Waste Connections, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed July 30, 2019. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars unless noted. The company provides solid-waste collection, transfer, disposal and recycling services in the U.S. and Canada, along with E&P waste and intermodal services.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.370 billion | $1.240 billion | $2.614 billion | $2.380 billion |
| Operating income | $222.1 million | $210.7 million | $407.0 million | $399.4 million |
| Operating margin | 16.2% | 17.0% | 15.6% | 16.8% |
| Net income attributable to Waste Connections | $148.8 million | $138.7 million | $274.5 million | $263.6 million |
| Diluted EPS | $0.56 | $0.52 | $1.04 | $1.00 |
| Adjusted EBITDA, non-GAAP | $425.3 million | $395.5 million | $811.0 million | $752.4 million |
Revenue rose 10.5% in Q2 and 9.8% year to date. Management attributed growth principally to acquisitions and customer price increases; Q2 also benefited from existing-business volume gains. Higher operating costs compressed margins: cost of operations increased to 59.5% of revenue in Q2 from 58.5%, and to 59.3% year to date from 58.2%. Interest expense rose 14.9% in Q2 and 15.0% year to date, largely reflecting the 2028 and 2029 senior-note issuances.
Q2 price increases at existing operations added $58.5 million of revenue, including $56.3 million of core pricing. Acquisitions contributed approximately $84.2 million of incremental revenue in Q2; divestitures reduced revenue by approximately $6.8 million. Lower recycled-commodity prices reduced revenue by $7.1 million in Q2, while the weaker Canadian dollar reduced it by $6.4 million. E&P revenue increased with drilling activity and disposal volumes.
Cash flow, liquidity and debt
- Six-month operating cash flow was $753.0 million, up from $664.9 million. Investing cash outflow was $640.3 million, including $381.4 million for acquisitions and $253.8 million in capital expenditures. Financing cash outflow was $223.3 million.
- Management-reported adjusted free cash flow, a non-GAAP measure, was $503.9 million, versus $472.7 million. The measure includes specified adjustments; it is not a substitute for GAAP cash flow.
- At June 30, cash and equivalents were $209.2 million, restricted cash $84.5 million, and working capital surplus $47.7 million. Working capital surplus fell from $232.2 million at December 31, 2018, mainly because cash declined and lease accounting added current liabilities.
- Long-term debt and notes payable were $4.083 billion, net of issuance costs, with $0.8 million classified as current. The company had $472.2 million drawn on its revolver, $700 million drawn on its term loan, and $982.2 million of revolver availability; letters of credit outstanding were $108.1 million. Credit Agreement maturity is March 2023.
- In April 2019, the company issued $500 million of 3.50% senior notes due 2029. It reported compliance with applicable note covenants at June 30. Management intends to redeem $175 million of 5.25% notes due 2019 on November 1, 2019, using Credit Agreement borrowings.
Material changes and operating developments
- Acquisitions were a significant growth contributor: ten individually immaterial businesses were acquired in the first half for total consideration of $432.0 million, including $381.4 million cash and $50.6 million debt assumed. Goodwill increased to $5.317 billion from $5.032 billion at year-end.
- Segment EBITDA increased across most segments, while Canada was nearly flat year over year. Consolidated segment EBITDA margin was 30.2% in Q2 versus 31.2%; year-to-date it was 30.3% versus 30.9%. Segment EBITDA is a non-GAAP measure.
- The company adopted lease accounting on January 1, 2019, recording $206.5 million of operating lease right-of-use assets at adoption. At June 30, operating lease liabilities totaled $201.1 million. Adoption did not materially affect reported net income or cash flows.
- The quarterly dividend was $0.16 per share, up from $0.14 in the comparable 2018 period. No shares were repurchased in the first half of 2019; the company renewed its normal-course issuer bid in July, subject to approvals.
Outlook, risks and contingencies
The filing does not provide a specific earnings or revenue forecast. Management expected 2019 capital expenditures of $575 million to $600 million, compared with $253.8 million spent in the first half, and said cash, operating cash generation and credit facilities should fund foreseeable needs. It also expected seasonal variation, with revenues generally strongest in the second and third quarters; the company estimates a roughly 12% spread between highest and lowest quarters.
Key operating risks include cost inflation in labor, transport, maintenance and fuel; competition and contract renewals; acquisition integration and availability; recycling commodity prices; E&P activity and oil and gas prices; foreign-exchange movements; landfill permitting and capacity; and environmental regulation. The company had no fuel hedges outstanding at June 30, although it had fixed-price fuel purchase contracts. It estimated that a $0.10-per-gallon diesel price increase over the remainder of 2019 would reduce pretax income by about $2.2 million. A one-percentage-point increase in interest rates on unhedged floating-rate debt was estimated to reduce annual pretax income by about $3.2 million.
Material legal and environmental matters include the Lower Duwamish Waterway Superfund process, where estimated site cleanup costs were approximately $342 million but the company could not determine its allocation or potential liability; Chiquita Canyon landfill expansion litigation, including contested permit conditions and estimated new costs exceeding $300 million; and appeals concerning the Town of Colonie landfill expansion. The company states that outcomes and potential liabilities in the noted matters cannot currently be determined. It also reported $280.1 million of landfill closure and post-closure liabilities at June 30 and approximately $1.039 billion of surety bonds supporting financial assurance obligations.
Investor verification priorities
- Reconcile acquisition-driven growth and pricing with organic volumes, especially Southern and Canada, and assess whether weaker recycling and intermodal revenue persists.
- Track cost inflation and operating-margin trends against pricing, including labor, maintenance, third-party transportation, leachate and fuel costs.
- Review debt repayment and refinancing plans, revolver availability, interest-rate exposure and the November 2019 maturity of the $175 million notes.
- Monitor planned capital expenditures, acquisition spending, cash conversion and the assumptions and exclusions in adjusted EBITDA and adjusted free cash flow.
- Follow landfill expansion approvals and the outcomes or potential financial exposure from the Duwamish and Chiquita Canyon matters; the filing does not quantify Waste Connections’ likely exposure in these proceedings.