Waste Management, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Amounts are in U.S. dollars. Waste Management provides collection, transfer, disposal, recycling and related environmental services across North America.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $3.729 billion | $3.696 billion | Up 0.9% |
| Operating income | $573 million | $621 million | Down 7.7%; operating margin 15.4%, versus 16.8% |
| Net income attributable to WM | $361 million | $347 million | Up 4.0% |
| Diluted EPS | $0.85 | $0.81 | Increased despite lower operating income |
| Operating cash flow | $765 million | $890 million | Down $125 million |
| Free cash flow (non-GAAP) | $318 million | $431 million | Down $113 million |
| Capital expenditures | $459 million | $471 million | Cash investment in the business |
Lower income tax expense—$74 million versus $115 million, with effective rates of 17.0% and 24.8%—helped lift net income. The comparison also reflects a $52 million non-deductible investment impairment in Q1 2019 that did not recur. Q1 2020 included a $7 million impairment of a refined-coal investment.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $3.125 billion at March 31, down from $3.561 billion at year-end 2019. Current assets were $5.635 billion and current liabilities were $3.070 billion.
- Total debt was $13.452 billion, including $387 million classified as current. Approximately $1.9 billion was scheduled to mature or have tax-exempt bond rate periods expire within 12 months; $1.5 billion was classified as long-term based on the company’s stated intent and ability to refinance.
- The $3.5 billion revolving credit facility had no borrowings and $412 million of letters of credit outstanding, leaving $3.1 billion of available capacity. There were no commercial paper borrowings at quarter-end.
- Operating cash flow was lower primarily due to working-capital movements, reduced customer receipts late in the quarter, higher interest payments and higher incentive compensation payments.
- The company paid $236 million in dividends and repurchased $402 million of shares during the quarter. It suspended further repurchases for the foreseeable future to preserve liquidity.
Operating trends and material changes
- Collection and disposal yield added $72 million of revenue, while volume contributed $10 million. Acquisitions added $29 million; lower recycling commodity revenue reduced revenue by $59 million.
- Average recycling commodity prices at WM facilities were about 30% lower year over year. Recycling revenue was $254 million versus $291 million.
- Operating expenses rose to $2.329 billion from $2.298 billion; selling, general and administrative expenses increased to $425 million from $409 million. Depreciation and amortization increased to $402 million from $366 million, partly reflecting investment in trucks and facilities and higher landfill volumes.
- Interest expense increased to $112 million from $96 million, primarily due to the $4.0 billion senior-note issuance in May 2019. Equity-method losses increased to $26 million from $9 million, including the $7 million refined-coal impairment.
Outlook, risks and contingencies
- COVID-19: Management reported a $40 million revenue impact in March from business closures and reduced customer service needs. Lower landfill, industrial and commercial activity was partly offset by higher residential collection volumes, which increased service costs. WM also waived or suspended certain ancillary charges, extended payment terms, incurred workforce and technology costs, and established about $5 million of COVID-related receivable reserves.
- The filing says the pandemic is expected to negatively affect near-term financial position, results and cash flows, with a significant adverse impact expected in Q2 2020 and potentially beyond. The scale and duration were uncertain; the company provided no quantified forecast.
- Management described cost and capital controls, including route optimization, reduced overtime and hiring, lower discretionary expenses and adjusting capital spending to anticipated volumes. It said liquidity was sufficient to continue operations during the volatile period.
- Advanced Disposal acquisition: WM agreed to acquire the company for $33.15 per share in cash, representing $4.9 billion enterprise value including approximately $1.9 billion of net debt. WM anticipated final antitrust approval and closing by the end of Q2 2020. Certain $3.0 billion of WM notes include a special mandatory redemption at 101% plus accrued interest if the deal is not completed by July 14, 2020, or the agreement is terminated earlier.
- Environmental obligations: Landfill and environmental remediation liabilities totaled $2.128 billion, including $248 million for remediation. The company noted that using high-end estimates for remediation ranges would increase the recorded liability by approximately $145 million. Its recorded estimate for the San Jacinto waste pits matter was $57 million; ultimate liability could differ materially.
- Other risks include customer payment or contract deterioration, service disruption or employee illness, supply-chain issues, recycling commodity volatility, regulation, litigation, weather events and cybersecurity or internal-control risks associated with remote work.
Important facts for investors to verify
- Subsequent quarterly disclosures on COVID-19 impacts to volumes, pricing, service costs, customer collections and cash flow, compared with the company’s Q2 warning.
- Whether Advanced Disposal received regulatory approval and closed on the anticipated timetable, and the resulting financing, integration and synergies.
- Execution of the stated refinancing plans for near-term debt and tax-exempt bond rate expirations, and continued availability of revolving-credit capacity.
- Trends in operating margins, free cash flow, recycling commodity prices and the company’s capital-spending and shareholder-return plans.
- Changes in landfill, remediation and self-insurance estimates, including developments in the San Jacinto matter and other environmental proceedings.