Casella Waste Systems, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in millions of dollars unless noted. Casella is a regional, vertically integrated waste services company operating primarily in the northeastern United States.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $198.5 | $172.8 | $549.7 | $485.9 |
| Operating income | $18.5 | $28.9 | $38.5 | $44.9 |
| Net income | $12.4 | $22.3 | $22.6 | $20.1 |
| Diluted EPS | $0.26 | $0.50 | $0.47 | $0.46 |
| Operating margin | 9.3% | 16.7% | 7.0% | 9.2% |
- Revenue increased 14.9% in Q3 and 13.1% year to date. Growth reflected acquisitions and favorable pricing; lower volumes and weaker commodity-related revenue were offsets.
- Q3 operating income fell 36.0% and net income fell 44.5%. Year-to-date operating income declined 14.3%, while net income increased 12.4%.
- Operating cash flow was $71.5 versus $89.9 in the prior-year nine-month period. Investing cash outflow was $148.6, including $73.5 for acquisitions and $76.0 for property and equipment. Financing cash inflow was $78.1.
- Cash was $5.0 at September 30. Current assets were $113.8 and current liabilities $127.0. The $200.0 revolving facility had $132.0 available, net of letters of credit.
- Debt and finance leases totaled $536.8 principal amount, compared with $555.2 at December 31, 2018. Long-term debt and finance leases on the balance sheet, net of issuance costs and current maturities, were $524.0. Operating lease liabilities of $81.5 were recognized following adoption of the new lease standard.
- Stockholders’ equity was $110.8, versus a deficit of $15.8 at year-end 2018, following a $100.4 net-proceeds public share offering and retained earnings improvement.
Material changes and unusual items
- Acquisitions contributed substantially to growth: eight businesses were acquired in the first nine months for total consideration of $81.0, including $71.0 cash. A separate September acquisition of hauling and transfer assets had approximately $46.6 consideration.
- Q3 results included a $3.6 pension withdrawal charge and $0.6 of Southbridge closure-related legal and other costs. The 2018 comparison included a $10.0 Southbridge insurance recovery, contributing to the apparent year-over-year operating-income decline. The 2018 nine-month period also included a $7.4 debt-extinguishment loss.
- In October 2019, the company agreed to withdraw from and re-enter a multiemployer pension plan. The arrangement caps gross payments at $4.2 million over approximately 17 years, compared with a potential $18.5 million complete-withdrawal liability; a $3.2 million obligation was recorded at September 30.
- Adoption of lease accounting on January 1, 2019 added operating lease assets and liabilities and reclassified certain landfill lease cash payments from investing to operating activities, affecting cash-flow comparability.
Management commentary, outlook and risks
- Management attributed solid-waste revenue growth mainly to pricing and acquired operations. Tight labor markets, wage increases, disposal costs, maintenance, fuel and acquisition-related costs pressured expenses.
- Management noted seasonal weakness in late fall, winter and early spring; borrowing needs and covenant headroom can tighten during these periods. No specific revenue or earnings guidance is provided in the filing.
- The company reported compliance with its credit covenants at September 30: net leverage was 3.24x against a 4.50x maximum, and interest coverage was 6.87x against a 3.00x minimum. The credit facility matures in May 2023 and is secured by substantially all assets.
- Interest-rate swaps cover $190.0 of variable-rate debt; management estimated a 100-basis-point rate change could affect quarterly interest expense by up to approximately $0.5. A $10-per-ton commodity price change was estimated to affect annual operating income by approximately $0.3.
- Environmental and litigation exposures remain significant. Southbridge groundwater-related claims may result in a loss, but the company says it cannot reasonably estimate the amount; potential costs could be material. A New Hampshire landfill case is stayed pending Supreme Court proceedings. A new Ontario County odor-related class action was served in October 2019. The company intends to defend these matters.
Important facts for investors to verify
- How much of revenue and operating growth is organic versus acquisition-driven, and whether pricing can continue to offset cost inflation and weak volumes.
- Cash conversion and capital demands, including the effect of lease-payment classification, elevated capital expenditures and acquisition spending.
- Debt reduction, revolver availability and covenant headroom through the seasonally weaker months.
- Ultimate costs and allocation of responsibility for Southbridge and Potsdam remediation, and developments in the environmental lawsuits and Ontario County class action.
- The earnings and cash impact of the pension withdrawal/re-entry agreement and the expected effects of the Southbridge landfill closure.