Waste Connections, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 4, 2022. Unless otherwise noted, financial amounts below are U.S. dollars. The company provides non-hazardous waste collection, transfer, disposal and recycling services, as well as E&P waste and intermodal services in the U.S. and Canada.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1.646 billion | $1.396 billion | +17.9% |
| Operating income | $273.9 million | $238.4 million | +14.9% |
| Operating margin | 16.6% | 17.1% | Down 0.5 percentage points |
| Net income attributable to Waste Connections | $180.3 million | $160.3 million | +12.5% |
| Diluted EPS | $0.69 | $0.61 | +13.1% |
| Adjusted EBITDA (non-GAAP) | $502.1 million | $433.2 million | +15.9% |
| Adjusted free cash flow (non-GAAP) | $320.4 million | $289.8 million | +10.6% |
| Cash provided by operating activities | $440.9 million | $400.4 million | +$40.5 million |
Cost of operations rose to 60.1% of revenue from 59.2%, with higher fuel, supplemental compensation, trucking and maintenance costs among the pressures. SG&A declined to 9.9% of revenue from 10.1%. Net margin was 11.0%, versus 11.5%.
Revenue growth reflected acquisitions, customer price increases and surcharges, higher solid-waste volumes, improved E&P activity, and higher recyclable commodity and renewable energy credit revenue. Management reported $94.0 million of net price increases at existing operations, including $83.5 million of core price and $10.5 million of surcharges. Acquisitions added $112.3 million of revenue; existing-business solid-waste volume contributed $7.0 million, overcoming the prior-year revenue from two nonrenewed residential contracts.
Cash, debt and capital allocation
- Cash and equivalents were $391.4 million at March 31, 2022, compared with $147.4 million at year-end. Working capital was a $155.1 million surplus, versus a $200.0 million deficit at December 31, 2021.
- Long-term debt and notes payable totaled $5.905 billion before unamortized discounts and issuance costs; the balance-sheet carrying amount was $5.846 billion, including the current portion. Revolver borrowings were $1.087 billion, with $718.7 million available. The company reported $650 million outstanding under its term loan.
- Investing cash outflow was $489.9 million, including $355.2 million for acquisitions and $152.3 million of capital expenditures. Financing cash inflow was $292.1 million, including $1.305 billion of debt proceeds and $505.6 million of principal payments.
- The company repurchased 3.388 million shares for $425.0 million, an average $125.44 per share, and paid $59.4 million in dividends. The quarterly dividend was $0.23 per share.
- Management expected approximately $850 million of 2022 capital expenditures, funded principally by cash, operating cash generation and credit-facility borrowings. It said available cash, the credit agreement and expected operating cash flows should meet foreseeable needs, while noting capital-market and lender-access risks.
Material developments, outlook and risks
- On March 9, 2022, the company issued $500 million of 3.20% senior notes due 2032. The credit agreement matures in July 2026. The company reported compliance with applicable covenants at quarter-end.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management noted that results are seasonal, typically lowest in Q1, and that 2022 capital expenditures were expected to be approximately $850 million.
- Inflation, fuel, labor, maintenance and third-party service costs pressured operations. Management said customer pricing and contractual pass-throughs may offset many cost increases, but competitive pressures or timing delays could leave some costs unrecovered. A $0.10-per-gallon rise in fuel prices over the remaining nine months of 2022 was estimated to reduce pretax income by about $3.3 million.
- COVID-related operating impacts had largely abated for many solid-waste volumes, but Q1 included approximately $10 million of supplemental pay and benefits. The filing also cites continuing labor constraints and supply-chain pressures.
- Unhedged variable-rate debt was $886.6 million; a one-percentage-point increase in interest rates was estimated to reduce annual pretax income by approximately $8.9 million. The company had $1.475 billion of U.S. LIBOR-based loans and said a hypothetical transition to SOFR at quarter-end would have an immaterial estimated annual interest-expense impact.
- Key contingencies include the Lower Duwamish Waterway Superfund matter, for which the company cannot determine its allocation or potential liability, and litigation over Chiquita Canyon Landfill permit conditions. The filing describes more than $300 million of estimated new costs imposed under the permit, but states that the outcome of the litigation is uncertain. A trial on remaining permit claims was scheduled for August 2022.
- The company estimated average remaining landfill life at approximately 29 years based on permitted capacity, or 33 years including probable expansions; expansion approvals are not assured. It also disclosed risks tied to E&P activity and oil and gas prices, recyclable commodity prices, Canadian-dollar movements and regulatory requirements.
Important facts for investors to verify
- Whether pricing and surcharges can continue to offset fuel, labor and other inflationary cost increases, and how margins trend in subsequent quarters.
- Acquisition contribution, integration, purchase-price allocations and the effect of acquisition spending on leverage and free cash flow.
- Debt maturities, revolving-credit availability, variable-rate exposure and the company’s ability to fund planned capital expenditures, dividends and repurchases.
- Progress and potential financial exposure in the Lower Duwamish and Chiquita Canyon matters, including any material developments in the scheduled litigation.
- Landfill expansion approvals, disposal capacity, E&P demand and commodity-price impacts on recycling and fuel costs.
- Non-GAAP adjusted EBITDA and adjusted free cash flow reconciliations and definitions; these measures are not substitutes for GAAP results.