Waste Management, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited results. The company provides collection, transfer, disposal, recycling and waste-to-energy services across North America; its segments are four geographic groups and Wheelabrator.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $3.459bn | $3.347bn | $6.754bn | $6.450bn |
| Income from operations | $466m | $506m | $867m | $933m |
| Operating margin | 13.5% | 15.1% | 12.8% | 14.5% |
| Net income attributable to Waste Management | $208m | $237m | $379m | $423m |
| Diluted EPS | $0.45 | $0.50 | $0.82 | $0.89 |
Q2 revenue increased 3.3%, but operating income fell 7.9% and attributable net income fell 12.2%. For the first half, revenue rose 4.7%, while operating income declined 7.1%. Acquisitions contributed $199m to Q2 and $395m to first-half revenue; Oakleaf alone contributed $139m and $270m, respectively, and recorded $4m net losses in each period. Q2 internal volume growth was 0.6%; collection and disposal yield increased 0.6%, while total-company average yield declined 2.9%, chiefly due to lower commodity prices.
Cash flow and investment: First-half operating cash flow was $1.144bn versus $1.078bn. Capital expenditures rose to $730m from $596m. Defined free cash flow, a non-GAAP measure, was $434m versus $495m for the half; Q2 free cash flow was $332m versus $206m. The company says first-half cash flow benefited from lower tax payments and $72m received upon terminating interest-rate swaps, while capital spending and lower earnings weighed on free cash flow.
Balance sheet and liquidity: At June 30, cash was $237m, total debt $9.826bn and equity $6.487bn. Debt was slightly higher than year-end 2011 ($9.756bn), though long-term debt excluding current maturities was $8.973bn versus $9.125bn. Current liabilities were $3.187bn. The filing identifies $1.004bn of debt maturing within 12 months, including $400m of senior notes due November 2012; $151m was classified as long-term based on refinancing intent and ability. A further $550m of tax-exempt debt is subject to repricing in that period. The $2bn revolving facility expires in May 2016; $300m was drawn. Cash dividends paid in the first half were $329m; declared quarterly dividend per share rose to $0.355 from $0.34.
Material changes and operating trends
- Recyclable commodity prices reduced revenue by $95m in Q2 and $169m in the first half. Electricity prices reduced revenue by $8m and $14m, respectively; fuel surcharge revenue fell $9m in Q2 but increased $9m for the half.
- Operating expenses increased 5.6% in Q2 and 7.0% year to date; as a share of revenue they rose to 65.3% and 65.5%, respectively. Oakleaf drove much of the cost increase, particularly subcontractor costs. SG&A fell 2.1% in Q2 but rose 2.2% for the half.
- Wheelabrator operating income fell to $15m from $42m in Q2 and to $19m from $55m for the half. Management cited expired or renegotiated contracts, lower electricity prices, international development costs and maintenance costs. Geographic segment operating results were generally stronger or near prior year, with the Midwest posting notable gains.
- Environmental remediation liabilities were $264m at June 30; management estimates use the low end of reasonable cost ranges where no estimate is better. Using high-end estimates would increase the aggregate liability by about $150m. Total landfill and environmental liabilities were $1.593bn.
Outlook, risks and unusual items
- Management expected continued improvement in core solid-waste pricing and cost-saving initiatives, but anticipated continued pressure from declining recyclable commodity prices and a negative year-over-year impact from waste-to-energy in the second half. Commodity market outcomes could differ materially from its expectations.
- In July 2012, the company announced a reorganization expected to eliminate about 700 positions by year-end. It estimated $50m–$60m of pretax charges, primarily severance and benefits, mainly in Q3; additional facility, lease or other costs were not yet estimable.
- Q2 included $34m of impairment charges, primarily for two medical-waste facilities with projected operating losses; a $10m noncash charge for partial withdrawal from an underfunded multiemployer pension plan; and $5m of restructuring and Oakleaf integration costs. The medical-waste impairment reduced diluted EPS by about $0.04; the pension and restructuring/integration items reduced it by about $0.01 each.
- Wheelabrator goodwill was $788m. Its interim impairment test found fair value only slightly above carrying value by more than 10%, versus about 30% at the October 2011 annual test. Further electricity-price deterioration, weaker disposal rates or higher costs could trigger a future impairment.
- Risks include commodity and fuel-price movements, competition and customer retention, economic effects on waste volumes and customer credit, regulation and permitting, environmental obligations, weather, labor and pension exposure, refinancing, and litigation. The company disclosed 80 Superfund National Priorities List sites where it had been notified as a potentially responsible party. It said it did not expect disclosed matters to materially harm the company, while noting that some potential losses could not be estimated.
Key facts for investors to verify
- Whether core pricing and volume trends can offset ongoing recycling and electricity price weakness, and whether Wheelabrator’s impairment cushion remains adequate.
- Execution and realized savings from the announced restructuring, including whether actual charges exceed the $50m–$60m estimate.
- Refinancing or repayment plans for near-term debt maturities and tax-exempt bond repricing, including the availability of revolving credit capacity.
- Capital spending, cash taxes and working-capital needs, and the sustainability of free cash flow after dividends and debt service.
- Updates to environmental remediation estimates, Superfund matters, pension withdrawal liabilities and other litigation or regulatory proceedings.