Waste nections(WCN) - 2021 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Financial statements for Q2 2021 show a significant turnaround with revenues up 17.5% to $1.53 billion and net income of $177.1 million, contrasting with a prior-year net loss Condensed Consolidated Balance Sheets The balance sheet shows a slight increase in total assets to $14.11 billion and a 17.8% rise in cash and equivalents as of June 30, 2021 Balance Sheet Highlights (in thousands of U.S. dollars) | Account | June 30, 2021 | December 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $14,106,207 | $13,992,364 | +0.8% | | Cash and equivalents | $727,395 | $617,294 | +17.8% | | Goodwill | $5,818,749 | $5,726,650 | +1.6% | | Total Liabilities | $7,237,607 | $7,128,926 | +1.5% | | Long-term debt and notes payable | $4,762,857 | $4,708,678 | +1.1% | | Total Equity | $6,868,600 | $6,863,438 | +0.1% | Condensed Consolidated Statements of Net Income (Loss) The income statement reflects a 17.5% Q2 2021 revenue increase to $1.53 billion and a swing to $177.0 million net income, largely due to the absence of a prior-year impairment charge Income Statement Summary (in thousands of U.S. dollars, except per share data) | Metric | Q2 2021 | Q2 2020 | YoY Change | Six Months 2021 | Six Months 2020 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,533,931 | $1,305,782 | +17.5% | $2,929,874 | $2,658,187 | +10.2% | | Operating Income (Loss) | $266,788 | $(232,357) | N/A | $505,160 | $(15,394) | N/A | | Net Income (Loss) attributable to Waste Connections | $177,047 | $(227,072) | N/A | $337,356 | $(84,037) | N/A | | Diluted EPS | $0.68 | $(0.86) | N/A | $1.29 | $(0.32) | N/A | | Cash Dividends per Share | $0.205 | $0.185 | +10.8% | $0.410 | $0.370 | +10.8% | - The significant swing from a net loss in 2020 to net income in 2021 was primarily due to a $437.3 million impairment charge taken in Q2 2020 that did not recur in 2021[11] Condensed Consolidated Statements of Cash Flows Operating cash flow increased by 12.7% to $848.5 million for the six months ended June 30, 2021, with significant share repurchases and dividend payments Cash Flow Summary for Six Months Ended June 30 (in thousands of U.S. dollars) | Cash Flow Category | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $848,478 | $753,185 | +12.7% | | Net cash used in investing activities | $(332,794) | $(359,956) | -7.5% | | Net cash provided by (used in) financing activities | $(393,184) | $67,515 | N/A | | Net increase in cash | $123,373 | $460,203 | -73.2% | | Cash at end of period | $837,762 | $883,424 | -5.2% | - Key financing activities in the first six months of 2021 included $305.6 million for share repurchases and $107.3 million for dividend payments[20] Notes to Condensed Consolidated Financial Statements Notes detail a significant Q2 2020 impairment charge, segment realignment, and revenue breakdown by service line, including strong recycling growth and share repurchases - In Q2 2020, the company recorded a significant impairment charge of $417.4 million related to property and equipment at four Exploration & Production (E&P) landfills, triggered by a decline in oil prices and E&P activity, exacerbated by the COVID-19 pandemic[41][42] Revenue by Service Line - Q2 2021 vs Q2 2020 (in thousands of U.S. dollars) | Service Line | Q2 2021 | Q2 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Total collection | $1,098,319 | $948,072 | +15.9% | | Landfill | $327,124 | $280,619 | +16.6% | | Transfer | $217,133 | $189,085 | +14.8% | | Recycling | $41,539 | $20,217 | +105.5% | | E&P | $34,607 | $40,152 | -13.8% | - As of July 2020, the company realigned its segments, combining the former E&P segment into the Southern segment, with prior period segment results reclassified to conform to this new structure[75] - The company repurchased 2,745,990 common shares for $305.6 million in the first six months of 2021 under its Normal Course Issuer Bid (NCIB)[115] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q2 2021 performance to broad recovery, driving 17.5% revenue growth, improved operating margins, and a strong liquidity position with a $414.2 million working capital surplus Results of Operations Q2 2021 revenue growth was primarily driven by solid waste volume increases and core price adjustments, leading to improved operating margins and a significant swing to operating income Q2 2021 Revenue Growth Drivers (in millions of U.S. dollars) | Driver | Impact on Revenue | | :--- | :--- | | Acquisitions | +$47.6 | | Core Price Increases | +$58.3 | | Surcharges | +$2.6 | | Solid Waste Volume Increases | +$80.2 | | E&P Revenue Decrease | -$4.4 | | Recyclable Commodities Increase | +$18.0 | | Foreign Exchange Impact | +$20.5 | | Divestitures | -$3.5 | | Total Increase | ~$228.1 | - Cost of Operations as a percentage of revenue decreased to 58.8% in