Casella Waste Systems, Inc. — Q3 2017 Form 10-Q
Business and period. Regional, vertically integrated waste-services company operating primarily in the northeastern United States. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $160.3 | $151.1 | $448.1 | $421.2 |
| Operating income (loss) | $18.3 | $17.4 | $(22.4) | $34.9 |
| Net income (loss) attributable to common stockholders | $12.1 | $7.5 | $(41.8) | $5.1 |
| Diluted EPS | $0.28 | $0.18 | $(1.00) | $0.12 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $79.1 | $56.1 |
- Q3 revenue increased 6.0%; operating margin was approximately 11.4%, compared with 11.5% a year earlier. Q3 earnings improved despite higher operating costs.
- Nine-month revenue increased 6.4%, but operating results included a $64.9 million Southbridge Landfill closure charge. The charge comprised a $48.0 million impairment, $9.1 million in project-development write-offs, $6.4 million for environmental remediation, and $1.3 million in legal and transaction costs. The filing does not provide a single adjusted operating-income figure excluding these items.
- Nine-month operating cash flow rose $23.0 million year over year. The $63.5 million non-cash Southbridge charge was added back in the cash-flow reconciliation. Capital expenditures were $43.2 million; cash and cash equivalents declined to $2.3 million from $2.5 million at year-end 2016.
- At September 30, current assets were $84.5 million and current liabilities $86.0 million. Total assets were $592.4 million, down from $631.5 million at year-end 2016; stockholders’ deficit was $60.5 million.
- Debt principal was $500.3 million ($484.4 million carrying amount after unamortized discounts and issuance costs), including $36.3 million drawn on the revolving facility. A further $100.8 million was available under the revolver after letters of credit. The company reported compliance with its debt covenants: net leverage of 3.71x against a 5.375x maximum and interest coverage of 5.68x against a 2.50x minimum.
Changes, outlook, and risks
- Revenue growth reflected higher collection and disposal pricing and volumes, acquisitions, and improved recycling commodity prices. Recycling revenue grew $2.0 million in Q3 and $11.3 million year to date; organics revenue declined $0.5 million and $1.4 million, respectively.
- Interest expense declined year over year, reflecting lower average debt and prior refinancing and debt-reduction activity. The company repriced its term loan in 2017; it expected a further 25-basis-point margin reduction after submission of its compliance certificate.
- The company expects to cease Southbridge Landfill operations when permitted capacity is exhausted, no later than December 31, 2018, and says further expansion is not expected to earn an adequate risk-adjusted return. It estimates approximately $21 million of cash outflows over the next five years for related capital, remediation, and closure activities, and expects over $52 million of additional tax deductions over that period. These are management estimates, not guarantees.
- Southbridge-related groundwater contamination is under investigation. A federal lawsuit seeks fines, remediation, and personal and property damages; the company says a loss is reasonably possible but cannot estimate it. The company recorded a $6.2 million Southbridge waterline remediation liability and agreed to fund up to $5.0 million toward a municipal waterline. It is also pursuing insurance coverage; the insurer disputes coverage.
- The company expects Southbridge closure and related liabilities could materially affect results, cash flows, or financial condition. A separate Potsdam environmental remediation liability was $5.9 million; the company notes expenditures could exceed estimates.
- Management warned of significant recycling-market uncertainty: China’s National Sword restrictions and lack of 2018 import licenses could pressure commodity markets. In October 2017, management considered a roughly 40% month-over-month drop in average commodity revenue per ton reasonably possible and estimated a $0.8 million quarterly operating-income-margin impact if commodity prices changed by 40%; actual effects may differ.
- Operations are seasonal and weather-sensitive, and the company notes that winter cash needs, capital intensity, commodity prices, permitting, environmental regulation, and debt-service capacity may affect performance and liquidity. No broad earnings or revenue guidance is provided.
Investor verification priorities
- Track Southbridge closure timing, remaining capacity, cash costs, remediation estimates, and the outcome of the groundwater litigation and insurance dispute.
- Assess the effect of China’s recycling restrictions and commodity-price changes on recycling revenue, costs, and margins.
- Monitor cash generation, seasonal revolver usage, covenant headroom, and debt repayment needs.
- Compare reported results with and without the $64.9 million Southbridge charge, using clearly defined adjustments rather than assuming the charge is the only unusual item.