Waste Connections, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results are reported in U.S. dollars. The company provides solid-waste collection, transfer, disposal and recycling, E&P waste services, and intermodal services in the U.S. and Canada.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.281 billion | $1.206 billion | $3.661 billion | $3.473 billion |
| Operating income | $232.9 million | $218.8 million | $632.3 million | $452.1 million |
| Operating margin | 18.2% | 18.1% | 17.3% | 13.0% |
| Net income attributable to Waste Connections | $150.8 million | $123.2 million | $414.4 million | $261.7 million |
| Diluted EPS | $0.57 | $0.47 | $1.57 | $0.99 |
| Operating cash flow | Not separately stated | Not separately stated | $1.038 billion | $888.4 million |
Q3 revenue rose 6.2% and diluted EPS rose 21%. Nine-month revenue increased 5.4%; operating income and net income increased substantially, principally because the prior-year period included a $77.3 million E&P goodwill impairment and other larger operating charges. Adjusted EBITDA, a non-GAAP measure, was $416.8 million for Q3 (32.5% of revenue) and $1.169 billion for the nine months (31.9%), versus $393.4 million (32.6%) and $1.100 billion (31.7%), respectively.
Q3 growth reflected acquisitions, customer price increases and stronger E&P volumes, partly offset by lower recyclable commodity prices and weaker intermodal revenue. For the nine months, acquisitions added about $155 million of revenue; pricing at existing operations added about $137 million, while volume declines reduced solid-waste revenue by about $28 million. Recycling revenue declined to $69.6 million from $131.4 million for the nine months, mainly due to lower prices for fiber commodities. E&P revenue increased 31.8% for the nine months as drilling activity and disposal volumes improved.
Cash, debt and capital allocation
- Cash and equivalents were $244.4 million at September 30, down from $433.8 million at December 31, 2017. Working capital was a $207.8 million surplus, down from $374.3 million.
- Operating cash flow of $1.038 billion was offset by $870.4 million used in investing and $395.7 million used in financing; cash, cash equivalents and restricted cash ended at $327.8 million.
- Capital expenditures were $373.5 million for the first nine months. Management expected full-year 2018 existing-business capital expenditures of $530–$550 million.
- Gross debt was approximately $3.763 billion before debt issuance costs; the balance sheet reported $3.749 billion including current debt and net of issuance costs. The company had $1.638 billion outstanding on its term loan and $170.0 million drawn on its revolving facility. Revolver availability was $1.252 billion after letters of credit. The credit facility matures in March 2023.
- The company paid $110.4 million in dividends and repurchased 594,474 shares for $42.0 million during the nine months. After quarter-end, it raised the quarterly dividend from $0.14 to $0.16 per share.
- Fifteen individually immaterial businesses were acquired during the nine months. Total consideration was $565.1 million, including $500.1 million cash and $65.0 million debt assumed.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance is provided. Management said cash, the credit facility and expected operating cash generation should fund working capital and foreseeable needs, while noting that credit-market disruptions could impair access to financing.
- Management cited seasonality, with results typically lower in the first and fourth quarters; expected fluctuation between highest and lowest quarters is approximately 10%. Other material business sensitivities include fuel costs, recycled commodity prices, labor costs, E&P activity and foreign exchange.
- Chiquita Canyon’s new operating permit increased taxes and fees; management cited estimated new costs exceeding $300 million. Related disputes include challenges to permit conditions and fees, an environmental-review lawsuit, and a county assessment of solid-waste fees and penalties. Outcomes remain uncertain.
- Other disclosed matters include the Lower Duwamish Waterway Superfund allocation, for which the company cannot estimate its likelihood of liability, a Florida $10 million default judgment under appeal with no accrual recorded, and challenges to permits for the Town of Colonie landfill expansion.
- Landfill closure and post-closure liabilities were $246.9 million on the balance sheet; estimated future expenditures in the contractual-obligations table were $1.406 billion in current dollars, largely due after five years. Estimates depend on engineering assumptions, capacity and timing.
- Interest-rate and fuel hedges mitigate only part of market exposure. A one-percentage-point increase in rates on unhedged variable-rate debt was estimated to reduce annual pretax income by $9.7 million. A $0.10-per-gallon diesel increase over the final three months of 2018 was estimated to reduce pretax income by about $0.9 million.
- The company adopted the new revenue standard in 2018, recording a $13.2 million cumulative increase to retained earnings, mainly from capitalizing sales incentives. It was still evaluating the impact of the lease standard, effective for the company in 2019.
Most important facts for investors to verify
- Whether price increases and acquisition contributions can offset organic volume weakness, divestitures and reduced recycling revenue.
- Whether E&P volume growth is sustainable if oil and gas prices or drilling activity weaken.
- Progress on Chiquita Canyon permit-related litigation, fees and operating costs, and the potential exposure from other environmental and landfill proceedings.
- Debt reduction, interest-rate exposure, capital spending and acquisition funding relative to operating cash flow and available revolver capacity.
- The assumptions underpinning landfill capacity, closure liabilities and future permitted expansions.
- How reported results compare with adjusted non-GAAP measures and the effects of tax estimates, foreign exchange and acquisition accounting.