Q2 2021 from 60.2% in Q2 2020, primarily due to leveraging revenue growth and a decrease in supplemental bonuses for front-line employees related to COVID-19 that were paid in the prior year[173] - Operating income swung to $266.8 million in Q2 2021 from an operating loss of $232.4 million in Q2 2020, with this $499.2 million increase primarily driven by the non-recurrence of a $417.4 million impairment charge at E&P operations in the prior-year period[198][201] Segment Results All geographic segments demonstrated strong Q2 2021 revenue growth, with Canada leading at 36.6%, though the Southern segment's growth was tempered by E&P declines Segment Revenue & EBITDA - Q2 2021 (in thousands of U.S. dollars) | Segment | Revenue | Revenue % of Total | Segment EBITDA | EBITDA Margin | | :--- | :--- | :--- | :--- | :--- | | Eastern | $369,617 | 24.1% | $99,382 | 26.9% | | Southern | $363,336 | 23.7% | $98,928 | 27.2% | | Western | $313,789 | 20.4% | $99,402 | 31.7% | | Central | $266,845 | 17.4% | $94,886 | 35.6% | | Canada | $220,344 | 14.4% | $88,641 | 40.2% | - All geographic segments showed strong YoY revenue growth in Q2 2021, with the Canada segment leading at 36.6% growth, significantly aided by favorable foreign currency exchange rates and higher renewable energy credit prices[236] - The Southern segment's 9.0% revenue growth was tempered by a $5.2 million decline in E&P operations revenue, highlighting the continued weakness in that sub-sector compared to the broader solid waste business recovery[229] Liquidity and Capital Resources Net cash from operating activities increased by $95.3 million to $848.5 million, supporting planned $675 million capital expenditures and a strong $414.2 million working capital surplus - Net cash from operating activities increased by $95.3 million to $848.5 million for the first six months of 2021 compared to the same period in 2020, driven by higher earnings and favorable changes in deferred income taxes[260][261] - The company plans for total capital expenditures of approximately $675 million in 2021, to be funded by cash on hand, internally generated funds, and borrowings[274] - As of June 30, 2021, the company had a working capital surplus of $414.2 million, including $727.4 million in cash and equivalents[264] Non-GAAP Financial Measures This section provides reconciliations for non-GAAP financial measures, including Adjusted EBITDA and Adjusted Free Cash Flow, demonstrating operational performance and liquidity Adjusted EBITDA Reconciliation (in thousands of U.S. dollars) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) attributable to Waste Connections | $177,047 | $(227,072) | $337,356 | $(84,037) | | Adjustments (Taxes, Interest, D&A, Impairments, etc.) | $307,858 | $621,394 | $580,723 | $886,882 | | Adjusted EBITDA | $484,905 | $394,322 | $918,079 | $802,845 | Adjusted Free Cash Flow (in thousands of U.S. dollars) | Period | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $848,478 | $753,185 | | Less: Capital expenditures | $(271,392) | $(268,711) | | Other Adjustments | $8,749 | $9,661 | | Adjusted free cash flow | $585,835 | $494,569 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, commodity prices, and foreign exchange, with specific sensitivities outlined for unhedged debt, fuel costs, and recycled commodity prices - A one percentage point increase in interest rates on the company's unhedged variable-rate debt of $305.0 million would decrease annual pre-tax income by approximately $3.0 million[305] - A $0.10 per gallon increase in the price of fuel for the remaining six months of 2021 would decrease pre-tax income by approximately $2.0 million[307] - A 10% decrease in average recycled commodity prices would have reduced revenues by $7.2 million for the six months ended June 30, 2021[308] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level[311] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, including environmental matters and litigation related to landfill permits, as detailed in Note 18 of the financial statements - Information regarding the company's legal proceedings is incorporated by reference from Note 18 to the Condensed Consolidated Financial Statements[314] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company repurchased 2,079,806 shares for approximately $239.7 million under its NCIB, with 10,398,783 shares remaining available for repurchase Share Repurchases for Q2 2021 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2021 | 1,879,806 | $114.86 | | May 2021 | 200,000 | $118.62 | | June 2021 | 0 | N/A | | Total Q2 | 2,079,806 | $115.22 | - The Board of Directors approved the annual renewal of the NCIB on July 27, 2021, expected to be effective from August 10, 2021, to August 9, 2022[315] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, and required CEO and CFO certifications