Casella Waste Systems, Inc. — Form 10-Q Summary
Reporting period: The quarter and nine months ended January 31, 2013, compared with the corresponding periods ended January 31, 2012. The filing is for the fiscal third quarter of fiscal 2013. Unless noted otherwise, amounts below are in millions of dollars.
Business context
Casella is a vertically integrated solid-waste and recycling services company operating primarily in the northeastern United States. Its segments are Eastern, Western, Recycling and Other. During the nine-month period, the company acquired four Western-region hauling operations and Bestway/BBI in the Eastern region. It also sold the Maine Energy Recovery Company property to the City of Biddeford and closed the facility.
Key financial results
| Metric | Three months ended Jan. 31, 2013 | Prior-year quarter | Nine months ended Jan. 31, 2013 | Prior-year period |
|---|---|---|---|---|
| Revenue | $115.0 | $114.6 | $356.5 | $371.6 |
| Operating income (loss) | $(0.1) | $4.4 | $10.1 | $26.3 |
| Net loss attributable to common stockholders | $(11.4) | $(24.6) | $(40.7) | $(28.5) |
| Basic and diluted loss per share | $(0.29) | $(0.92) | $(1.26) | $(1.07) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $30.5 | $49.7 |
For the quarter, operating margin was approximately break-even, versus 3.8% in the prior-year quarter. For the nine months, it was 2.8%, versus 7.1%. Cost of operations rose to 73.2% of quarterly revenue from 71.0%, and to 71.4% for the nine months from 68.1%. Nine-month revenue declined 4.1%; management attributed the decrease mainly to lower solid-waste volumes and recycling commodity prices.
Nine-month investing cash outflow was $76.1 million, including $25.1 million for acquisitions and $44.5 million of growth and maintenance capital spending. Financing provided $42.2 million. Cash and cash equivalents fell to $1.1 million from $4.5 million at April 30, 2012. The filing reports a $29.9 million net working-capital deficit, calculated excluding cash.
Debt, liquidity and capital structure
At January 31, 2013, long-term debt and capital leases were $491.7 million, compared with $474.6 million at April 30, 2012; financing lease obligations were an additional $1.9 million. The company refinanced and fully redeemed its $180 million of 11% Second Lien Notes, issuing an additional $125 million of 7.75% senior subordinated notes due 2019 and using revolver borrowings, equity proceeds and other funds. It recorded a $15.6 million nine-month debt-extinguishment loss, including $10.7 million of tender premiums and fees.
The $227.5 million revolving facility had $56.1 million of further borrowing availability after outstanding letters of credit. The company reported compliance with its debt covenants, but its leverage and coverage ratios were relatively close to limits: total funded debt to bank-defined cash flow was 5.23 against a 5.75 maximum; senior funded debt ratio was 1.81 against a 2.75 maximum; interest coverage was 2.24 against a 2.00 minimum. It also reported $145.3 million of variable-rate debt; a 100-basis-point rate change was estimated to affect quarterly interest expense by about $0.4 million.
In October 2012, Casella issued 11.5 million Class A shares at an average $4.00 per share, receiving $42.2 million net. Class A shares outstanding increased from approximately 26.0 million at April 30, 2012 to 38.7 million at January 31, 2013.
Material changes, outlook and risks
- Revenue and segment trends: Quarterly revenue was nearly flat, but nine-month revenue fell. Nine-month Recycling revenue declined $8.3 million, primarily from lower commodity prices; Western-region revenue declined $7.3 million, principally from lower volumes. Eastern revenue increased, but its operating loss widened. Management cited pricing, volume, commodity-market and acquisition effects.
- Acquisitions and restructuring: Four hauling operations and BBI were acquired for total consideration of approximately $28.0 million. BBI’s purchase-price allocation remained provisional. The company recorded $3.5 million of nine-month severance and reorganization charges and described cost reductions and operational realignment as objectives.
- Maine Energy: The facility closed December 31, 2012. The property sale consideration is $6.65 million, payable in equal installments over 21 years. Casella must demolish the facility at its own cost within 12 months of closing. A potential multiemployer-pension withdrawal liability is considered probable, but the amount or range could not be estimated; no accrual was recorded.
- Contingencies: A New York State tax dispute asserts $3.9 million of tax, penalties and interest; the company recorded no reserve and planned to contest it. A New York environmental remediation matter carries a recorded liability of $5.3 million; the company remains jointly and severally liable, and costs could exceed estimates. No accruals were established for outstanding legal proceedings. The PERC dispute was settled without a required cash payout.
- Other exposures: GreenFiber, a 50%-owned equity-method investee, continued to report losses, although Casella’s share of losses declined from the prior year. Casella’s guarantee supporting GreenFiber’s credit facility was $2.2 million. Recycling commodity-price exposure and regional economic, weather, fuel, permitting and landfill-capacity risks remain relevant.
- Guidance: The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management’s forward-looking statements are subject to substantial uncertainty; it cautioned that interim results may not indicate full-year results.
Most important facts for investors to verify
- Whether operating performance and cash generation improve after the nine-month decline, including the effect of lower volumes and recycling prices.
- Available revolver capacity, covenant headroom and the company’s ability to manage its debt burden with only $1.1 million of reported cash.
- Integration results and final purchase accounting for BBI, and whether expected cost savings from the reorganization are realized.
- The eventual Maine Energy demolition and pension-withdrawal costs, and outcomes of the New York tax and environmental matters.
- How the share issuance and future equity-linked compensation affect per-share results and ownership dilution.