Waste Connections, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Amounts are U.S. dollars. The company provides solid-waste collection, transfer, disposal and recycling services in the U.S. and Canada, as well as exploration and production (E&P) waste services and intermodal operations.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1,091.3 million | $514.7 million |
| Operating income (margin) | $26.4 million (2.4%) | $91.0 million (17.7%) |
| Net income attributable to Waste Connections | $14.9 million | $44.8 million |
| Diluted EPS | $0.08 | $0.36 |
| Net cash from operating activities | $287.5 million | $164.7 million |
| Capital expenditures | $91.2 million | $56.6 million |
| Adjusted EBITDA (non-GAAP) | $332.8 million | $169.7 million |
| Adjusted free cash flow (non-GAAP) | $237.5 million | $113.6 million |
- Revenue rose 112%, but the comparison is substantially affected by the June 2016 Progressive Waste acquisition: the 2017 quarter includes $490.3 million of acquired-operation revenue, while 2016 does not. Acquisitions closed during or after the prior-year quarter added approximately $539 million to 2017 revenue. Existing-operation drivers included $12.6 million of net price increases and higher solid-waste, E&P and recycling revenue.
- Cost of operations was 59.0% of revenue versus 55.8%; management attributed most of the increase to acquired operations with lower-than-company-average operating margins. SG&A improved to 11.8% of revenue from 13.2%.
- Operating income and GAAP earnings fell sharply, principally because impairments and other operating items increased to $141.7 million from $0.2 million. The 2017 total included a $77.3 million E&P goodwill impairment, a $53.4 million charge on assets held for disposal and an $11.3 million increase in contingent-consideration fair value.
- Interest expense increased to $29.1 million from $17.2 million, reflecting higher average borrowings and acquisition-related financing. The reported income-tax benefit was $16.9 million; the unusually high effective benefit rate reflects, among other factors, the small pretax loss and a $6.7 million benefit from newly adopted share-based-payment accounting.
Cash, debt and liquidity
- Cash and equivalents were $268.5 million at March 31, 2017, up from $154.4 million at year-end. Working capital was a $152.2 million surplus, versus $51.2 million at December 31, 2016.
- Investing cash outflow was $412.9 million, including $344.3 million for acquisitions and $91.2 million of capital expenditures. The January acquisition of Groot Industries was the principal acquisition expenditure; the company reported Groot annual revenue of approximately $200 million.
- Financing cash inflow was $239.4 million. The company reported $3.972 billion of debt before deducting debt issuance costs and the current portion; the balance-sheet carrying amount was $3.958 billion. Revolver borrowings were $636.9 million, with $698.6 million available and $227.0 million of letters of credit outstanding. The credit agreement matures in June 2021.
- Quarterly dividends paid were $0.18 per share, compared with $0.145 a year earlier. No shares were repurchased under the company’s normal-course issuer bid during the quarter.
Material changes, outlook and risks
- The June 2016 Progressive Waste combination materially changed the scale and geographic composition of the business; the company also acquired Groot and four smaller businesses in Q1 2017. Segment reporting was reorganized, so year-over-year segment comparisons are not fully like-for-like.
- Management expected approximately $450 million of 2017 capital expenditures for the existing business. It said cash, operating cash generation and credit facilities should fund foreseeable needs, while noting capital-market disruption could constrain borrowing or other financing. No full-year earnings or revenue guidance is provided in the supplied filing text.
- Management described improving E&P demand as oil and gas production activity recovered, but warned that a renewed decline in commodity prices or drilling could reduce E&P demand and lead to further asset impairments. Recyclable commodity prices, diesel prices, labor costs and seasonal conditions also affect results. The company estimated Q1 is typically its lowest-revenue quarter and seasonal variation between highest and lowest quarters may be about 10%.
- Chiquita Canyon Landfill’s expansion and 30-year permit extension were approved by the county commission with proposed fees, operating restrictions and a reduced annual tonnage limit. The company planned to appeal; management said the conditions could make continued operations economically unviable and that the landfill could face temporary closure if a permit was not approved by July 31, 2017. The outcome was not reasonably determinable.
- A subsidiary is a potentially responsible party in the Lower Duwamish Waterway Superfund matter. The company could not determine its allocation, the likelihood of a settlement or potential liability; estimated site cleanup costs in the EPA’s 2014 decision were about $342 million for the site as a whole, not the company’s share.
- The company early adopted a simplified goodwill impairment standard and recorded the $77.3 million E&P impairment. It also reported that a material weakness related to acquisition accounting valuation controls, disclosed in its 2016 Form 10-K, had been remediated by March 31, 2017; management said it would continue testing controls.
- Subsequent events: the company issued $400 million of senior unsecured notes on April 20, 2017; the filing text does not provide their interest rate. The board later approved a $0.18 quarterly dividend and a proposed three-for-two share split, subject to shareholder approval.
Investor verification priorities
- Separate acquired growth from organic trends, and review integration progress and the margins of acquired operations.
- Verify the drivers and potential recurrence of impairment and other operating charges, especially the E&P valuation and planned divestitures.
- Check leverage, revolver availability, interest-rate exposure and the terms of the $400 million notes issued after quarter-end.
- Monitor the Chiquita Canyon permit appeal, potential operating restrictions and the unresolved Lower Duwamish liability.
- Assess whether cash generation can support planned capital spending, acquisitions and dividends, and confirm the effectiveness of remediated acquisition-accounting controls.