Waste Management, Inc. — Q1 2012 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012. Financial statements are unaudited. Waste Management provides collection, transfer, recycling and disposal services, alongside waste-to-energy and related operations, primarily in North America.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $3,295 million | $3,103 million |
| Income from operations | $401 million | $427 million |
| Operating margin | 12.2% | 13.8% |
| Net income attributable to Waste Management | $171 million | $186 million |
| Diluted EPS | $0.37 | $0.39 |
| Cash from operating activities | $475 million | $600 million |
| Capital expenditures | $379 million | $316 million |
| Free cash flow, company-defined non-GAAP | $102 million | $289 million |
- Revenue rose 6.2%, with acquisitions contributing $196 million, including $131 million from Oakleaf. Excluding acquisitions and foreign currency, volume added $39 million while average yield reduced revenue by $40 million.
- Collection, landfill and transfer yield increased $22 million, but recycling commodity prices reduced revenue by $74 million and electricity pricing by $6 million. Fuel surcharges and mandated fees added $18 million.
- Operating expenses increased 8.6%, faster than revenue, to 65.7% of revenue from 64.3%. Higher subcontractor costs, fuel, labor, and maintenance contributed. SG&A increased 6.5% to $407 million.
- Interest expense was $122 million, versus $121 million. The effective tax rate declined to 32.8% from 35.9%. Cash dividends declared were $0.355 per share, versus $0.34.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $189 million, down from $258 million at year-end 2011. Total debt was $9.849 billion, up from $9.756 billion; $860 million was classified as current.
- The company reported $1.005 billion of debt maturing within 12 months, including $400 million of senior notes due November 2012. It classified $145 million of borrowings as long-term based on intent and ability to refinance. Another $429 million of fixed-rate tax-exempt borrowings are subject to repricing within 12 months and were classified as long-term based on expected revolving-credit capacity.
- The revolving facility had $300 million drawn and matures in May 2016. The company had $2.5 billion of committed letter-of-credit capacity, with $1.5 billion outstanding under various facilities.
- Operating cash flow fell $125 million year over year, primarily due to working-capital movements, particularly accounts payable and accrued liabilities. Investing cash outflow was $503 million, including $379 million of capital expenditures and $129 million for acquisitions. Financing cash outflow was $42 million; no shares were repurchased in the quarter.
Material changes and management commentary
- Acquisitions drove much of revenue growth, led by Oakleaf, acquired in July 2011. Oakleaf generated $148 million of Q1 2012 revenue and a net loss of less than $1 million. The company also spent $94 million on oil and gas property interests during the quarter.
- Management reported an improvement in volumes, particularly landfill and recycling brokerage activity, while collection volumes remained pressured by competition, pricing and weak economic conditions. Management said pricing discipline remains a priority.
- Management attributed the decline in Wheelabrator operating income to contract expirations, lower merchant electricity prices and maintenance costs. Management also described continued cost-saving initiatives and said expected benefits should increase through the rest of 2012.
- Q1 results include $4 million of restructuring charges. The company said restructuring and Oakleaf integration costs reduced 2012 EPS by $0.01. Its cost-saving reorganization eliminated more than 700 positions, including approximately 300 open positions.
- The company cited seasonal patterns: revenues typically rise in the second and third quarters, while Q1 often includes higher waste-to-energy maintenance. Weather and one-time projects can affect revenue and margins.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue, earnings or cash-flow guidance. Management expects cost-saving benefits to increase during the remainder of the year and estimates that 2012 bonus depreciation may reduce cash taxes by approximately $90 million; it cautions that accelerated deductions increase taxes in later periods.
- Environmental and landfill liabilities totaled $1.586 billion, including $267 million for environmental remediation. The company estimated that using the high end of its remediation-cost ranges would add approximately $150 million to the recorded remediation liability. It was identified as a potentially responsible party at 79 Superfund sites.
- Disclosed proceedings include environmental and water-related matters in Hawaii, California and Texas; a Pennsylvania matter resolved for $114,000; and customer class actions challenging fuel and environmental charges. For several cases and an ongoing Hawaii investigation, the company said a loss range could not currently be estimated. Management did not expect the disclosed matters to have a material adverse effect, but outcomes remain uncertain.
- Other risks highlighted include competitive pressure on pricing and customer retention, weak waste volumes, recycling and energy commodity-price volatility, fuel costs, regulation and permitting, environmental obligations, labor and multiemployer-pension exposure, refinancing and interest rates, weather, and execution of growth and efficiency initiatives.
- A new England waste-to-energy and recycling joint venture is expected to cost about $320 million in total; Waste Management committed up to approximately $91 million of funding. The company also disclosed that its maximum potential exposure under related construction and operating contracts could not be quantified.
Important facts for investors to verify
- Whether revenue growth translates into improved operating margins, particularly as commodity prices, fuel costs and competitive pricing change.
- Whether operating cash flow and free cash flow recover from the year-over-year decline, and how much capital spending and working-capital timing affect those measures.
- How the company addresses the $1.005 billion of near-term debt maturities and tax-exempt bond repricing requirements.
- Whether Oakleaf and other growth investments deliver expected strategic and cost benefits, and whether restructuring savings offset integration and operating costs.
- Developments in remediation estimates, Superfund matters, litigation and the England project’s funding and contract exposures.