Waste Connections, Inc. — Q2 2020 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. Dollar amounts below are U.S. dollars; financial statement figures are converted from thousands to millions where applicable.
Business context and performance
Waste Connections provides non-hazardous solid-waste collection, transfer, disposal and recycling services in the U.S. and Canada, alongside E&P waste services and Pacific Northwest intermodal operations. COVID-19 reduced commercial, roll-off, transfer and disposal activity; weak oil and gas activity further pressured E&P.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,305.8m | $1,369.6m | $2,658.2m | $2,614.3m |
| Operating income (loss) | ($232.4m) | $222.1m | ($15.4m) | $407.0m |
| Net income (loss) attributable to Waste Connections | ($227.1m) | $148.8m | ($84.0m) | $274.5m |
| Diluted EPS | ($0.86) | $0.56 | ($0.32) | $1.04 |
| Segment EBITDA margin | 29.7% | 30.2% | 29.7% | 30.3% |
| Adjusted EBITDA (non-GAAP) | $394.3m | $425.3m | $802.8m | $811.0m |
| Adjusted net income (non-GAAP) | $158.0m | $181.3m | $328.5m | $345.2m |
Cash flow, debt and liquidity
- First-half cash from operations was $753.2m, essentially unchanged from $753.0m a year earlier. Capital expenditures for property and equipment were $268.7m; adjusted free cash flow, a non-GAAP measure, was $494.6m versus $503.9m.
- Cash and equivalents were $790.6m at June 30, 2020. Working capital surplus was $465.6m. The company reported $1.26bn of remaining borrowing capacity under its credit agreement, which matures in March 2023.
- Debt and notes payable were approximately $4.70bn, including $4.69bn long-term and $7.7m current. Net debt based on reported cash was approximately $3.91bn. The company issued $600m of 2.60% notes due 2030 and $500m of 3.05% notes due 2050 during the first half.
- Cash dividends paid in the first half were $96.9m; the quarterly dividend was $0.185 per share. The company repurchased $105.7m of shares during the first half.
- Management expected approximately $550m of 2020 property-and-equipment capital expenditures, funded principally with cash, operating funds and credit-facility borrowings.
Material changes and drivers
- Q2 revenue declined 4.7% year over year, while first-half revenue rose 1.7%, supported by acquisitions and pricing. In Q2, acquisitions added about $45m of revenue and net price increases added $54.4m; lower volumes reduced existing-business solid-waste revenue by $121.2m.
- Management reported same-store solid-waste revenue down 5.3% in Q2. It said volumes exceeded its initial expectations and were about 0.7 percentage points better than the expectations it provided in May. Excluding the most impacted Northeast and Canadian markets, same-store solid-waste revenue was down 1.3%.
- E&P revenue fell 43.3% in Q2, to $36.4m, and E&P segment EBITDA fell 61.1%, to $13.0m. Canada segment revenue declined 14.5% and EBITDA declined 20.7% in Q2.
- A $417.4m impairment charge on property and equipment at four E&P landfills was the principal cause of the reported loss. Total impairments and other operating items were $437.3m in Q2. The impairment followed weaker oil and gas activity and lower projected future cash flows; management said a 10% change in estimated annual cash flows would change the charge by approximately $3m.
- Despite the impairment, Q2 adjusted EBITDA was $394.3m and adjusted EPS was $0.60, both non-GAAP measures; comparable prior-year figures were $425.3m and $0.69.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or volume guidance. Management said the future effects of COVID-19 remained uncertain and depended on its spread, containment measures and the pace of economic recovery.
- Management described cost and cash-preservation steps including hiring limits, wage freezes for certain personnel, reduced travel and discretionary spending, suspension of the 401(k) match effective June 1, and deferral of $13.7m in qualifying U.S. payroll taxes under the CARES Act.
- Risks include prolonged COVID-related demand weakness, volatile oil and gas activity, customer credit deterioration, fuel and labor costs, interest-rate and currency changes, landfill permitting and capacity, and environmental regulation. The company had no fuel hedge agreements in place at June 30; fixed-price contracts covered 33.9m of its expected 79.3m gallons of 2020 fuel purchases.
- Material legal and environmental matters include the Lower Duwamish Superfund allocation and potential natural-resource-damage process, for which the company said it could not reasonably determine its potential liability; Chiquita Canyon landfill-permit litigation; and appeals challenging the Colonie landfill expansion permits. Outcomes and any resulting costs were uncertain.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether solid-waste volumes recover as reopening progresses, and whether the reported Q2 improvement versus management’s May expectations is sustained.
- The trajectory of E&P revenue and margins, and whether further impairment charges are needed as oil and gas activity and forecasts change.
- Cash generation after capital expenditures, dividends and repurchases, alongside leverage, debt maturities and available credit capacity.
- Actual 2020 capital spending versus the approximately $550m estimate, and the effect of COVID-related cost actions and deferred payroll taxes.
- Developments in landfill permitting and the cited environmental and legal proceedings, including potential liabilities that the filing says cannot yet be estimated.