Waste Management, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; dollar amounts are in millions unless stated otherwise. WM provides waste collection, transfer, disposal, recycling and related environmental services across North America.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3,561 | $3,946 | $7,290 | $7,642 |
| Income from operations | $527 | $696 | $1,100 | $1,317 |
| Operating margin | 14.8% | 17.6% | 15.1% | 17.2% |
| Net income attributable to WM | $307 | $381 | $668 | $728 |
| Diluted EPS | $0.72 | $0.89 | $1.57 | $1.70 |
| Net cash from operations | $856 | $1,010 | $1,621 | $1,900 |
| Free cash flow (non-GAAP) | $423 | $440 | $741 | $871 |
- Q2 revenue declined 9.8% year over year. Management attributed approximately $400 million of the quarterly decline and $440 million for the first half to COVID-19-related reductions in customer waste-service needs. Q2 volume fell $406 million; yield gains partly offset the decline.
- Commercial, industrial and landfill activity weakened, while residential revenue was broadly stable. Lower fuel surcharges also reduced Q2 revenue by $60 million.
- Operating expenses fell to $2,180 million from $2,443 million in Q2, and were 61.2% of revenue versus 61.9%. Cost actions helped cushion reduced volumes, but the revenue declines disproportionately affected higher-margin lines of business.
- Cash from operations and free cash flow declined year over year. Lower capital spending partly offset reduced operating cash flow; first-half capital expenditures were $895 million versus $1,049 million.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $2,663 million; total debt was $12,788 million. The $3.5 billion revolving credit facility had no borrowings and $3.1 billion of unused capacity after letters of credit. No commercial paper was outstanding at quarter-end.
- Current debt was $3,190 million, including $3.0 billion of senior notes subject to mandatory redemption because the Advanced Disposal acquisition had not closed by the contractual deadline. WM redeemed those notes on July 20 using cash and, to a lesser extent, commercial paper, paying $30 million in premiums and $8 million accrued interest. WM expects to record the related extinguishment loss in Q3.
- On July 28, WM entered into a separate $3.0 billion, 364-day revolving credit facility, intended for general corporate purposes, including funding part of the Advanced Disposal acquisition and refinancing debt.
- First-half dividends paid were $466 million; share repurchases were $402 million. WM suspended further repurchases for the foreseeable future to support liquidity.
Material changes, outlook and risks
- Q2 included $61 million of non-cash impairment charges: $41 million primarily for energy-services assets affected by lower oil demand and activity, competition and weaker landfill-use prospects; and $20 million related to a decision to close a landfill after its constructed airspace is filled. The first-half total also included a $7 million impairment of a refined-coal investment.
- COVID-19 impacts began in March. Volumes improved from April lows as some areas reopened, but remained meaningfully below prior-year levels; management cautioned that renewed restrictions could reverse the improvement. WM expected pandemic effects to remain significant for the rest of 2020. The filing gives no formal earnings or revenue guidance.
- Management described liquidity and the business fundamentals as strong, while emphasizing cost control, route optimization, reduced discretionary spending and disciplined capital investment. Customer support measures included extended payment terms, waived or deferred charges and price increases, and one month of free service for qualifying small and medium businesses upon reopening.
- WM amended its planned Advanced Disposal acquisition terms to $30.30 per share, or approximately $4.6 billion enterprise value including assumed net debt, and expected closing by the end of Q3 2020, subject to approvals and closing conditions. A planned $835 million asset sale to GFL Environmental was intended to address substantially all expected DOJ divestiture requirements and was also conditional on the acquisition. The merger agreement allowed termination after September 30, 2020, with a possible extension to November 30; specified termination circumstances could trigger a $250 million fee.
- Key exposures include economic and pandemic-driven volume declines, fuel and recycling commodity prices, competition, acquisition execution and financing, environmental regulation and remediation, landfill estimates, litigation, severe weather and impairment risk. Recorded landfill and environmental remediation liabilities totaled $2,164 million; management noted that using the high end of remediation cost ranges would increase the recorded environmental liability by approximately $145 million.
Important facts for investors to verify
- Whether volumes and margins recovered after quarter-end, particularly in commercial, industrial and landfill operations, and whether pandemic-related customer credit losses increased.
- Completion, financing, regulatory clearance and integration of the Advanced Disposal acquisition, along with the GFL asset divestiture and any changes to expected timing or terms.
- The Q3 cash and earnings effects of the $3.0 billion note redemption, including the expected extinguishment loss and use of commercial paper or revolving facilities.
- Future capital spending, free cash flow, dividends and share repurchases; free cash flow is a non-GAAP measure and excludes dividends and debt service.
- Potential changes in landfill and environmental remediation estimates, including the disclosed $145 million sensitivity, and developments in material environmental or legal proceedings.