Waste Management, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Unless otherwise noted, financial amounts are in millions of dollars. Waste Management provides collection, transfer, recycling, disposal, and waste-to-energy services, primarily in North America.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $3,621 | $3,461 | $10,483 | $10,215 |
| Income from operations | $577 | $500 | $1,489 | $1,367 |
| Operating margin | 15.9% | 14.4% | 14.2% | 13.4% |
| Net income attributable to Waste Management | $291 | $214 | $703 | $593 |
| Diluted earnings per share | $0.62 | $0.46 | $1.50 | $1.28 |
| Cash dividends declared per share | $0.365 | $0.355 | $1.095 | $1.065 |
Q3 revenue rose 4.6%; management attributed growth to acquisitions and stronger collection and disposal pricing, partly offset by lower volumes. Collection and disposal yield increased $68, or 2.3%, in the quarter; total company average yield increased $90, or 2.6%. Nine-month revenue growth was 2.6%, while lower volumes reduced revenue by $56.
Q3 operating expenses were $2,325, or 64.2% of revenue, versus $2,229, or 64.4%. Nine-month operating expenses were $6,845, or 65.3% of revenue, versus $6,655, or 65.1%. Q3 SG&A was $349, or 9.6% of revenue; nine-month SG&A was $1,092, or 10.4%. The effective tax rate was 34.3% in Q3 and 33.6% for the nine months, compared with 36.1% and 34.5%, respectively, in 2012.
Cash flow, debt, and liquidity
- Nine-month cash from operations was $1,858, up from $1,718. Capital expenditures were $824, down from $1,132. Company-defined free cash flow was $1,147, compared with $614.
- Q3 cash from operations was $736 versus $574; free cash flow was $452 versus $180. Free cash flow is a non-GAAP measure and excludes certain obligations, including dividends and debt service.
- Cash and cash equivalents were $157 at September 30, 2013, compared with $194 at year-end 2012. Total debt was $10,059, up from $9,916; current debt was $568 and long-term debt was $9,491.
- The amended $2.25 billion revolving credit facility runs through July 2018. The company reported $140 of revolver borrowings and $1.2 billion of unused available capacity; $1.3 billion of letters of credit were outstanding across its credit facilities.
- Debt due within 12 months included $510 of maturities, and $857 of tax-exempt borrowings subject to repricing. Management classified $1.4 billion as long-term based on its intent and ability to refinance.
- Nine-month investing cash outflow was $1,432, including $698 for acquisitions; financing cash outflow was $459, including $512 of dividends. The company made $1,218 of new borrowings and $1,244 of debt repayments.
Material changes and unusual items
- Q3 income from operations increased $77 year over year. Solid Waste operating income rose $52; Wheelabrator operating income fell $7, while “Other” improved by $37, partly reflecting prior-year impairment charges.
- Acquisitions increased nine-month revenue by $204. Greenstar, acquired in January, contributed $104 of nine-month revenue and recorded a $9 net loss. RCI Environnement, acquired in July for approximately $487, contributed $45 of revenue and $7 of net income after acquisition.
- Q3 included $23 of charges related primarily to impairments and divestitures, with a reported $0.02 negative EPS impact, and $8 of charges primarily related to a partial multiemployer pension-plan withdrawal and restructuring, with a $0.01 negative EPS impact. Nine-month restructuring charges were $13 versus $51 in 2012.
- Recycling commodity prices reduced nine-month revenue by $80 and income from operations by an estimated $24; Q3 commodity prices were higher year over year. Management cited higher recycling processing costs and Greenstar integration losses.
- Wheelabrator’s results were affected by maintenance costs, higher labor, a facility disposal surcharge, and a $14 impairment charge. Two renegotiated South Florida waste-to-energy contracts are expected to weigh on results through the first half of 2014.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management emphasized pricing discipline, cost control, strategic acquisitions, operating efficiency, and investment in recycling and other emerging waste technologies. It noted that lower collection volumes, competitive pricing, waste diversion, and weak economic activity could constrain growth; results are also seasonal and weather-sensitive.
- The annual goodwill impairment test was scheduled for October 1, 2013. The prior-year test showed estimated fair-value headroom of approximately 10% for Wheelabrator and 5% for Eastern Canada; management warned that small changes in assumptions could lead to a fourth-quarter impairment.
- Environmental remediation liabilities totaled $236. Management stated that using the high end of reasonable remediation estimates would increase the liability by approximately $190; actual exposure may differ materially. The company had been identified as a potentially responsible party at 78 Superfund sites.
- Management estimated up to approximately $40 of additional future charges related to Central States Pension Plan withdrawal demands. It said the matter was not expected to be material to financial condition or liquidity, but could materially affect cash flows in a particular period.
- Pending matters include customer class actions concerning fuel and environmental charges and an investigation into stormwater discharges at a Hawaii landfill. The company said it could not estimate a loss range for these matters; it did not believe the disclosed matters would ultimately have a material adverse effect, while noting uncertainty.
- Other key risks identified include regulation and permitting, fuel and commodity prices, environmental obligations, labor and pension costs, insurance and financial assurance, debt refinancing and interest rates, cybersecurity, and operational or weather disruptions.
Important facts for investors to verify
- Whether improved pricing and operating margins can continue while collection volumes remain under pressure.
- Greenstar integration, recycling profitability, and the earnings contribution and financing costs associated with RCI.
- Results of the October 2013 goodwill impairment test, particularly for Wheelabrator and Eastern Canada.
- Progress on refinancing or repricing near-term debt and the availability of revolving credit capacity after letters of credit.
- Changes in environmental remediation estimates, Superfund proceedings, and multiemployer pension withdrawal exposure.
- Whether free cash flow can sustain dividends, acquisitions, capital investment, and debt obligations; management cautions that free cash flow excludes required or committed expenditures.