Waste Management, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unaudited results; dollar amounts are in millions except per-share data.
Business context and financial performance
Waste Management provides collection, transfer, recycling, disposal and waste-to-energy services, primarily in North America. Its reportable groups are Eastern, Midwest, Southern, Western and Wheelabrator.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $3,235 | $3,023 | $9,328 | $8,785 |
| Income from operations | $544 | $525 | $1,542 | $1,431 |
| Net income attributable to Waste Management | $244 | $277 | $672 | $679 |
| Diluted EPS | $0.51 | $0.56 | $1.39 | $1.37 |
| Operating margin | 16.8% | 17.4% | 16.5% | 16.3% |
Q3 net margin was approximately 7.5%, versus 9.2% a year earlier; nine-month net margin was approximately 7.2%, versus 7.7%. Cash dividends declared per share were $0.315 in Q3 and $0.945 for the first nine months, up from $0.29 and $0.87, respectively, in 2009.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,653, compared with $1,642. Capital expenditures were $737, versus $823. Company-defined free cash flow was $952, versus $839; this non-GAAP measure includes $36 of asset-sale proceeds and excludes certain required outlays, including debt service and dividends.
- Cash and cash equivalents fell to $550 at September 30 from $1,140 at year-end 2009. Current assets were $2,569 and current liabilities $2,311, a current ratio of approximately 1.11.
- Total debt was $8,959, up from $8,873 at December 31, 2009; the current portion was $161. The company reported $477 of maturities within 12 months, of which $316 was classified as long-term based on management’s intent and ability to refinance. Estimated debt fair value was $9,800.
- The company had $2.5 billion of committed letter-of-credit capacity and $1.7 billion of letters of credit outstanding; no borrowings were outstanding under its credit facilities. A new three-year $2.0 billion revolving facility was executed in June.
- Financing cash outflows included $443 of share repurchases and $454 of dividends. Investing cash outflows were $1,175, including $343 of acquisitions and $162 of investments in unconsolidated entities.
Material changes versus prior comparable periods
- Q3 revenue increased 7.0%; nine-month revenue increased 6.2%. Growth reflected higher recycling commodity prices, collection and disposal pricing, acquisitions, fuel surcharges and currency translation.
- Volume-related revenue declined $22, or 0.7%, in Q3 and $250, or 2.8%, year to date. This was a marked improvement from declines of 8.9% and 8.6% in the comparable 2009 periods. Gulf Coast oil-spill cleanup contributed volume and revenue during Q2 and Q3.
- Q3 operating expenses rose 8.1%, faster than revenue growth; the operating expense ratio increased to 62.0% from 61.4%. Higher recycling customer rebates, fuel and subcontractor costs, and waste-to-energy maintenance contributed. Nine-month operating expenses rose 9.6% and were 63.1% of revenue, versus 61.1%.
- Interest expense rose to $126 in Q3 from $104 and to $354 for nine months from $316, reflecting higher average debt, credit-facility costs and reduced benefits from interest-rate swaps. The effective tax rate was 37.3% for Q3 and 39.8% year to date, versus 31.2% and 35.2%.
Outlook, commentary, risks and unusual items
- Management reported improved volume trends but expected continued economic challenges in Q4 2010. It cited construction weakness, waste-reduction and diversion trends, and pricing competition as obstacles. The filing provides no specific earnings or revenue guidance.
- Management expected the 2010 extension of bonus depreciation to reduce 2010 cash taxes by approximately $60; the timing benefit is expected to increase cash taxes in later periods.
- Q3 included $18 of non-cash remediation and closure charges at three closed sites, a $6 non-cash charge from lower Treasury discount rates applied to remediation reserves, and net tax charges of $4. Prior-year Q3 included a $14 tax benefit and $3 restructuring charge. For the nine months, 2010 operating income included a $77 one-time cash litigation settlement; 2009 included a $51 non-cash software-abandonment charge, of which $49 was recorded in the first nine months.
- Environmental remediation liabilities were $323 at September 30, up from $256 at year-end. The company said using high-end estimates across remediation ranges would raise its recorded liability by approximately $150. It was identified as a potentially responsible party at 75 EPA National Priorities List sites. Changes in site estimates and discount rates can materially affect expenses.
- Other material exposures include environmental enforcement matters, class-action and other litigation with uncertain outcomes, self-insured claims, and multi-employer pension plans. The company recorded $26 of 2010 charges for agreed withdrawals of five bargaining units from an underfunded pension plan; future withdrawals could materially affect results in a period.
- Waste-to-energy operating income declined year to date, reflecting maintenance outages and greater exposure to market electricity prices as contracts expired. Management noted seasonal patterns and weather-related volatility; the filing also identifies fuel costs, regulation, permits, financial assurance, labor, litigation and refinancing conditions as risks.
Important facts for investors to verify
- Whether volume declines continue to ease, and whether pricing gains can offset competition and waste diversion without further margin pressure.
- How much earnings and cash flow depend on volatile recycling prices, oil-spill cleanup work, asset sales and the one-time $77 litigation settlement.
- Whether recorded environmental remediation and landfill liabilities adequately reflect site risks, discount-rate changes and potential additional costs.
- How the company will address $477 of maturities within 12 months, including the $316 classified as long-term, and maintain liquidity while funding dividends, repurchases and investments.
- Whether operating cash flow and free cash flow remain sufficient after seasonal working-capital changes, capital expenditures, debt service and shareholder distributions.