Waste Connections, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Figures are in U.S. dollars unless stated otherwise. The company provides non-hazardous waste collection, transfer, recycling and disposal services, as well as E&P waste and intermodal services.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $1.880 billion | $1.597 billion | +17.7% |
| Operating income | $326.8 million | $285.1 million | +14.6% |
| Operating margin | 17.4% | 17.9% | Down 0.5 percentage points |
| Net income attributable to Waste Connections | $236.9 million | $114.4 million | More than doubled |
| Diluted EPS | $0.92 | $0.44 | Up from prior-year period |
| Segment EBITDA margin | 30.4% | 31.0% | Down 0.6 percentage points |
| Adjusted EBITDA (non-GAAP) | $588.1 million | $505.6 million | +16.3% |
| Adjusted diluted EPS (non-GAAP) | $1.10 | $0.89 | +23.6% |
The prior-year quarter included a $115.3 million loss on early extinguishment of debt, which reduced reported 2021 earnings and makes the GAAP year-over-year profit comparison less representative of underlying operating growth. Q3 cost of operations rose to 59.6% of revenue from 59.2%; higher fuel, transportation and acquisition-related costs pressured margins.
Nine-month results: Revenue was $5.343 billion, up 18.0%; operating income was $930.2 million, up 17.7%; net income attributable to the company was $641.3 million, up 42.0%; diluted EPS was $2.49 versus $1.72. Adjusted EBITDA was $1.657 billion versus $1.424 billion, and adjusted diluted EPS was $2.93 versus $2.39.
Cash flow and liquidity: For the first nine months, operating cash flow was $1.500 billion versus $1.270 billion. Capital expenditures were $618.3 million; adjusted free cash flow, a non-GAAP measure, was $929.0 million versus $825.8 million. Cash and equivalents were $200.2 million at September 30. Working capital was negative $148.4 million, an improvement from a $200.0 million deficit at year-end 2021. The company reported $1.069 billion available under its revolving facility, after borrowings and letters of credit.
Debt: Reported debt and notes payable were approximately $6.219 billion, net of unamortized discounts and issuance costs, versus approximately $5.047 billion at December 31, 2021. The increase reflects acquisition and financing activity. The company issued $500 million of 3.20% notes due 2032 and $750 million of 4.20% notes due 2033 during 2022. On October 31, after quarter-end, it drew an $800 million term loan, primarily intended to repay revolving borrowings, and amended its credit agreement to transition certain benchmark rates from LIBOR to SOFR.
Changes, business drivers and management commentary
- Revenue growth reflected acquisitions, price increases and stronger E&P activity. Acquisitions added $154.1 million to Q3 revenue; existing-operation price increases and surcharges added $154.2 million.
- Q3 volume losses totaled $22.3 million, including declines tied mainly to two nonrenewed residential collection contracts and lower landfill disposal volumes, partly offset by roll-off growth.
- Existing-operation costs rose amid higher wages, fuel, third-party trucking, maintenance and disposal costs. Management said pricing can offset many inflationary increases, but competition or contract timing may leave some costs unrecovered.
- Recycling commodity revenue fell $19.5 million in Q3 as prices declined. E&P revenue increased with higher drilling and production activity. Canadian-dollar weakness reduced Q3 revenue by $7.8 million.
- Fifteen individually immaterial businesses were acquired in the first nine months. Cash paid for acquisitions was $1.273 billion, compared with $561.3 million in the prior-year period.
- Cash repurchases were $425.0 million for the first nine months; dividends paid were $177.7 million. The quarterly dividend was increased after quarter-end from $0.23 to $0.255 per share.
Outlook, risks and unusual items
- Management expected full-year 2022 property-and-equipment capital expenditures of approximately $850 million, net of asset sales, and stated that cash, operating funds and credit availability should meet foreseeable cash needs. The filing does not provide a clear earnings or revenue guidance range.
- Risks highlighted include inflation and labor constraints, fuel and recycled-commodity price volatility, interest-rate exposure, foreign exchange, seasonality, customer credit, regulatory and environmental requirements, acquisitions, and uncertainty in E&P activity. A one-percentage-point increase in rates on September 30 unhedged floating-rate debt was estimated to reduce annual pre-tax income by about $4.4 million.
- Q3 impairments and other operating items included an $8.4 million lawsuit judgment accrual and $5.5 million of contract write-offs. The filing does not clearly identify the lawsuit connected to that accrual.
- A settlement was reached in October 2022 with Los Angeles County concerning the Chiquita Canyon landfill CUP litigation. Resolution remains contingent on approval of a CUP modification application and other conditions; the company said it could not determine the likelihood of an outcome. The company had previously estimated new CUP costs in excess of $300 million.
- Landfill accounting estimates remaining life at approximately 30 years based on permitted capacity, or 34 years including probable expansions. Expansion approvals are not assured.
Important facts for investors to verify
- Whether price increases continue to offset labor, fuel, trucking and other operating-cost inflation without further margin erosion.
- How much reported growth comes from acquisitions versus existing operations, and whether acquired businesses meet expected returns.
- Debt reduction, interest costs and cash generation after acquisition spending, capital expenditures, dividends and share repurchases.
- Progress and potential financial consequences of the Chiquita Canyon settlement and CUP modification process.
- Exposure to fuel, recycling-market, E&P activity, interest-rate and Canadian-dollar changes, along with landfill capacity and permitting assumptions.