Waste nections(US:WCN)2021-10-28 10:05PART I – FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Waste Connections, Inc. for the quarterly period ended September 30, 2021, including the Balance Sheets, Statements of Net Income, Comprehensive Income, Equity, and Cash Flows, along with detailed Notes to the financial statements Condensed Consolidated Balance Sheets The balance sheet shows total assets increased to $14.27 billion as of September 30, 2021, from $13.99 billion at December 31, 2020, primarily driven by growth in Goodwill and Property and equipment, while Cash and equivalents decreased, and total liabilities rose to $7.39 billion from $7.13 billion, mainly due to an increase in long-term debt Condensed Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $1,160,288 | $1,408,272 | | Cash and equivalents | $339,479 | $617,294 | | Total Assets | $14,274,832 | $13,992,364 | | Total Current Liabilities | $1,145,298 | $1,028,654 | | Long-term portion of debt and notes payable | $4,869,213 | $4,708,678 | | Total Liabilities | $7,391,676 | $7,128,926 | | Total Equity | $6,883,156 | $6,863,438 | Condensed Consolidated Statements of Net Income For the three months ended September 30, 2021, revenues increased to $1.60 billion from $1.39 billion year-over-year, but net income decreased to $114.4 million from $158.0 million, primarily due to a $115.3 million loss on early extinguishment of debt, while for the nine-month period, revenues grew to $4.53 billion from $4.05 billion, and net income significantly increased to $451.7 million from $74.0 million in the prior year, which was impacted by a large impairment charge Statement of Net Income Summary (in thousands of U.S. dollars, except per share data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,597,168 | $1,389,552 | $4,527,042 | $4,047,739 | | Operating Income | $285,144 | $230,679 | $790,304 | $215,284 | | Loss on early extinguishment of debt | ($115,288) | — | ($115,288) | — | | Net Income Attributable to Waste Connections | $114,381 | $158,049 | $451,736 | $74,012 | | Diluted EPS | $0.44 | $0.60 | $1.72 | $0.28 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash from operating activities increased to $1.27 billion from $1.19 billion in the prior year, net cash used in investing activities rose to $1.03 billion, driven by higher payments for acquisitions, and net cash used in financing activities was $491.6 million, a significant increase from $4.1 million in 2020, mainly due to debt repayments, share repurchases, and premiums paid on early debt extinguishment Cash Flow Summary (Nine Months Ended Sep 30, in thousands of U.S. dollars) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,269,961 | $1,185,573 | | Net cash used in investing activities | ($1,034,840) | ($650,066) | | Net cash used in financing activities | ($491,581) | ($4,093) | | Net (decrease) increase in cash | ($256,017) | $532,394 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the accounting policies and financial data presented in the statements, covering impairments related to E&P operations, revenue recognition by service line, acquisition activities, details on long-term debt including new note offerings and credit agreement amendments, segment performance, derivative instruments, and legal contingencies - In 2020, the company recorded a significant impairment charge of $417.4 million on property and equipment related to four E&P landfills, triggered by a decline in oil prices, the COVID-19 pandemic, and reduced demand for E&P waste services3738200 - During the first nine months of 2021, the company acquired 14 non-hazardous solid waste businesses for a total consideration of $591.8 million, including $561.3 million in cash, which resulted in the recognition of $280.9 million in goodwill5560 - In September 2021, the company issued $1.5 billion in new Senior Notes due 2032 and 2052, with proceeds along with borrowings from the credit facility used to repay $1.5 billion of existing Private Notes, resulting in a $115.3 million loss on early extinguishment of debt7881214 - The company is involved in significant legal proceedings, including being named a potentially responsible party (PRP) for the Lower Duwamish Waterway Superfund Site and litigation with Los Angeles County over the Chiquita Canyon Landfill expansion permit conditions129136138 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, highlighting a 14.9% revenue increase in Q3 2021 to $1.6 billion, driven by acquisitions, price increases, and volume recovery from COVID-19 impacts, covering detailed operational performance, segment results, liquidity, capital resources, and non-GAAP financial measures, with key events including significant acquisition activity, a major debt refinancing, and continued impacts from the COVID-19 pandemic on volumes and costs Results of Operations For Q3 2021, revenues grew 14.9% to $1.60 billion, driven by acquisitions ($54.1 million), price increases ($67.7 million), and solid waste volume growth ($28.9 million), operating income rose 23.6% to $285.1 million, and net income fell to $114.4 million from $158.0 million YoY due to a $115.3 million loss on debt extinguishment, while for the nine-month period, revenues increased 11.8% to $4.53 billion, and operating income surged to $790.3 million from $215.3 million, as the prior year included a $417.4 million E&P impairment charge Results of Operations Summary (Q3 2021 vs Q3 2020, in thousands) | Item | Q3 2021 | % of Revenue | Q3 2020 | % of Revenue | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,597,168 | 100.0% | $1,389,552 | 100.0% | | Cost of operations | $946,098 | 59.2% | $828,822 | 59.6% | | SG&A | $155,520 | 9.8% | $136,003 | 9.8% | | Operating income | $285,144 | 17.8% | $230,679 | 16.6% | | Loss on early extinguishment of debt | ($115,288) | (7.2%) | — | 0.0% | | Net income attributable to WCN | $114,381 | 7.2% | $158,049 | 11.4% | - Q3 2021 revenue growth of $207.6 million was primarily driven by acquisitions ($54.1 million), core price increases and surcharges ($67.7 million), solid waste volume increases ($28.9 million), higher recyclable commodity sales ($28.3 million), and increased E&P