Waste Management, Inc. — Q3 2011 Form 10-Q
Business context and period: Waste Management provides collection, transfer, disposal, recycling and waste-to-energy services primarily in North America. This unaudited filing covers the three and nine months ended September 30, 2011, compared with the same 2010 periods; balance-sheet figures are compared with December 31, 2010. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $3,522 | $3,235 | $9,972 | $9,328 |
| Income from operations | $543 | $544 | $1,476 | $1,542 |
| Operating margin | 15.4% | 16.8% | 14.8% | 16.5% |
| Net income attributable to Waste Management | $272 | $244 | $695 | $672 |
| Diluted EPS | $0.58 | $0.51 | $1.46 | $1.39 |
| Cash dividends declared per share | $0.34 | $0.315 | $1.02 | $0.945 |
- Q3 revenue increased 8.9%; management attributed growth to collection and disposal yield, higher recycling commodity prices and fuel surcharges, foreign currency, and acquisitions. Internal volume growth was negative 2.0% versus negative 0.7% a year earlier. Nine-month revenue rose 6.9%, while volume declined 1.8%.
- Q3 operating expenses rose 12.7% to $2,261, or 64.2% of revenue versus 62.0%. Higher recycling rebates, acquired operations, growth initiatives and fuel costs contributed. Operating income was nearly flat in Q3 and down 4.3% for the nine months.
- Operating cash flow was $659 in Q3 versus $677; for nine months it rose to $1,737 from $1,653. Capital expenditures were $313 in Q3 and $909 year to date, up from $262 and $737. Company-defined free cash flow was $372 in Q3 versus $424 and $867 for nine months versus $952.
- At September 30, cash was $282, total assets $22,052, and total liabilities $15,767. Total debt was $9,613, including $225 current and $9,388 long-term, versus $8,907 at year-end 2010. Current assets of $2,419 were below current liabilities of $2,527. Debt fair value was estimated at $10.6 billion.
- Nine-month financing included $1,001 of borrowings and $425 of repayments, $528 of cash share repurchases, and $481 of dividends. The company had no outstanding borrowings under its revolving and letter-of-credit facilities at quarter-end; it had $1.5 billion of letters of credit outstanding and $2.5 billion of committed letter-of-credit capacity.
Material changes and operating drivers
- Oakleaf Global Holdings was acquired on July 28 for $432, net of cash received and including adjustments. Oakleaf provides outsourced waste and recycling services through third-party haulers. It contributed $112 of revenue and less than $1 of net loss since acquisition. The preliminary allocation included $320 of goodwill and $92 of amortizable intangibles; the allocation remained subject to valuation finalization.
- Recycling commodity prices increased approximately 26% year to date, lifting revenue but also increasing customer rebates. Diesel prices rose 32% in Q3 and 31% year to date; fuel surcharges partly offset the cost impact.
- Collection and disposal yield growth was 1.6% in Q3 and 2.0% for nine months. Management cited competition and bundled services as pressure on residential pricing. The 2010 Gulf Coast oil-spill cleanup project reduced year-over-year volume comparisons by $56 in Q3 and $66 year to date.
- Segment results were mixed: Q3 operating income increased in Eastern, Midwest and Western, but declined in Southern and Wheelabrator. Wheelabrator faced lower revenue after a power-capacity agreement expired at year-end 2010, among other factors.
Outlook, unusual items and risks
- Management maintained full-year expectations for revenue growth from yield of approximately 2.0% and volume growth in the range of negative 1.5% to negative 2.5%. No full-year earnings guidance is provided in the supplied filing text.
- In July, the company eliminated more than 700 positions, including approximately 300 open roles. It recorded $15 of restructuring charges and had paid approximately $4 by September 30.
- Q3 included $6 of impairment charges at two medical-waste facilities. A lower remediation discount rate increased environmental remediation liabilities by $25; this was partly offset by a $9 favorable site estimate revision. Management reported a net $8 of non-cash pre-tax charges from remediation discount-rate effects and related recovery assets.
- Q3 tax benefits included $10 from favorable audit settlements and finalization of 2010 tax returns. Effective tax rates were 32.3% for Q3 and 34.0% year to date, compared with 37.3% and 39.8%. Bonus depreciation was expected to reduce 2011 cash taxes by approximately $190, with higher cash taxes in future periods as deductions are accelerated.
- The prior-year comparison included a $77 litigation settlement that increased 2010 operating income and a $65 federal tax refund received in Q3 2010. Those nonrecurring cash inflows affected year-over-year cash-flow comparisons.
- Environmental remediation liabilities totaled $285 at September 30. Management said using the high end of reasonable remediation cost ranges would increase the recorded liability by approximately $150. The company was identified as a potentially responsible party at 79 Superfund sites. Estimates may change and could materially affect operating income in a period.
- Other disclosed exposures include multiemployer pension withdrawal liabilities, self-insurance and claims development, regulatory and permit requirements, fuel and commodity-price volatility, competition, economic-driven waste volumes, weather, and litigation. A new Florida class action concerning fuel and environmental charges was filed in October 2011; its outcome and potential damages could not be estimated. Management stated that known contingencies were not expected to have a material adverse effect, while noting uncertainties around these matters.
- The amended $2.0 billion revolving credit facility was extended through May 2016 and its cost was reduced. The company issued $400 of 4.60% notes due 2021 and $500 of 2.60% notes due 2016 during 2011.
Important facts for investors to verify
- Whether pricing and acquisition-driven revenue growth can offset continued volume declines and competition, particularly in residential collection.
- Whether Oakleaf delivers the expected strategic benefits and synergies, and whether its preliminary purchase-price allocation changes materially.
- Whether operating margins and free cash flow stabilize as fuel, rebate, acquisition, restructuring and growth-investment costs evolve.
- Debt maturities and refinancing: $348 of debt was due within twelve months, including $133 under the Canadian credit facility; $123 was classified as long-term based on management’s intent and ability to refinance.
- Potential revisions to landfill, environmental, insurance and pension liabilities; monitor the Florida customer-charge litigation and other legal and regulatory proceedings.
- Cash taxes benefited from accelerated depreciation and tax credits; distinguish those timing benefits from recurring operating cash generation.