Waste Management, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Waste Management provides waste collection, transfer, disposal, recycling, and renewable-energy services in the U.S. and Canada. Comparisons are affected by the October 2020 acquisition of Advanced Disposal and by pandemic-related volume declines in 2020.
Financial performance
Amounts are in millions of dollars, except per-share data. Q2 compares with the three months ended June 30, 2020; first-half compares with the six months ended June 30, 2020.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $4,476 | $3,561 | $8,588 | $7,290 |
| Income from operations | $791 | $527 | $1,441 | $1,100 |
| Operating margin | 17.7% | 14.8% | 16.8% | 15.1% |
| Net income attributable to WM | $351 | $307 | $772 | $668 |
| Diluted EPS | $0.83 | $0.72 | $1.82 | $1.57 |
| Cash from operating activities | $1,043 | $856 | $2,163 | $1,621 |
| Free cash flow (non-GAAP) | $649 | $423 | $1,514 | $741 |
- Q2 revenue rose 25.7%; first-half revenue rose 17.8%. Q2 growth reflected volume recovery, Advanced Disposal, higher collection and disposal yield, and stronger recycling commodity prices.
- Operating expenses were 61.1% of Q2 revenue versus 61.2% a year earlier; SG&A was 9.9% versus 10.6%. First-half operating expenses were 61.1% of revenue versus 61.9%.
- At June 30, cash and cash equivalents were $148 million, versus $553 million at December 31, 2020. Total debt was $13.244 billion, down from $13.810 billion; long-term debt was $12.883 billion.
- The $3.5 billion revolving facility had no direct borrowings outstanding and $1.7 billion of unused capacity after supporting commercial paper and letters of credit. WM reported $1.5 billion outstanding under its commercial-paper program.
- First-half capital expenditures were $666 million, down from $895 million. Dividends paid were $489 million and share repurchases were $500 million.
Material changes and unusual items
- Revenue growth reflected both recovery and acquisition effects: Advanced Disposal contributed an estimated $316 million of Q2 revenue growth and $618 million for the first half. Excluding acquisitions and divestitures, Q2 volume rose 9.6% and average yield rose 7.0%.
- Q2 operating income improved by $264 million year over year. Management cited stronger collection and disposal results, recycling profitability, cost management, and the absence of $61 million in Q2 2020 non-cash impairment charges. Higher depreciation and amortization from Advanced Disposal partly offset the improvement.
- Net income included a $220 million loss on early extinguishment of debt. In May, WM issued $950 million of lower-coupon notes and used the proceeds and cash on hand to retire $1.3 billion of higher-coupon notes. Q2 net interest expense declined to $98 million from $119 million.
- Six-month operating cash flow increased by $542 million year over year. Management attributed the increase to higher earnings, the acquisition, favorable working-capital changes, and lower incentive-compensation payments, partly offset by tax-payment timing and other factors. The company cautioned that free cash flow is a non-GAAP measure and excludes items such as dividends and debt service.
Outlook, commentary, and risks
- No specific numerical earnings or revenue guidance is provided in the filing. Management was optimistic about continued 2021 volume recovery as businesses reopened, but warned that renewed COVID-19 transmission, variants, or closures could affect volumes and costs.
- Management said recycling commodity prices were substantially higher than the prior year and expected the year-over-year increase to continue for the rest of 2021, citing demand for recycled materials. Commodity prices remain a source of variability.
- Management reported inflationary cost pressures, particularly in operating costs and capital expenditures, as well as driver shortages and increased overtime. It cited pricing, efficiency, and cost controls as responses.
- WM expected to complete its May accelerated share repurchase in July and stated it expected to repurchase the remaining $850 million authorization in the second half of 2021, subject to management discretion and business needs.
- Debt of $2.9 billion was due or subject to interest-rate-period expiry within 12 months; $2.6 billion was classified as long-term based on WM’s intent and ability to refinance, including available revolver capacity. This refinancing assumption is important to liquidity.
- Landfill and environmental remediation liabilities totaled $2.454 billion, including $220 million for environmental remediation. WM disclosed 73 Superfund sites where it had been identified as a potentially responsible party; it estimated that using the high end of remediation-cost ranges would raise the recorded environmental liability by about $135 million. Actual costs may differ materially.
- Other stated risks include environmental regulation and permitting, litigation, labor availability and costs, severe weather, competition, commodity prices, acquisition integration and synergies, cybersecurity, and execution of technology and cost initiatives. The company said it did not expect known contingencies or pending litigation to have a material adverse effect, while acknowledging uncertainty in estimates and outcomes.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects durable organic volume and pricing versus Advanced Disposal and recovery from the depressed 2020 comparison.
- Whether operating-margin gains persist as inflation, wage pressures, driver shortages, and acquired-asset depreciation continue.
- Whether cash generation remains strong after capital spending normalizes, and how dividends and planned repurchases affect liquidity and debt.
- WM’s ability to refinance near-term maturities and maintain access to commercial-paper and revolving-credit markets.
- Developments in environmental remediation estimates, Superfund matters, and landfill closure obligations.
- Whether expected recycling commodity-price strength and pandemic-related volume recovery continue; the filing provides no numerical full-year guidance.