WASTE MANAGEMENT, INC. The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and notes thereto included under Item 1 and
our Consolidated Financial Statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended
This Quarterly Report on Form 10-Q contains certain forward-looking statements
that are made subject to the safe harbor protections provided by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are often
identified by the words, "will," "may," "should," "continue," "anticipate,"
"believe," "expect," "plan," "forecast," "project," "estimate," "intend," and
words of a similar nature and include estimates or projections of financial and
other data; comments on expectations relating to future periods; plans or
objectives for the future; and statements of opinion, view or belief about
current and future events, circumstances or performance. You should view these
statements with caution. They are based on the facts and circumstances known to
us as of the date the statements are made. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to be
materially different from those set forth in such forward-looking statements,
including but not limited to, increased competition; pricing actions; failure to
implement our optimization, growth, and cost savings initiatives and overall
business strategy; failure to identify acquisition targets and negotiate
attractive terms; failure to consummate or integrate the acquisition of Advanced
Disposal Services, Inc. or other acquisitions; failure to obtain the results
anticipated from the acquisition of Advanced Disposal Services, Inc. or other
acquisitions; environmental and other regulations, including developments
related to emerging contaminants and renewable fuel; commodity price
fluctuations; international trade restrictions; weakness in general economic
conditions and capital markets; public health risk and other impacts of COVID-19
or similar pandemic conditions, including increased costs, social and commercial
disruption, service reductions and other adverse effects on our business,
financial condition, results of operations and cash flows; failure to obtain and
maintain necessary permits; disposal alternatives and waste diversion; declining
waste volumes; failure to develop and protect new technology; failure of
technology to perform as expected, including implementation of a new enterprise
resource planning system; failure to prevent, detect and address cybersecurity
incidents or comply with privacy regulations; significant environmental or other
incidents resulting in liabilities and brand damage; significant storms and
destructive events influenced by climate change; labor disruptions; impairment
charges; negative outcomes of litigation or governmental proceedings and other
risks discussed in our filings with the
Overview
We are
Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. Revenues from our collection operations are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility or material recovery facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are
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generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenues generally consist of tipping fees and the sale of recycling commodities to third parties. The fees we charge for our services generally include our environmental fee, fuel surcharge and regulatory recovery fee which are intended to pass through to customers direct and indirect costs incurred. We also provide additional services that are not managed through our Solid Waste business, described under Results of Operations below.
COVID-19 Update
In
The COVID-19 pandemic and related measures have had a significant adverse impact on many sectors of the economy. Waste Management provides essential services to a diverse customer base and, as a result, certain elements of our business are less exposed to variability. Despite these favorable attributes of our business model, we expect the impacts of COVID-19 on our business to be significant.
In
The Company has proactively taken steps to put our customers' and employees' needs first and we continue to work with the appropriate regulatory agencies to ensure we can provide our essential services safely and efficiently. With a focus on customers, we have temporarily waived and suspended certain ancillary service charges until further notice, extended payment terms and adjusted service levels, which will result in a negative impact to our revenue, earnings and cash flows. In addition, we are working with municipalities to address the increase in residential volumes and recycling challenges in areas where there have been processing disruptions. We have also incurred costs related to the health, safety and financial security of our workforce. This includes transitioning back-office employees to work-from-home and providing financial certainty to employees by guaranteeing all full-time hourly employees compensation for a 40-hour work week regardless of service decreases.
We are prudently managing our response to the COVID-19 pandemic; the
fundamentals of the Company remain strong and we believe we have sufficient
liquidity on hand to continue business operations during this volatile period.
During
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for the three months ended
See Part II, Item 1A. Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows.
Strategy
Our fundamental strategy has not changed; we remain dedicated to providing long-term value to our stockholders by successfully executing our core strategy of focused differentiation and continuous improvement. We have enabled a people-first, technology-led focus, that leverages and sustains the strongest asset network in the industry to drive best-in-class customer experience and growth. Our strategic planning processes appropriately consider that the future of our business and the industry can be influenced by changes in economic conditions, the competitive landscape, the regulatory environment, asset and resource availability and technology. We believe that focused differentiation, which is driven by capitalizing on our unique and extensive network of assets, will deliver profitable growth and position us to leverage competitive advantages. Simultaneously, we believe the combination of cost control, process improvement and operational efficiency will deliver on the Company's strategy of continuous improvement and yield an attractive total cost structure and enhanced service quality. While we will continue to monitor emerging diversion technologies that may generate additional value and related market dynamics, our current attention will be on improving existing diversion technologies, such as our recycling operations. We believe the execution of our strategy will deliver shareholder value and leadership in a dynamic industry and challenging economic environment.
