Waste nections(US:WCN)2019-10-29 10:18PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Waste Connections' unaudited condensed consolidated financial statements for Q3 and nine months 2019 and 2018 Condensed Consolidated Balance Sheets Total assets increased to $13.27 billion by September 30, 2019, with liabilities at $6.47 billion and equity at $6.80 billion Condensed Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $1,105,290 | $1,092,903 | | Property and equipment, net | $5,375,166 | $5,168,996 | | Goodwill | $5,297,556 | $5,031,685 | | Total Assets | $13,270,235 | $12,627,329 | | Total Current Liabilities | $991,794 | $860,709 | | Long-term debt and notes payable | $4,039,405 | $4,153,465 | | Operating lease liabilities | $196,509 | $— | | Total Liabilities | $6,473,895 | $6,167,141 | | Total Equity | $6,796,340 | $6,460,188 Condensed Consolidated Statements of Net Income Q3 2019 revenues grew 10.3% to $1.41 billion, with net income at $159.1 million and diluted EPS at $0.60 Key Income Statement Data (in thousands of U.S. dollars, except per share amounts) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,412,444 | $1,281,110 | $4,026,719 | $3,661,209 | | Operating Income | $236,600 | $232,869 | $643,594 | $632,264 | | Net Income Attributable to Waste Connections | $159,109 | $150,843 | $433,579 | $414,393 | | Diluted EPS | $0.60 | $0.57 | $1.64 | $1.57 | Condensed Consolidated Statements of Cash Flows Nine-month operating cash flow increased to $1.19 billion, with $885.7 million used in investing and $308.0 million in financing activities Cash Flow Summary for Nine Months Ended Sep 30 (in thousands of U.S. dollars) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,185,430 | $1,037,792 | | Net cash used in investing activities | ($885,672) | ($870,446) | | Net cash used in financing activities | ($308,039) | ($395,689) | | Net decrease in cash | ($8,138) | ($228,871) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, including new lease standards, $420.4 million in acquisitions, $500 million in new debt, and legal contingencies - The company adopted new lease accounting guidance on January 1, 2019, recognizing $206.5 million in operating lease right-of-use assets and corresponding lease liabilities on the balance sheet2627 - During the first nine months of 2019, the company acquired 13 non-hazardous solid waste businesses for total cash consideration of $420.4 million, resulting in $223.0 million of goodwill4851 - In April 2019, the company issued $500 million of 3.50% Senior Notes due 2029. Total long-term debt stood at $4.06 billion as of September 30, 20196668 - The company is involved in significant legal proceedings, including potential liabilities at the Lower Duwamish Waterway Superfund Site and litigation concerning landfill expansions in Los Angeles County, CA, and Colonie, NY129134143 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2019 financial performance, noting a 10.3% revenue increase, compressed operating margins, strong liquidity, and segment results Results of Operations Q3 2019 revenues grew 10.3% to $1.41 billion, driven by acquisitions and price, but operating margin decreased to 16.8% due to higher costs Q3 2019 vs Q3 2018 Revenue Change Drivers (in millions of U.S. dollars) | Driver | Revenue Impact | | :--- | :--- | | Acquisitions (net of divestitures) | ~$77.0 | | Price Increases (core & surcharges) | $61.1 | | Solid Waste Volume | $10.3 | | E&P Revenue (existing facilities) | $1.4 | | Recyclable Commodities Sales | ($9.5) | | Foreign Exchange & Other | ($9.0) | | Total Increase | $131.3 | - Cost of operations as a percentage of revenues increased by 1.6 percentage points to 59.1% in Q3 2019, primarily due to the impact of recent acquisitions, higher labor expenses, and increased maintenance and repair costs187 - SG&A expenses as a percentage of revenues decreased by 1.0 percentage point to 9.8% in Q3 2019, mainly due to lower equity-based compensation and reduced legal expenses194195 Segment Results All segments reported Q3 2019 revenue growth, with Central and Eastern segments leading due to acquisitions, while EBITDA margins varied Segment Revenue and EBITDA - Q3 2019 (in thousands of U.S. dollars) | Segment | Revenue | Revenue Growth (YoY) | EBITDA | EBITDA Margin | | :--- | :--- | :--- | :--- | :--- | | Eastern | $330,887 | 16.2% | $88,101 | 26.6% | | Southern | $305,188 | 7.8% | $77,406 | 25.4% | | Western | $289,208 | 6.7% | $90,059 | 31.1% | | Central | $230,074 | 21.2% | $81,746 | 35.5% | | Canada | $190,820 | 2.0% | $66,794 | 35.0% | | E&P | $66,267 | 1.6% | $35,803 | 54.0% | Liquidity and Capital Resources Nine-month operating cash flow increased to $1.19 billion, supporting $465.2 million in capital expenditures and $126.3 million in dividends - Net cash provided by operating activities increased by $147.6 million to $1.185 billion for the nine months ended September 30, 2019, compared to the same period in 2018264265 - Capital expenditures for the first nine months of 2019 were $433.5 million for property and equipment, plus an additional $31.7 million for the purchase of a greenfield landfill site270274 - The company renewed its Normal Course Issuer Bid (NCIB) to repurchase up to 13.2 million shares but did not repurchase any shares during the first nine months of 2019. Cash dividends paid increased by 14.4% to $126.3 million125269273 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, fuel prices, recyclable commodity prices, and foreign currency, with specific exposures detailed - A one percentage point increase in interest rates on the $277.8 million of unhedged variable-rate debt would decrease annual pre-tax income by approximately $2.8 million306 - A $0.10 per gallon increase in fuel prices for the remainder of 2019 would decrease pre-tax income by approximately $1.1 million308 - A 10% decrease in average recycled commodity prices would have reduced revenues by $4.9 million for the first nine months of 2019309 - A $0.01 change in the Canadian dollar to U.S. dollar exchange rate would impact annual revenue by approximately $9.8 million and EBITDA by $3.6 million310 Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019312 - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls313 PART II – OTHER INFORMATION Item 1. Legal Proceedings This section details the company's significant legal proceedings, including environmental liabilities and landfill expansion litigation - The company is a potentially responsible party (PRP) under CERCLA for the Lower Duwamish Waterway Superfund Site in Seattle, WA, with potential liability for cleanup costs and natural resource damages. The outcome and financial impact are currently indeterminable129132133 - The company is engaged in multiple legal challenges related to the expansion of its Chiquita Canyon Landfill in Los Angeles County, CA, involving disputes over permit conditions and environmental reviews134136141 - The company is a respondent in litigation challenging the permits issued by New York State for the expansion of the Town of Colonie Landfill143144145 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, senior note indentures, and executive certifications - The report includes as exhibits the Second Supplemental Indenture for the 3.50% Senior Notes due 2029, various separation and benefits agreements, and required CEO and CFO certifications (31.1, 31.2, 32.1, 32.2)316