revenue ($11.3 million)165166167 - Cost of Operations as a percentage of revenue decreased to 59.2% in Q3 2021 from 59.6% in Q3 2020, mainly due to a reduction in supplemental bonuses for frontline workers related to COVID-19 and lower recycling processing costs, which offset higher fuel and 401(k) matching expenses178180 - The effective tax rate for the nine months ended Sep 30, 2021 was 19.1%, compared to 24.4% for the same period in 2020, with the 2020 rate higher due to a $27.4 million expense from new tax regulations and a $4.1 million expense related to the E&P asset impairment215217 Segment Results All five geographic segments reported revenue and EBITDA growth in Q3 2021, with the Eastern segment's revenue growing 15.1% to $396.2 million, the Southern segment's revenue increasing 12.2% to $371.0 million, the Western segment seeing 10.2% revenue growth, the Central segment's revenue jumping 19.7%, and the Canada segment's revenue rising 21.3% Segment Revenue (Q3 2021 vs Q3 2020, in thousands) | Segment | Q3 2021 Revenue | Q3 2020 Revenue | % Change | | :--- | :--- | :--- | :--- | | Eastern | $396,229 | $344,353 | 15.1% | | Southern | $370,958 | $330,575 | 12.2% | | Western | $332,020 | $301,221 | 10.2% | | Central | $273,682 | $228,566 | 19.7% | | Canada | $224,279 | $184,837 | 21.3% | Segment EBITDA (Q3 2021 vs Q3 2020, in thousands) | Segment | Q3 2021 EBITDA | Q3 2020 EBITDA | % Change | | :--- | :--- | :--- | :--- | | Western | $108,280 | $101,071 | 7.1% | | Eastern | $106,908 | $90,991 | 17.5% | | Southern | $99,612 | $81,394 | 22.4% | | Central | $95,026 | $82,887 | 14.6% | | Canada | $92,275 | $72,516 | 27.2% | Liquidity and Capital Resources The company maintained strong liquidity with $1.27 billion in cash from operations for the first nine months of 2021, though working capital surplus decreased to $15.0 million from $379.6 million at year-end 2020, mainly due to cash used for acquisitions and debt management, with key activities including paying $561.3 million for acquisitions, $479.5 million in capital expenditures, and $305.6 million in share repurchases, and the company refinanced $1.5 billion of debt by issuing new senior notes, leading to adjusted free cash flow for the nine-month period increasing to $825.8 million from $778.4 million YoY - Net cash from operations increased by $84.4 million YoY to $1.27 billion for the nine months ended Sep 30, 2021, primarily due to higher earnings259260 - Cash used in investing activities increased significantly to $1.035 billion from $650.1 million YoY, driven by a $387.5 million increase in cash paid for acquisitions264265 - Financing activities used $491.6 million in cash, a sharp increase from $4.1 million used in the prior year, driven by a $110.6 million premium paid on early debt extinguishment and a $200.0 million increase in share repurchases266270 - The company repurchased 2.75 million common shares for $305.6 million in the first nine months of 2021 and increased its quarterly dividend by 12.2% to $0.23 per share in October 2021125145 Adjusted Free Cash Flow (in thousands) | | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,269,961 | $1,185,573 | | Less: Capital expenditures | ($479,480) | ($420,694) | | Adjustments | $25,847 | $2,941 | | Adjusted free cash flow | $825,838 | $778,391 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, commodity prices (diesel fuel and recyclables), and foreign currency exchange rates, with $434.9 million of its debt at floating rates as of September 30, 2021, where a 1% rate increase would decrease annual pre-tax income by $4.3 million, and a 10% decrease in average recycled commodity prices would have impacted nine-month revenues by $12.6 million, while a $0.01 change in the CAD/USD exchange rate would impact annual revenue by approximately $10.6 million - A one percentage point increase in interest rates on the $434.9 million of unhedged variable-rate debt would decrease annual pre-tax income by approximately $4.3 million306307 - A $0.10 per gallon increase in fuel price for the remainder of 2021 would decrease pre-tax income by approximately $1.0 million based on an expected 10.2 million gallons purchased at market prices309 - A 10% decrease in average recycled commodity prices would have reduced revenues by $12.6 million for the nine months ended September 30, 2021310 - The company uses interest rate swaps to effectively fix the rate on a notional amount of its variable rate debt, with six agreements outstanding as of September 30, 2021303 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of September 30, 2021, concluding that these controls are effective at a reasonable assurance level, ensuring that required information is recorded, processed, and reported in a timely manner, with no material changes to the company's internal control over financial reporting during the third quarter of 2021 - The President and CEO, along with the Executive VP and CFO, concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level313 - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls314 PART II – OTHER INFORMATION Legal Proceedings This section incorporates by reference the information regarding the company's legal proceedings as detailed in Note 18 of the Condensed Consolidated Financial Statements, with key proceedings mentioned in Note 18 including the Lower Duwamish Waterway Superfund site allocation process and litigation concerning the Chiquita Canyon Landfill expansion in Los Angeles County - Information regarding legal proceedings is incorporated by reference from Note 18 to the Condensed Consolidated Financial Statements316 Exhibits This section lists the exhibits filed with the Form 10-Q, including the Second Amended and Restated Credit Agreement, the Fifth Supplemental Indenture for the new senior notes, and certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act - Key exhibits filed include the Second Amended and Restated Revolving Credit and Term Loan Agreement dated July 30, 2021, and the Fifth Supplemental Indenture for senior notes dated September 20, 2021317 - Certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) and 18 U.S.C. §1350 are included as exhibits317