Waste Management, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2021, compared with Q1 2020. Waste Management provides collection, transfer, landfill, recycling and related environmental services across the U.S. and Canada. The comparison is affected by the October 2020 Advanced Disposal acquisition; its operations are included in 2021 but not in the prior-year period.
Financial performance and liquidity
- Revenue: $4.112 billion, up $383 million (10.3%). Growth included $302 million from acquisitions and $181 million from higher average yield, partly offset by a $101 million volume decline.
- Profitability: Operating income was $650 million, up 13.4%; operating margin improved to 15.8% from 15.4%. Net income attributable to WM was $421 million versus $361 million; diluted EPS was $0.99 versus $0.85.
- Costs and taxes: Operating expenses were $2.514 billion, or 61.1% of revenue, versus 62.5%. Depreciation and amortization rose to $472 million from $402 million, largely reflecting acquired assets. The effective tax rate increased to 22.7% from 17.0%.
- Cash flow: Operating cash flow was $1.120 billion versus $765 million. Capital expenditures were $270 million versus $459 million. Company-defined free cash flow, a non-GAAP measure, was $865 million versus $318 million; it excludes dividends and debt service.
- Balance sheet and debt: Cash and cash equivalents were $476 million; total debt was $13.488 billion, compared with $13.810 billion at year-end 2020. Total assets were $29.070 billion and total liabilities $21.641 billion. The company reported $1.7 billion of unused capacity under its $3.5 billion revolving credit facility.
- Capital returns: WM paid $247 million in dividends, at $0.575 per share, and paid $250 million under a February accelerated share repurchase. $1.1 billion of repurchase authorization remained at quarter-end.
Material changes versus Q1 2020
- Revenue growth reflected Advanced Disposal, higher collection and disposal yield, and a 97% increase in average recycling commodity prices versus the prior-year period’s unusually low levels. WM said it did not expect that degree of year-over-year commodity-price increase to continue through 2021.
- Underlying volumes, excluding acquisitions and divestitures, declined 2.7%. COVID-19 effects, lower special-waste and project volumes, and severe February winter storms contributed; management reported recovery from April 2020 lows.
- Operating income benefited from yield, cost management, recycling and renewable-energy credit results. Higher depreciation and amortization, digital-platform investment, incentive compensation and a loss-contingency charge partly offset these gains.
- Cash from operations rose in part because of improved receivables collections and lower annual incentive compensation payments. Lower capital spending also boosted the free-cash-flow comparison, partly reflecting timing of fleet purchases and spending accelerated into Q4 2020.
Outlook, risks, contingencies and unusual items
- Management expressed optimism about further volume recovery as vaccination and reopening progressed, but noted that the pace of economic recovery and the pandemic’s longer-term effects remained uncertain. The filing provides no quantified financial guidance.
- Q1 2021 included $17 million of net charges: a $19 million reserve for loss contingencies and $6 million of asset impairments, partly offset by an $8 million divestiture gain. Higher recycling commodity prices and renewable energy credit values supported results.
- Approximately $3.0 billion of debt was described as maturing or requiring rate resets within 12 months. WM classified $2.7 billion as long-term based on its intent and ability to refinance, supported by forecast revolving-facility capacity; $244 million was current.
- Landfill and environmental remediation liabilities totaled $2.417 billion. Recorded environmental remediation liability was $218 million; using the high end of estimated remediation ranges would increase the aggregate liability by approximately $135 million. WM was identified as a potentially responsible party at 73 Superfund sites; its estimated share for the San Jacinto waste pits was $54 million.
- Other risks include regulation and permitting, environmental or safety incidents, litigation, labor and wage costs, severe weather, competition, commodity prices, waste-volume changes, acquisition integration and cybersecurity or technology execution. Management said no material changes had occurred to previously reported risk factors and did not expect known contingencies to materially affect results, while noting estimates and outcomes can differ.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects Advanced Disposal and other non-recurring or market-driven factors, versus continuing organic performance.
- Whether volume recovery continues and whether recycling commodity prices and renewable energy credit values remain supportive.
- Actual capital spending, operating cash flow and free cash flow over the full year; free cash flow is non-GAAP and excludes required dividends and debt service.
- Refinancing and remarketing of near-term commercial paper and tax-exempt bonds, and continued availability of revolving-credit capacity.
- Potential changes to environmental, landfill, insurance and litigation estimates, including the San Jacinto matter and other remediation exposures.
- Progress integrating Advanced Disposal and implementing customer-service digitalization and the new enterprise resource planning system.