Waste Connections, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 15, 2018. Amounts are U.S. dollars unless noted. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are unaudited.
Business context
Waste Connections is a North American solid-waste services provider operating in 38 U.S. states and six Canadian provinces. Its services include collection, transfer, landfill disposal and recycling, plus non-hazardous oil-and-gas exploration and production (E&P) waste services and Pacific Northwest intermodal operations. The company focuses on secondary and rural markets, exclusive contracts, vertical integration and acquisitions.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $4.630 billion | $3.376 billion |
| Operating income | $627.1 million; 13.5% margin | $452.3 million; 13.4% margin |
| Net income attributable to Waste Connections | $576.8 million; diluted EPS $2.18 | $246.5 million; diluted EPS $1.07 |
| Adjusted EBITDA (non-GAAP) | $1.461 billion; 31.5% of revenue | $1.071 billion; 31.7% of revenue |
| Cash provided by operating activities | $1.187 billion | $795.3 million |
| Capital expenditures | $479.3 million | $344.7 million |
| Adjusted free cash flow (non-GAAP) | $763.9 million; 16.5% of revenue | $550.9 million; 16.3% of revenue |
At year-end, cash and equivalents were $433.8 million and working capital surplus was $374.3 million. Total debt principal was approximately $3.926 billion; reported long-term debt and notes payable, net of current portion and debt issuance costs, were $3.900 billion. Management’s leverage ratio was 2.53x, down from 2.69x, against a target range of approximately 2.75x–3.0x. The company reported $1.150 billion available under its revolving facility and compliance with debt covenants.
Fourth-quarter 2017 revenue was $1.157 billion, operating income $175.0 million, net income attributable to the company $315.1 million and diluted EPS $1.19. Fourth-quarter 2016 comparables were $1.049 billion, $139.2 million, $85.6 million and $0.32, respectively.
Material changes versus prior period
- Revenue rose 37.2%. Acquisitions contributed approximately $1.059 billion of incremental revenue, partly offset by $55.8 million from divested operations; the company also cited solid-waste internal growth of 5.1% and improved E&P activity.
- Solid-waste internal growth reflected 3.2% pricing growth, 1.2% volume growth, higher recycling commodity prices and surcharges. E&P revenue increased to $192.0 million from $120.2 million as activity recovered.
- Adjusted EBITDA rose 36.4%, but its revenue margin edged down to 31.5% from 31.7%, reflecting the lower margins of acquired operations. GAAP operating margin was broadly stable.
- Net income included a $269.8 million income-tax benefit, primarily from the U.S. Tax Cuts and Jobs Act’s reduction in the federal corporate rate. The reported earnings increase therefore should not be read as solely operating growth.
- Impairments and other operating items totaled $156.5 million, including a $77.3 million E&P goodwill impairment, $34.5 million of net charges on assets held for disposal, an $11.0 million write-off of a discontinued landfill-development project and other charges.
- The company completed 14 acquisitions for net fair-value consideration of $562.2 million, including the January 2017 Groot acquisition. It also completed divestitures with total consideration of approximately $104.1 million.
- Cash dividends paid increased to $132.0 million from $92.5 million; the quarterly dividend rose from $0.12 to $0.14 per share. No shares were repurchased in 2017.
Outlook, commentary and risks
- Management expected approximately $500 million of 2018 capital expenditures, funded principally by cash on hand, operating cash flow and borrowings. The filing provides no formal revenue or earnings guidance.
- Management said E&P demand improved with higher oil and gas production, but a renewed price decline could reduce customer drilling, service volumes and asset values. E&P goodwill was fully impaired at year-end.
- Management estimated 2018 recycling-commodity revenue could decline approximately 30% from 2017 if prices remained at January 2018 levels. Commodity prices, overseas demand and changing recycling standards remain risks.
- Landfill capacity was estimated at an average 26 years on permitted capacity and approximately 30 years including probable expansions. Expansion permits are uncertain; four landfill operating agreements not covering the full landfill life expire between 2018 and 2024, and the company intends to seek renewals.
- Material exposures include extensive and evolving environmental regulation, landfill closure and remediation obligations, competition and contract renewals, labor costs and union negotiations, fuel and interest-rate changes, Canadian currency movements, cybersecurity, acquisition integration and potential impairment.
- Significant contingencies include the Lower Duwamish Waterway Superfund allocation, for which the company could not estimate its likelihood or potential liability, and litigation and disputed fees and conditions relating to the Chiquita Canyon landfill expansion in Los Angeles County. Outcomes were uncertain.
- Management did not expect significant business disruption from labor negotiations in 2018. Twenty-one collective bargaining agreements covering 1,196 employees had expired or were due to expire during 2018.
Most important facts for investors to verify
- How much future growth comes from acquired businesses versus pricing, volumes and other organic drivers, and whether acquired operations improve margins.
- The earnings and cash-flow effect of the one-time Tax Act benefit; the company recorded a provisional $1.0 million transition-tax obligation and had not finalized its accounting for certain Tax Act provisions.
- Debt maturities, variable-rate exposure, covenant headroom and the sustainability of cash generation after acquisitions, capital spending and dividends.
- Progress on landfill permit renewals and expansions, Chiquita Canyon litigation and the Lower Duwamish allocation, including any resulting costs or operating restrictions.
- Whether E&P activity and recycling-commodity prices support management’s assumptions, and whether landfill closure, self-insurance and other contingent liabilities remain adequately provided for.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported effective internal controls at December 31, 2017.