Waste Connections, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
Waste Connections provides non-hazardous waste collection, transfer, disposal and recycling services across the U.S. and Canada, alongside exploration and production (E&P) waste services and Pacific Northwest intermodal operations. Its strategy emphasizes secondary and rural markets, exclusive service arrangements, vertical integration and acquisitions. It completed 20 acquisitions in 2018 for approximately $1.032 billion in net fair value consideration.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $4.923 billion | $4.630 billion |
| Operating income / margin | $832.2 million / 16.9% | $627.1 million / 13.5% |
| Net income attributable to Waste Connections | $546.9 million | $576.8 million |
| Diluted EPS | $2.07 | $2.18 |
| Adjusted EBITDA (non-GAAP) / margin | $1.566 billion / 31.8% | $1.461 billion / 31.5% |
| Cash from operating activities | $1.411 billion | $1.187 billion |
| Capital expenditures | $546.1 million | $479.3 million |
| Adjusted free cash flow (non-GAAP) | $879.9 million | $763.9 million |
| Cash and equivalents at year-end | $319.3 million | $433.8 million |
| Working capital surplus | $232.2 million | $374.3 million |
| Total debt outstanding | $4.175 billion | $3.926 billion |
Management reported leverage of 2.45x at year-end, down from 2.53x in 2017, against a target range of approximately 2.75x–3.0x debt to EBITDA. The company reported compliance with debt covenants. Its $3.2 billion credit facility matures in March 2023; $955.8 million of revolving capacity was available at year-end, excluding the facility’s stated treatment of letters of credit.
Fourth quarter: Revenue was $1.262 billion versus $1.157 billion in Q4 2017; operating income was $200.0 million versus $175.0 million; and net income attributable to Waste Connections was $132.5 million versus $315.1 million. Q4 2017 included a substantial tax benefit from U.S. tax reform, making the net-income comparison unusual.
Material changes versus prior year
- Revenue rose 6.3%, reflecting acquisitions, solid waste pricing and stronger E&P activity. Acquisitions added revenue, while divestitures, lower recyclable commodity prices and selected volume reductions partly offset growth.
- Solid waste internal growth was 2.2%; pricing growth was 4.5%, while volume declined 0.7%. Lower recycled commodity values reduced internal solid waste growth by 1.6%.
- E&P revenue increased to $256.3 million from $203.5 million, supported by higher drilling and disposal activity. Segment EBITDA increased to $129.8 million from $90.6 million.
- Operating income increased 32.7%, helped by acquisitions, E&P growth and impairment/other operating charges falling to $20.1 million from $156.5 million. 2017 included a $77.3 million E&P goodwill impairment and other significant charges.
- Reported net income declined 5.2%, largely because 2017 included a $269.8 million tax benefit related primarily to the Tax Cuts and Jobs Act. The 2018 effective tax rate was 22.6%, versus a 13.6% tax benefit rate in 2017.
- Operating cash flow rose 18.9%; capital spending increased 13.9%. Adjusted free cash flow increased to $879.9 million from $763.9 million.
Outlook, commentary, risks and unusual items
- Management expected approximately $575 million of 2019 capital expenditures for the existing business, funded principally from cash, operating funds and credit-facility borrowings. No explicit 2019 revenue or earnings guidance is provided in the supplied filing text.
- The company expects seasonal revenue variation, typically with the first quarter lowest and the second and third quarters highest; the historical high-to-low quarterly fluctuation is estimated at approximately 12%.
- Management cited weaker recycling economics following China’s import restrictions and quality requirements. The company raised recycling processing fees and may seek to shift commodity-price exposure to customers.
- Key risks include environmental compliance and remediation costs, landfill permitting and expansion approvals, E&P activity and commodity prices, fuel and labor costs, acquisition integration, competitive contract renewals, foreign exchange and interest-rate exposure, and cybersecurity.
- Landfill capacity averaged approximately 26 years on currently permitted capacity, or approximately 29 years including probable expansions; the latter depends on obtaining permits. The company was pursuing probable expansions at 14 landfills.
- In 2018, the company issued $500 million of 4.25% senior notes due 2028. It paid $152.6 million in dividends and repurchased 831,704 shares for $58.9 million. The quarterly dividend was raised to $0.16 per share in October 2018.
- Unusual legal items include an $11.0 million accrual for a Florida default judgment, which the company continued to contest, and ongoing Chiquita Canyon landfill permit and fee litigation. The company paid an $11.6 million fee under protest; it stated that outcomes in key proceedings could not be determined.
- The company recorded no goodwill impairment in 2018; its 2017 E&P goodwill impairment was $77.3 million. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Separate recurring operating growth from acquisition contributions, divestitures, and changes in service volumes.
- Review the composition and reconciliation of adjusted EBITDA and adjusted free cash flow, which are non-GAAP measures.
- Assess the sustainability of recycling revenue and margins after lower commodity prices and changes in customer fees.
- Track debt maturities, variable-rate exposure, available credit capacity and the company’s acquisition spending relative to leverage targets.
- Follow landfill expansion permits and the outcomes and potential costs of the Chiquita Canyon, Lower Duwamish and Florida proceedings.
- Consider the 2017 tax benefit when comparing reported net income and quarterly earnings with 2018.