Waste Management, Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Unless stated otherwise, dollar amounts are in millions.
Business context
Waste Management is a North American integrated waste-services provider, with collection, landfill disposal, transfer, recycling, and waste-to-energy operations. It operates through four geographic groups and Wheelabrator, with additional activities reported as Other. The company employed approximately 43,400 people at year-end.
Financial performance and liquidity
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $11,791 | $13,388 | Down 11.9% |
| Income from operations | $1,887 | $2,234 | Down 15.5% |
| Operating margin | 16.0% | 16.7% | Down 0.7 percentage points |
| Net income attributable to Waste Management | $994 | $1,087 | Down 8.6% |
| Diluted EPS | $2.01 | $2.19 | Down 8.2% |
| Cash from operating activities | $2,362 | $2,575 | Down $213 |
| Free cash flow (company-defined, non-GAAP) | $1,211 | $1,466 | Down $255 |
| Capital expenditures | $1,179 | $1,221 | Down $42 |
| Total debt at year-end | $8,873 | $8,326 | Up $547 |
| Cash and cash equivalents at year-end | $1,140 | $480 | Up $660 |
| Working capital | $109 | $(701) | Improved by $810 |
Operating expenses fell 14.5% to $7,241 and were 61.4% of revenue, compared with 63.2% in 2008. Lower volumes, fuel costs and recycling rebates reduced expenses, alongside cost-control measures. Interest expense was $426, down from $455. The 2009 effective tax rate was 28.1%, versus 37.2% in 2008; management attributed the lower rate principally to tax benefits and adjustments.
Fourth-quarter revenue was $3,006, down 3.3% from $3,108 a year earlier. Fourth-quarter net income attributable to the company was $315, versus $218, and diluted EPS was $0.64 versus $0.44.
Material changes versus the prior period
- Revenue fell $1,597, reflecting a $1,078 volume decline and a $528 yield decline. Collection, landfill and transfer pricing/yield added $323, but this was outweighed by lower recycling commodity revenue ($447), electricity revenue ($76), fuel-surcharge and mandated-fee revenue ($328), and weaker volumes.
- Management said volume declines began to moderate late in 2009; the fourth-quarter revenue decline was considerably smaller than the full-year decline. Recycling commodity prices also recovered from late-2008 and early-2009 lows, though remained below earlier levels.
- Operating income fell despite lower expenses. The year included $50 of restructuring charges and $83 of impairment charges, including $51 for abandoning the SAP revenue-management software and $27 for a California landfill.
- Cash from operations and free cash flow declined year over year. The company nevertheless returned $795 to shareholders through $569 of dividends and $226 of repurchases.
- Debt rose following senior-note issuance, including $600 of 30-year notes at 6.125%. Cash balances also increased, partly because the proceeds were awaiting planned investment.
- Recycling facility oversight moved into the geographic groups, and the company consolidated 45 Market Areas into 25, eliminating more than 1,500 positions. Management reported annualized restructuring savings above its $120 target.
Outlook, risks and unusual items
- Management emphasized pricing discipline, cost control, operational efficiency and profitable growth. It said fourth-quarter volume comparisons improved, but did not provide a quantified revenue or earnings forecast.
- The board expected the 2010 quarterly dividend to rise to $0.315 per share from $0.29; declarations remain at the board’s discretion. Management estimated a recurring 2010 effective tax rate of approximately 38% and expected higher interest expense following debt issuance.
- The company expected to use cash from the 2009 note offering for acquisitions and investments, including an approximately $140 investment for a 40% interest in Shanghai Environment Group, then expected to close in the first half of 2010, and up to a further $350 for other investments over six months.
- Electricity-price exposure increased as long-term contracts expired: 34% of waste-to-energy electricity revenue was at market rates in 2009, with nearly 50% expected in 2010. The company planned a more actively managed energy program, including hedging intended to reduce price volatility.
- Liquidity considerations include $749 of current debt on the balance sheet, $998 of debt maturities within twelve months, and $767 of tax-exempt bonds subject to repricing within twelve months. The $2.4 billion revolving facility had $822 of available capacity at year-end and matured in August 2011; management said it would renegotiate the facility and expected comparable financing to cost more.
- Key risks include recession-sensitive waste volumes, competition and pricing pressure, volatile recyclables, fuel and electricity markets, environmental regulation and remediation obligations, landfill permitting and airspace estimates, self-insurance and labor obligations, and litigation. The company reported $1,523 of landfill and environmental-remediation liabilities at year-end and potential additional remediation exposure if estimates prove inadequate.
- Notable contingencies include the SAP lawsuit, with trial scheduled for May 2010; environmental proceedings and potential Superfund liabilities; and employment-related litigation. Management said known contingencies were not expected to materially affect financial condition, results or cash flows, while acknowledging uncertainty in litigation outcomes.
- The fourth-quarter effective tax rate was 4.9%, with a $108 tax benefit from a capital-loss carry-back, state tax attributes and lower Ontario tax rates. This benefit materially supported reported fourth-quarter earnings and is not representative of management’s expected 2010 recurring rate.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported no material weaknesses and said disclosure controls were effective.
Important facts for investors to verify
- Whether waste volumes and recycling commodity prices continued to recover after year-end, and how much of the reported improvement was sustainable.
- Whether collection and disposal pricing gains continued to offset volume declines, and whether cost savings preserved operating margins.
- The cash-flow implications of planned acquisitions and investments, the Shanghai Environment Group transaction, dividends and repurchases.
- Refinancing and repricing outcomes for 2010 debt maturities and tax-exempt bonds, and the cost and availability of replacement financial-assurance capacity.
- Future electricity-market exposure and the effectiveness of the planned hedging program as contracts expire.
- Potential changes in landfill expansion assumptions, environmental remediation estimates, litigation outcomes and the outcome of the SAP dispute.