Casella Waste Systems, Inc. — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015. The company changed its fiscal year-end from April 30 to December 31; the filing compares FY2015 with unaudited calendar 2014, so the comparison is not to the eight-month 2014 transition period. Unless noted, dollar amounts are in millions.
Business context
Casella is a regional, vertically integrated waste-services company operating primarily in Vermont, New Hampshire, New York, Massachusetts, Maine and Pennsylvania. Its operations include collection, transfer, disposal, recycling and organics services. FY2015 revenue was led by collection and disposal; the company reported 34 collection operations, 44 transfer stations, 18 recycling facilities and nine Subtitle D landfills as of January 2016.
Financial performance and liquidity
| Metric | FY2015 | Calendar 2014 | Change / context |
|---|---|---|---|
| Revenue | $546.5 | $525.9 | Up $20.6, or 3.9% |
| Operating income | $31.9 | $12.1 | Operating margin about 5.8%, versus 2.3% |
| Net loss attributable to common stockholders | $(13.0) | $(6.0) | Loss widened; basic and diluted loss per share was $0.32, versus $0.15 |
| Net cash from operating activities | $70.5 | $62.2 | Up $8.3 |
| Capital expenditures | $50.0 | Not clearly provided on the same comparative basis | Management said FY2015 spending was $17.5 lower than calendar 2014 |
| Interest expense, net | $40.1 | $38.1 | Higher average debt and financing changes |
Revenue growth reflected $10.5 of pricing and $16.2 of volume, partly offset by $3.4 of lower commodity price and volume, among other items. Collection price growth was 4.5%; landfill average price per ton rose 3.7%. Cost of operations declined to 70.0% of revenue from 71.7%, while general and administration rose to 13.3% from 12.7% and depreciation and amortization was 11.5% versus 11.6%. Reported operating income included $5.5 of net favorable divestiture-related items and a $1.9 contract-settlement charge.
At December 31, 2015, cash was $2.3, working capital was negative $11.0, total debt and capital leases were $523.6, and stockholders’ deficit was $21.6. The company reported $64.1 of ABL borrowing availability after $57.4 of revolver borrowings and $26.9 of letters of credit. Its ABL-defined consolidated leverage ratio was 4.75; management said the company complied with its debt covenants. Operating cash flow exceeded capital expenditures by approximately $20.5 before other investing items.
Material changes and management commentary
- Revenue increased 3.9% year over year, driven mainly by solid-waste pricing and higher disposal volumes. Eastern and Western segment operating income improved; Recycling remained loss-making, with a $2.4 operating loss.
- Management said it exceeded its landfill-volume initiative, with annual landfill volumes approximately 0.8 million tons above the twelve months ended December 31, 2012, excluding Worcester closure-project volumes. It also cited tighter regional disposal capacity and began raising landfill prices above CPI in some markets.
- Recycling commodity prices had fallen about 60% since 2011 and were at historically low levels. Management said commodity-sale revenue no longer covered processing costs or provided a positive return on recycling infrastructure at current prices. A Sustainability Recycling Adjustment fee was introduced to help offset the pressure.
- The company refinanced its near-term revolving facility with a $190 million asset-based facility maturing in February 2020, subject to an earlier maturity if the 2019 Notes are not refinanced by November 2018. It issued $60 million of additional 7.75% notes and retired $14.7 million of those notes, expecting annual cash-interest savings of $1.1 million. Management intends to prioritize excess cash flow for debt repayment.
- No specific FY2016 revenue, earnings or cash-flow guidance is provided. Management said it would continue focusing on landfill returns, collection profitability, resource solutions and balance-sheet improvement, while reviewing underperforming assets and considering selective tuck-in acquisitions.
- The January 2016 Ontario landfill expansion permit allows estimated additional capacity of 13.6 million tons. Management also described planned rail access and market capacity constraints as potential ways to extend landfill reach, subject to execution and economics.
Risks, contingencies and unusual items
- Debt and liquidity: Significant leverage, substantial interest obligations, covenant restrictions and low cash balances leave the company dependent on operating cash flow, borrowing availability and refinancing access. The $370.3 million principal amount of 2019 Notes matures in February 2019.
- Environmental and permitting matters: The company recorded a $5.2 million Potsdam remediation liability and is jointly and severally liable with other parties. Significant onsite remediation spending was not expected before FY2017, but costs could exceed estimates. Near Southbridge, 2015 well samples showed contaminants above state notice and response thresholds; the company was investigating, and a law firm representing nearby residents had notified it of intent to sue in February 2016. Potential costs and permitting effects were not clear.
- Contract litigation: A February 2016 agreement in principle would resolve the Expera/MFGR dispute for $1.25 million on execution and $0.35 million annually for five years. Casella had reserved $2.6 million, including legal costs; completion of definitive agreements remained pending in the filing.
- Commodity and operating exposure: Recycling prices, fuel costs, weather, regional economic conditions, landfill permit renewals and closure obligations can affect margins and cash flow. The company had no commodity hedges at year-end and estimated a 10% commodity-price change would affect annual operating income by about $0.8 million.
- Nonrecurring and judgment-sensitive items: FY2015 included a $2.1 million investment impairment charge, a $1.0 million debt-extinguishment loss, the $1.9 million contract-settlement charge and gains related to CARES asset sales and other divestitures. CARES had incurred a $7.5 million impairment in the prior period. Goodwill impairment testing found reporting-unit fair values more than 22.9% above carrying values; no goodwill impairment was recorded.
Most important facts for investors to verify
- How much of FY2015 operating-income improvement is repeatable after removing divestiture gains, settlement costs and other unusual items.
- Whether operating cash flow can sustain required capital spending, landfill closure obligations and meaningful debt reduction while cash and working capital remain low.
- The 2019 Notes refinancing plan, ABL availability and covenant headroom through seasonal cash-flow lows.
- The outcome, cost allocation and timing of Southbridge and Potsdam environmental matters, and whether they affect landfill permitting or expansion.
- Whether the recycling adjustment fee and service pricing can offset persistently weak commodity prices without customer or volume losses.
- Execution, permitted capacity and economics of Ontario expansion, rail-based waste sourcing and other landfill growth plans.
Audit note: The independent auditor gave an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2015.