Waste Connections, Inc. — Q3 2017 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2017. Waste Connections provides solid-waste collection, transfer, disposal and recycling services in the U.S. and Canada, as well as exploration and production (E&P) waste services and intermodal services. Unless noted, amounts below are U.S. dollars. Comparisons—especially for the nine-month period—are affected by the June 1, 2016 Progressive Waste acquisition: 2017 includes the acquired operations for the full period, while 2016 includes them only from June 1.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,206.5 million | $1,084.9 million | $3,473.3 million | $2,327.2 million |
| Operating income | $218.8 million | $158.7 million | $452.1 million | $313.1 million |
| Operating margin | 18.1% | 14.6% | 13.0% | 13.5% |
| Net income attributable to Waste Connections | $123.2 million | $88.6 million | $261.7 million | $160.9 million |
| Diluted EPS | $0.47 | $0.34 | $0.99 | $0.73 |
| Adjusted EBITDA (non-GAAP) | $393.4 million | $342.3 million | $1,099.8 million | $745.6 million |
- Q3 revenue rose 11.2%; management attributed growth to acquisitions, customer price increases, higher volumes, recovering E&P activity and recyclable-commodity pricing. Nine-month revenue rose 49.2%, substantially reflecting acquisitions, including Progressive Waste.
- Q3 operating margin improved 3.5 percentage points, helped by lower SG&A as a share of revenue, improved internalization of waste and operating leverage. Nine-month operating margin declined 0.5 percentage points, chiefly because of higher impairment and other operating charges.
- Nine-month operating cash flow was $888.4 million, versus $538.8 million; investing cash outflow was $683.6 million, including $394.0 million of acquisition payments and $317.4 million of capital expenditures. Financing provided $135.2 million. Adjusted free cash flow, a non-GAAP measure, was $614.0 million.
- At September 30, cash was $495.3 million and working capital surplus was $373.2 million. Long-term debt and notes payable were $3.94 billion, with gross debt before debt issuance costs and current portion of $3.95 billion. The company reported $1.12 billion available under its revolver and $221.6 million of letters of credit outstanding.
- Capital expenditures were $317.4 million for the first nine months; management expected approximately $460 million for full-year 2017. Quarterly dividends paid were $0.12 per share; on October 25, the board raised the regular quarterly dividend to $0.14.
Material changes and unusual items
- The company acquired Groot Industries in January 2017 and 11 other individually immaterial solid-waste businesses during the nine months. Consideration for 2017 acquisitions totaled $545.5 million, including cash, assumed debt, seller notes and exchanged operations.
- Nine-month impairments and other operating items were $141.3 million, compared with $4.6 million in 2016. These included a $77.3 million E&P goodwill impairment, a $35.7 million charge to reduce assets held for disposal to fair value, and contingent-consideration and contract write-off charges. Q3 charges in this line were $0.8 million.
- The E&P segment’s revenue and EBITDA increased as drilling and disposal volumes recovered from earlier weakness. The company cautioned that a renewed decline in oil and gas prices could reduce activity and lead to further asset impairments.
- Operations divested during the nine months generated $104.1 million of consideration, including cash and non-cash assets. Certain Southern segment operations remained classified as held for sale; the company recorded an estimated $19.2 million disposal loss during the period.
- Foreign-currency translation added $155.2 million to other comprehensive income for the nine months, contributing to accumulated other comprehensive income of $114.8 million at period end.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of approximately $460 million and stated that cash, operating cash generation and credit facilities should fund working capital and foreseeable cash needs, while noting capital-market and lender-funding risks.
- If recyclable-commodity price declines that began in September continued, management estimated recyclable-commodity revenue could be about 6% lower in Q4 2017 and 27% lower in full-year 2018 than the comparable periods. These were conditional estimates, not formal earnings guidance.
- Key operating sensitivities include labor and fuel costs, weather and seasonality, commodity prices, E&P activity, competition and the ability to renew or expand landfill permits. Management estimated that a one-percentage-point rise in rates on unhedged floating-rate debt would reduce annual pretax income by approximately $15.0 million. Fuel and interest-rate hedges mitigate, but do not eliminate, exposure.
- At Chiquita Canyon, the company challenged Los Angeles County permit conditions it says impose significant operating restrictions and fees; its complaint estimated new fees and taxes could exceed $250 million over the permit’s 30-year life. A separate third-party lawsuit challenges the permit’s environmental review. Outcomes were uncertain.
- A subsidiary is a potentially responsible party at Seattle’s Lower Duwamish Waterway Superfund site. The company said it could not reasonably determine its allocation or potential liability; cleanup costs for the site were estimated by the EPA at about $342 million in present-value dollars, before possible additional costs.
- Landfill accounting depends on estimates of capacity, closure costs and permitting. Estimated average remaining life was approximately 27 years based on permitted capacity, or 29 years including probable expansions; expansion approvals are not assured.
Most important facts for investors to verify
- Separate acquisition-driven growth from underlying price and volume trends, particularly in the nine-month comparisons affected by Progressive Waste.
- Review the size and nature of the $141.3 million nine-month impairment and other operating charges, and monitor further asset-sale or impairment effects.
- Assess debt repayment capacity, revolver availability, covenant compliance and exposure to higher interest rates, alongside planned capital expenditures and acquisitions.
- Track recyclable-commodity pricing, E&P activity, fuel and labor costs, and whether management’s conditional revenue estimates materialize.
- Monitor the Chiquita Canyon permit litigation and the Lower Duwamish environmental allocation process; the filing does not provide a clear estimate of potential liability for these matters.