Casella Waste Systems, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Casella provides integrated solid waste collection, disposal, transfer, recycling and resource-management services across nine states. The GFL acquisition expanded operations into Delaware and Maryland; the Mid-Atlantic region began operating July 1, 2023. Amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $352.7 | $295.3 | $905.0 | $813.0 |
| Operating income | $34.2 | $36.3 | $67.1 | $78.2 |
| Operating margin | 9.7% | 12.3% | 7.4% | 9.6% |
| Net income | $18.2 | $22.7 | $27.2 | $44.7 |
| Diluted EPS | $0.31 | $0.44 | $0.50 | $0.86 |
| Operating cash flow | Not separately provided | Not separately provided | $157.8 | $152.4 |
- Q3 revenue grew 19.5%, but operating income declined 5.8% and net income declined 19.9% year over year. Nine-month revenue rose 11.3%, while operating income fell 14.2% and net income fell 39.1%.
- For the first nine months, cost of operations was $592.9 (65.5% of revenue), general and administration expense was $112.7 (12.5%), and depreciation and amortization was $116.1 (12.8%). Higher depreciation and amortization reflects acquisitions, including acquired intangible assets.
- Cash from operations was $157.8 for the nine months. Investing used $937.2, largely reflecting $847.8 of acquisition spending; financing provided $930.0, including $496.2 net proceeds from a June share offering and new borrowings.
- At September 30, cash and cash equivalents were $219.1. Debt carrying value, net of issuance costs, was $1,046.1, versus $594.0 at year-end 2022. The company had $272.3 of undrawn revolving credit availability, net of letters of credit.
- Working capital excluding cash and restricted cash was negative $58.9; management says the negative working-capital cycle is intentional. The company reported compliance with debt covenants: net leverage ratio 2.89 against a 5.00 maximum, and interest coverage 9.15 against a 3.00 minimum.
Material changes and management commentary
- Five businesses were acquired during the nine months for total consideration of $845.1, including the GFL subsidiaries and Twin Bridges. The GFL acquisition accounted for much of the new Mid-Atlantic revenue; that segment recorded a $0.7 operating loss in Q3.
- Solid waste revenue growth benefited from pricing and acquisitions, but was partly offset by lower organic volumes. Management cited slowing economic activity, customer churn following price increases, and deliberate shedding of less-profitable customers. Resource Solutions revenue declined, primarily due to lower recycled-commodity prices.
- Inflationary labor, repair, disposal and other costs continued to pressure results. Management says pricing, pass-through fees and efficiency programs help recover costs, but competitive conditions may require the company to absorb some increases.
- Management expects cash, operating cash flows and financing availability to be sufficient for operating needs and commitments for at least the next 12 months and thereafter for the foreseeable future. The filing provides no specific revenue, earnings or margin guidance.
Risks, contingencies and unusual items
- Nine-month results include a $6.2 legal settlement charge related to wage-and-hour claims, $9.8 of acquisition-related costs and an $8.2 loss from terminating bridge-financing arrangements. The Q3 acquisition-related charge was $3.3.
- The appeal of the Stage VI landfill expansion permit in New Hampshire remains unresolved. If the permit is not ultimately approved, capacity at the landfill could be curtailed.
- Environmental and legal obligations require estimates; the company reported a $6.3 aggregate accrual for outstanding legal proceedings and $6.1 of environmental remediation liabilities at September 30.
- Interest-rate exposure remains material: variable-rate debt was approximately $359.6, with a weighted average rate of about 7.0%; management estimates a 100-basis-point rate change would affect annual interest expense by about $3.6. Swaps hedge $415.0 of notional debt at a weighted average fixed rate of approximately 3.41%.
- Management identifies seasonality, severe weather, fuel and commodity-price volatility, labor and inflation costs, acquisition integration, and access to capital as risks. A $10-per-ton recycled-commodity price change is estimated to affect annual operating income by about $1.0.
Important facts for investors to verify
- How much reported growth and future earnings depend on the GFL and Twin Bridges acquisitions, and whether integration delivers expected performance.
- Whether weaker organic volumes, recycled-commodity pricing and margin pressure persist, and how much pricing offsets costs.
- Debt service, interest-rate exposure and covenant headroom, particularly through seasonally weaker periods.
- The outcome and timing of the Stage VI permit appeals and any implications for landfill capacity.
- Final acquisition purchase-price allocations, which the filing says remain preliminary for certain acquisitions.