Business Environment
The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. We monitor these developments to adapt our services offerings. As companies, individuals and communities look for ways to be more sustainable, we promote our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs.
Despite some industry consolidation in recent years, we encounter intense competition from governmental, quasi-governmental and private service providers based on pricing, service quality, customer experience and breadth of service offerings. Our industry is directly affected by changes in general economic factors, including increases and decreases in consumer spending, business expansions and construction starts. These factors generally correlate to volumes of waste generated and impact our revenue. Negative economic conditions, including the impact of COVID-19, can and have caused customers to reduce their service needs. Such negative economic conditions, in addition to competitor actions, can and have made it more challenging to implement our pricing strategy and negotiate, renew or expand service contracts with acceptable margins. We also encounter competition for acquisitions and growth opportunities. General economic factors and the market for consumer goods, in addition to regulatory developments, can also significantly impact commodity prices for the recyclable materials we sell. Our operating expenses are directly impacted by volume levels; as volume levels shift, due to economic and other factors, we must manage our network capacity and cost structure accordingly.
We experienced overall growth in our collection and disposal lines of business
in the first quarter of 2020; however, volume growth was muted by the negative
impacts of COVID-19 beginning in
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addresses the cost of processing materials and the impact on our costs of contamination. We believe that the Company's industry-leading asset network and strategic focuses on investing in people and technology will give the Company the necessary tools to address the challenges presented by the COVID-19 pandemic and the impacts on our industry.
Current Quarter Financial Results
During the first quarter of 2020, we achieved an overall increase in operating
results for our collection and disposal lines of business; however, the volume
growth was muted by the impacts of COVID-19 beginning in
Key elements of our financial results for the first quarter include:
Revenues of
period, an increase of
attributable to (i) higher yield and volume in our collection and disposal
? business and (ii) acquisitions, net of divestitures, partially offset by lower
market prices for recycling commodities. The year-over-year comparison has been
negatively impacted by revenue declines in
closures and reduction in customers' waste service needs associated with the
COVID-19 pandemic;
Operating expenses of
increase is primarily attributable to (i) higher volumes particularly the first
two months of the quarter; (ii) a
? decrease in the risk-free discount rate, which is based on the rate for
obligations and recovery assets and (iii) one additional workday in the current
year period, partially offset by lower cost of goods sold primarily driven by
the decline in market prices for recycling commodities;
Selling, general and administrative expenses were
revenues, compared with
period. The
associated with planned investments in our people and technology;
? (ii) increased acquisition-related costs and (iii) costs incurred as a direct
result of the COVID-19 pandemic such as technology costs to transition
employees to work-from-home and personal protective equipment to ensure safety
for our frontline employees. These higher costs were partially offset by lower
incentive compensation and litigation reserves in the current period;
Income from operations was
year-over-year comparison has primarily been affected by (i) the investments we
? are making in technology and acquisition-related costs in the current period,
which increased selling, general and administrative expenses; (ii) investments
made in capital assets, including trucks and facilities, which increased
depreciation and amortization expense and (iii) the overall negative impact of
the COVID-19 pandemic to our business;
Net income attributable to
per diluted share, compared with
? the prior year period. In addition to the activity discussed above, net income
in the current period was also impacted by (i) an increase in net interest
expense primarily related to our
notes and (ii) lower income tax expense;
Net cash provided by operating activities was
? working capital changes, including a reduction in customer receipts at the end
of the first quarter that we attribute to COVID-19, as well as higher interest
and incentive compensation payments; and
Free cash flow was
? period. The decrease in net cash provided by operating activities noted above
was slightly offset by a decrease in capital expenditures. Free cash
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flow is a non-GAAP measure of liquidity. Refer to Free Cash Flow below for our
definition of free cash flow, additional information about our use of this
measure, and a reconciliation to net cash provided by operating activities,
which is the most comparable GAAP measure.
Results of Operations Operating Revenues
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. We also provide additional services that are not managed through our Solid Waste business, including operations managed by both our Strategic Business Solutions ("WMSBS") and Energy and Environmental Services ("EES") organizations, recycling brokerage services, landfill gas-to-energy services and certain other expanded service offerings and solutions.
