Waste Management, Inc. — 2009 Third-Quarter Form 10-Q
Business context and reporting period. Waste Management provides collection, transfer, recycling, disposal and waste-to-energy services, principally in North America. This unaudited quarterly report covers the three and nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods. Unless otherwise noted, figures are in millions of dollars, except per-share amounts.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $3,023 | $3,525 | $8,785 | $10,280 |
| Operating income | $525 | $632 | $1,431 | $1,775 |
| Operating margin | 17.4% | 17.9% | 16.3% | 17.3% |
| Net income attributable to Waste Management | $277 | $310 | $679 | $869 |
| Diluted EPS | $0.56 | $0.63 | $1.37 | $1.75 |
| Cash provided by operating activities | $575 | $771 | $1,642 | $1,902 |
| Free cash flow (company-defined, non-GAAP) | $343 | $524 | $839 | $1,207 |
Q3 operating expenses were $1,856, or 61.4% of revenue, versus $2,221, or 63.0%, a reduction in both dollars and revenue share. For the nine-month period, operating expenses were $5,367, or 61.1% of revenue, versus $6,494, or 63.2%. Free cash flow is defined as operating cash flow less capital expenditures plus proceeds from asset sales; the company cautions that it excludes required or committed payments, including dividends and debt service.
At September 30, 2009, cash was $612 (up from $480 at December 31, 2008); total debt was $8,246, comprising $742 current and $7,504 long-term (versus $8,326 at year-end). Total assets were $20,392 and total liabilities were $13,871. Current assets were $2,510 and current liabilities $2,805. Landfill and environmental remediation liabilities totaled $1,529, including $261 for remediation.
For the first nine months, capital expenditures were $823, acquisitions $127, cash dividends $428, and stock repurchases $65. Dividends declared were $0.29 per share in Q3 and $0.87 year to date. Debt issuance of $1,026 and repayments of $1,142 resulted in net cash debt repayments of $116.
Material changes versus comparable periods
- Revenue fell 14.2% in Q3 and 14.5% year to date. Declines reflected weaker volumes amid the economic downturn, sharply lower recycling commodity prices, lower fuel surcharges, weaker electricity prices and adverse currency translation. Collection and disposal yield remained positive: 2.9% in Q3 and 3.0% year to date.
- Q3 net income attributable to the company declined about 11%; year-to-date net income declined about 22%. Operating income fell 16.9% in Q3 and 19.4% year to date.
- Management attributed lower operating costs to reduced volumes, lower recycling commodity and diesel prices, operational efficiencies and restructuring. SG&A declined 8.1% in Q3, partly reflecting lower spending and restructuring benefits.
- Operating income in Wheelabrator fell 28.8% in Q3 and 30.1% year to date, affected by lower natural-gas-linked electricity prices, expiring power contracts and business-development costs. Recycling commodity prices had begun recovering from late-2008 and early-2009 lows, but remained well below prior-year levels.
Outlook, management commentary, risks and unusual items
- Management described Q3 results as solid despite the challenging economy, citing pricing discipline and cost control. It reported stabilizing volumes and expected recovering recycling prices to support Q4 revenue and earnings improvement. The filing provides no formal earnings or full-year financial guidance.
- The January 2009 restructuring consolidated 45 Market Areas into 25 and eliminated more than 1,500 positions. Nine-month charges were $46; management expected an additional $5–$10 of charges in the remainder of 2009.
- A $49 non-cash impairment was recorded after the company abandoned the SAP revenue-management software project. Waste Management’s lawsuit against SAP was scheduled for trial in May 2010; recovery is uncertain.
- The company agreed to acquire a 40% interest in Shanghai Environment Group for approximately $140, subject to regulatory approval and then expected to close in early 2010. Management also said it was pursuing other waste-to-energy investments.
- Near-term refinancing is a key liquidity consideration. Debt maturing within 12 months was $1,014, including $600 of senior notes due August 2010 and $269 under the Canadian facility. The company reported that $742 was classified as current after considering its intent and ability to refinance certain amounts. Of a $2.4 billion revolving facility, $1.632 billion was used to support letters of credit; after expected increases, only $21 of capacity was forecast to remain available for refinancing the 2010 notes.
- Environmental estimates are judgmental. Management stated that using the high end of reasonable remediation-cost ranges would increase the recorded $261 remediation liability by approximately $145. The company had been named a potentially responsible party at 74 EPA National Priorities List sites.
- Other risks include continued economic and volume weakness, competition and pricing pressure, commodity and energy-price volatility, seasonal and weather effects, fuel costs, regulation and permitting, labor disputes, litigation, insurance and financial-assurance costs, and uncertainty in landfill, remediation and self-insurance estimates. The company said no material subsequent events requiring recognition or disclosure had occurred through October 29, 2009.
Important facts for investors to verify
- Whether volumes and recycling commodity prices continued to recover, and whether pricing gains offset declines in economically sensitive businesses.
- Availability and terms of refinancing for the 2010 maturities, the utilization of revolving-credit capacity for letters of credit, and liquidity after required debt service and dividends.
- Whether restructuring savings materialized and whether additional charges stayed within the stated $5–$10 range.
- Actual exposure from remediation obligations, including developments at the 74 listed sites and changes in key cost or discount-rate estimates.
- Progress and potential outcomes of the SAP litigation and approval and completion of the proposed Shanghai Environment Group investment.