Waste Connections, Inc. — Q2 2022 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2022, compared with the same 2021 periods. Waste Connections provides non-hazardous solid-waste collection, transfer, disposal and recycling services across the U.S. and Canada, alongside E&P waste and intermodal services. Dollar amounts below are U.S. dollars.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $1.816bn | $1.534bn | $3.463bn | $2.930bn |
| Operating income | $329.6m | $266.8m | $603.4m | $505.2m |
| Operating margin | 18.1% | 17.4% | 17.4% | 17.2% |
| Net income attributable to Waste Connections | $224.1m | $177.0m | $404.4m | $337.4m |
| Diluted EPS | $0.87 | $0.68 | $1.57 | $1.29 |
| Adjusted EBITDA (non-GAAP) | $566.8m | $484.9m | $1.069bn | $918.1m |
- Q2 revenue rose 18.4% and first-half revenue rose 18.2%. Acquisitions contributed $144.2m and $256.5m, respectively. Existing-operation price increases and surcharges added $128.6m in Q2 and $222.7m in the first half.
- Operating income rose 23.5% in Q2 and 19.5% in the first half. Price increases, acquisitions and stronger E&P results were key contributors. Higher costs partly offset those gains: cost of operations increased to 59.9% of revenue in Q2 from 58.8%, and to 60.0% in the first half from 59.0%.
- Net cash from operations was $973.7m in the first half, versus $848.5m. Investing used $892.0m, including $547.0m for acquisitions and $371.4m of property and equipment capital expenditures. Financing provided $25.1m, compared with $393.2m used in the prior-year period. Adjusted free cash flow, a non-GAAP measure, was $638.4m versus $585.8m.
- At June 30, cash and equivalents were $217.8m; working capital was negative $79.8m. Cash, cash equivalents and restricted cash totaled $324.5m. Debt principal was approximately $5.698bn, compared with $5.102bn at year-end 2021. The company reported $904.7m available under its revolver and $43.3m of letters of credit outstanding under the credit agreement.
- Interest expense was $45.1m in Q2 and $86.4m for the first half. The company estimated that a 1-percentage-point rise in rates on its $702m of unhedged variable-rate debt at June 30 would reduce annual pretax income by about $7m.
Changes, outlook and risks
- Growth reflected pricing, acquisitions, recovering E&P activity, and higher recycling and renewable-energy-credit revenue. Residential collection volume losses, including contracts not renewed after June 2021, partly offset growth.
- Inflationary pressures raised fuel, labor, maintenance, trucking and other costs. Management said pricing and contract pass-through mechanisms may offset many cost increases, but competition or delays in rate changes could leave the company absorbing some increases. COVID-related supplemental pay and benefits were approximately $10m in the first half of 2022.
- Management expects approximately $850m of 2022 property and equipment capital expenditures. It said cash, operating cash flow and credit facilities should fund working capital and foreseeable cash needs, while noting that capital-market or lender disruption could constrain access to financing. The filing provides no specific earnings or revenue guidance.
- Acquisition spending was substantial: eight individually immaterial businesses were acquired in the first half for $547.0m. The company also repurchased $425.0m of shares and paid $118.8m in dividends in the period. The quarterly dividend was $0.23 per share; a renewal of the share-repurchase program was approved subject to regulatory approval.
- Landfill capacity estimates average approximately 28 years on permitted capacity and 32 years including probable expansions; expansions remain subject to permitting. The company recorded $334.7m of landfill closure and post-closure liabilities at June 30.
- Contingencies include the Lower Duwamish Waterway Superfund allocation process, for which management believes its potential share should be small and not material but settlement prospects remain uncertain. In litigation concerning the Chiquita Canyon landfill permit, the company estimates new costs imposed by the permit exceed $300m; it prevailed on some challenged conditions, but remaining claims and outcomes are uncertain. A related $11.6m fee was paid under protest.
- Other exposures include fuel and commodity-price volatility, labor and supply-chain constraints, E&P demand tied to oil and gas activity, foreign-exchange movements, regulatory and permitting matters, and seasonality. A $0.10-per-gallon fuel-price increase over the remaining six months of 2022 was estimated to reduce pretax income by approximately $2.2m. Disclosure controls were reported effective as of June 30, 2022.
Important facts for investors to verify
- How much future growth comes from price increases and acquisitions versus underlying volume, and whether price gains continue to cover fuel, labor and maintenance inflation.
- Acquisition integration, returns and resulting leverage, alongside the planned $850m annual capital program and ongoing repurchases and dividends.
- Revolver availability, variable-rate exposure and the debt maturity and refinancing profile.
- Developments in the Chiquita Canyon and Lower Duwamish matters, including potential financial exposure and timing.
- Permitting progress for landfill expansions and the assumptions behind remaining-capacity and closure-liability estimates.