Casella Waste Systems, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Casella is a regional, vertically integrated solid-waste services company operating primarily in the northeastern United States. Figures below are in U.S. dollars; amounts are rounded to millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $172.8m | $160.3m | $485.9m | $448.1m |
| Operating income (loss) | $28.9m | $18.3m | $44.9m | $(22.4)m |
| Net income (loss) | $22.3m | $12.1m | $20.1m | $(41.8)m |
| Diluted EPS | $0.50 | $0.28 | $0.46 | $(1.00) |
| Operating margin | 16.7% | 11.4% | 9.2% | (5.0)% |
Q3 revenue grew 7.8%; nine-month revenue grew 8.4%. Solid-waste revenue increased on higher pricing, surcharges and acquisitions. Recycling revenue fell to $10.9m in Q3 from $16.4m, and to $30.6m year to date from $49.2m, mainly due to lower commodity prices and volumes.
Cash flow: Nine-month operating cash flow was $89.9m, versus $79.1m. Investing cash outflow was $109.9m, including $58.2m for acquisitions and $51.8m of property and equipment additions. Financing provided $21.1m. Cash ended the period at $3.1m. Operating cash flow less capital expenditures was approximately $38.1m; this simple comparison excludes other investing needs.
Debt and liquidity: September 30 debt and capital leases totaled $528.2m principal, compared with $497.7m at December 31, 2017. Cash was $3.1m; current assets were $101.9m and current liabilities $109.0m. The revolving facility had $132.7m available, net of letters of credit. The company reported compliance with debt covenants; leverage was 3.54x against a maximum of 4.75x, and interest coverage was 6.45x against a minimum of 3.00x.
Material changes and unusual items
- The nine-month comparison improved substantially in part because 2017 included $64.9m of net Southbridge Landfill closure charges, including a $48.0m impairment. In 2018, the company recorded a net $7.7m credit for Southbridge-related items, including a $10.0m insurance recovery, partly offset by settlement and legal costs. Q3 included a net $9.5m credit.
- The company refinanced its credit facilities in Q2 2018, replacing the prior term loan and revolver with a $350m term loan and $200m revolving facility. Nine-month debt-extinguishment loss was $7.4m, primarily from write-offs associated with refinancing and bond remarketing.
- Acquisition spending increased significantly: nine-month total consideration was $67.1m, including $57.8m cash, compared with $6.3m total consideration in the prior-year period. The filing also disclosed approximately $24m of acquisitions completed in October and November 2018, after quarter-end.
- Q3 operating income benefited from the Southbridge insurance recovery. Meanwhile, recycling segment operating results weakened, reflecting lower revenue and costs associated with slower processing and quality improvements.
Outlook, risks and contingencies
- No quantitative full-year guidance is provided. Management notes that results are seasonal, with lower activity generally in late fall, winter and early spring.
- Casella expected to cease Southbridge Landfill operations when permitted capacity was exhausted, anticipated no later than early 2019. The company cited limited economic prospects for expansion and had filed a closure plan.
- Southbridge matters remain material uncertainties. A court dismissed citizen-group claims under federal environmental statutes, but residents’ claims remained pending. A separate dispute with the Town over contractual obligations and landfill closure was being contested; trial was scheduled for November 27, 2018. Management said potential costs could materially affect results, cash flows and financial condition, and could not reasonably estimate certain losses.
- A New Hampshire environmental lawsuit concerning the NCES landfill remained pending after the court denied the company’s motion to dismiss. The company said it would vigorously defend the case.
- Other exposures include environmental remediation at Potsdam, landfill closure obligations, commodity-price volatility, fuel and labor costs, interest-rate exposure, severe weather and debt covenant headroom. The company estimated a $10-per-ton commodity-price change could affect annual operating income by about $1.2m; a 100-basis-point change in relevant variable rates could change quarterly interest expense by up to about $0.5m.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects sustainable pricing and organic volumes versus acquisitions and the $10m Southbridge insurance recovery?
- What are the eventual costs and timing of Southbridge closure, waterline work, resident claims and the Town dispute, and what additional insurance or third-party recoveries may apply?
- Can recycling margins recover amid lower commodity pricing and ongoing quality-related operating costs?
- How will the October–November acquisitions affect leverage, integration costs and cash generation?
- Does seasonal cash flow or further borrowing pressure liquidity or covenant headroom? The filing identifies these as potential concerns but provides no later-period outcome.