Waste Management, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in millions of dollars except per-share data. Waste Management provides collection, transfer, recycling, disposal, and waste-to-energy services, principally in North America.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $3,526 | $3,459 | $6,862 | $6,754 |
| Operating income | $510 | $466 | $912 | $867 |
| Operating margin | 14.5% | 13.5% | 13.3% | 12.8% |
| Net income attributable to Waste Management | $244 | $208 | $412 | $379 |
| Diluted EPS | $0.52 | $0.45 | $0.88 | $0.82 |
| Operating cash flow | $545 | $669 | $1,122 | $1,144 |
| Free cash flow (non-GAAP) | $347 | $332 | $695 | $434 |
Q2 revenue rose 1.9%; operating income increased 9.4%. Management attributed revenue growth to collection and disposal pricing, acquisitions, and fuel surcharges, partly offset by lower recyclable commodity prices and lower volumes. Collection and disposal yield growth was 2.1% in Q2, while recycling commodity prices reduced revenue by $45 and operating income by an estimated $18. Operating expenses rose 2.3% in Q2, but SG&A declined 5.6%, reflecting cost controls and restructuring. Q2 net margin was approximately 6.9%, versus 6.0% a year earlier.
For the first half, revenue increased 1.6% and operating income increased 5.2%. Operating cash flow declined $22 year over year, primarily because of higher income tax payments and the prior-year receipt from terminating interest-rate swaps; lower incentive-plan payments and higher earnings partly offset the decline. Capital expenditures were $501 versus $730, contributing to higher reported free cash flow. The company cautions that free cash flow is a non-GAAP measure and excludes items such as dividends and debt service.
Balance sheet, debt, and liquidity
- At June 30, cash was $154; total assets were $23,012 and total liabilities were $16,194.
- Total debt was $9,770, down from $9,916 at December 31, 2012. This includes $776 current and $8,994 long-term debt. Net debt repayments in the first half were $197.
- The company reported $902 of debt maturing within 12 months and another $577 of tax-exempt borrowings subject to repricing in that period. It classified $703 of near-term debt as long-term based on its intent and ability to refinance.
- At June 30, $335 was drawn on the $2.0 billion revolving facility, with $704 of unused and available capacity after letters of credit. In July, the facility was amended, increasing total credit capacity to $2.25 billion and extending its term through July 2018.
- First-half cash dividends paid were $341; dividends declared were $0.365 per share in Q2, compared with $0.355 in Q2 2012.
Business developments and unusual items
- Greenstar, a recycling and resource recovery operator, was acquired on January 31 for $170, with up to $40 of additional consideration potentially payable. It contributed Q2 revenue of $40 but recorded a net loss of $4 for the quarter.
- On July 5, after quarter-end, Waste Management acquired substantially all assets of Quebec-based RCI Environnement for total closing consideration of C$509 million (approximately $481), primarily financed through a Canadian credit-facility term loan.
- First-half unusual charges included a $14 impairment at a waste-to-energy facility, other impairment and divestiture items, and $10 of restructuring charges. The Q2 2013 impairment and restructuring items reduced diluted EPS by $0.02, according to management. Q2 2012 included $34 of impairment charges, a $10 multiemployer-pension withdrawal charge, and $5 of restructuring and Oakleaf integration costs.
- Wheelabrator operating income fell to $4 in Q2 from $17, with impairment, a disputed disposal surcharge, and maintenance timing partly offset by improved energy prices. Solid Waste operating income increased modestly.
Outlook, risks, and contingencies
- The filing provides strategic priorities—pricing discipline and customer-focused growth, cost control and operational efficiency, and investment in alternatives to traditional disposal—but does not provide clear numerical full-year earnings or revenue guidance.
- Management expects 2013 cash tax payments to be approximately $185 higher than in 2012, despite an estimated $95 reduction from 2013 bonus depreciation; accelerated deductions shift cash taxes into later periods.
- Environmental remediation liabilities totaled $239 at June 30. Management estimates that using the high end of identified remediation cost ranges would increase the liability by approximately $145. The company was identified as a potentially responsible party at 80 EPA Superfund sites; ultimate costs could differ from estimates.
- Other exposures include uncertain environmental proceedings and litigation, customer disputes over fuel and environmental charges, and multiemployer pension withdrawal liabilities. The company estimates up to approximately $40 of potential future charges related to the Central States Pension Plan; it warns that a resolution could materially affect cash flow in a particular period.
- Key stated risks include competition and pricing pressure, declining waste volumes and recycling commodity prices, regulation and permitting, fuel and other input costs, weather and seasonality, environmental obligations, labor and pension costs, and the ability to execute cost-saving and growth initiatives. Management says interim results are seasonal and not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether collection and disposal yield gains can continue to offset weak volumes and lower recycling commodity prices, and whether Greenstar can improve profitability.
- The sustainability of higher operating margins given increased operating costs and Wheelabrator performance.
- Cash conversion and capital-spending trends: first-half operating cash flow declined even as reported free cash flow rose with lower capital expenditures.
- Near-term refinancing and repricing needs, including the $350 senior notes maturing in March 2014, and the liquidity impact of the July RCI acquisition.
- Potential changes in environmental remediation estimates, litigation outcomes, and pension withdrawal liabilities, including the possible $145 remediation range sensitivity and up to $40 in Central States charges.