Waste Connections, Inc. — Q2 2021 Form 10-Q
Business and period: The company provides non-hazardous waste collection, transfer, disposal and recycling services across the U.S. and Canada, as well as oilfield waste and intermodal services. This unaudited filing covers the three and six months ended June 30, 2021. Dollar amounts below are U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $1.534 billion | $1.306 billion | $2.930 billion | $2.658 billion |
| Operating income (loss) | $266.8 million | $(232.4) million | $505.2 million | $(15.4) million |
| Net income (loss) attributable to Waste Connections | $177.0 million | $(227.1) million | $337.4 million | $(84.0) million |
| Diluted earnings (loss) per share | $0.68 | $(0.86) | $1.29 | $(0.32) |
| Adjusted EBITDA (non-GAAP) | $484.9 million | $394.3 million | $918.1 million | $802.8 million |
| Adjusted free cash flow (non-GAAP) | Not stated for the quarter | Not stated for the quarter | $585.8 million | $494.6 million |
- Q2 revenue rose 17.5%; first-half revenue rose 10.2%. Management attributed growth to pricing, higher solid-waste volumes as markets reopened, acquisitions, Canadian-dollar translation and improved recycling commodity prices. E&P revenue remained weaker year over year.
- Q2 operating margin was 17.4%, versus negative 17.8% in 2020; first-half operating margin was 17.2%, versus negative 0.6%. Cost of operations fell to 58.8% of revenue in Q2 from 60.2% and to 59.0% for the first half from 60.2%.
- The comparison is substantially affected by a $417.4 million E&P landfill impairment recorded in Q2 2020. Excluding that item and other adjustments, management reported Q2 adjusted net income of $210.9 million, or $0.81 per diluted share, versus $158.0 million, or $0.60, in Q2 2020. These are non-GAAP measures.
- Operating cash flow for the first half was $848.5 million, up from $753.2 million. Investing cash outflow was $332.8 million, including $271.4 million of property and equipment capital expenditures and $67.5 million for acquisitions. Financing cash outflow was $393.2 million, including $305.6 million of share repurchases and $107.3 million of dividends.
- At June 30, cash and equivalents were $727.4 million; cash, equivalents and restricted cash totaled $837.8 million. Working capital was $414.2 million. Balance-sheet debt and notes payable were approximately $4.77 billion, before unamortized discounts and issuance costs.
Changes versus the prior comparable period
- Solid-waste activity rebounded: management reported Q2 solid-waste volumes up 6.5% year over year and up 9.6% sequentially, with positive volumes in all regions.
- Q2 segment EBITDA increased year over year in every reported region. Canada rose 65.1% to $88.6 million, aided by revenue growth and currency translation; Southern first-half EBITDA declined 1.6% to $192.4 million, reflecting the continuing E&P downturn.
- First-half adjusted free cash flow increased to $585.8 million. The filing notes that operating cash flow benefited from changes in deferred taxes, accounts payable and accrued liabilities, and other long-term liabilities, so the increase should not be viewed as solely operating earnings growth.
- The company repaid $250 million of senior notes due in 2021. Debt carrying value rose modestly from year-end, while cash increased; share repurchases also rose substantially year over year.
Outlook, risks and notable items
- No specific revenue or earnings guidance is stated in the provided filing text. Management expected approximately $675 million of 2021 property and equipment capital expenditures; $271.4 million had been spent in the first half.
- Management said cash, operating cash generation and credit availability should fund working capital and foreseeable needs, but cautioned that credit-market disruption or lender funding constraints could affect access to capital.
- After quarter-end, on July 30, 2021, the company amended and restated its credit agreement: a $2.5 billion facility comprising a $1.85 billion revolving commitment and a $650 million term loan, with scheduled maturity in July 2026. The company reported covenant compliance at June 30. A 3.75x funded-debt-to-EBITDA covenant applies, with a conditional 4.25x limit during material acquisition periods.
- Inflation in labor, fuel, repairs and third-party services may pressure margins; management expects pricing and contract surcharges to offset many cost increases, but acknowledged timing and competitive constraints. Fuel-price, interest-rate, recycled-commodity and Canadian-dollar movements are additional exposures.
- COVID-19 recovery, variants and the pace of economic normalization remain uncertain. E&P waste demand depends on oil and gas activity; a further downturn could lead to additional asset impairment. The company also identifies landfill permitting, environmental compliance, labor, operational and safety, acquisition, insurance and cybersecurity risks.
- Contingencies include the Lower Duwamish Waterway Superfund allocation and potential natural-resource damages, for which the company says it cannot reasonably estimate its allocation or potential liability. Chiquita Canyon landfill expansion and permit-related litigation remains ongoing; the company also says it cannot determine the likely outcome. Management reported no other pending matter it believed would have a material adverse effect.
- Unusual items included a $4.6 million Q2 2021 loss from a facility fire and a $417.4 million E&P impairment in Q2 2020. The company’s landfill portfolio had an estimated average remaining life of about 28 years on permitted capacity, or about 32 years including probable expansions; such expansions are not assured.
Important facts for investors to verify
- Underlying organic revenue, pricing and volume trends, separating acquisition and foreign-exchange contributions from continuing operations.
- Whether margin and adjusted cash-flow improvements persist as COVID-related comparisons normalize and labor, fuel and maintenance costs rise.
- The scale and timing of the company’s $675 million full-year capital expenditure plan, acquisitions, share repurchases and dividends relative to cash generation and debt.
- Debt covenants, available borrowing capacity and the effect of the July 2021 credit-agreement terms and LIBOR transition on interest expense.
- Developments in the Lower Duwamish and Chiquita Canyon matters, landfill expansion approvals, and any resulting costs or operational constraints.
- Reconciliation of non-GAAP adjusted EBITDA, adjusted net income and adjusted free cash flow to GAAP results, and the recurring nature of adjustments and working-capital cash-flow effects.