Waste Connections, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated figures are in U.S. dollars; amounts below are rounded to millions unless stated otherwise. The company provides integrated solid-waste collection, transfer, disposal and recycling services in the U.S. and Canada, plus non-hazardous E&P waste services.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $1,140.1 million | $1,091.3 million |
| Operating income (margin) | $188.7 million (16.5%) | $26.4 million (2.4%) |
| Net income attributable to Waste Connections | $124.9 million | $14.9 million |
| Diluted EPS | $0.47 | $0.06 |
| Adjusted EBITDA (non-GAAP) | $356.9 million | $332.8 million |
| Adjusted free cash flow (non-GAAP) | $220.2 million | $237.5 million |
| Cash provided by operations | $307.2 million | $287.5 million |
- Operating margin was 57.9% of revenue, down from 59.0%; SG&A was 11.5% versus 11.8%. Depreciation was 11.7% versus 11.5% of revenue.
- Cash and equivalents were $217.5 million at quarter-end, down from $433.8 million at year-end 2017. Working capital was a $227.5 million surplus. Cash, equivalents and restricted cash totaled $294.5 million.
- Long-term debt and notes payable, net of issuance costs, were $3.88 billion; gross debt was $3.90 billion. Credit-facility borrowings included a $1.64 billion term loan and $172.2 million revolver draw. Revolver availability was $1.17 billion, with $216.3 million of letters of credit outstanding.
- Capital expenditures were $91.2 million. Acquisition payments were $312.0 million; investing cash outflow was $402.3 million. Financing cash outflow was $167.0 million, including $42.0 million of share repurchases and $36.8 million of dividends.
- Quarterly dividend paid was $0.14 per share, increased from $0.12 a year earlier. The company repurchased 594,474 shares at an average $70.72 per share.
Changes versus the prior comparable period
- Revenue grew 4.5%. Management attributed growth to $42.3 million of net customer price increases, $38.7 million of acquisition contribution, and stronger E&P activity; divestitures reduced revenue by $27.9 million. Existing-business solid-waste volume declined $11.2 million, while lower recyclable commodity prices reduced revenue by $18.8 million.
- E&P revenue rose 52.5% to $56.0 million and segment EBITDA nearly doubled to $28.7 million, reflecting higher oil and gas activity. Adjusted EBITDA increased 7.2%, while adjusted free cash flow declined about 7.3%.
- Reported operating income and earnings improved sharply largely because Q1 2017 included $141.7 million of impairments and other operating charges, including a $77.3 million E&P goodwill impairment and $53.4 million related to assets held for disposal. Q1 2018 had $1.0 million of such charges; the comparison is therefore not a like-for-like measure of underlying growth.
- The effective tax rate was 20.3% in Q1 2018; the reported 911.3% rate in Q1 2017 reflected the low pretax-income base and tax items. Other comprehensive income included a $59.3 million foreign-currency translation loss in Q1 2018.
Outlook, management commentary and risks
- Management expected 2018 capital expenditures of $500–$515 million for existing operations and said cash, operating cash flow and credit facilities should fund foreseeable needs. The filing does not provide full-year revenue or earnings guidance.
- The company entered into an amended and restated $3.2 billion credit facility on March 21, 2018, maturing in March 2023. It redeemed $50 million of 2018 Senior Notes and $59 million of specified tax-exempt bonds on April 2, 2018, using credit-facility borrowings for the notes redemption.
- Management described customary seasonality: first-quarter revenue is typically lowest, with results affected by winter weather, construction activity and E&P conditions. It cited competition, pricing and cost inflation, labor and fuel costs, recycling commodity prices, acquisition integration, landfill permitting and expansion, environmental regulation, foreign exchange, and leverage among risks.
- Landfill capacity estimates were particularly sensitive: average remaining life was approximately 26 years on permitted capacity and 30 years including probable expansions. The company was pursuing expansions at 17 sites.
- Significant contingencies include the Lower Duwamish Waterway Superfund allocation and possible natural-resource damages, for which the company could not estimate its likely share; Chiquita Canyon expansion-related litigation and disputed fees, including an $11.6 million bridge and thoroughfare fee; and a $10 million Florida default judgment. The company had not accrued a liability for the Florida judgment and could not estimate the likelihood or range of loss.
- Adoption of the new revenue standard did not materially change revenue recognition, but capitalized $16.3 million of sales incentives as contract acquisition costs; $4.1 million was amortized in the quarter.
Most important facts for investors to verify
- Underlying operating momentum apart from the large year-over-year impairment comparison, including whether price increases continue to offset volume and cost pressures.
- Whether E&P activity and margins remain resilient if oil and gas prices or drilling activity weaken.
- Cash conversion and funding needs against the $500–$515 million capex outlook, acquisition spending, dividends and repurchases.
- Debt levels, floating-rate exposure, covenant headroom and the effects of the March credit agreement and April redemptions.
- Developments in the Chiquita Canyon disputes, Lower Duwamish matter and Florida judgment, including any material change in estimated exposure.