Waste Connections, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; fourth-quarter results are included below. Unless noted, amounts are U.S. dollars. The company provides collection, transfer, disposal and recycling services in the U.S. and Canada, along with E&P waste services and Pacific Northwest intermodal operations.
Business context and comparability
On June 1, 2016, Waste Connections completed its all-stock acquisition of Progressive Waste Solutions. The company’s 2016 results include Progressive Waste from the acquisition date, while 2015 results do not; the reported year-over-year growth is therefore not directly comparable. Progressive Waste contributed approximately $1.185 billion of 2016 revenue. The acquisition expanded the company’s geographic footprint and created Canada and Southern reporting segments.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $3.376 billion | $2.117 billion |
| Operating income (loss) | $452.3 million | $(61.5) million |
| Net income (loss) attributable to Waste Connections | $246.5 million | $(95.8) million |
| Diluted EPS | $1.60 | $(0.78) |
| Adjusted EBITDA (non-GAAP) | $1.071 billion | $710.6 million |
| Net cash from operating activities | $795.3 million | $577.0 million |
| Capital expenditures | $344.7 million | $238.8 million |
| Adjusted free cash flow (non-GAAP) | $550.9 million | $343.0 million |
Revenue rose 59.4%, primarily from acquisitions. Solid-waste internal growth was 4.5%; E&P revenue fell to $120.5 million from $215.4 million. Reported operating margin was 13.4% versus (2.9%) in 2015, when substantial E&P impairments depressed results. Adjusted EBITDA margin declined to 31.7% from 33.6%, reflecting the acquired operations’ lower margin profile. Adjusted net income was $395.2 million, or $2.57 per diluted share, in 2016; these are non-GAAP measures and include specified adjustments.
| Fourth-quarter metric | Q4 2016 | Q4 2015 |
|---|---|---|
| Revenue | $1.049 billion | $531.9 million |
| Operating income | $139.2 million | $101.7 million |
| Net income attributable to Waste Connections | $85.6 million | $52.1 million |
| Diluted EPS | $0.49 | $0.42 |
Q4 operating margin was approximately 13.3%, compared with 19.1% in Q4 2015. Acquisition timing substantially affects this comparison.
Cash, debt and capital allocation
At year-end, cash and equivalents were $154.4 million and working capital was positive $140.4 million, versus a $15.8 million deficit at year-end 2015. Total debt was approximately $3.633 billion; the company reported leverage of 2.69x, down from 2.88x, and said it was in compliance with debt covenants. The credit facility had $1.004 billion available, excluding outstanding letters of credit. Most outstanding debt was variable-rate; a 1 percentage-point rate increase was estimated to reduce annual pretax income by approximately $15.9 million.
The company paid $92.5 million in dividends during 2016 and increased its quarterly dividend from $0.145 to $0.18 per share in October. It made no share repurchases in 2016. Management expected approximately $450 million of 2017 capital expenditures, principally funded through cash, operating funds and credit-facility borrowings.
Outlook, risks and unusual items
- Management said E&P demand improved as oil and gas prices recovered later in 2016 and into early 2017, but warned that a renewed or sustained price decline could reduce drilling, service demand and asset values.
- The 2016 E&P goodwill impairment test found reporting-unit carrying value above estimated fair value, but no goodwill impairment was recorded under the then-applicable test. The company recorded $0.156 million of E&P indefinite-lived intangible impairment. Following a new accounting standard, management said a 2017 goodwill test could result in a charge of up to $77.3 million if the valuation shortfall persists.
- 2016 included $27.7 million of impairments and other operating items, including a $14.9 million estimated loss on assets held for sale. The 2015 comparison included $494.5 million of such charges, chiefly E&P impairments.
- Environmental and permitting requirements, landfill capacity and closure obligations, fuel and interest-rate movements, labor costs, recycled-commodity prices, seasonality, acquisition integration and potential customer or contract losses are material risks. The company also identified the possibility of additional costs from the Lower Duwamish Waterway Superfund matter; it could not reasonably estimate its likelihood or potential liability.
- Management and the auditor reported a material weakness in controls over fair-value estimates for business combinations. Related errors were deemed immaterial and corrected before issuance, but disclosure controls were concluded ineffective at year-end. Remediation was in progress and had not yet been demonstrated effective.
- After year-end, the company acquired Groot Industries, with approximately $200 million in annual revenue, and announced plans to issue $400 million of notes to help fund the acquisition and for general corporate purposes.
Most important facts for investors to verify
- How much of reported growth and cash generation reflects Progressive Waste versus underlying internal growth, and whether integration synergies offset lower acquired margins and one-time costs.
- Progress on remediating the material weakness and the reliability of acquisition-related fair values and estimates.
- Debt, interest-rate exposure, covenant headroom and funding needs after the Groot acquisition and planned note issuance.
- Whether E&P activity and the related goodwill valuation recover; confirm the 2017 impairment outcome.
- Updates on landfill permits and expansions, closure obligations, asset divestitures and the potential exposure from the Lower Duwamish Waterway matter.