Casella Waste Systems, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Casella is a vertically integrated solid-waste services company operating primarily in six northeastern states, with Eastern, Western, Recycling and Other segments.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $660.7 million | $599.3 million |
| Operating income (loss) | $39.7 million | $(12.6) million |
| Net income (loss) | $6.4 million | $(21.8) million |
| Diluted earnings per share | $0.15 | $(0.52) |
| Cash from operations | $120.8 million | $107.5 million |
| Capital expenditures | $73.2 million | $64.9 million |
| Cash and cash equivalents at year-end | $4.0 million | $2.0 million |
| Principal debt and capital leases at year-end | $555.2 million | $497.7 million |
- Revenue increased 10.2%. Collection revenue rose to $303.4 million; disposal revenue was $181.1 million. Recycling revenue fell to $42.2 million from $62.3 million, mainly due to weaker commodity prices and lower commodity volumes.
- Cost of operations was 68.6% of revenue, versus 67.6% in 2017; general and administrative expense was 12.8%, versus 13.2%. Operating margin was approximately 6.0% in 2018; the prior-year operating loss included a $65.2 million Southbridge closure charge.
- Operating cash flow less capital expenditures was approximately $47.6 million, compared with $42.7 million in 2017. Investing cash outflow increased to $164.2 million, primarily reflecting $88.9 million of acquisition spending and higher capital expenditures.
- Working capital, as defined in the filing and excluding cash, was negative $18.4 million. The $200 million revolving facility had $107.9 million of unused commitments at year-end, net of letters of credit; no amount was drawn at that date.
- Year-end consolidated net leverage was 3.62x against a 4.75x maximum covenant; interest coverage was 6.35x against a 3.00x minimum. The company reported compliance with its covenants.
Fourth-quarter results
Fourth-quarter revenue was $174.7 million, up from $151.2 million in 2017. Operating loss was $5.1 million, compared with operating income of $9.9 million; net loss was $13.7 million, compared with net income of $20.0 million. Diluted loss per share was $0.32, versus diluted earnings per share of $0.46. The filing provides quarterly results but does not clearly isolate the causes of the year-over-year fourth-quarter earnings decline.
Material changes and unusual items
- FY2018 revenue growth reflected acquisitions, pricing, surcharges and increased volumes. Solid-waste revenue grew 10.0%; collection pricing rose 5.3% and landfill pricing rose 4.1% (average price per ton increased 6.4%).
- Casella acquired nine businesses during FY2018 for approximately $99.5 million of total consideration, including $86.7 million cash. These businesses represented approximately $77 million in annualized revenue.
- Southbridge Landfill closed in November 2018. The company recorded an $8.1 million net closure charge in 2018, versus $65.2 million in 2017, which included a $48.0 million impairment. The 2018 charge included an $8.7 million contract-settlement charge, partly offset by a $10.0 million insurance recovery.
- Recycling operating results weakened: the segment recorded a $7.8 million operating loss, versus $2.8 million operating income in 2017. Management cited depressed commodity markets following China’s National Sword restrictions, increased quality requirements, and higher processing and residue-disposal costs. Risk-mitigation measures include processing fees and a floating Sustainability Recycling Adjustment fee; no commodity hedges were in place at year-end.
- Interest expense rose to $26.0 million from $24.9 million, while a $7.4 million debt-extinguishment loss was recorded following refinancing. The company refinanced its credit facilities in 2018 with a $350 million term loan A and a $200 million revolver.
Outlook, risks and contingencies
- No formal financial guidance for FY2019 is provided. Management expects approximately $40 million of 2019 revenue contribution from including a full year of revenue from 2018 acquisitions. Its strategic plan targets $20–$40 million of annualized revenue additions from acquisitions or development and a 75–100 basis-point reduction in G&A as a percentage of revenue by 2021.
- Management expects tight disposal capacity in the Northeast and believes pricing can continue to advance. It also expects recycling commodity markets to remain depressed for the foreseeable future.
- Material risks include environmental regulation and permitting, landfill expansion and closure costs, regional concentration and severe weather, fuel and labor costs, recycling commodity volatility, acquisition integration, cybersecurity, and substantial debt. A 100-basis-point change in variable interest rates was estimated to affect annual interest expense by up to approximately $2.3 million.
- Environmental remediation liabilities totaled approximately $10.8 million at year-end, including $5.2 million associated with the Southbridge waterline and $5.6 million for the Potsdam site. The Southbridge residents’ claims remain pending; the company says a loss is reasonably possible but cannot estimate it. Separately, a Clean Water Act case concerning the NCES landfill continued after a court denied the company’s motion to dismiss.
- The New England Teamsters pension fund was classified as “critical and declining”; potential withdrawal or plan liabilities are uncertain. A January 2019 share offering, completed after year-end, generated $100.9 million net proceeds for general corporate purposes, including potential acquisitions, working capital and capital expenditures.
Most important facts for investors to verify
- Whether operating and cash-flow improvement persists after separating ordinary performance from Southbridge closure, refinancing, acquisition and other unusual items.
- Whether the acquired businesses deliver the expected revenue, margins, synergies and integration results, and how acquisition spending affects leverage.
- How recycling prices, volumes, customer fees and contamination costs develop, and whether risk-mitigation arrangements continue to offset market pressure.
- The eventual cost and outcome of Southbridge and Potsdam remediation, the NCES litigation, and required landfill closure, post-closure and financial-assurance obligations.
- Debt covenant headroom, refinancing terms and liquidity through seasonal low-cash-flow periods; also confirm the deployment of the post-year-end offering proceeds.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting. Certain 2018 acquisitions were excluded from the internal-control assessment pending integration.