Casella Waste Systems, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Casella is a vertically integrated waste-services company operating primarily in six northeastern states, across collection, disposal, transfer, recycling and organics services.
Financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $599.3 million | $565.0 million |
| Operating income (loss) | $(12.6) million | $44.9 million |
| Net loss attributable to common stockholders | $(21.8) million; $(0.52) per share | $(6.8) million; $(0.17) per share |
| Cash from operating activities | $107.5 million | $80.4 million |
| Capital expenditures | $64.9 million | $54.2 million |
| Cash and cash equivalents at year-end | $2.0 million | $2.5 million |
| Principal debt and capital leases | $497.7 million | $525.6 million |
- Revenue increased 6.1%. Growth reflected higher collection and disposal pricing and volumes, acquisitions, and improved recycling commodity pricing. Collection price growth was 3.1%; landfill pricing rose 3.4%.
- Cost of operations was 67.6% of revenue, flat with 2016; general and administration was 13.2% versus 13.3%; depreciation and amortization was 10.4% versus 10.9%. Operating margin was approximately (2.1)%, compared with 8.0% in 2016, largely because of the Southbridge closure charge.
- The $65.2 million Southbridge Landfill closure charge comprised a $48.0 million asset impairment, $9.1 million in project-development write-offs, $6.4 million in environmental remediation expense and $1.7 million in legal and transaction costs.
- Operating cash flow rose by $27.1 million. It included $63.5 million of non-cash Southbridge closure adjustments. Cash interest paid was $25.0 million. Cash flow from operations less property-and-equipment additions was approximately $43.1 million, before acquisitions and other investing outflows.
- Year-end debt included $346.5 million of Term Loan B borrowings and $36.0 million drawn on the revolver. Revolver availability was $101.5 million, net of $22.5 million of letters of credit. The company reported a 3.68x consolidated net leverage ratio against a 5.375x maximum and a 5.91x interest coverage ratio against a 2.50x minimum; it said it was in covenant compliance.
- Stockholders’ deficit was $37.9 million. The reported $15.3 million income-tax benefit reflected, in part, remeasurement following U.S. tax reform; it should not be viewed as recurring operating profit.
Changes, outlook and material matters
- Comparative performance: Revenue increased by $34.3 million; operating results swung to a loss from income, principally due to Southbridge. Net loss also widened. Interest expense declined $13.8 million, reflecting lower debt balances and borrowing rates; 2016 results included a $13.7 million debt-extinguishment loss.
- Southbridge: Casella decided not to pursue expansion and expects to cease landfill operations when permitted capacity is exhausted, expected by no later than December 31, 2018. Management estimated approximately $19 million of cash outflows over five years for remaining capital, remediation, capping, closure and post-closure work, and said it did not expect the closure to materially affect future operations or liquidity.
- Environmental and legal exposure: Groundwater contamination near Southbridge prompted response obligations and litigation by residents and environmental groups. Casella recorded a $5.9 million liability for its share of a municipal waterline project, with costs up to $5 million under the agreement. The litigation and a separate Charlton dispute over stormwater basins could result in additional material losses; the filing says amounts cannot currently be estimated. At Potsdam, the recorded remediation liability was $5.8 million; the company is jointly and severally liable with other parties.
- Recycling risk: Commodity markets weakened amid China’s National Sword restrictions. The filing reports mixed-paper export prices fell 80% and old corrugated cardboard prices fell 45% from July 2017 through February 2018. Despite pricing and processing-cost mitigation measures, management expected recycling to be a negative headwind in FY 2018. No numerical FY 2018 earnings or revenue guidance is provided in the supplied filing text.
- Strategy: The 2021 Plan targets reducing G&A as a share of revenue by 75–100 basis points by year-end 2021 and balancing debt reduction with growth. Management set a goal of $20–$40 million per year in acquisition or development activity. In January 2018, Casella acquired Complete for $16.5 million, subject to adjustment; it was expected to contribute about $17 million of annual revenue.
- Other risks: The company is capital intensive and exposed to fuel prices, weather, regional economic conditions, permitting and landfill-capacity uncertainty, regulation, labor availability, and interest-rate changes. A 100-basis-point change in variable borrowing rates was estimated to change annual interest expense by up to approximately $3.2 million. Management also described a multiyear technology upgrade and sales-efficiency program, whose timing and benefits are uncertain.
- Controls and audit: The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor facts to verify
- Whether Southbridge closure, waterline costs, litigation and the Charlton zoning dispute lead to additional obligations beyond recorded amounts.
- FY 2018 recycling margins and the effectiveness of customer surcharges, commodity contracts and processing changes in offsetting market declines.
- Landfill capacity, permit outcomes and the operational and financial effects of losing Southbridge capacity.
- Cash generation relative to required capital expenditures, closure obligations, debt service and planned acquisitions; also monitor revolver availability and covenant headroom.
- The realization and timing of deferred-tax assets and net operating loss benefits, and the actual contribution from the Complete acquisition.