Waste Connections, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2019, with comparisons to Q1 2018. Waste Connections provides non-hazardous solid-waste collection, transfer, disposal and recycling services in the U.S. and Canada, as well as E&P waste and intermodal services. Unless otherwise indicated, dollar amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,244.6 million | $1,140.1 million | +9.2% |
| Operating income | $184.9 million | $188.7 million | -2.0% |
| Operating margin | 14.8% | 16.5% | -1.7 percentage points |
| Net income attributable to Waste Connections | $125.6 million | $124.9 million | +0.6% |
| Diluted EPS | $0.48 | $0.47 | +$0.01 |
| Adjusted EBITDA (non-GAAP) | $385.7 million | $356.9 million | +8.1% |
| Adjusted free cash flow (non-GAAP) | $246.3 million | $220.2 million | +11.9% |
Revenue growth reflected approximately $75.3 million from acquisitions and $54.8 million of net price increases, partly offset by $12.6 million of lower solid-waste volumes, weaker Canadian-dollar translation, lower recycling commodity revenue and divestitures. E&P revenue increased with drilling activity and disposal volumes. Cost of operations rose to 58.9% of revenue from 57.9%; reported operating income and margin declined in part because impairments and other operating items increased to $16.1 million from $1.0 million. Q1 2019 charges included $12.2 million for contracts not renewed or expected to be renewed, $1.5 million of contingent-consideration expense and $2.5 million of asset-disposal losses.
Operating cash flow was $363.8 million, up from $307.2 million. Capital expenditures were $114.2 million, versus $91.2 million; cash used in investing activities was $128.0 million, compared with $402.3 million, primarily reflecting much lower acquisition spending. Cash used in financing activities was $55.2 million. Cash, cash equivalents and restricted cash ended the quarter at $584.7 million; cash and equivalents alone were $499.5 million. The company reported a $398.7 million working-capital surplus.
At March 31, 2019, long-term debt and notes payable, net of debt issuance costs and current portion, were $4,157.1 million; gross debt was approximately $4,176.7 million. The company had $504.0 million drawn on its revolving facility, $1,237.5 million outstanding on its term loan, and $950.2 million of revolver availability, excluding $108.3 million of outstanding letters of credit. The $175 million of 5.25% senior notes due in 2019 were intended to be redeemed in November using credit-facility borrowings. Interest expense rose 15.2% to $37.3 million.
Material changes and management commentary
- Acquisitions, pricing and E&P activity supported growth, while existing solid-waste volume declines, weather impacts and non-renewed residential contracts weighed on results. Recycling revenue fell with lower prices for cardboard and other fiber products.
- Segment EBITDA was $378.4 million, compared with $349.0 million; its margin was 30.4%, versus 30.6%. Eastern, Southern, Western, Central and E&P segment EBITDA increased; Canada was essentially flat.
- The company adopted lease accounting on January 1, 2019, recognizing $206.5 million of operating lease right-of-use assets and $209.6 million of lease liabilities at adoption. Management said adoption did not materially affect net income or cash flows.
- Operating lease liabilities were $206.1 million at March 31. The company reported an average remaining lease term of 9.2 years and a weighted-average discount rate of 3.97%.
- Management expected approximately $575 million of 2019 capital expenditures for existing operations, funded principally by cash on hand, operating cash flow and credit-facility borrowings. It said existing cash, the Credit Agreement and expected operating cash generation should meet foreseeable liquidity needs, while noting capital-market and bank-funding risks.
- Seasonality typically makes first-quarter revenue the lowest of the year. Management cited winter weather, construction activity and E&P activity as drivers of quarterly variability. No specific full-year revenue or earnings guidance is stated in the provided filing text.
Outlook, risks and contingencies
Key risks include competition and pricing pressure; labor, maintenance, insurance and fuel costs; access to landfill permits and expansion capacity; acquisition integration; E&P demand sensitivity to oil and gas activity; recycling commodity prices; weather and seasonality; foreign-exchange movements; environmental regulation and litigation; and leverage. The company had no fuel hedge agreements outstanding at quarter-end, though it had fixed-price fuel purchase contracts. It estimated that a 1 percentage-point increase in rates on unhedged floating-rate debt would reduce annual pretax income by about $8.9 million. For April–December 2019, a $0.10-per-gallon fuel-price increase was estimated to reduce pretax income by approximately $3.3 million.
- Landfill obligations: Final capping, closure and post-closure liabilities were $262.7 million at March 31. Estimated future expenditures were $1.397 billion in current dollars, substantially due more than five years out. Estimates depend on landfill capacity, timing and cost assumptions.
- Environmental matter: A subsidiary is among more than 100 potentially responsible parties at the Lower Duwamish Waterway Superfund Site. EPA’s estimated cleanup cost for the site was approximately $342 million, but the company said it could not determine its allocation or potential liability; additional cleanup or natural-resource damages could arise.
- Chiquita Canyon disputes: The company disputed Los Angeles County landfill permit conditions and fees, with stated estimated new costs in excess of $300 million. The California Court of Appeal revived challenges to certain conditions; outcomes remained uncertain. A separate environmental-review case was scheduled for August 2019.
- Other litigation: Appeals remained possible or pending in the Town of Colonie landfill-expansion matter after dismissal of petitions. The Florida default judgment against a subsidiary was paid in April 2019 for $11.2 million, after quarter-end, and the case was dismissed with prejudice.
- Subsequent financing: On April 16, 2019, the company issued $500 million of 3.50% senior notes due 2029; proceeds were expected to repay part of Credit Agreement borrowings and for general corporate purposes. The board also approved a $0.16-per-share quarterly dividend payable in May.
Management stated that disclosure controls and procedures were effective at the reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter. Forward-looking statements are subject to the risks described in the filing and actual results may differ.
Most important facts for investors to verify
- Whether pricing and acquisition growth can offset volume softness and elevated operating costs, and whether operating margins recover.
- Details and cash/non-cash effects of the $16.1 million impairment and other operating charges, particularly contract write-offs.
- Debt refinancing and use of proceeds from the April 2019 $500 million notes, including the planned redemption of the 2019 notes and evolution of revolver borrowings.
- Progress toward the approximately $575 million 2019 capital-expenditure plan and resulting free cash flow after dividends and acquisitions.
- Developments in landfill permits, the Chiquita Canyon litigation and the Lower Duwamish allocation process, where potential company exposure was not determinable.
- Changes in fuel prices, interest rates, recycling prices, Canadian-dollar exchange rates and E&P activity, along with the assumptions behind management’s sensitivity estimates.
Non-GAAP measures, including adjusted EBITDA and adjusted free cash flow, are defined by the company and are not substitutes for GAAP results; comparisons should account for the company’s stated adjustments.