Waste Management, Inc. — Q3 2020 Form 10-Q
Business context and period: North American waste collection, transfer, disposal, recycling and renewable-energy services provider. This unaudited filing covers the quarter and nine months ended September 30, 2020; amounts below are in millions except per-share data. Comparisons are with 2019.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3,861 | $3,967 | $11,151 | $11,609 |
| Income from operations | $680 | $734 | $1,780 | $2,051 |
| Operating margin | 17.6% | 18.5% | 16.0% | 17.7% |
| Net income attributable to WM | $390 | $495 | $1,058 | $1,223 |
| Diluted EPS | $0.92 | $1.16 | $2.49 | $2.86 |
| Net cash from operating activities | $1,029 | $952 | $2,650 | $2,852 |
| Free cash flow | $691 | $478 | $1,432 | $1,349 |
- Revenue and margins: Q3 revenue declined 2.7%; nine-month revenue fell 3.9%. Q3 operating expenses declined to 60.4% of revenue from 61.5%, reflecting cost controls, while SG&A rose to 10.8% from 9.7%. Operating income declined 7.4% in Q3 and 13.2% year to date.
- Cash flow and capital spending: Q3 operating cash flow and free cash flow increased year over year. Nine-month operating cash flow declined, while free cash flow increased, supported in part by a $294 million reduction in capital expenditures. WM defines free cash flow as a non-GAAP measure; it excludes certain required outflows, including dividends and debt service.
- Debt and liquidity: Debt was $10.4 billion at September 30, compared with $13.5 billion at year-end 2019. Cash and equivalents were $703 million, down from $3.56 billion. WM reported $2.6 billion of unused capacity under its $3.5 billion revolving facility, in addition to a separate $3.0 billion facility with no borrowings at quarter-end. The company identified $2.2 billion of debt maturing within 12 months, of which $2.0 billion was classified as long-term based on its intent and ability to refinance.
- Shareholder returns: Nine-month dividends paid were $696 million. WM repurchased $402 million of shares in Q1, then suspended further repurchases amid pandemic uncertainty and acquisition funding needs.
Material changes versus prior period
- COVID-19 reduced revenue by an estimated $240 million in Q3 and $680 million for the first nine months. Volume declines in landfill and industrial and commercial collection continued, although WM reported sequential recovery during Q3; recovery had moderated in recent weeks.
- Q3 revenue also reflected $42 million less in fuel surcharges and the absence of prior-year disaster cleanup revenue. Higher recycling commodity prices and collection and disposal yield partly offset these pressures.
- WM recorded $68 million of non-cash impairment charges in the first nine months, including $41 million for energy-services assets, $20 million related to a landfill closure decision, and Q3 charges primarily involving renewable-energy assets.
- A $52 million loss on early extinguishment of debt followed the July redemption of $3.0 billion of acquisition-related notes. Q3 net income also reflected higher acquisition and technology costs and increased long-term incentive compensation.
- Nine-month operating cash flow was lower year over year, partly reflecting higher interest payments, lower operating income, and acquisition and technology costs. Financing cash flows included $3.942 billion of debt repayments and $597 million of net commercial-paper borrowings.
Outlook, commentary, risks and contingencies
- Management outlook: No specific financial guidance is provided in the supplied filing text. Management expected COVID-19 effects to continue through the remainder of 2020 and described the pace of economic and volume recovery as uncertain. It emphasized cost controls, capital discipline, customer-service digitalization and strategic investment.
- Advanced Disposal: WM completed its acquisition on October 30, 2020, after quarter-end, for an enterprise value of approximately $4.6 billion, including about $1.8 billion of target net debt. It was funded with the $3.0 billion revolving facility and commercial-paper borrowings. Required divestitures to GFL Environmental closed concurrently, generating $856.4 million in proceeds, subject to post-closing adjustments. Purchase accounting was not complete at filing.
- Key risks: Further pandemic disruption or delayed recovery; reduced waste volumes; competition and pricing pressure; commodity-price volatility; integration and expected returns from Advanced Disposal; regulatory and permitting requirements; environmental obligations; severe weather and climate-related events; and litigation or impairment risk.
- Environmental matters: Recorded landfill and environmental-remediation liabilities totaled $2.166 billion. The $238 million remediation liability could be approximately $145 million higher using the high end of estimated ranges. WM had been identified as a potentially responsible party at 75 Superfund sites; its estimated liability for the San Jacinto waste pits was $55 million.
- Management said it had sufficient liquidity to continue operations and did not expect known contingencies or guarantees to materially harm the company. Actual environmental, insurance and other obligations could differ from estimates. The filing also notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether waste-volume recovery continued after Q3, particularly in landfill and commercial and industrial collection, and whether pandemic effects or customer-credit losses worsened.
- Post-acquisition borrowing, debt maturities, refinancing capacity and liquidity after the Advanced Disposal closing and GFL divestiture proceeds.
- Advanced Disposal purchase accounting, integration costs, realized benefits and any additional required adjustments or divestitures.
- Whether cost savings and pricing gains can sustain margins as volumes recover, and whether recycling commodity prices remain supportive.
- Changes in impairment assumptions, landfill closure costs, environmental remediation estimates and other material contingencies.