GFL Environmental Inc. annual report, Q4 FY2020

Business context and reporting period

GFL Environmental Inc. filed its annual Form 20-F for the fiscal year ended December 31, 2020, including results for the three months ended that date. The company provides solid waste, liquid waste, infrastructure and soil remediation services in Canada and 27 U.S. states. Its audited consolidated financial statements are prepared under IFRS and reported in Canadian dollars unless otherwise stated. Comparisons with 2019 are affected by acquisitions and changes in the business portfolio.

Key financial metrics

Metric	FY 2020	FY 2019	Q4 2020	Q4 2019
Revenue	$4,196.2 million	$3,346.9 million	$1,235.6 million	$896.6 million
Net loss	$(994.9) million	$(451.7) million	$(486.7) million	$(180.4) million
Adjusted EBITDA	$1,076.7 million	$825.7 million	$311.2 million	$208.9 million
Operating cash flow	$502.2 million	$251.0 million	$163.5 million	$133.0 million
Cash at period end	$27.2 million	$574.8 million	$27.2 million	$574.8 million

Full-year revenue rose 25.4%; management attributed the increase primarily to acquisitions, which contributed approximately $876 million of revenue. Organic solid waste pricing and surcharges helped offset volume declines, while infrastructure/soil remediation and liquid waste experienced organic declines.
Adjusted EBITDA increased 30.4% year over year; its margin was approximately 25.7%, versus 24.7% in 2019. Adjusted EBITDA is a non-IFRS measure and excludes specified items.
Net loss widened substantially. The 2020 result included a $449.2 million non-cash mark-to-market loss on TEU Purchase Contracts, $168.7 million of debt extinguishment losses, and higher depreciation and amortization. The filing also reports $231.7 million of additional ARO-related depreciation from purchase-accounting discount-rate differences.
Q4 revenue grew 37.8% and Adjusted EBITDA grew 49.0% year over year, substantially reflecting acquisitions. Q4 net loss increased to $486.7 million, including a $355.9 million non-cash Purchase Contract revaluation loss.
FY cost of sales was $4,006.1 million, or 95.5% of revenue, versus 91.8% in 2019. Excluding depreciation, intangible amortization and acquisition integration costs, cost of sales was 66.3% of revenue, improving 120 basis points.
FY investing cash outflow was $4,353.5 million, including $3,941.2 million of acquisitions and $428.3 million of capital expenditures. Financing cash inflow was $3,338.3 million. Operating cash flow included $152.8 million of IPO-related and debt-repayment costs; excluding those payments, management reported $655.0 million of operating cash flow.
At year-end, reported long-term debt was $6,166.1 million, including accounting adjustments; principal debt before those adjustments was $6,107.6 million. Total liabilities were $10,050.7 million and shareholders’ equity was $5,679.3 million. The company reported no material debt maturities before 2025, apart from its revolving facility, which matures in 2024.
Liquidity included $27.2 million of cash and a revolving facility with stated capacity of $628 million plus US$40 million; $148.8 million was drawn. The company stated expected operating cash flow and revolving borrowing capacity should meet anticipated operating needs, dividends and certain tuck-in acquisitions.

Material changes versus the prior comparable period

Acquisitions drove most reported revenue growth, including major U.S. solid waste acquisitions late in 2020. The company acquired 15 solid waste and seven liquid waste businesses during the year; purchase-price allocations remained provisional at year-end.
COVID-19 reduced commercial and industrial collection activity, post-collection volumes, used motor oil sales and infrastructure/soil remediation volumes. Management cited improving organic volume trends in Q4 compared with Q3, but said the continuing pandemic made its full impact uncertain.
Organic solid waste revenue benefited from pricing and surcharges but was partly offset by lower volumes. Full-year organic revenue fell 6.2% in infrastructure and soil remediation and 16.1% in liquid waste.
The IPO and refinancing reduced debt and interest expense compared with the prior-year interest burden, but 2020 also included significant early repayment premiums and extinguishment costs. The company issued new secured and unsecured notes and $600 million of convertible preferred shares.
Year-end cash fell from $574.8 million to $27.2 million, reflecting acquisition spending and financing and investing flows. Operating cash flow increased year over year.

Outlook, commentary, risks and unusual items

Management’s strategy is to pursue organic growth, accretive acquisitions and operating efficiencies, with priorities including pricing, route density, cross-selling and cost synergies. The filing provides no specific numeric revenue or earnings guidance.
Management noted the business is seasonal, with revenue generally higher in the second and third quarters and lower in winter. It deferred certain non-essential capital spending and reduced discretionary costs in response to COVID-19.
Key risks include pandemic-related demand impacts; acquisition integration and undiscovered liabilities; environmental regulation and remediation exposure, including evolving PFAS requirements; landfill permitting, capacity and closure costs; municipal contract renewals; labor, fuel and disposal costs; commodity prices; foreign exchange and interest rates; and access to financing.
A Township of Scugog counterclaim seeks $105 million for alleged contaminated soil and site-restoration issues. GFL says it has defenses and insurance, but cannot assure the outcome or adequacy of coverage. Management believes ordinary-course claims overall will not materially affect the company; the Scugog matter remains a specific contingency to monitor.
Other notable items include $21.4 million of impairment and other charges, a $7.2 million write-off of amounts expected from a prior acquisition vendor, and landfill closure/post-closure obligations of $735.6 million, up from $236.6 million.
The company reported that disclosure controls were effective at year-end. It did not provide management’s internal-control effectiveness assessment or auditor attestation, citing the transition period for newly public companies.

Most important facts for investors to verify

How much of revenue and Adjusted EBITDA growth came from acquisitions versus organic pricing, volume and synergies, and how comparable acquired-business margins are.
Whether COVID-affected volumes and margins recover, particularly in commercial collection, liquid waste and infrastructure/soil remediation.
The cash conversion and capital needs of the enlarged business, including acquisition spending, maintenance capital expenditures and the sharp decline in year-end cash.
Debt, refinancing and liquidity disclosures, including available revolving capacity, covenant headroom, interest-rate exposure and the treatment of TEUs and convertible preferred shares.
The assumptions and potential cash impact of landfill closure obligations, the $105 million Scugog claim and other environmental or acquisition-related contingencies.
Adjusted EBITDA reconciliations and the significance of purchase-accounting depreciation, Purchase Contract revaluation and other excluded items to reported losses.