Waste Management, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Financial statements are unaudited. Waste Management provides collection, transfer, recycling, disposal and waste-to-energy services, primarily across North America.
Financial performance and liquidity
- Revenue: $2.935 billion, up $125 million (4.4%) year over year. Internal revenue growth was 1.8% from yield, offset by a 4.9% decline from volume. Higher recycling commodity prices, acquisitions and fuel surcharges supported revenue; weak volumes weighed on it.
- Profit: Operating income was $412 million, up 10.8%, with operating margin improving to 14.0% from 13.2%. Net income attributable to Waste Management was $182 million versus $155 million; diluted EPS was $0.37 versus $0.31.
- Costs and margins: Operating expenses rose 9.0% to $1.881 billion, or 64.1% of revenue versus 61.4%. Management cited higher recycling commodity costs, fuel, acquisitions and Canadian-dollar translation. SG&A increased 4.2% to $351 million; depreciation and amortization was $291 million.
- Cash flow: Operating cash flow was $496 million versus $519 million. Capital expenditures were $255 million versus $325 million. Company-defined free cash flow, a non-GAAP measure, was $253 million versus $199 million. Cash and cash equivalents fell to $871 million from $1.140 billion.
- Debt and liquidity: Total debt was $8.823 billion, down from $8.873 billion at year-end 2009; estimated fair value was $9.1 billion. Cash less total debt was approximately $7.952 billion. The company reported $1.108 billion of debt maturities within twelve months, of which $476 million was classified as long-term based on intent and ability to refinance. No borrowings were outstanding under its $2.4 billion revolving facility, though $1.447 billion of letters of credit were outstanding under it.
- Shareholder returns: The quarterly dividend declared was $0.315 per share, up from $0.29. The company repurchased 3.8 million shares for approximately $125 million during the quarter.
- Balance sheet obligations: Landfill and environmental remediation liabilities totaled $1.546 billion, including $257 million for environmental remediation. Total liabilities were $14.454 billion and total equity was $6.541 billion.
Changes versus Q1 2009
- Revenue growth reflected a recovery in recycling commodity prices: recycling yield added $138 million, while collection and disposal yield added $45 million. Volume reduced revenue by $137 million, an improvement from the $265 million decline in Q1 2009.
- Operating income increased despite higher operating expenses. The comparison benefited from the absence of Q1 2009 charges for restructuring ($38 million) and abandoned revenue-management software ($49 million), partly offset in 2010 by a $28 million charge for agreed withdrawals of bargaining units from an underfunded multi-employer pension plan.
- Operating cash flow declined by $23 million, primarily because income-tax payments increased by $42 million year over year. Free cash flow increased mainly alongside lower capital expenditures; management attributed the capex comparison partly to payment timing.
- Interest expense rose to $112 million from $105 million, mainly due to higher average debt balances. The effective tax rate was 36.6%, compared with 37.2%.
Outlook, commentary and risks
- Management reported improved revenue and earnings, citing pricing discipline, cost control and a better general economic environment, but did not provide numerical full-year earnings or revenue guidance in the supplied filing text.
- Management expected continuing economic and fuel-price challenges and described industrial collection volumes as weak, particularly amid reduced construction activity. Severe winter weather reduced revenue and increased overtime and landfill costs; management estimated a $0.02-per-share diluted-EPS impact.
- Management said it remained focused on pricing, operational efficiencies, cost control, acquisitions and growth in waste-to-energy and related services. It completed a $142 million purchase of a 40% interest in Shanghai Environment Group and expected to complete an approximately $150 million Portsmouth, Virginia waste-to-energy facility acquisition in April 2010.
- Risks include continued volume weakness and competitive pricing, commodity and fuel price volatility, weather, regulation and permitting, environmental remediation estimates, insurance and financial-assurance capacity, labor negotiations and litigation. The filing says risk factors had no material changes from the 2009 Form 10-K.
- Environmental remediation liability estimates involve significant judgment; using the high end of disclosed reasonable ranges would increase the recorded $257 million liability by approximately $150 million. The company had been identified as a potentially responsible party at 74 EPA National Priorities List sites.
- Other notable items: the company settled its SAP software litigation in April 2010 for a one-time cash payment; the amount is not stated in the filing text. It adopted revised variable-interest-entity consolidation guidance, deconsolidating certain trusts without a material reported effect. The company said no material subsequent events requiring recognition or disclosure had occurred as of issuance.
Key facts for investors to verify
- Whether improving volume trends and collection/disposal yield persist, and how pricing competition affects volumes and margins.
- How recycling commodity prices, diesel fuel costs and electricity market exposure affect operating costs and Wheelabrator results.
- Plans and execution for refinancing near-term maturities, including the $600 million senior notes due August 2010 and the Canadian credit facility.
- Cash requirements and returns associated with the Shanghai Environment Group investment, Portsmouth acquisition, capital spending, dividends and repurchases.
- Potential changes to landfill, remediation, self-insurance, multi-employer pension and litigation exposures, including the uncertainty around remediation estimates.
- Whether reported free cash flow remains sufficient to support capital needs and shareholder distributions; it is a non-GAAP measure and excludes certain committed uses of cash, including dividends and debt service.