The mix of operating revenues from our major lines of business for three months
ended
2020 2019
Commercial $ 1,063 $ 1,026
Residential 650 640
Industrial 693 680
Other collection 112 109
Total collection 2,518 2,455
Landfill 887 864
Transfer 441 412
Recycling 254 291
Other (a) 430 431
Intercompany (b) (801) (757)
Total $ 3,729 $ 3,696
The "Other" line of business includes (i) our WMSBS organization; (ii) our
landfill gas-to-energy operations; (iii) certain services within our EES
organization, including our construction and remediation services and our
services associated with the disposal of fly ash and (iv) certain other (a) expanded service offerings and solutions. In addition, our "Other" line of
business reflects the results of non-operating entities that provide
financial assurance and self-insurance support for our Solid Waste business,
net of intercompany activity. Activity related to collection, landfill,
transfer and recycling within "Other" has been reclassified to the
appropriate line of business for purposes of the presentation in this table.
(b) Intercompany revenues between lines of business are eliminated in the
Condensed Consolidated Financial Statements included within this report.
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The following table provides details associated with the period-to-period changes in revenues and average yield (dollars in millions):
Period-to-Period Change for the
Three Months Ended
March 31, 2020 vs. 2019
As a % of As a % of
Related Total
Amount Business(a) Amount Company(b)
Collection and disposal $ 72 2.2 %
Recycling commodities (c) (59) (21.0)
Fuel surcharges and mandated fees (16) (10.8)
Total average yield (d) $ (3) (0.1) %
Volume 10 0.3
Internal revenue growth 7 0.2
Acquisitions 29 0.8
Divestitures (1) -
Foreign currency translation (2) (0.1)
Total $ 33 0.9 %
Calculated by dividing the increase or decrease for the current year period (a) by the prior year period's related business revenue adjusted to exclude the
impacts of divestitures for the current year period.
Calculated by dividing the increase or decrease for the current year period (b) by the prior year period's total Company revenue adjusted to exclude the
impacts of divestitures for the current year period.
(c) Includes net impact of commodity price variability and changes in fees.
(d) The amounts reported herein represent the changes in our revenue attributable
to average yield for the total Company.
The following provides further details associated with our period-to-period change in revenues:
Average Yield
Collection and Disposal Average Yield - This measure reflects the effect on our revenue from the pricing activities of our collection, transfer and landfill lines of business, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes and environmental and service fee increases, but also (i) certain average price changes related to the overall mix of services, which are due to the types of services provided; (ii) changes in average price from new and lost business and (iii) price decreases to retain customers.
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The details of our revenue growth from collection and disposal average yield are as follows (dollars in millions):
Period-to-Period Change for the
Three Months Ended
March 31, 2020 vs. 2019
As a % of
Related
Amount Business
Commercial $ 22 2.3 %
Industrial 23 3.6
Residential 12 2.0
Total collection 57 2.5
Landfill 9 1.7
Transfer 6 2.9
Total collection and disposal $ 72 2.2 %
Our strategic pricing efforts continue to focus on ensuring we overcome
inflationary cost pressures and grow margins. This strategy has been most
successful in our collection line of business. Overall, for the first quarter of
2020, we continued to experience growth in our landfill and transfer businesses
with our municipal solid waste business experiencing 3.0% average yield growth.
However, during
Fuel Surcharges and Mandated Fees - These fees, which are predominantly
generated by our fuel surcharge program, declined
Volume
Our revenues from volumes increased
We experienced higher volumes in the first quarter of 2020 particularly during
the first two months of the year due to our continued focus on customer service
and disciplined growth in our collection and disposal business. We experienced
volume growth with existing customers, particularly in our commercial collection
business as a result of proactive efforts taken to work with our customers as
their needs expand to identify service upgrade opportunities. We saw higher
volumes at our transfer stations in the current period driven by one-time event
projects. However, current period volume growth was partially muted by the
clean-up efforts of natural disasters throughout the
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was partially offset by significant volume declines in
Operating Expenses
The following table summarizes the major components of our operating expenses for the three months endedMarch 31 (in millions of dollars and as a percentage of revenues): 2020 2019 Labor and related benefits$ 689 18.5 %$ 667 18.0 % Transfer and disposal costs 278 7.5 263 7.1 Maintenance and repairs 335 9.0 323 8.7 Subcontractor costs 371 9.9 348 9.4 Cost of goods sold 118 3.2 170 4.6 Fuel 76 2.0 101 2.7 Disposal and franchise fees and taxes 145 3.9 143 3.9 Landfill operating costs 109 2.9 91 2.5 Risk management 69 1.9 64 1.7 Other 139 3.7 128 3.6$ 2,329 62.5 %$ 2,298 62.2 %
The increase in volumes in the current periods, as discussed above in Operating
Revenues, in addition to cost inflation, affect the comparability of the
components of our operating expenses. Additionally, the impact of the COVID-19
pandemic began to negatively impact our operations during
Significant items affecting the comparability of operating expenses for the reported periods include:
Labor and Related Benefits - The increase was driven by (i) volume growth in our collection and disposal lines of business; (ii) merit increases and (iii) one additional workday in the current period. This increase was partially offset by lower bonus costs.
