Waste Connections, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars. The company provides non-hazardous waste collection, transfer, disposal and recycling services in the U.S. and Canada, as well as oilfield waste and intermodal services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,389.6m | $1,412.4m | $4,047.7m | $4,026.7m |
| Operating income | $230.7m | $236.6m | $215.3m | $643.6m |
| Operating margin | 16.6% | 16.7% | 5.3% | 16.0% |
| Net income attributable to Waste Connections | $158.0m | $159.1m | $74.0m | $433.6m |
| Diluted EPS | $0.60 | $0.60 | $0.28 | $1.64 |
| Adjusted EBITDA (non-GAAP) | $432.6m | $443.6m | $1,235.4m | $1,254.6m |
| Adjusted diluted EPS (non-GAAP) | $0.72 | $0.73 | $1.96 | $2.03 |
Q3 cost of operations was 59.6% of revenue versus 59.1% a year earlier. For the nine-month period it was 60.0% versus 59.2%. The nine-month GAAP results include a $417.4m impairment charge on four E&P landfills; excluding specified adjustments, adjusted net income was $517.2m versus $538.1m in 2019. Non-GAAP measures are company-defined and are not substitutes for GAAP results.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,185.6m, essentially unchanged from $1,185.4m in 2019. Investing cash use was $650.1m, including $420.7m of property and equipment capital expenditures and $66.8m for undeveloped landfill property. Adjusted free cash flow, a non-GAAP measure, was $778.4m versus $762.9m.
- Cash and equivalents were $859.1m at September 30, up from $326.7m at year-end 2019. Working capital surplus was $456.0m. The company reported $1,257.9m of remaining revolver availability; $125.9m of letters of credit were outstanding.
- Debt and notes payable had a $4,686.9m balance-sheet carrying amount, including current maturities; gross principal before unamortized discounts and issuance costs was $4,721.9m. The company issued $600m of 2.60% notes due 2030 and $500m of 3.05% notes due 2050 during 2020. Credit Agreement borrowings included $650m term debt and $178.7m revolver borrowings; the facility matures in March 2023.
- The company paid $145.9m in dividends and repurchased $105.7m of shares in the first nine months. The quarterly dividend was raised after quarter-end from $0.185 to $0.205 per share.
Material changes and management commentary
- Q3 revenue declined 1.6% year over year; nine-month revenue increased 0.5%. Price increases and acquisitions partly offset lower volumes. Existing-business solid waste volume losses reduced revenue by $74.6m in Q3 and $199.8m year to date; E&P revenue fell $42.8m and $75.2m, respectively.
- Management said COVID-19 disruption continued to weigh on commercial collection, transfer, landfill and roll-off activity, but conditions improved in many markets during Q3. Solid waste collection, transfer and disposal revenue was down 2.0% year over year on a same-store basis in Q3, an improvement from a 5.3% decline in Q2. By Q3, 68% of tracked commercial customers that had reduced or suspended service had sought resumption or increased frequency.
- E&P weakness reflected lower oil prices, reduced drilling and production, and uncertainty about future demand. Rig counts fell 72% in certain basins. The $417.4m landfill impairment used discounted cash flow assumptions, including a 12% discount rate; management estimated a 10% change in annual cash flows would change the impairment by about $3m.
- From July 2020, E&P operations were combined with the Southern segment; prior-year segment data was recast. Southern segment EBITDA declined 28.1% in Q3 and 15.4% year to date, largely reflecting E&P revenue weakness. Total segment EBITDA declined 3.4% in Q3 and 1.6% year to date.
- Management cited cost controls, reduced discretionary spending and suspension of the 401(k) match, alongside supplemental frontline employee pay and other pandemic support. The company deferred $29.4m of payroll taxes through Q3 under the CARES Act and expected about $45m of 2020 U.S. payroll and other tax deferrals, with repayment split between 2021 and 2022.
Outlook, risks and contingencies
- The filing gives no numerical revenue or earnings guidance. Management expected 2020 property and equipment capital expenditures of approximately $575m, in addition to potential purchases of undeveloped landfill property. It stated cash, operating cash generation and credit facilities should meet foreseeable needs, while warning that capital-market disruption could affect access to financing.
- Future COVID-19 effects remain uncertain and depend on the pandemic’s duration, severity, containment measures and the pace of economic recovery. Other risks include oil and gas activity and prices, labor and fuel costs, recyclable commodity prices, foreign exchange, environmental regulation, landfill permits and capacity, customer credit, and interest-rate and LIBOR transition exposures.
- Material legal matters include the Lower Duwamish Waterway Superfund allocation and potential natural-resource damages, for which the company said it could not reasonably estimate its potential liability; Chiquita Canyon landfill permit and fee litigation, including a separate environmental-review appeal; and appeals concerning the Town of Colonie landfill expansion permits. Outcomes and potential exposure were not clear from the filing.
- Estimated final capping, closure and post-closure obligations totaled $1,527.8m in the contractual-obligations schedule. The company also had $138.2m of fixed-price fuel purchase commitments and approximately $1,181m of surety bonds outstanding.
Key facts for investors to verify
- Whether solid waste volume recovery continued after Q3 and whether COVID-related service reductions returned.
- Whether E&P activity and landfill cash-flow assumptions support the carrying values following the $417.4m impairment.
- How recurring operating performance compares with adjusted EBITDA and adjusted free cash flow after reviewing the company’s non-GAAP definitions and reconciliations.
- Debt repayment and refinancing plans, revolver availability, and exposure to interest rates and the LIBOR transition.
- Developments in the cited landfill litigation and Superfund matters, including any changes in potential costs or liabilities.