Waste Connections, Inc. — Q2 2017 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2017. Waste Connections provides solid-waste collection, transfer, disposal and recycling services in the U.S. and Canada, along with E&P waste services and intermodal operations. Comparisons are materially affected by the Progressive Waste acquisition: its results are included from June 1, 2016, so the 2016 second quarter includes only one month of those operations. Amounts below are U.S. dollars.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,175.6 million | $727.6 million | $2,266.8 million | $1,242.3 million |
| Operating income | $206.9 million | $63.5 million | $233.3 million | $154.5 million |
| Operating margin | 17.6% | 8.7% | 10.3% | 12.4% |
| Net income attributable to Waste Connections | $123.7 million | $27.5 million | $138.5 million | $72.3 million |
| Diluted EPS | $0.47 | $0.13 | $0.52 | $0.37 |
| Segment EBITDA | $363.3 million | $158.6 million | $682.2 million | $318.4 million |
| Adjusted EBITDA (non-GAAP) | $373.6 million | $233.6 million | $706.4 million | $403.3 million |
Q2 revenue rose 61.6% year over year; the company attributed approximately $390.8 million of the increase to acquisitions, including $336.6 million from Progressive Waste. Existing-operation pricing, solid-waste volumes, E&P activity and improved recyclable commodity prices also contributed. Six-month revenue increased 82.5%, with approximately $929.8 million attributed to acquisitions. Acquisition timing makes headline growth rates poor measures of organic growth.
Cost of operations was 58.4% of revenue in Q2, versus 57.2% a year earlier; for the six-month period it was 58.6%, versus 56.6%. Management attributed pressure in part to acquired operations with lower-than-company-average margins and higher maintenance, labor, transport and other costs. Q2 SG&A was 10.7% of revenue, down from 21.0%, partly because the prior-year period included acquisition, integration, severance, excise-tax and share-compensation costs. Six-month operating margin fell to 10.3%, principally reflecting impairment and other operating charges.
For the six months, cash provided by operations was $551.9 million, investing cash outflow was $528.0 million and financing cash inflow was $221.1 million. Capital expenditures were $202.6 million; acquisition payments were $347.9 million. Cash and equivalents were $399.7 million at June 30, 2017, up from $154.4 million at year-end 2016. Working capital was a $323.8 million surplus.
At June 30, total debt and notes payable were $3,975.4 million before debt issuance costs, including $11.5 million current; the contractual-obligations table reports $3,991.9 million of long-term debt obligations. The company had $1.09 billion available under its revolving credit facility and $215.9 million of letters of credit outstanding. The stated balance-sheet carrying amount of long-term debt and notes payable, net of issuance costs, was $3,963.9 million.
Material changes, outlook and risks
- Acquisitions and financing: The company acquired Groot Industries in January 2017, with approximately $200 million in annual revenue, and made other acquisitions. It issued $400 million of senior notes in April 2017, due in 2024 and 2027, at fixed rates of 3.24% and 3.49%. Total debt rose from year-end 2016.
- Unusual charges: Six-month impairments and other operating items were a net expense of $140.5 million, versus a net gain of $3.0 million in 2016. The 2017 amount included a $77.3 million E&P goodwill impairment, a $42.0 million charge on assets held for disposal, and an $11.3 million increase in contingent consideration. Q2 included a net gain of $1.2 million in this line, including reversal of some prior held-for-sale valuation charges.
- Management outlook: The company expected approximately $460 million of 2017 capital expenditures for its existing business. Management stated that cash, the Credit Agreement and expected operating cash flows should provide adequate funding for foreseeable working-capital and other cash needs, while noting capital-market and lender-funding risks. No revenue or earnings guidance is stated in the supplied filing text.
- Dividends and repurchases: The quarterly dividend was $0.12 per share; $63.5 million was paid during the first half. No shares were repurchased under the existing issuer bid during the first half. The board approved a proposed annual renewal of the issuer bid, subject to regulatory approval, after the existing bid expires August 7, 2017.
- Contingencies and operating risks: The company could not reasonably determine its potential liability in the Lower Duwamish Waterway Superfund matter, including possible cleanup and natural-resource damages. Chiquita Canyon’s permit, approved in revised form July 25, 2017, includes operating restrictions and fees that management said could reduce profitability; the company was considering legal challenges. Other risks include landfill permitting and expansion, E&P demand and commodity prices, fuel and interest rates, labor and insurance costs, acquisition integration, and environmental regulation.
- Landfill and market exposure: Management estimated average remaining landfill life of about 25 years based on permitted capacity, or 31 years including probable expansions. Expansion approvals are not assured. A 1-percentage-point increase in rates on unhedged variable-rate debt was estimated to reduce annual pretax income by approximately $15.4 million. A $0.10-per-gallon diesel-price increase over the remaining six months of 2017 was estimated to reduce pretax income by about $1.7 million.
Important facts for investors to verify
- Separate acquisition-driven growth from pricing, volume and other organic performance; 2016 comparisons include only one month of Progressive Waste.
- Review the E&P goodwill impairment assumptions and the valuation and timing of held-for-sale disposals and contingent consideration.
- Confirm debt maturities, revolver availability, interest-rate exposure and the company’s ability to fund acquisitions, capital spending and dividends.
- Track the final Chiquita Canyon permit conditions and any appeal, and developments in the Lower Duwamish Waterway allocation and cleanup process.
- Assess landfill expansion approvals, E&P activity, recycling prices, fuel costs and the impact of higher operating costs on margins.