Waste Management, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone Q4 filing; it also provides unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Waste Management is a North American waste and environmental services provider. Its operations include collection, transfer, landfill disposal, recycling, resource recovery, and landfill-gas energy. At year-end, it owned or operated 249 landfills and 302 transfer stations, and employed approximately 44,900 people. Its largest customer accounted for less than 2% of annual revenue.
Key financial metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $15.455B | $14.914B | +3.6% |
| Operating income | $2.706B | $2.789B | -3.0% |
| Operating margin | 17.5% | 18.7% | -1.2 percentage points |
| Net income attributable to WM | $1.670B | $1.925B | -13.2% |
| Diluted EPS | $3.91 | $4.45 | -12.1% |
| Operating cash flow | $3.874B | $3.570B | +$304M |
| Capital expenditures | $1.818B | $1.694B | +$124M |
| Free cash flow (non-GAAP) | $2.105B | $2.084B | +$21M |
| Cash and cash equivalents | $3.561B | $61M | +$3.500B |
| Total debt | $13.498B | $10.026B | +$3.472B |
Free cash flow is defined by the company as operating cash flow less capital expenditures plus divestiture proceeds; it is not a GAAP measure and excludes items such as dividends and debt service. Year-end working capital was positive $3.065B, compared with a $463M deficit in 2018, largely reflecting higher cash from debt issuance. Debt less cash was approximately $9.9B, calculated from reported balances.
Material changes versus 2018
- Revenue growth reflected higher collection and disposal yield and volumes, plus acquisitions net of divestitures. Internal revenue growth was 2.9%; acquisition contributions were 1.5% and divestitures reduced growth by 0.7%.
- Collection and disposal average yield increased $364M; volume added $346M. Recycling commodity price declines reduced revenue by $248M, following a $273M decline in 2018. Average recycling commodity prices at WM facilities were 35% lower year over year.
- Operating expenses rose to $9.496B, but declined to 61.4% of revenue from 62.0%. SG&A increased to $1.631B, or 10.6% of revenue, from $1.453B, or 9.7%, reflecting people and technology investments, acquisition costs, and litigation reserves.
- Net income and EPS fell despite higher revenue and operating cash flow. Contributing items included higher depreciation and amortization, an $85M loss on early debt extinguishment, a $52M impairment of a minority-owned waste-conversion investment, and $27M of goodwill impairments. 2018 had benefited from divestiture gains.
- Revenue from recycling fell to $1.040B from $1.293B. The company’s fee-based pricing and efforts to pass through processing and contamination costs supported results, but did not offset lower commodity prices.
Fourth-quarter detail and unusual items
Unaudited Q4 2019 revenue was $3.846B versus $3.842B in Q4 2018. Operating income was $655M versus $767M; net income attributable to WM was $447M versus $531M; diluted EPS was $1.05 versus $1.24. Q4 2019 included $38M of pretax costs primarily for the pending Advanced Disposal acquisition and ERP implementation, and $37M of pretax impairment and restructuring charges, including goodwill impairments.
Other notable 2019 items included $84M of premiums on retired high-coupon notes (reported within the $85M debt extinguishment loss), a $52M investment impairment, and a $70M benefit from federal natural-gas fuel credits, compared with $28M in 2018. The effective tax rate was 20.6%, versus 19.0% in 2018.
Liquidity, debt, and capital allocation
- WM issued $4.0B of senior notes in May 2019 and C$500M (approximately $377M) of Canadian senior notes in September. Proceeds contributed to year-end cash and funded repayment of commercial paper and other corporate needs.
- The $3.5B revolving credit facility had no borrowings at year-end; $412M of letters of credit used the facility, leaving $3.1B of available capacity. The facility matures in November 2024, subject to extension options.
- Approximately $1.5B of debt matured or had interest-rate periods expiring within 12 months after year-end; $1.3B was classified as long-term based on the company’s intent and ability to refinance. Variable-rate debt and tax-exempt bond remarketing expose WM to interest-rate and refinancing risk.
- Capital expenditures were $1.818B and acquisitions used approximately $521M of cash. Dividends paid were $876M; share repurchases were $244M, down from $1.008B in 2018 as WM limited repurchases while preparing for the Advanced Disposal transaction.
Outlook, risks, and contingencies
- Management said operations performed well, citing favorable economic conditions, collection and disposal growth, and customer service and efficiency initiatives. It expected the company’s asset network and investments in people, technology, and growth to support continued growth. The filing does not provide specific 2020 revenue, earnings, or cash-flow guidance.
- WM expected to raise its quarterly dividend from $0.5125 to $0.545 per share for dividends declared in 2020; future declarations remain subject to Board approval and business needs.
- The planned $4.9B enterprise-value acquisition of Advanced Disposal was pending regulatory approval. WM anticipated approval by the end of March 2020 and closing soon thereafter. Certain $3B of the May 2019 notes had a special mandatory redemption feature if the transaction failed to close by July 14, 2020 or the merger agreement was terminated, requiring redemption at 101% plus accrued interest.
- Key risks include persistent recycling-market weakness and export restrictions, particularly China’s restrictions and anticipated import ban; environmental and landfill compliance costs; permitting and landfill airspace; commodity and fuel prices; labor and pension obligations; severe weather and climate-related disruption; cybersecurity and ERP implementation; and acquisition integration and financing.
- Recorded landfill and environmental remediation liabilities totaled $2.095B at year-end, including $1.855B for landfill obligations and $240M for remediation. The filing notes that the remediation amount could be about $140M higher using the high end of estimated ranges. WM was identified as a potentially responsible party at 75 Superfund sites; its recorded estimate for its share of the San Jacinto waste pits remedy was $56M, and ultimate liability could differ materially.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether Advanced Disposal received regulatory approval and closed as anticipated, and the final purchase funding, integration costs, synergies, and any required divestitures.
- Whether collection and disposal pricing and volume growth can offset cost inflation, while recycling commodity prices, contamination costs, and customer participation remain under pressure.
- How cash generation, capital spending, dividends, and debt evolve after the 2019 financing-driven cash increase; also monitor near-term maturities, bond remarketing, and interest-rate exposure.
- Whether landfill capacity and expansion assumptions, closure and post-closure estimates, and environmental remediation accruals remain appropriate as costs and regulations change.
- Whether the anticipated 2020 dividend increase was declared and sustained, and whether management issued subsequent financial guidance.