Waste Management, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited. Amounts are in millions except per-share data. Waste Management provides collection, transfer, recycling, disposal, and waste-to-energy services across North America.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $3,158 | $2,952 | $6,093 | $5,762 |
| Income from operations | $586 | $534 | $998 | $906 |
| Operating margin | 18.6% | 18.1% | 16.4% | 15.7% |
| Net income attributable to Waste Management | $246 | $247 | $428 | $402 |
| Diluted EPS | $0.51 | $0.50 | $0.88 | $0.81 |
| Operating cash flow | $480 | $548 | $976 | $1,067 |
| Free cash flow (company-defined non-GAAP) | $275 | $297 | $528 | $496 |
- Q2 revenue rose 7.0%; reported operating income increased 9.7%, while attributable net income was essentially flat. Six-month revenue rose 5.7% and attributable net income increased 6.5%.
- Q2 operating expenses were $1,996, or 63.2% of revenue, versus $1,786, or 60.5%, a year earlier. Higher recycling commodity costs, fuel costs, and environmental remediation charges weighed on costs.
- Cash and cash equivalents were $1,169 at June 30, compared with $1,140 at year-end 2009. Current assets were $3,156 and current liabilities $2,858.
- Total debt was $9,585, up from $8,873 at year-end; long-term debt was $8,827 and the current portion $758. The company reported $1,100 of debt maturing within 12 months, including $600 of senior notes due August 2010 and $147 due March 2011; $342 was classified as long-term based on intent and ability to refinance.
- Operating cash flow declined $91 in the first half, principally from higher tax payments and seasonal receivables. Capital expenditures were $475 versus $583; acquisitions were $237 versus $59. Financing included $286 of share repurchases and $305 of dividends.
- Landfill and environmental remediation liabilities totaled $1,598 at June 30, including $302 for environmental remediation, versus $1,523 at year-end.
Material changes and operating drivers
- Q2 revenue growth included $123 from higher recyclable commodity prices, $27 from fuel surcharges, $22 from foreign currency translation, and $62 from acquisitions. Internal yield on collection and disposal grew 2.3%; volume reduced revenue by 2.9%, an improvement from an 8.6% volume decline in Q2 2009.
- For the first half, volume reduced revenue by 4.0%, compared with 8.4% in the prior-year period. Management cited continued weakness in industrial and construction-related activity, pricing competition, and waste reduction and diversion.
- Q2 reported results included a one-time $77 pre-tax cash benefit from settling litigation related to abandoned revenue-management software. Other significant Q2 items were a $37 state deferred-tax charge and a $39 non-cash increase in environmental remediation reserves. Management estimated impacts on diluted EPS of +$0.10, −$0.08, and −$0.05, respectively.
- In April, the company paid $150 for a waste-to-energy facility in Portsmouth, Virginia; it also invested $142 in a 40% interest in Shanghai Environment Group. These investments had no significant impact on reported Q2 or first-half revenue or operating income.
- The Wheelabrator Group’s operating income declined year over year, reflecting greater exposure to market electricity prices and increased maintenance outages. The company said expiring long-term energy contracts would increase market-price exposure.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided in the filing. Management said it was optimistic about the slower pace of volume declines, but expected economic weakness and higher fuel prices to remain challenges during 2010. It emphasized pricing discipline, cost control, and growth initiatives.
- In June, Waste Management issued $600 of 4.75% senior notes due 2020, intending to use proceeds and cash on hand to repay $600 of 7.375% notes due August 2010. It also entered a new three-year $2.0 billion revolving credit facility; no borrowings were outstanding under its credit facilities at quarter-end. Letters of credit outstanding under revolving and letter-of-credit facilities totaled $1.7 billion.
- Environmental liabilities are sensitive to remediation estimates and discount rates. The filing records $39 of revised estimates for two sites and notes that using the high end of reasonable remediation ranges would increase the recorded environmental liability by approximately $125. The company identified 74 EPA National Priorities List sites where it had been named a potentially responsible party.
- Other disclosed exposures include class-action wage-and-hour cases, a customer-charge lawsuit, an EPA matter involving a Hawaii landfill, and multi-employer pension plans. Management said known contingencies were not expected to have a material adverse effect, but outcomes of litigation and certain environmental matters remain uncertain.
- Additional risks cited include fuel and commodity-price volatility, weather, regulation and permitting, insurance and financial-assurance costs, labor relations, competition, and the ability to refinance debt. Management identified landfill and remediation liabilities, impairment estimates, and insurance reserves as significant areas of estimation uncertainty.
Important facts for investors to verify
- How much of reported revenue and operating income growth reflects recurring performance versus the $77 litigation settlement, commodity-price recovery, acquisitions, and fuel surcharges.
- Whether collection and disposal yield gains can continue to offset volume declines, especially in industrial, construction, and demolition activity.
- Completion of the planned refinancing of near-term maturities and the effect of higher debt and interest expense on cash available for investment, dividends, and repurchases.
- Future revisions to environmental remediation estimates, including the two sites responsible for the Q2 reserve charge and the disclosed potential range above recorded liabilities.
- Whether Wheelabrator can offset lower contract pricing and maintenance-related outages as more electricity sales become exposed to market rates.