Waste Connections, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, with comparisons to Q1 2022. Amounts are U.S. dollars. Waste Connections provides non-hazardous waste collection, transfer, recycling and disposal services, as well as E&P waste and intermodal services in the U.S. and Canada.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1.901 billion | $1.646 billion | +15.4% |
| Operating income | $314.7 million | $273.9 million | +14.9% |
| Operating margin | 16.5% | 16.6% | -0.1 percentage point |
| Net income attributable to Waste Connections | $197.8 million | $180.3 million | +9.7% |
| Diluted GAAP EPS | $0.77 | $0.69 | Up |
| Adjusted EBITDA (non-GAAP) | $566.9 million | $502.1 million | +12.9% |
| Cash from operating activities | $442.4 million | $440.9 million | Nearly flat |
| Adjusted free cash flow (non-GAAP) | $274.0 million | $320.4 million | Down 14.5% |
Revenue growth reflected $132.6 million from acquisitions and $183.5 million of net price increases at existing operations, partly offset by $20.5 million of volume losses. Lower recyclable commodity prices reduced revenue by $29.9 million; E&P waste revenue increased $7.8 million. Higher costs, particularly labor, repairs, trucking and fuel, contributed to cost of operations rising to 60.3% of revenue from 60.1%. SG&A rose to 10.2% of revenue from 9.9%. Net margin declined to 10.4% from 11.0%, while interest expense increased 65.4% to $68.4 million, largely due to higher borrowings and rates.
Cash, debt and liquidity: Cash and equivalents were $133.9 million at March 31, 2023; restricted cash was a further $106.6 million. Total debt and notes payable were approximately $7.0 billion gross ($6.92 billion long-term, net of discounts and issuance costs). The company had $1.16 billion available under its revolving credit facility, with $650.6 million drawn, plus $650 million under its Credit Agreement term loan and $800 million under a separate term loan. The credit facilities mature in July 2026. Working capital was negative $248.9 million, improved from a $395.0 million deficit at year-end 2022. Capital expenditures were $175.8 million in the quarter; management expects approximately $895 million for full-year 2023, net of disposal proceeds.
Material changes and operating trends
- Collection revenue increased across commercial, residential and industrial/construction roll-off services. Landfill and transfer revenue also grew; recycling revenue fell to $31.3 million from $63.1 million, primarily on weaker commodity prices.
- Segment EBITDA increased in Eastern, Southern, Western and Central, but declined in Canada. EBITDA margins weakened in Eastern, Western and Canada; Southern and Central margins improved. Weather-related volume losses affected Western operations, while hurricane-related construction and demolition activity supported Southern results.
- Acquisitions were lower in cash cost than the prior-year quarter: $144.6 million paid for acquisitions versus $355.2 million. The company acquired four individually immaterial businesses in Q1 2023.
- Quarterly dividends paid increased to $0.255 per share from $0.230. No shares were repurchased in Q1 2023, compared with $425.0 million of buybacks in Q1 2022.
Outlook, risks and unusual items
- Outlook: The filing provides a 2023 capital expenditure estimate of approximately $895 million, but no earnings or revenue guidance. Management expects operating cash, cash on hand and credit facilities to fund working capital and planned capital needs. The company notes customary seasonal softness in Q1 and possible seasonal operating-cost increases.
- Cost and market exposure: Management cites inflation in labor, fuel, materials, repairs and third-party services. Contractual pass-throughs and pricing increases may offset some costs, but timing and competitive pressures could leave costs unrecouped. A one-percentage-point increase in rates on unhedged floating-rate debt would reduce annual pre-tax income by about $13 million. A $0.10-per-gallon diesel increase over the remaining nine months of 2023 would reduce pre-tax income by about $3.5 million.
- Legal contingencies: In Jefferson Parish landfill odor litigation, the court found general causation for certain alleged damages; the company says it cannot estimate the likelihood or allocation of any liability. A trial involving selected plaintiffs was scheduled for September 2023, subject to the company’s appellate challenge. For the Chiquita Canyon landfill permit dispute, a settlement requires a permit modification application and other conditions before dismissal; the company cannot determine the outcome. The filing describes estimated new CUP costs in excess of $300 million.
- Landfill obligations: Final capping, closure and post-closure liabilities were $361.9 million on the balance sheet. The company estimates average remaining landfill life at approximately 31 years on permitted capacity, or approximately 34 years including probable expansions; expansions and permits are not assured.
- Subsequent events: Effective April 1, the company reorganized into six geographic operating segments for Q2 reporting. On April 24, 2023, CEO Worthing F. Jackman departed and founder Ronald J. Mittelstaedt became CEO. The board approved a $0.255 quarterly dividend payable May 24, 2023.
Management reported disclosure controls were effective as of March 31, 2023, with no material change in internal control over financial reporting during the quarter. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether pricing continues to offset wage, fuel, repair and other inflation, and whether volume losses and weaker recycling prices persist.
- How higher interest expense, approximately $7.0 billion of gross debt and the July 2026 credit-facility maturities affect interest costs and refinancing needs.
- Execution and funding of the approximately $895 million 2023 capital expenditure plan alongside acquisitions and dividends.
- Developments, timing and potential financial exposure in the Jefferson Parish and Chiquita Canyon matters; the filing does not provide a clear estimate of potential loss.
- Progress and approvals for landfill expansions included in estimated capacity, and sensitivity of landfill liabilities to updated cost and capacity estimates.
- Effects of the CEO transition and new segment structure on operating execution and subsequent-period comparability.