Waste Connections, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; amounts are in U.S. dollars unless noted. Waste Connections provides non-hazardous waste collection, transfer, disposal and recycling services across the U.S. and Canada, alongside E&P waste services and Pacific Northwest intermodal operations.
Financial performance
- Revenue: Full-year revenue was $5.389 billion, up 9.5% from $4.923 billion in 2018. Acquisitions contributed materially; existing solid-waste internal growth was 4.3%, driven by 5.2% pricing growth, partly offset by lower volumes and recycled commodity prices. E&P revenue increased to $256.1 million from $244.6 million.
- Profit and margins: Operating income was $837.8 million, up 0.7%, while operating margin fell to 15.5% from 16.9%. Net income attributable to Waste Connections was $566.8 million versus $546.9 million; diluted EPS was $2.14 versus $2.07. Adjusted EBITDA, a non-GAAP measure, rose 6.8% to $1.674 billion, but its margin declined to 31.1% from 31.8%. Adjusted net income was $719.6 million versus $667.3 million.
- Fourth quarter: Revenue was $1.362 billion versus $1.262 billion in Q4 2018. Operating income was $194.2 million versus $200.0 million; net income attributable to the company was $133.3 million versus $132.5 million. Diluted EPS was $0.50 in both periods.
- Cash flow and investment: Cash from operations increased 9.2% to $1.541 billion. Property-and-equipment capital expenditures rose 16.2% to $634.4 million. Adjusted free cash flow, a non-GAAP measure, increased to $916.8 million from $879.9 million; as a share of revenue, it declined to 17.0% from 17.9%. Investing cash outflow was $1.426 billion, including $736.6 million of acquisition payments.
- Liquidity and debt: Cash and equivalents were $326.7 million and working capital surplus was $123.4 million at year-end. Total debt was approximately $4.376 billion; the company reported leverage of 2.41x, down from 2.45x. The $3.2 billion credit facility matures in March 2023; $1.616 billion was outstanding under its revolver and term loan at year-end. The company reported compliance with debt covenants.
- Capital returns: Dividends paid were $175.1 million, and the quarterly dividend was raised 15.6% to $0.185 per share in October 2019. No shares were repurchased in 2019.
Changes versus 2018
- Acquisitions and organic pricing drove revenue growth; 21 acquisitions were completed for net fair-value consideration of $837.7 million, compared with 20 acquisitions totaling $1.032 billion in 2018.
- Cost of operations rose faster than revenue, increasing to 59.4% of revenue from 58.2%. Management cited labor, maintenance, transportation, recycling-processing and leachate costs, among other factors.
- Recycling revenue declined to $64.2 million from $92.6 million, reflecting weaker commodity prices and demand. Lower renewable energy credit values and intermodal customer losses also weighed on revenue.
- Impairments and other operating items rose to $61.9 million from $20.1 million, including a $25.8 million write-down at a materials recovery facility, $15.4 million in contract-related charges and an $8.0 million abandoned E&P landfill project.
Outlook, risks and unusual items
- Management expected 2020 property-and-equipment capital expenditures of $600 million to $625 million, funded principally through operating cash, cash on hand and credit-facility borrowings. The filing does not provide a clear numerical revenue or earnings forecast.
- Management described acquisition-led growth, pricing and operating efficiency as strategic priorities. It expects seasonal revenue patterns, with the first quarter typically weakest and a roughly 10% range between highest and lowest quarters.
- Key exposures include environmental permitting and remediation, landfill capacity and closure obligations, volatile E&P activity tied to oil and gas markets, recycled commodity and renewable-credit prices, labor and fuel costs, competition, acquisition integration, interest rates, currency translation and cybersecurity. The company estimated average landfill life at approximately 26 years on permitted capacity, or 29 years including probable expansions.
- Material contingencies include the Lower Duwamish Waterway Superfund allocation and potential natural-resource damages, for which the company said it could not reasonably determine its likely liability. Chiquita Canyon landfill-expansion litigation remained unresolved; the company cited more than $300 million of estimated new costs imposed under the permit conditions and challenged them. A separate challenge to the expansion’s environmental review had been denied, but an appeal was filed.
- Other notable items: the company adopted lease-accounting guidance in 2019, recording operating lease right-of-use assets and liabilities; it issued $500 million of 3.50% notes due 2029. Subsequent to year-end, it issued $600 million of 2.60% notes due 2030, with net proceeds used partly to repay credit-facility borrowings. The auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Reconcile reported GAAP results with management’s non-GAAP adjusted EBITDA, adjusted net income and adjusted free cash flow, including the exclusions used in each measure.
- Review the debt maturity schedule, variable-rate exposure, covenant headroom and use of the January 2020 note proceeds; the filing estimates a 1 percentage point rate increase would reduce annual pretax income by about $7.7 million.
- Assess whether landfill expansion assumptions, remaining capacity and the $291.5 million recorded closure and post-closure liability remain supportable.
- Track outcomes and potential financial exposure from the Duwamish and Chiquita Canyon proceedings, including the status of the landfill permit challenges.
- Monitor whether price increases and acquisitions offset cost inflation, weaker recycling markets, contract losses and fluctuations in E&P demand.