Waste Connections, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are U.S. dollars. Waste Connections provides integrated non-hazardous waste collection, transfer, disposal and recycling services, as well as E&P waste and intermodal services in the U.S. and Canada.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2,064.7 million | $1,879.9 million | $5,986.3 million | $5,342.6 million |
| Operating income | $353.0 million | $326.8 million | $1,011.8 million | $930.2 million |
| Operating margin | 17.1% | 17.4% | 16.9% | 17.4% |
| Net income attributable to Waste Connections | $229.0 million | $236.9 million | $636.0 million | $641.3 million |
| Diluted EPS | $0.89 | $0.92 | $2.46 | $2.49 |
| Adjusted EBITDA (non-GAAP) | $671.2 million | $588.1 million | $1,866.9 million | $1,657.0 million |
| Adjusted diluted EPS (non-GAAP) | $1.17 | $1.10 | $3.08 | $2.93 |
- Q3 revenue rose 9.8%; nine-month revenue rose 12.1%. Management attributed growth chiefly to core price increases and acquisitions. Existing-operation net pricing added $137.4 million in Q3 and $476.7 million year to date, while reported volume losses were $42.0 million and $95.4 million, respectively.
- Q3 GAAP net income attributable to the company fell about 3.3% year over year despite revenue and operating-income growth. Higher interest and tax expense and increased impairments and other operating items weighed on earnings.
- Q3 cost of operations improved to 58.4% of revenue from 59.6%; SG&A improved to 9.5% from 9.9%. These gains were offset at the operating-margin level by impairments and other operating items, which rose to $56.5 million from $13.4 million.
- Recycling revenue declined to $36.1 million in Q3 from $48.2 million, and to $105.7 million year to date from $178.8 million, primarily due to lower commodity prices. E&P revenue increased, reflecting stronger activity in certain basins.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,570.9 million, up from $1,500.1 million. Capital expenditures were $615.6 million; adjusted free cash flow, a non-GAAP measure, was $969.3 million versus $929.0 million.
- Investing cash outflow was $1,185.6 million, including $573.2 million for acquisitions. Financing cash outflow was $366.5 million. Cash, cash equivalents and restricted cash ended the period at $199.0 million, including unrestricted cash and equivalents of $96.2 million.
- Debt and notes payable totaled $6,836.2 million on the balance sheet, including current and long-term portions; the debt table reports $6,898.4 million before unamortized discounts and issuance costs. The company reported $1,182 million of unhedged floating-rate debt. A one-percentage-point rate increase would reduce annual pretax income by approximately $11.8 million.
- At September 30, $531.6 million was drawn on the revolving facility and $650 million on its term loan; a further $800 million was outstanding under a separate term-loan agreement. The revolving facility showed $1,278.9 million available, before considering other facility details. Credit and term-loan agreements mature in July 2026.
- Working capital was negative $424.0 million. Management said cash, credit facilities and expected operating cash flow should fund foreseeable needs, while noting that capital-market or lender disruptions could constrain access to funds.
Outlook, material items and risks
- Management expected 2023 capital expenditures of approximately $920 million, net of asset-disposal proceeds. This is the principal quantified outlook in the supplied filing; no full-year revenue or earnings guidance is stated here.
- Q3 impairments and other operating items included $31.3 million to increase contingent-consideration liabilities, $25.0 million of asset impairment charges and $3.0 million of legal-settlement charges. Nine-month charges totaled $69.2 million. Nine-month SG&A also included $15.1 million of executive separation costs.
- On October 25, 2023, the board raised the quarterly dividend from $0.255 to $0.285 per share, payable November 28, 2023. The Q3-period dividend was $0.255 per share. The company renewed its share-repurchase authorization for up to 12,881,534 shares through August 9, 2024, but made no repurchases in the first nine months of 2023.
- In the Jefferson Parish landfill odor litigation, the court found general causation for certain alleged injuries; the company disputes liability and says it cannot determine the likelihood or allocation of any outcome. A trial involving 13 plaintiffs was scheduled to begin August 5, 2024, with class-certification briefing due by June 26, 2024.
- For the Chiquita Canyon landfill expansion disputes, a 2022 settlement requires a permit-modification application and satisfaction of contingencies before the related lawsuits can be dismissed. The company says the outcome remains uncertain; estimated new costs under the permit conditions were stated to exceed $300 million.
- Other exposures include landfill closure and post-closure obligations ($376.6 million recorded liability), regulatory and permitting matters, fuel and recyclable-commodity prices, labor and insurance costs, interest rates, foreign exchange, and oil-and-gas activity. Management estimates average remaining landfill life at approximately 33 years based on permitted capacity, or 36 years including probable expansions.
Most important facts for investors to verify
- Whether pricing and acquisition-led growth can offset continuing volume losses and weaker recycling commodity prices.
- Whether operating-margin pressure from impairments, insurance claims, labor costs and higher interest expense persists.
- Debt refinancing and interest-rate exposure ahead of the July 2026 facility maturities, and the extent of available revolver capacity.
- Actual 2023 capital expenditures versus the approximately $920 million estimate and resulting free cash flow.
- Developments in the Jefferson Parish and Chiquita Canyon matters, including potential liability, permitting outcomes and related costs.
- Performance of non-GAAP adjusted EBITDA, adjusted EPS and adjusted free cash flow against GAAP results and the company’s stated calculation methods.