Transfer and Disposal Costs - The increase in transfer and disposal costs was largely driven by overall volume growth in our collection and disposal business and, to a lesser extent cost inflation.
Maintenance and Repairs - The increase in maintenance and repairs costs was
largely driven by (i) higher labor costs primarily as a result of annual merit
increases, volume growth in our collection and disposal lines of business, as
well as one additional workday in the current period and (ii) a
Subcontractor Costs - The increase in subcontractor costs was largely driven by (i) overall volume growth in our collection and disposal business, as well as our WMSBS and EES organizations and (ii) cost inflation related to capacity constraints of our subcontractors in certain markets.
Cost of Goods Sold - The decrease in cost of goods sold was primarily driven by lower market prices for recycling commodities.
Fuel - The decrease in fuel costs was primarily due to (i) a benefit from the extension of federal alternative fuel credits during the fourth quarter of 2019 which extended into 2020 and (ii) lower market prices for diesel fuel.
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Landfill Operating Costs - The increase in landfill operating costs was
primarily due to a decrease in the risk-free discount rate, which is based on
the rate for
Risk Management - The increase in risk management costs was primarily due to an increase in claims expense as a result of growth in the business and cost inflation.
Other - The increase in other was primarily due to professional fees related to a company-wide initiative focused on streamlining our operations and optimizing our disposal volume flows.
Selling, General and Administrative Expenses
The following table summarizes the major components of our selling, general and
administrative expenses for the three months ended
2020 2019
Labor and related benefits $ 246 6.6 % $ 265 7.2 %
Professional fees 60 1.6 35 1.0
Provision for bad debts 14 0.4 9 0.2
Other 105 2.8 100 2.7
$ 425 11.4 % $ 409 11.1 %
Significant items affecting the comparison of our selling, general and administrative expenses between reported periods include:
Labor and Related Benefits - The decrease in labor and related benefits costs was primarily due to lower incentive compensation accruals in the current period, partially offset by an increase in headcount, merit increases and one additional workday in the current period.
Professional Fees - The increase in professional fees was primarily driven by consulting fees incurred to plan for the acquisition and integration of Advanced Disposal. The remaining increase is due to our strategic investments in operating, customer-facing and back-office technologies, including the planned implementation of a new enterprise resource planning system.
Provision for Bad Debts - The increase in provision for bad debts can generally
be attributed to
Other - The increase in other expenses was primarily driven by (i) increased infrastructure costs associated with our ongoing investments in technology and (ii) incremental technology costs to transition employees to work-from-home in response to the COVID-19 pandemic. This was partially offset by lower litigation reserves in 2020 as compared to 2019.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and
amortization expenses for the three months ended
2020 2019
Depreciation of tangible property and equipment
138 3.7 127 3.4
Amortization of intangible assets 24 0.6 26 0.7
$ 402 10.8 % $ 366 9.9 %
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The increase in depreciation of tangible property and equipment during the three
months ended
Income from Operations
The following table summarizes income from operations for our reportable
segments for the three months ended
Period-to-Period
2020 2019(c) Change
Solid Waste:
Tier 1 $ 393 $ 398 $ (5) (1.3) %
Tier 2 188 200 (12) (6.0)
Tier 3 264 270 (6) (2.2)
Solid Waste 845 868 (23) (2.6)
Other (a) (25) (18) (7) 38.9
Corporate and Other (b) (247) (229) (18) 7.9
Total $ 573 $ 621 $ (48) (7.7) %
Percentage of revenues 15.4 % 16.8 %
"Other" includes (i) our WMSBS organization; (ii) those elements of our
landfill gas-to-energy operations and third-party subcontract and
administration revenues managed by our EES and WM Renewable Energy
organizations that are not included in the operations of our reportable (a) segments; (iii) our recycling brokerage services and (iv) certain other
expanded service offerings and solutions. In addition, our "Other" segment
reflects the results of non-operating entities that provide financial
assurance and self-insurance support for our Solid Waste business, net of
intercompany activity.
