Waste Management, Inc. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011; filed February 16, 2012. The filing includes unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Business context
Waste Management is a North American waste services provider, with collection, landfill, transfer, recycling, waste-to-energy and related businesses. It reported five operating segments: Eastern, Midwest, Southern, Western and Wheelabrator. At year-end it owned or operated 271 landfills and 287 transfer stations. Its strategy emphasizes customer growth, recycling and resource-conversion technologies, operational efficiency, and acquisitions.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $13,378 | $12,515 |
| Income from operations | $2,028 | $2,116 |
| Operating margin | 15.2% | 16.9% |
| Net income attributable to Waste Management | $961 | $953 |
| Diluted EPS | $2.04 | $1.98 |
| Net cash from operating activities | $2,469 | $2,275 |
| Capital expenditures | $1,324 | $1,104 |
| Free cash flow, company-defined non-GAAP | $1,198 | $1,215 |
| Year-end debt | $9,756 | $8,907 |
| Year-end cash and cash equivalents | $258 | $539 |
Revenue increased 6.9%, while operating income declined 4.2%. Revenue growth reflected acquisitions, higher recycling commodity prices, fuel surcharges and collection/disposal pricing; lower volumes partly offset these gains. Operating expenses rose 9.2%, faster than revenue, and increased to 63.8% of revenue from 62.5%. Net income attributable to the company rose slightly, supported in part by a lower effective tax rate (33.6% versus 38.5%).
Operating cash flow improved 8.5%. The company returned $1.212 billion to shareholders through $637 million of dividends and $575 million of share repurchases. It defines free cash flow as operating cash flow less capital expenditures, plus specified asset-sale proceeds; it cautions that this non-GAAP measure excludes committed items such as dividends and debt service.
Working capital was a deficit of $689 million at year-end, compared with a $3 million deficit in 2010. Current debt was $631 million; total liabilities were $16.179 billion and total assets were $22.569 billion. The $2.0 billion revolving facility had $838 million of available capacity after borrowings and letters of credit. Management reported compliance with debt covenants. Approximately $2.2 billion of debt was exposed to interest-rate changes in 2012; a 100-basis-point increase was estimated to add about $18 million to 2012 interest expense.
Material changes and unusual items
- Revenue growth was 6.9%, compared with 6.1% in 2010. Internal revenue growth from yield and volume combined was 3.1%; volume alone remained negative at 1.5%, improving from negative 2.6% in 2010.
- Recycling revenue rose to $1.580 billion from $1.169 billion, including a $216 million increase attributed to commodity prices. Commodity prices fell about 8% in the fourth quarter of 2011.
- On July 28, 2011, Waste Management acquired Oakleaf for $432 million net of cash received. Oakleaf contributed $265 million of revenue and less than $1 million of net income after acquisition; its purchase-price allocation remained preliminary.
- Operating income included a $24 million litigation loss and $9 million of medical-waste facility impairment charges, partly offset by a $9 million favorable environmental-liability revision. A $19 million tax benefit from audit settlements and tax-return adjustments also benefited earnings.
- Fourth-quarter revenue was $3.406 billion versus $3.187 billion in 2010; operating income was $552 million versus $574 million; net income attributable to Waste Management was $266 million versus $281 million; diluted EPS was $0.58 versus $0.59. Fourth-quarter operating income included a $24 million litigation loss, a $20 million reduction in depreciation and amortization from landfill estimate changes, and a $7 million tax benefit.
Outlook, management commentary and risks
Management said it expected in 2012 to grow revenue, expand operating margins, improve return on invested capital and continue returning cash to shareholders. It expected benefits from cost-saving programs to increase through 2012. The company expected a recurring 2012 effective tax rate of approximately 35.5%, and estimated about $400 million of landfill construction and development spending in 2012 and approximately $1 billion combined in 2013–2014.
The Board expected to raise the quarterly dividend to $0.355 per share in 2012 and authorized up to $500 million of 2012 share repurchases; both remained subject to Board or management discretion and business conditions. These are expectations, not guaranteed outcomes.
- Volumes and competition: Economic weakness, price competition, customer waste-reduction and diversion, and recycling/composting alternatives may reduce landfill and collection volumes or pricing.
- Commodity and energy exposure: Recycling commodity prices affect revenue, rebates and margins; electricity and fuel prices also create volatility. More waste-to-energy contracts were moving to market-based pricing.
- Regulation and environmental obligations: Extensive environmental rules, permits, enforcement, closure/post-closure costs and remediation liabilities may require additional spending. The company recorded $1.565 billion of landfill and environmental remediation liabilities; it stated that using the high end of remediation cost ranges could add approximately $150 million to the recorded remediation liability.
- Landfill expansion estimates: Capacity and asset values depend partly on successful permits. Eleven landfill expansions required CFO approval to include unpermitted airspace, including sites with community, political or zoning obstacles.
- Litigation and labor: Pending matters include class actions alleging improper disclosure or charging of fuel and environmental fees, environmental proceedings, and multiemployer pension withdrawal liabilities that could exceed amounts recognized. Management said outcomes and potential damages in certain cases could not be estimated clearly.
- Financing and liquidity: Debt increased, cash declined and near-term maturities and tax-exempt bond repricing create refinancing and interest-rate risks. Financial assurance requirements may also affect liquidity if instruments become more costly or unavailable.
- Other exposures: Risks include fuel-cost pass-through limits, safety incidents, insurance and self-insurance claims, cybersecurity, technology execution, and integration of acquisitions and new businesses.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded Oakleaf controls from the internal-control assessment; Oakleaf represented approximately 2% of consolidated 2011 revenue.
Most important facts for investors to verify
- Whether the operating-margin decline persists and whether cost savings offset higher fuel, rebates, subcontractor and acquisition-related costs.
- Underlying collection and disposal pricing and volume trends, including the effect of the 2010 Gulf Coast cleanup comparison and ongoing waste diversion.
- Oakleaf integration, profitability, final purchase-price allocation and realization of expected synergies.
- Recycling commodity and electricity-market exposure, contract expirations, and the effectiveness and coverage of hedges.
- Debt maturities, refinancing plans, available revolver capacity, covenant headroom and sensitivity to interest-rate increases.
- Landfill expansion permit assumptions, environmental remediation estimates, and developments in the disclosed litigation and pension withdrawal matters.
- Whether the announced 2012 dividend increase, repurchase authorization and management outlook are implemented; these remain discretionary.