Waste Management, Inc. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Unaudited results; amounts below are in millions of dollars except per-share data. The company provides collection, transfer, recycling, landfill disposal and waste-to-energy services.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $2,952 | $3,489 | $5,762 | $6,755 |
| Income from operations | $534 | $632 | $906 | $1,143 |
| Operating margin | 18.1% | 18.1% | 15.7% | 16.9% |
| Net income attributable to Waste Management | $247 | $318 | $402 | $559 |
| Diluted EPS | $0.50 | $0.64 | $0.81 | $1.13 |
| Cash dividends declared per share | $0.29 | $0.27 | $0.58 | $0.54 |
- Q2 revenue fell 15.4%; first-half revenue fell 14.7%. Operating income declined 15.5% and 20.7%, respectively. Q2 operating margin held at 18.1%, while first-half margin decreased.
- Q2 operating expenses declined $395 (18.1%) to $1,786; as a share of revenue, they improved to 60.5% from 62.5%. SG&A fell $35, though SG&A as a share of revenue rose to 10.9% from 10.3%.
- Cash from operations was $1,067 for the first half, versus $1,131. Capital expenditures were $583 versus $486. Company-defined free cash flow was $496 versus $683; Q2 free cash flow was $297 versus $321. This non-GAAP measure equals operating cash flow less capital expenditures plus proceeds from asset sales and excludes items such as dividends and debt service.
- At June 30, cash was $528, total debt $8,243, and equity $6,367. Debt was $8,326 at year-end 2008. Current debt was $244 versus $835; current assets were $2,417 against current liabilities of $2,235. The filing classifies $813 of debt as long-term based on stated intent and ability to refinance, although it matures or is subject to remarketing within twelve months.
- First-half financing included $908 of new borrowings and $1,014 of repayments. The company issued $800 of senior notes in February, using proceeds in part to repay revolving-credit borrowings and notes that matured. Cash dividends paid were $285; no shares were repurchased in the first half.
Changes and drivers versus prior year
- Management attributed revenue weakness chiefly to recession-related volume declines and lower recycling commodity, fuel and electricity prices, plus foreign-currency translation. More than 60% of the Q2 revenue decline was attributed to market factors outside collection and disposal operations.
- Collection and disposal yield added $85 to Q2 revenue (2.4% of company revenue), partly offsetting lower volumes. First-half yield added $169.
- Lower recycling prices reduced revenue by $165 in Q2 and $343 in the first half. Management said weaker recycling markets reduced Q2 operating income by $59 and diluted EPS by $0.07. Lower diesel prices also reduced costs; average Q2 diesel prices fell 47% year over year.
- Management said weaker-than-usual seasonal volume increases occurred in 2009. Geographic segment operating income declined across all four regions; Wheelabrator income also fell, reflecting lower natural-gas-linked electricity prices, increased exposure to market prices and business-development costs.
Outlook, risks and unusual items
- Management cited strong operating cash generation and expected to resume share repurchases in Q3, with authorization to repurchase up to $400 through year-end. It also expected to continue dividends and capital investment. The board retains discretion over future dividends. No earnings or revenue forecast is provided.
- The 2009 capital-allocation program authorizes up to $1.3 billion in combined dividends, repurchases, debt reduction and acquisitions; $368 had been used through June 30. Management expected up to $10 of additional restructuring charges during the rest of 2009.
- A January reorganization consolidated 45 Market Areas into 25 and eliminated more than 1,500 positions. First-half restructuring charges were $43, including $38 for severance and benefits; approximately $25 of severance and benefit costs had been paid by June 30.
- The company recorded a $49 non-cash charge in Q1 after abandoning use of SAP revenue-management software; it is suing SAP, with trial scheduled for March 2010. A separate $2 landfill impairment was recorded in Q2.
- Environmental remediation liabilities totaled $272 at June 30. Management said using the high end of reasonable remediation cost ranges would increase the aggregate potential liability by approximately $145. The company was identified as a potentially responsible party at 75 EPA Superfund sites. Landfill, environmental, impairment and self-insurance estimates involve significant judgment.
- Other risks include continued economic weakness and volume reductions, recycling and energy price volatility, competition and pricing pressure, fuel and regulatory changes, permitting, weather and litigation. The company disclosed pending wage-and-hour cases, an ERISA fiduciary-duty lawsuit, an EPA notice involving a Hawaii landfill, and IRS and tax-exempt bond examinations. Management did not expect known contingencies to have a material adverse impact, but some outcomes and damages could not be estimated.
- The filing reports effective tax rates of 37.9% for Q2 and 37.6% for the first half. Management noted 2008 tax-audit settlements and a fuel-credit adjustment had reduced prior-year tax expense. No material subsequent events through July 30, 2009 were reported.
Investor verification points
- Track whether recycling commodity prices and collection, landfill and industrial waste volumes recover, and whether pricing gains continue to offset volume declines.
- Assess the sustainability of operating cash flow and free cash flow after capital expenditures, dividends, debt service and planned repurchases.
- Confirm refinancing or remarketing of near-term maturities and monitor debt levels, interest-rate exposure and credit-facility capacity.
- Monitor execution and realized savings from the restructuring, including remaining charges and severance payments.
- Follow the SAP litigation, environmental remediation estimates and Superfund matters, tax examinations, and Wheelabrator’s exposure as long-term energy contracts expire.