Waste Connections, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. All amounts are in U.S. dollars unless noted. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited.
Business context
Waste Connections provides collection, transfer, disposal, recycling and resource recovery services in mostly exclusive and secondary markets across 43 U.S. states and six Canadian provinces. It also provides oil and gas exploration and production (E&P) waste services and Pacific Northwest intermodal services. In July 2020, the company combined its E&P segment with its Southern segment for reporting purposes.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $5.446 billion | $5.389 billion | +1.1% |
| Operating income | $412.4 million | $837.8 million | -50.8% |
| Operating margin | 7.6% | 15.5% | -7.9 percentage points |
| Net income attributable to Waste Connections | $204.7 million | $566.8 million | -63.9% |
| Diluted EPS | $0.78 | $2.14 | Lower |
| Adjusted EBITDA (non-GAAP) | $1.662 billion | $1.674 billion | -0.7% |
| Adjusted EBITDA margin (non-GAAP) | 30.5% | 31.1% | -0.6 percentage points |
| Adjusted net income (non-GAAP) | $695.8 million | $719.6 million | -3.3% |
| Net cash from operating activities | $1.409 billion | $1.541 billion | -8.6% |
| Adjusted free cash flow (non-GAAP) | $841.9 million | $916.8 million | Lower |
Reported operating income and net income were heavily affected by $466.7 million of impairments and other operating items, including a $417.4 million impairment of four E&P landfills. Adjusted EBITDA, adjusted net income and adjusted free cash flow are non-GAAP measures; the filing cautions that they are not substitutes for GAAP measures and may not be comparable across companies.
Revenue growth included $197.2 million of incremental revenue from acquisitions, net of divestitures. Excluding acquisitions and divestitures, revenue declined 2.6%. Solid waste internal growth was negative 0.4%, with 4.3% pricing growth more than offset by lower volumes and surcharges. E&P revenue fell to $144.0 million from $256.0 million in management’s overview; the service-line table reports $159.4 million for 2020 and $271.9 million for 2019, a differing presentation the filing text does not clearly reconcile.
Cash and equivalents were $617.3 million at year-end, versus $326.7 million a year earlier; working capital surplus was $379.6 million. Long-term debt and notes payable were $4.709 billion on the balance sheet; total debt principal was approximately $4.751 billion. Leverage was 2.68x debt to EBITDA, up from 2.41x, within the company’s stated 2.5x–3.0x target range. Remaining borrowing capacity under the credit agreement was $1.239 billion; the agreement matures in March 2023. The company reported compliance with debt covenants.
Capital expenditures for property and equipment were $597.1 million; undeveloped landfill property spending was $67.5 million. The company distributed $305.6 million through $199.9 million in dividends and $105.7 million in share repurchases. The annual dividend was $0.760 per share.
Fourth quarter: Revenue was $1.398 billion, operating income $197.1 million, net income attributable to Waste Connections $130.7 million and diluted EPS $0.50. Same-store solid waste collection, transfer and disposal revenue increased 0.7% year over year; same-store municipal solid waste landfill tons rose 2%.
Material changes versus 2019
- COVID-19 disruptions reduced commercial collection, transfer, landfill and roll-off volumes, while residential activity and later-quarter recovery partly offset declines. Solid waste same-store revenue improved from a 5.3% decline in Q2 to a 0.7% increase in Q4.
- E&P revenue fell 44% for the year, with rig counts down 56% in certain basins. The downturn drove the $417.4 million landfill impairment.
- Cost of operations rose to 60.2% of revenue from 59.4%, reflecting labor, employee support payments, maintenance and insurance costs; lower fuel and certain other costs provided offsets.
- Operating cash flow and adjusted free cash flow declined. The company cited working-capital timing and deferred taxes among the factors affecting cash flow; it deferred $44.6 million of eligible U.S. payroll taxes under the CARES Act.
- The company completed 21 acquisitions for net fair-value consideration of $481.6 million, below 2019’s $837.7 million.
Outlook, commentary, risks and contingencies
- Management expected approximately $625 million of 2021 property-and-equipment capital expenditures, funded principally from cash, operating cash flow and credit-facility borrowings. No earnings or revenue guidance is provided in the supplied filing text.
- Management said pandemic impacts moderated in Q4 but remained dependent on reopening patterns, restrictions and broader economic conditions. It incurred more than $35 million in incremental COVID-related costs in 2020, primarily frontline employee support.
- Key operating exposures include landfill permits and expansion approvals, environmental regulation and remediation, commodity and fuel prices, E&P customer activity, labor availability and costs, contract renewals, acquisition integration, insurance claims, cybersecurity and foreign exchange.
- The company estimated average landfill life at approximately 29 years on permitted capacity and approximately 32 years including probable expansions; estimates depend on permits and projected volumes. Expansion capacity is not assured.
- Significant legal matters include the Lower Duwamish Waterway Superfund allocation, for which the company could not estimate its allocation or potential liability, and continuing Chiquita Canyon permit-related litigation. The filing states the likely outcome of the latter matter could not be determined.
- Approximately 486 contracts, representing about 4.4% of annual revenue, were scheduled to expire or automatically renew on or before December 31, 2021. Seventeen collective bargaining agreements covering employees had expired or were due to expire during 2021; management did not expect significant disruption.
- Auditors issued unqualified opinions on the financial statements and internal controls. Critical audit matters included acquisition intangible valuations, landfill obligations and the E&P impairment; these matters did not modify the audit opinion.
Important facts for investors to verify
- Reconcile the differing 2020 E&P revenue figures in the management overview and service-line disclosure, and assess the effect of the segment reclassification.
- Review the assumptions and sensitivity behind the $417.4 million E&P impairment and the outlook for drilling activity in the affected basins.
- Track the recovery in commercial volumes, customer service resumptions and the persistence of pandemic-related costs.
- Assess refinancing and liquidity needs ahead of the March 2023 credit-agreement maturity, as well as 2021 note maturities and planned capital spending.
- Monitor landfill expansion permitting and the potential exposure from environmental and legal contingencies, including the Lower Duwamish and Chiquita Canyon matters.
- Evaluate non-GAAP measures alongside GAAP earnings and cash flows, including the adjustments used to calculate adjusted EBITDA, adjusted net income and adjusted free cash flow.