Waste Management, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012; balance-sheet amounts are compared with December 31, 2012. Waste Management provides collection, transfer, recycling, disposal, waste-to-energy and related services, primarily in North America. Results are interim and may not indicate full-year performance.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Operating revenue | $3,336 million | $3,295 million |
| Income from operations | $402 million; 12.1% margin | $401 million; 12.2% margin |
| Net income attributable to Waste Management | $168 million; $0.36 diluted EPS | $171 million; $0.37 diluted EPS |
| Operating cash flow | $577 million | $475 million |
| Capital expenditures | $266 million | $379 million |
| Free cash flow (company-defined, non-GAAP) | $348 million | $102 million |
| Cash and cash equivalents | $307 million at March 31 | $194 million at December 31 |
| Total debt | $10,009 million at March 31 | $9,916 million at December 31 |
| Cash dividends declared per share | $0.365 | $0.355 |
Operating expenses were $2,209 million, or 66.2% of revenue, versus $2,166 million, or 65.7%, a year earlier. SG&A declined to $390 million from $407 million. Interest expense was $122 million in both periods; the effective tax rate was 32.8% in both.
Material changes versus Q1 2012
- Revenue increased 1.2% ($41 million), primarily from acquisitions ($44 million) and improved collection and disposal yield ($42 million); lower volume reduced revenue by $14 million. Recycling commodity prices reduced revenue by $40 million and operating income by an estimated $12 million.
- Operating income was nearly flat. Solid Waste operating income fell $10 million to $614 million, while Wheelabrator rose $4 million to $9 million; Other operations recorded a $41 million operating loss, compared with $35 million.
- Net income attributable to the company declined $3 million. Q1 2013 included $15 million of pre-tax impairment charges (including $11 million on two cost-method investments and charges primarily involving goodwill) and $8 million of restructuring charges. Management estimated these reduced diluted EPS by $0.03 and $0.01, respectively.
- Operating cash flow rose $102 million, substantially reflecting approximately $86 million less in annual incentive-plan payments. Lower capital spending also lifted reported free cash flow; the company cited spending management and payment timing as factors.
- Greenstar, acquired January 31 for $170 million, contributed $25 million in post-acquisition revenue and a $3 million net loss. Up to another $40 million may be payable to sellers through 2018; preliminary fair value was $36 million.
Outlook, commentary, and risks
- No formal earnings or full-year financial guidance is provided in the supplied filing text. Management said volume growth would have been in line with its 0.5%–1.0% full-year expectation absent two fewer workdays in the quarter.
- Management highlighted pricing discipline, cost control, strategic acquisitions, operational efficiency, and investment in recycling and emerging disposal alternatives. It noted competitive pricing pressures, customer diversion of waste, and excess landfill capacity in some markets.
- Seasonality typically supports higher revenue in the second and third quarters; winter maintenance can increase first-quarter costs. Weather-related work may boost revenue but can carry lower margins, while severe weather can disrupt operations.
- Debt was approximately $10.0 billion. The company reported $1.159 billion of debt maturing within 12 months and $485 million of tax-exempt borrowings subject to repricing within that period. It classified $680 million of the stated near-term amount as long-term based on intent and ability to refinance; $964 million remained current. The $2.0 billion revolving facility matures in May 2016, with $500 million drawn and about $1.0 billion of letters of credit issued under it.
- Recorded landfill and environmental remediation liabilities totaled $1.617 billion. The company said using the high end of estimated remediation ranges would increase the recorded $252 million environmental remediation liability by approximately $140 million. It was identified as a potentially responsible party at 79 Superfund sites; some future costs remain uncertain.
- Management estimated up to approximately $40 million in future charges related to Central States and other multiemployer pension withdrawal matters; a particular period’s cash flows and results could be materially affected. Other risks include commodity and fuel prices, regulation, permits, environmental obligations, litigation, labor, customer credit, and refinancing conditions.
- The company said known contingencies were not expected to have a material adverse effect overall. An unresolved federal investigation concerns alleged stormwater discharges at a Hawaii landfill; the filing says a loss range could not be estimated. The filing also reports a Hawaii Clean Air Act consent decree with a $1.1 million penalty, entered after quarter-end.
Important facts for investors to verify
- Whether collection volumes and pricing trends improve, and whether the stated 0.5%–1.0% volume-growth expectation remains applicable.
- How recycling commodity prices, Greenstar integration and its contingent purchase consideration affect margins and cash generation.
- Near-term debt refinancing and tax-exempt bond repricing needs, including the basis for classifying $680 million as long-term.
- Capital expenditure levels and the extent to which the increase in free cash flow reflects durable operating improvement versus timing and lower incentive payments.
- Potential changes to landfill, environmental remediation and multiemployer pension liabilities, and developments in the Hawaii investigation and other litigation.