Waste Connections, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. U.S. dollars; financial statement amounts below are in millions unless noted. Waste Connections provides non-hazardous waste collection, transfer, disposal and recycling services, plus oilfield waste and intermodal services across the U.S. and Canada.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,597.2 | $1,389.6 | $4,527.0 | $4,047.7 |
| Operating income | $285.1 | $230.7 | $790.3 | $215.3 |
| Operating margin | 17.8% | 16.6% | 17.5% | 5.3% |
| Net income attributable to Waste Connections | $114.4 | $158.0 | $451.7 | $74.0 |
| Diluted EPS | $0.44 | $0.60 | $1.72 | $0.28 |
| Adjusted EBITDA (non-GAAP) | $505.6 | $432.6 | $1,423.7 | $1,235.4 |
| Adjusted diluted EPS (non-GAAP) | $0.89 | $0.72 | $2.39 | $1.96 |
Q3 revenue rose 14.9%, while operating income rose 23.6%. Q3 net income and GAAP EPS declined mainly because the company recorded a $115.3 million loss on early debt extinguishment. Excluding specified items, adjusted net income was $233.1 million and adjusted diluted EPS was $0.89, compared with $188.6 million and $0.72 a year earlier. Nine-month operating income and net income comparisons were strongly affected by the $417.4 million E&P landfill impairment recorded in 2020.
Revenue growth reflected customer price increases, recovering solid waste volumes, acquisitions, stronger recycling commodity prices and higher renewable energy credit prices. Q3 existing-operation price increases were $67.7 million; solid waste volume increases contributed $28.9 million. Segment EBITDA increased in all five regions for Q3; Canada had the highest segment EBITDA margin at 41.1%. Segment EBITDA and adjusted metrics are non-GAAP measures and may not be comparable with similarly titled measures at other companies.
Cash flow, liquidity and debt
- Operating cash flow: $1,270 million for the first nine months, up from $1,186 million. The filing reports no separate quarterly cash-flow figures.
- Investing cash flow: $1,035 million used, including $561 million for acquisitions and $479 million in property and equipment capital expenditures.
- Financing cash flow: $492 million used; included $306 million of share repurchases and $161 million of dividends.
- Cash and equivalents: $339.5 million at September 30, down from $617.3 million at year-end 2020. Including restricted cash, period-end cash was $458.4 million. Working capital surplus was $15.0 million, down from $379.6 million.
- Debt: $4,930 million of debt before unamortized discounts and issuance costs, including $4,869 million long-term debt net of those items. The company had $634.9 million drawn on its revolver and $650 million outstanding under its term loan. Revolver availability was approximately $1,100 million; letters of credit under the facility were $114.7 million. The company reported compliance with its financial covenants.
In September, the company issued $650 million of 2.20% notes due 2032 and $850 million of 2.95% notes due 2052, and repaid $1.5 billion of private notes, including a $110.6 million make-whole payment. The refinancing extended maturities but generated the reported extinguishment loss. The July 2021 credit agreement provides a $2.5 billion facility and matures in July 2026.
Changes, outlook and risks
- Acquisitions were a significant growth contributor: the company acquired 14 individually immaterial solid-waste businesses in the first nine months for total consideration of approximately $592 million, including assumed debt.
- Management expected 2021 property-and-equipment capital expenditures of approximately $700 million. It stated that cash, operating cash generation and the credit facility should cover foreseeable working-capital and other cash needs, while noting that capital-market or bank-funding disruptions could constrain access.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management reported Q3 solid-waste volumes up 2.1% year over year, following sequential improvement in Q2; E&P revenue had also recovered from early-2021 lows. COVID-19 effects remained uncertain, including the course of variants and economic reopening.
- Cost pressures included higher labor, fuel, maintenance, transportation and medical costs. Management said pricing and contractual pass-throughs may offset many inflationary increases, but competition or rate-increase delays could leave some costs with the company. For remaining 2021 fuel purchases, a $0.10-per-gallon increase was estimated to reduce pre-tax income by about $1.0 million.
- Other exposures include oil and gas activity and prices affecting E&P services and potential impairments; recycling commodity prices; foreign exchange; interest rates; seasonal operating patterns; landfill capacity and permitting; and environmental, regulatory, labor, safety and cybersecurity risks.
- Significant unresolved matters include the Lower Duwamish Waterway Superfund allocation and potential cleanup/natural-resource liabilities, for which the company could not determine its allocation or likely outcome, and litigation concerning conditions, fees and expansion at Chiquita Canyon Landfill. The filing states that no other current proceeding was believed likely to have a material adverse effect.
- Landfill capacity estimates imply an average remaining life of about 27 years based on permitted capacity, or about 32 years including probable expansions; the company cautions that expansions are not assured. It operated or owned 94 landfills at September 30.
- Subsequent to quarter-end, the board increased the regular quarterly dividend from $0.205 to $0.23 per share, payable November 23, 2021.
Important facts for investors to verify
- How much of revenue and EBITDA growth is organic pricing/volume versus acquisitions, currency effects and commodity or renewable-credit pricing.
- The effect of the debt refinancing on future interest expense, leverage and covenant headroom, alongside ongoing repurchases and dividends.
- Whether inflationary labor, fuel and maintenance costs continue to be passed through or offset by pricing, and how margins respond.
- Developments in the named environmental and landfill-permit litigation, including potential exposure that management says cannot yet be estimated.
- Progress and permitting outcomes for landfill expansions, and the assumptions underlying stated capacity and remaining-life estimates.