Waste Connections, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Unless noted otherwise, amounts are U.S. dollars. The company provides solid-waste collection, transfer, disposal and recycling services, E&P waste services, and intermodal services in the U.S. and Canada.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,240m | $1,176m | $2,380m | $2,267m |
| Operating income | $211m | $207m | $399m | $233m |
| Operating margin | 17.0% | 17.6% | 16.8% | 10.3% |
| Net income attributable to Waste Connections | $139m | $124m | $264m | $139m |
| Diluted EPS | $0.52 | $0.47 | $1.00 | $0.52 |
| Adjusted EBITDA (non-GAAP) | $396m | $374m | $752m | $706m |
| Adjusted net income (non-GAAP) | $172m | $145m | $321m | $276m |
- Q2 revenue grew 5.5%; six-month revenue grew 5.0%. Growth reflected pricing, acquisitions and stronger E&P activity, partly offset by divestitures, lower solid-waste volumes and weaker recycling commodity prices.
- Q2 operating income rose 1.8%, while operating margin fell 0.6 percentage points. Six-month operating income rose 71.2%, primarily because the 2017 comparison included substantial impairment and other operating charges, including a $77.3m E&P goodwill impairment.
- Q2 diluted EPS increased from $0.47 to $0.52. Six-month EPS increased from $0.52 to $1.00, with the comparison affected by the prior-year impairment charges.
- Recycling revenue fell to $22.7m in Q2 from $43.7m, and to $46.2m for the six months from $87.6m, mainly due to lower prices for recovered paper and other fiber products. E&P revenue grew 25% in Q2 and 35% for the six months, supported by higher drilling activity and disposal volumes.
- Q2 segment EBITDA increased in Southern, Eastern, Central and E&P, but declined in Western and Canada. E&P segment EBITDA rose to $31.2m from $21.1m; Western segment EBITDA declined to $81.2m from $87.0m.
Cash flow, liquidity and capital
- Six-month operating cash flow was $664.9m, versus $551.9m. Capital expenditures were $201.7m; adjusted free cash flow, a non-GAAP measure, was $472.7m versus $393.6m.
- Investing cash use was $685.2m, including $485.5m of cash paid for acquisitions. The company acquired 12 individually immaterial businesses; total acquisition consideration was $550.5m, including $65.0m of debt assumed.
- Cash and equivalents were $145.8m at June 30, down from $433.8m at year-end 2017. Working capital surplus was $120.7m, down from $374.3m. The decline primarily reflected lower cash balances and acquisition spending.
- Debt principal was approximately $3.810bn, down from $3.926bn at December 31, 2017. The company had $1.638bn outstanding on its term loan and $195.2m drawn on its revolving facility, with $1.220bn available and $147.2m of letters of credit outstanding. The credit facility matures in March 2023.
- The company paid $73.6m in dividends and repurchased 594,474 shares for $42.0m during the six months. The quarterly dividend was $0.14 per share; the board approved another $0.14 dividend payable in August 2018 and approved a proposed renewal of the share-repurchase program.
Outlook, risks and unusual items
- Management expected approximately $530m of 2018 capital expenditures for the existing business and stated that cash, operating cash generation and credit availability should meet foreseeable needs. No specific revenue or earnings guidance is provided in the filing text.
- Management cited pricing and acquisition contributions, improving E&P activity, lower recycling commodity prices, volume declines in some markets, and higher fuel, labor and landfill-related costs. Results are seasonal; management estimated a roughly 10% range between highest and lowest quarters.
- Interest-rate exposure: unhedged floating-rate debt was $1.019bn. A one-percentage-point rate increase was estimated to reduce annual pretax income by approximately $10.2m. Diesel price increases, commodity-price weakness, Canadian-dollar movements and E&P activity are additional exposures; hedges cover only portions of interest-rate and fuel risks.
- Chiquita Canyon landfill permit conditions are being litigated. The company estimated new permit costs in excess of $300m; a disputed $11.6m bridge-and-thoroughfare fee is also at issue, and a court denied a stay, so penalties of up to $1 per day may continue to accrue. Outcomes remain uncertain.
- For the Lower Duwamish Waterway Superfund site, the EPA’s estimated cleanup cost was approximately $342m for the site as a whole; the company said it could not determine its allocation or potential liability. A separate Florida $10m judgment is under appeal and has not been accrued because the outcome and loss range could not be estimated. Landfill expansion and environmental challenges in California and New York are also pending.
- Adoption of the new revenue standard increased retained earnings by $13.2m at January 1, 2018, principally from capitalizing sales incentives. Six-month comprehensive income was affected by a $102.8m foreign-currency translation loss. Tax accounting for certain Tax Act effects remained provisional.
Investor verification priorities
- Separate underlying operating growth from acquisition, divestiture, pricing, foreign-exchange and prior-year impairment effects; review the company’s non-GAAP reconciliations.
- Monitor recycling prices and volumes, E&P activity, solid-waste volume trends, and whether pricing offsets rising fuel, labor and landfill costs.
- Verify acquisition spending, leverage, revolver availability, planned capital expenditures and cash returned through dividends and repurchases.
- Track outcomes and potential financial exposure from the Chiquita Canyon matters, the Duwamish site allocation process, the Florida judgment and other landfill-related proceedings.
- Assess the sensitivity of results to floating interest rates, diesel prices, Canadian-dollar movements and landfill closure, post-closure and expansion assumptions.