Waste Connections, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results are presented in U.S. dollars. Comparisons are with the corresponding 2018 periods unless stated otherwise.
Business context
Waste Connections provides non-hazardous waste collection, transfer, disposal and recycling services in the U.S. and Canada, along with E&P waste services and intermodal operations. Growth strategy emphasizes acquisitions, pricing, and vertically integrated and niche markets. The company acquired 13 individually immaterial businesses during the first nine months of 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.412 billion | $1.281 billion | $4.027 billion | $3.661 billion |
| Operating income | $236.6 million | $232.9 million | $643.6 million | $632.3 million |
| Net income attributable to Waste Connections | $159.1 million | $150.8 million | $433.6 million | $414.4 million |
| Diluted EPS | $0.60 | $0.57 | $1.64 | $1.57 |
| Adjusted EBITDA (non-GAAP) | $443.6 million | $416.8 million | $1.255 billion | $1.169 billion |
| Adjusted free cash flow (non-GAAP) | Not stated for quarter | Not stated for quarter | $762.9 million | $675.7 million |
- Q3 revenue grew 10.3%; management attributed growth principally to acquisitions and customer price increases. Existing-business price increases added $61.1 million, while volume added $10.3 million to solid waste revenue. Nine-month revenue grew 10.0%; existing-business price increases contributed $174.5 million.
- Q3 operating margin declined to 16.8% from 18.2%; nine-month operating margin declined to 16.0% from 17.3%. Cost of operations rose to 59.1% of revenue in Q3 from 57.5%, reflecting acquisition costs and higher labor, maintenance and recycling-processing costs. SG&A as a share of revenue improved.
- Q3 net margin was 11.3%, versus 11.8%; nine-month net margin was 10.8%, versus 11.3%. Lower effective tax rates supported net income growth, while higher interest expense partly offset operating gains.
- Operating cash flow for the first nine months increased to $1.185 billion from $1.038 billion. Capital expenditures for property and equipment were $433.5 million; acquisition payments were $420.4 million, and a $31.7 million greenfield landfill site was purchased. Cash, cash equivalents and restricted cash totaled $395.8 million at period-end.
- At September 30, cash and equivalents were $303.8 million and working capital was $113.5 million. Debt and notes payable had a $4.040 billion carrying value; principal outstanding was $4.063 billion. The revolving facility had $427.8 million drawn and $1.013 billion available, with $121.9 million of letters of credit outstanding. The company reported covenant compliance.
Changes, outlook and notable items
- Revenue and earnings increased, but operating margins narrowed as operating costs and impairment-related charges grew faster than revenue. Nine-month adjusted free cash flow increased about 12.9% year over year.
- The company issued $500 million of 3.50% senior notes due 2029 in April. It intended to redeem $175 million of 5.25% notes due 2019 on November 1, 2019 using credit-facility borrowings. Debt carrying value declined from $4.153 billion at year-end 2018.
- Management expected 2019 property-and-equipment capital expenditures of $600 million to $625 million, in addition to the greenfield site purchase. It said cash, operating cash generation and its credit agreement should fund needs for the foreseeable future, while warning that capital-market disruption could restrict access to funding. No specific revenue or earnings forecast is provided in the supplied filing text.
- Q3 impairments and other operating items were a net expense of $12.9 million, including an $8.0 million write-off from abandoning an E&P landfill development project. Nine-month charges totaled $32.9 million, including contract write-offs, asset losses and litigation-related costs.
- Pricing and acquisitions supported growth, while management cited labor and maintenance cost increases, lower recyclable commodity and landfill-gas credit prices, and reduced intermodal activity. E&P results remain exposed to oil and gas activity; operations also face fuel, weather, foreign-exchange, competition, permit and landfill-capacity risks.
- Material contingencies include the Lower Duwamish Waterway Superfund allocation and potential natural-resource damages; the Chiquita Canyon landfill expansion and related proceedings; and appeals concerning the Town of Colonie landfill expansion. The company said it could not reasonably determine the likelihood or amount of liability in the Duwamish matter or the likelihood of outcomes in the Chiquita proceedings. A separate Chiquita environmental-review petition was denied in full on October 10, 2019, subject to possible appeal.
- The company adopted lease accounting on January 1, 2019, recording $189.7 million of operating lease right-of-use assets and $196.5 million of lease liabilities at September 30. Adoption did not materially affect net income or cash flows. After quarter-end, the board raised the quarterly dividend from $0.16 to $0.185 per share.
Important facts for investors to verify
- Whether pricing gains continue to offset labor, maintenance, disposal, fuel and recycling-related cost pressure, and whether operating margins stabilize.
- Acquisition contribution and integration, including the quality of acquired earnings and the effect of goodwill, which reached $5.298 billion.
- Debt repayment, interest-rate exposure, available credit and planned capital spending; assess the effect of the 2029 note issuance and intended 2019-note redemption.
- Landfill expansion and permit outcomes, closure and post-closure obligations, and the uncertain environmental and litigation exposures described in the filing.
- Assumptions behind non-GAAP adjusted EBITDA and adjusted free cash flow, and the distinction between those measures and GAAP results.