Waste Management, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a stand-alone fourth-quarter report; the supplied filing text does not provide a clear Q4-only financial summary.
Business context
Waste Management is a North American environmental services provider, with collection, transfer, landfill disposal, recycling and renewable-energy operations. At year-end, it owned or operated 268 landfills and 348 transfer stations. Advanced Disposal was acquired on October 30, 2020, expanding WM’s footprint, particularly in the eastern U.S.
Key financial results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $15.218 billion | $15.455 billion | Down 1.5% |
| Income from operations | $2.434 billion | $2.706 billion | Down 10.1% |
| Operating margin | 16.0% | 17.5% | Down 1.5 percentage points |
| Net income attributable to WM | $1.496 billion | $1.670 billion | Down 10.4% |
| Diluted earnings per share | $3.52 | $3.91 | Down 10.0% |
| Cash from operating activities | $3.403 billion | $3.874 billion | Down $471 million |
| Free cash flow (non-GAAP) | $2.656 billion | $2.105 billion | Up $551 million |
| Capital expenditures | $1.632 billion | $1.818 billion | Down $186 million |
Operating expenses were $9.341 billion, or 61.4% of revenue, unchanged as a share of revenue year over year. SG&A rose to $1.728 billion, or 11.4% of revenue, from $1.631 billion, or 10.6%. Interest expense, net, was $425 million versus $411 million. The effective tax rate was 20.9% versus 20.6%.
Revenue was pressured by a $692 million volume-related decline, partly offset by $299 million of collection and disposal yield growth, a $75 million increase from recycling commodity prices, and acquisition contributions. Management estimated COVID-19 reduced 2020 revenue by approximately $890 million. Free cash flow increased largely because of $885 million in divestiture proceeds and lower capital spending; it is a non-GAAP measure and excludes items such as dividends and debt service.
Debt and liquidity
Year-end debt was $13.810 billion, compared with $13.498 billion in 2019; cash and cash equivalents were $553 million, down from $3.561 billion, primarily reflecting the Advanced Disposal acquisition. WM reported $3.403 billion of operating cash flow and $1.4 billion of unused availability under its $3.5 billion revolving credit facility. Commercial paper borrowings were $1.814 billion. The company stated it was in compliance with material debt covenants and had no borrowings outstanding under the revolver.
About $3.3 billion of debt was described as maturing or subject to rate-period expiration within 12 months; $2.7 billion was classified as long-term based on management’s stated intent and ability to refinance. WM identified $3.1 billion of debt exposed to market-rate changes within the next 12 months and estimated a 100-basis-point rate increase would add $12 million to 2021 interest expense.
Material changes, outlook and risks
- Advanced Disposal: Acquired for $30.30 per share; enterprise value was approximately $4.6 billion, including about $1.8 billion of net debt. The preliminary purchase-price allocation included $2.470 billion of goodwill. DOJ-required divestitures generated $856 million in proceeds and a $33 million net gain. Acquisition and integration costs were $156 million; expected synergies and integration benefits remain subject to execution.
- COVID-19: Reduced commercial and industrial collection and landfill volumes, while stay-at-home patterns increased residential service costs. Volumes improved from April lows, but recovery remained uncertain. Management described continued cost control, route optimization, hiring restraint and disciplined capital spending.
- Unusual items: WM recorded $68 million of asset impairments, including $41 million related primarily to energy-services assets and $20 million related to a landfill closure decision. It also recorded a $33 million net divestiture gain and $53 million of net losses on early debt extinguishment.
- Recycling and commodities: Recycling commodity prices recovered modestly in 2020, but export restrictions, contamination costs, changing end markets and customer sensitivity to higher recycling fees remain risks. WM is shifting toward fee-based recycling arrangements to recover processing costs.
- Management outlook: The filing provides no specific financial forecast or numerical earnings guidance. Management said the duration of COVID-19 and pace of recovery were uncertain. The Board expected to raise the 2021 quarterly dividend from $0.545 to $0.575 per share, subject to declaration; a new authorization permits up to $1.35 billion of share repurchases. Repurchases were temporarily suspended after Q1 2020.
- Other material risks: Environmental regulation and remediation obligations, landfill permitting and airspace estimates, severe weather and climate exposure, labor and safety costs, recycling and fuel-price volatility, interest-rate exposure, litigation, cybersecurity and the multi-year ERP implementation. Environmental remediation liabilities were $230 million; landfill liabilities were $2.156 billion.
Most important facts for investors to verify
- Whether collection, industrial and landfill volumes recover, and whether pricing gains can offset volume and service-cost pressures.
- Advanced Disposal integration progress, realized synergies, final purchase accounting and any further integration or control-related costs.
- Cash generation after considering capital requirements, dividends, debt service and the unusually significant divestiture proceeds supporting 2020 free cash flow.
- Refinancing and remarketing outcomes for near-term commercial paper and tax-exempt debt, and sensitivity to higher interest rates.
- Recycling economics, including commodity prices, processing costs, export-market changes and adoption of fee-based customer contracts.
- Changes in landfill airspace assumptions, closure and remediation estimates, permit outcomes and potential environmental liabilities.
- The auditor expressed unqualified opinions on the financial statements and internal controls; however, Advanced Disposal’s controls were excluded from the year-end internal-control assessment and audit.