Corporate operating results reflect certain costs incurred for various
support services that are not allocated to our reportable segments. Thesesupport services include, among other things, treasury, legal, information (b) technology, tax, insurance, centralized service center processes, other
administrative functions and the maintenance of our closed landfills. Income
from operations for "Corporate and Other" also includes costs associated with
our long-term incentive program and any administrative expenses or revisions
to our estimated obligations associated with divested operations.
In 2020, we revised allocations between our segments including (i) thediscontinuation of certain allocations from Corporate and Other to Solid (c) Waste and (ii) allocating certain insurance costs from Other to Solid Waste.
Reclassifications have been made to our prior period information for
comparability purposes.
The significant items affecting income from operations for our segments during
the three months ended
Solid Waste - Income from operations in our Solid Waste business increased on a
year-over-year basis due to revenue growth from yield and volume, partially
offset by volume and inflation-related cost increases, particularly in labor
? and repair and maintenance. This earnings growth was more than offset by the
impacts of higher depreciation and amortization, incremental landfill operating
costs, a charge associated with the withdrawal from an underfunded
multiemployer pension plan and an increase in bad debt reserves attributable to
the expected impact from the COVID-19 pandemic.
Corporate and Other - The decrease in income from operations was primarily
driven by increased expenses as a result of (i) preparation for our acquisition
? of Advanced Disposal; (ii) a decrease in the risk-free discount rate used in
the measurement of our environmental remediation obligations and recovery
assets in 2020; (iii) investments we are making in technology and
(iv) incremental costs associated with COVID-19 pandemic
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such as technology costs to transition employees to work-from-home and personal
protective equipment to ensure safety for our frontline employees. These
increases were partially offset by lower incentive compensation accruals in the
current period. Interest Expense, Net
Our interest expense, net was
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of
Other, Net
During the first quarter of 2019, we recognized a
Income Tax Expense
Our income tax expense and effective income tax rates were
The decrease in our income tax expense and effective income tax rate when
comparing the three months ended
On
Liquidity and Capital Resources
The Company consistently generates cash flow from operations that meets and exceeds our working capital needs, payment of our dividends and investment in the business through capital expenditures and acquisitions. We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources, enabling us to plan for our present needs and fund unbudgeted business requirements that may arise during the year, including the anticipated impact from COVID-19. Additionally, the Company is taking numerous actions to manage costs and capital spending without compromising long-term strategic priorities. This includes route optimization initiatives, reducing overtime hours, limiting
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hiring and optimizing our workforce through improved retention and reduced turnover, reducing non-essential selling, general and administrative expenses, reducing incentive compensation costs and lowering capital expenditures to a level that is consistent with anticipated volume changes. Additionally, as a result of the CARES Act discussed above in Income Tax Expense, we currently expect to benefit from the deferral of certain payroll taxes through the end of calendar year 2020. The Company believes that its investment grade credit ratings, large value of unencumbered assets and modest leverage enable it to obtain adequate financing to meet its ongoing capital, operating and other liquidity requirements, despite the disruptions and challenges presented by the COVID-19 pandemic. The long-term impacts from COVID-19 on our business, financial condition and operating results cannot be predicted with reasonable certainty at this time.
Summary of Cash and Cash Equivalents,
The following is a summary of our cash and cash equivalents, restricted trust and escrow accounts and debt balances (in millions):
March 31, December 31,
2020 2019
Cash and cash equivalents $ 3,125 $ 3,561
Restricted trust and escrow accounts:
Insurance reserves $ 344 $ 270
Final capping, closure, post-closure and environmental remediation funds
109 109
Other 3 4
Total restricted trust and escrow accounts (a) $ 456 $ 383
Debt:
Current portion $ 387 $ 218
Long-term portion 13,065 13,280
Total debt $ 13,452 $ 13,498 (a) Includes
current assets in our Condensed Consolidated Balance Sheets.
As of
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