Waste Connections, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Financial amounts below are in U.S. dollars and rounded to millions unless stated otherwise. The filing is unaudited. Waste Connections provides solid waste collection, transfer, recycling and disposal services, as well as E&P waste and intermodal services, across the U.S. and Canada.
Financial performance and liquidity
- Revenue: $2,072.7 million, up 9.1% from $1,900.5 million. Operating income was $366.8 million, up 16.6%; operating margin increased to 17.7% from 16.6%.
- Profit: Net income attributable to Waste Connections was $230.1 million, compared with $197.8 million; diluted EPS was $0.89 versus $0.77. The effective tax rate was 20.6%, versus 21.6%.
- Non-GAAP measures: Adjusted EBITDA was $650.7 million versus $566.9 million; adjusted net income was $268.7 million, or $1.04 per diluted share, versus $230.4 million, or $0.89. These company-defined measures are not GAAP substitutes.
- Margins and segments: Segment EBITDA margin was 30.4%, versus 29.5%. Canada segment EBITDA increased to $121.4 million from $83.0 million, with margin rising to 43.3% from 36.5%; Eastern EBITDA increased to $95.0 million from $73.3 million. Western margin declined to 26.8% from 28.0%, and MidSouth to 25.0% from 27.7%.
- Cash flow: Operating cash flow was $490.3 million, up from $442.4 million. Capital expenditures were $170.0 million. Adjusted free cash flow, a non-GAAP measure, was $324.8 million versus $274.0 million. Cash, cash equivalents and restricted cash totaled $217.7 million at quarter-end; unrestricted cash and equivalents were $112.0 million.
- Debt and liquidity: Debt principal was approximately $7.884 billion at March 31, compared with $6.812 billion at December 31, 2023. The company had $2.238 billion drawn on its new revolving facility and $723.4 million available; the facility matures February 27, 2029. The company reported compliance with its financial covenants. Working capital was negative $414.5 million.
- Dividends: The quarterly dividend was $0.285 per share, up from $0.255 a year earlier; $73.6 million was paid during the quarter. No shares were repurchased under the current issuer bid during the quarter.
Material changes and drivers
- Management attributed revenue growth to $80.6 million from acquisitions and $128.5 million of net price increases at existing operations, including $140.6 million of core price increases partly offset by $12.1 million lower surcharges. Volume losses reduced revenue by $69.6 million, including purposeful shedding of certain low-margin municipal contracts and weather-related impacts.
- E&P revenue rose to $97.4 million from $51.8 million, reflecting stronger demand and activity in certain basins. Recycling revenue increased to $49.0 million from $31.3 million, mainly on higher commodity prices. Landfill gas revenue also benefited from higher renewable energy credit values and greater volumes.
- Cost of operations rose 6.5%, slower than revenue growth, and declined to 59.0% of revenue from 60.3%. Lower fuel costs and price-led growth helped; higher risk management costs, labor and post-closure accretion partly offset those benefits. SG&A rose 14.0% and increased to 10.7% of revenue from 10.2%, driven in part by acquisition activity and incentive compensation.
- Acquisition spending was substantial: cash paid for acquisitions was $1,156.4 million, compared with $144.6 million in Q1 2023. The company acquired nine solid waste businesses and one E&P business; purchase-price allocations remain partly provisional.
- Investing cash outflow was $1,334.6 million, largely reflecting acquisitions. Financing provided $878.5 million, including significant new borrowings. Interest expense increased 14.8% to $78.5 million.
Outlook, risks and unusual items
- Outlook: The filing does not provide a clear revenue or earnings forecast. Management expects 2024 capital expenditures of approximately $1.150 billion, including about $150 million for renewable natural gas facilities, funded principally by cash from operations, cash on hand and borrowings. Management believes available cash, the revolving facility and operating cash generation should fund needs for the foreseeable future, while noting that credit-market disruption could constrain access to capital.
- The company expects seasonal variation, with first-quarter results typically lowest; historical variation between highest and lowest quarters is approximately 10%, excluding recession effects. Inflation, labor, fuel, materials and third-party costs remain relevant, and price increases may not fully or promptly offset cost increases.
- Chiquita Canyon landfill event: The company reported an elevated-temperature event at a non-active, lined landfill area, related odors and other impacts, approximately 163 SCAQMD Rule 402 notices, additional agency notices, and two DTSC summaries alleging violations. The company is incurring substantial response and operating costs; potential penalties could be substantial, but the amount and outcome are not estimable from the filing.
- Other contingencies: Jefferson Parish landfill odor litigation includes class and mass actions; trial proceedings and class-certification deadlines were scheduled for 2024. The company cannot determine the likelihood or allocation of potential liability. A separate Chiquita Canyon permit dispute is subject to a settlement process contingent on County approval of a permit modification; the filing cites estimated new permit-related costs exceeding $300 million.
- Landfill capacity: Average remaining life is estimated at approximately 32 years based on permitted capacity, or 35 years including probable expansions. Expansion approvals are not certain. Landfill closure, post-closure and leachate estimates depend on assumptions and may change.
- Interest-rate exposure: Unhedged floating-rate debt was $1.438 billion. A one-percentage-point rate increase would reduce annual pre-tax income by approximately $14.4 million. The company also faces diesel-price, recyclable-commodity and Canadian-dollar exposure.
- Financing changes: In February, the company issued $750 million of 5.00% senior notes due 2034 and entered a new $3.0 billion revolving credit facility, using borrowings in part to repay and terminate prior credit agreements. Early extinguishment resulted in a $2.3 million write-off of unamortized loan fees.
Key facts for investors to verify
- Whether acquisition contributions, pricing and margin performance continue to offset volume losses and higher risk-management, labor and incentive costs.
- Post-acquisition debt, interest expense, revolving-facility availability and covenant headroom, particularly given the $1.156 billion acquisition cash outlay.
- The trajectory and total cost of the Chiquita Canyon elevated-temperature event, including regulatory penalties and remediation obligations.
- Developments in the Jefferson Parish litigation and Chiquita Canyon permit proceedings, including any change in the company’s ability to estimate potential exposure.
- Progress against the approximately $1.150 billion 2024 capital-spending plan and management’s stated liquidity expectations.
- Landfill expansion approvals and revisions to closure, post-closure, leachate and capacity estimates.