, margins and goodwill valuation.
- Whether the restructuring delivers savings as planned, and whether Q4 charges fall within the estimated $20–$30 range and the 700-position reduction is completed.
- How higher capital spending, working-capital movements and swap-related cash payments affect cash generation; review the company’s non-GAAP free-cash-flow definition alongside operating cash flow.
- How the November 2012 note maturity and tax-exempt debt repricing are funded, and whether revolving-credit capacity remains available for refinancing and letters of credit.
- Whether environmental remediation estimates, Superfund matters, regulatory proceedings and litigation produce additional material charges or cash requirements.
- Oakleaf’s continuing contribution: it generated $143 of Q3 revenue and a $4 net loss in the quarter, and $438 of revenue and an $8 net loss for the nine months.