Waste Connections, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless noted.
Business context
Waste Connections provides non-hazardous waste collection, transfer, disposal and recycling services, landfill-gas energy services, E&P waste services and Pacific Northwest intermodal services across 43 U.S. states and six Canadian provinces. Its strategy emphasizes secondary and rural markets, exclusive contracts, vertical integration and acquisitions. The company completed 24 acquisitions in 2022 for consideration with a net fair value of $2.334 billion.
Financial performance and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $7.212 billion | $6.151 billion | +17.2% |
| Operating income | $1.242 billion | $1.040 billion | +19.5% |
| Operating margin | 17.2% | 16.9% | +0.3 percentage points |
| Net income attributable to Waste Connections | $835.7 million | $618.0 million | +35.2% |
| Diluted EPS | $3.24 | $2.36 | Up |
| Adjusted EBITDA (non-GAAP) | $2.221 billion | $1.919 billion | +15.7% |
| Adjusted EBITDA margin (non-GAAP) | 30.8% | 31.2% | -0.4 percentage points |
| Net cash from operating activities | $2.022 billion | $1.698 billion | +19.1% |
| Adjusted free cash flow (non-GAAP) | $1.165 billion | $1.010 billion | +15.4% |
| Capital expenditures | $912.7 million | $744.3 million | +22.6% |
Revenue growth reflected acquisitions and solid-waste internal growth. Solid-waste pricing growth was 9.2% (including 7.7% core pricing and 1.5% surcharges); volumes declined 1.1%, partly due to non-renewal of two residential contracts. Lower recycled commodity values reduced internal solid-waste growth by 0.7 percentage points. Higher E&P activity contributed to growth. Inflation, fuel and third-party transportation costs, and lower-margin acquisitions pressured adjusted EBITDA margin.
At year-end, total debt was $6.963 billion, up from $5.102 billion in 2021. The company reported a 2.93x leverage ratio, compared with 2.50x a year earlier, against a target range of approximately 2.5x–3.0x. Cash and equivalents were $78.6 million, and available borrowing capacity under the revolving credit agreement was $1.194 billion. Working capital was negative $395.0 million. The company reported compliance with its debt covenants.
Cash returned to shareholders totaled $668.0 million: $243.0 million in dividends and $425.0 million for repurchases of 3.4 million shares. The quarterly dividend was increased to $0.255 per share in November 2022.
Material changes versus 2021
- Revenue and operating income increased, supported by acquisitions, price increases, landfill-gas revenue and stronger E&P activity.
- Net income rose substantially; however, 2021 results included a $115.3 million loss on early extinguishment of debt, which did not recur in 2022.
- Adjusted EBITDA margin declined despite higher adjusted EBITDA, reflecting acquisition-related margin dilution and inflationary operating costs.
- Operating cash flow improved, while capital spending and acquisition cash outlays increased. Net cash used in investing activities rose to $3.087 billion from $1.693 billion.
- Debt increased following acquisitions and financing activity. Interest expense rose 24.3% to $202.3 million.
- Recycling commodity prices weakened in the second half; revenue from recyclable commodity sales at facilities owned in both periods declined $45.0 million.
Outlook, risks and unusual items
- Outlook: The filing gives no formal revenue or earnings guidance. Management expects 2023 property-and-equipment capital expenditures of approximately $895 million, net of asset-sale proceeds, and expects cash, operating funds and credit availability to meet needs for the foreseeable future. Management targets leverage of approximately 2.5x–3.0x.
- Costs and demand: Inflation, labor availability and wage costs, fuel, fleet and equipment costs, supply-chain delays, and limits or lags on contract price adjustments may pressure margins and cash flow. Economic weakness could reduce commercial, construction-related and E&P waste volumes.
- Financing: Variable-rate debt exposes the company to interest-rate risk; a one-percentage-point rate increase was estimated to reduce annual pretax income by about $11.1 million at year-end. The company also identified the transition of Canadian-dollar borrowings from CDOR to CORRA as an ongoing task.
- Environmental and permitting exposure: Extensive regulation, landfill permit and expansion uncertainty, closure and post-closure costs, and potential PFAS rules could increase costs or restrict operations. Average estimated landfill life was about 31 years based on permitted capacity and about 35 years including probable expansions; expansion assumptions and permit renewals are not assured.
- Litigation: In Jefferson Parish landfill odor litigation, the court found general causation for certain alleged injuries, limited the damages period and injury types, and further proceedings were expected, including a trial anticipated in the third quarter of 2023. The company said it could not determine the likelihood or allocation of potential liability. A Chiquita Canyon landfill-permit settlement remains contingent on approval of a CUP modification and other conditions; the company could not determine the outcome.
- Other exposures: Recycled commodity and renewable-fuel-credit prices, oil-and-gas activity, severe weather, labor negotiations, insurance claims, cybersecurity incidents and acquisition integration may affect results. Seventeen collective bargaining agreements had expired or were scheduled to expire in 2023; management did not expect significant disruption.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Landfill accounting and valuation of acquired intangible assets were identified as critical audit matters.
Important facts for investors to verify
- Whether 2023 pricing continues to outpace labor, fuel, transport and other inflationary costs, and whether the adjusted EBITDA margin stabilizes.
- Acquisition returns and integration progress, given $2.334 billion of 2022 acquisition consideration and higher year-end leverage.
- Debt and liquidity trends, including variable-rate exposure, borrowing capacity, and the path toward management’s leverage target.
- Results and potential financial exposure from the Jefferson Parish litigation and the status of the Chiquita Canyon CUP modification.
- Landfill expansion approvals, remaining permitted capacity, and any changes to closure, post-closure or emerging-contaminant liabilities.
- Cash conversion after capital expenditures, with 2023 capex planned at approximately $895 million, and the sustainability of dividends and share repurchases.