Waste Management, Inc. — Q1 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2011, compared with Q1 2010. Waste Management provides collection, transfer, recycling and disposal services, as well as waste-to-energy services, principally in North America.
Financial performance
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Operating revenue | $3.103 billion | $2.935 billion; up 5.7% |
| Income from operations | $427 million; 13.8% margin | $412 million; 14.0% margin |
| Net income attributable to Waste Management | $186 million; $0.39 diluted EPS | $182 million; $0.37 diluted EPS |
| Operating cash flow | $600 million | $496 million |
| Free cash flow (company-defined, non-GAAP) | $289 million | $253 million |
| Cash and cash equivalents | $676 million at March 31 | $539 million at December 31, 2010 |
| Total debt | $9.167 billion at March 31 | $8.907 billion at December 31, 2010 |
| Cash dividend declared per share | $0.34 | $0.315 |
Operating expenses were $1.995 billion, or 64.3% of revenue, versus $1.881 billion, or 64.1%. SG&A was $382 million (12.3% of revenue), up from $351 million (12.0%). Interest expense increased to $121 million from $112 million. The effective tax rate was 35.9%, compared with 36.6%.
Investing activities used $462 million, including $316 million of capital expenditures and $99 million for acquisitions. Financing activities used $3 million; the quarter included $396 million of new borrowings, $158 million of debt repayments, $162 million of cash dividends and $63 million of share repurchases. Free cash flow is a non-GAAP measure and excludes items such as dividends and debt service.
Changes and operating drivers
- Revenue rose $168 million. Yield contributed $162 million, including $69 million from collection and disposal pricing, $58 million from higher recycling commodity prices and $35 million from fuel surcharges and mandated fees. Acquisitions added $48 million and foreign currency translation $9 million; lower volume reduced revenue by $51 million.
- Internal volume-related revenue decline improved to 1.7% from 5.1% in Q1 2010. Management attributed continuing declines to economic weakness, pricing, competition and waste reduction/diversion; recycling volumes improved.
- Higher recyclable-material prices and fuel costs contributed to operating expense growth. Average diesel prices were up 27% year over year. Growth initiatives and acquisitions also added costs, partly offset by cost savings.
- Operating income increased $15 million, but operating margin narrowed by 0.2 percentage points. The Midwest improved substantially against a Q1 2010 comparison that included a $28 million multiemployer pension withdrawal charge. Wheelabrator operating income fell to $13 million from $36 million, primarily after a power capacity agreement expired, alongside higher maintenance and litigation-related costs.
Outlook, risks and contingencies
- Management expected full-year revenue growth from yield of approximately 2.0%, based on an anticipated CPI run-rate of 1.0% and the anniversary of certain ancillary fees; it expected full-year volume growth to be relatively flat. It said optimization initiatives were expected to benefit results in the second half of 2011.
- Bonus depreciation was expected to reduce 2011 cash taxes by approximately $190 million, with higher cash taxes in future periods as a consequence of accelerated deductions.
- Debt included $396 million maturing within 12 months; $111 million was classified as long-term based on management’s stated intent and ability to refinance. The company issued $400 million of 4.60% senior notes due 2021 and used part of the proceeds to repay $147 million of 7.65% notes. It reported $2.5 billion of committed letter-of-credit capacity, with $1.6 billion outstanding, and no borrowings under the credit facilities during the quarter.
- Recorded landfill and environmental remediation liabilities totaled $1.570 billion, including $281 million for environmental remediation. The company stated that using the high end of its reasonable remediation-cost ranges would increase the recorded liability by approximately $150 million. It had been identified as a potentially responsible party at 78 EPA National Priorities List sites.
- Disclosed matters include pending environmental proceedings, wage-and-hour and customer-charge lawsuits, and a landfill-site dispute. Management said outcomes of certain litigation and possible damages could not be predicted or reasonably estimated. Multiemployer pension withdrawal liabilities could exceed recognized charges and could materially affect results in a withdrawal period.
- Other key risks cited include waste volumes and economic conditions, competition and pricing, fuel and commodity costs, severe weather, permitting and regulation, environmental obligations, insurance and financial-assurance availability, labor matters, litigation, and debt refinancing. Management reported no material changes to previously disclosed risk factors and no material subsequent events requiring disclosure.
Important facts for investors to verify
- Whether pricing gains and improving volume trends persist, and whether full-year yield and volume expectations are achieved.
- Whether recycling-price benefits continue to offset customer rebates, fuel inflation and other operating-cost increases; track margin performance and Wheelabrator results after the capacity-agreement expiration.
- Cash generation relative to capital spending, dividends, acquisitions and repurchases; note that Q1 operating cash flow benefited from lower tax payments and favorable working-capital movements.
- Debt maturities and refinancing execution, including the $396 million due within 12 months and the assumptions supporting long-term classification of $111 million.
- Changes in landfill, remediation, pension and litigation exposures, including potential remediation costs above recorded estimates and developments in the identified environmental proceedings.
- Realization and timing of the stated $190 million cash-tax reduction, and the resulting future-period tax effects.