Waste Connections, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial amounts below are in millions unless otherwise stated. Waste Connections provides solid waste collection, transfer, disposal and recycling services in the U.S. and Canada, as well as E&P waste and intermodal services.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1,352.4 | $1,244.6 |
| Operating income; margin | $217.0; 16.0% | $184.9; 14.8% |
| Net income attributable to Waste Connections | $143.0 | $125.6 |
| Diluted EPS | $0.54 | $0.48 |
| Operating cash flow | $369.6 | $363.8 |
| Capital expenditures | $137.8 | $114.2 |
| Adjusted free cash flow (non-GAAP) | $235.7 | $246.3 |
Revenue rose 8.7% and attributable net income increased 13.9%. Adjusted EBITDA, a non-GAAP measure, was $408.5 million versus $385.7 million. Segment EBITDA was $400.9 million, or 29.6% of revenue, compared with $378.4 million, or 30.4%. Cost of operations increased to 60.3% of revenue from 59.0%; operating margin improved, helped by lower impairment and other operating charges ($1.5 million versus $16.1 million) and growth from acquisitions and pricing. The effective tax rate was 16.7%, versus 18.2%.
At quarter-end, cash and equivalents were $1,195.3 million; working capital was a $972.1 million surplus. Debt and notes payable totaled $5,201.9 million before unamortized discounts and issuance costs, up from $4,375.9 million at year-end 2019. Revolver availability was $762.6 million, excluding $107.3 million of letters of credit. Subsequent to quarter-end, the company repaid $500 million on its revolver; it reported more than $1.2 billion of remaining revolver capacity as of May 1.
Changes versus the prior-year quarter
- Revenue growth reflected approximately $64.1 million from acquisitions and $64.5 million of net price increases, partly offset by divestitures, lower volumes and other declines. The additional leap-year business day contributed an estimated $7 million to solid waste revenue.
- Management estimated COVID-19 reduced solid waste volumes by approximately $12 million in Q1, chiefly in commercial collection, roll-off, transfer and landfill services. Adverse effects began in March and were expected to continue in Q2 and beyond.
- E&P revenue declined 5.4% to $59.9 million, principally from lower activity in the Williston and Eagle Ford basins. Recycling revenue also fell, reflecting weaker commodity prices.
- Cash from operations increased modestly, but higher capital spending contributed to lower adjusted free cash flow. Financing cash flow included proceeds from $600 million of 2.60% notes due 2030 and $500 million of 3.05% notes due 2050. The company repurchased $105.7 million of shares in Q1 and paid $48.0 million in dividends.
- Comprehensive loss attributable to the company was $84.7 million, mainly reflecting foreign-currency translation losses and lower fair values of interest-rate swaps; this contrasted with comprehensive income of $154.4 million in Q1 2019.
Outlook, risks and unusual items
- Management reduced expected 2020 capital expenditures by approximately $110 million and forecast a $500–$550 million range. It cited cost controls, including hiring limits, wage freezes for certain employees, travel and discretionary-spending restrictions, and a planned suspension of the 401(k) match effective June 1. No full-year earnings or revenue guidance is provided in the supplied filing text.
- Management said April operating data suggested the pace of declines had slowed from late March, while emphasizing that pandemic effects remained highly uncertain. It described April improvement in some landfill and roll-off volumes and some customers resuming or increasing service.
- Low oil prices and reduced E&P activity pose demand and impairment risks. The company disclosed $832.7 million of E&P property and equipment and $59.6 million of related non-goodwill intangibles; a future impairment tied to Williston Basin operations could write down an estimated 90%–95% of the carrying value of affected property and equipment and intangibles.
- Subsequent to quarter-end, finalized U.S. tax regulations were expected to make certain related-party payments nondeductible for 2019. The company estimated approximately $27.4 million of additional tax expense, to be reported in Q2 2020; the ultimate tax liability remained under review.
- Material contingencies include the Lower Duwamish Waterway Superfund allocation and natural-resource-damages matters, for which the company said it could not reasonably estimate its potential liability. Chiquita Canyon landfill expansion litigation involves disputed conditions and fees; the company cited estimated new CUP costs exceeding $300 million and said the outcome was uncertain. COVID-19 delayed court proceedings.
- Other key exposures include customer and volume weakness, oil-price volatility, labor and claims costs, fuel and recycling commodity prices, foreign exchange, landfill permitting and environmental obligations, and access to credit markets. Management reported compliance with applicable debt covenants at March 31.
Most important facts for investors to verify
- Whether pandemic-related volume and service declines continued or reversed after the April trends described by management, and the effect on margins and cash flow.
- Whether the $500–$550 million 2020 capital-spending outlook and liquidity assumptions remained appropriate as conditions evolved.
- The timing and effect of the estimated $27.4 million tax expense, and any change in the company’s assessment of related tax exposure.
- Developments in E&P demand and whether further impairment indicators or charges arose, particularly for Williston Basin assets.
- Updates on the environmental and landfill litigation contingencies, including any estimable exposure or material change in proceedings.
- Debt, revolver availability, interest-rate exposure, and whether share repurchases and dividends continued alongside pandemic-related cash preservation measures.