Casella Waste Systems, Inc. — FY 2016 Form 10-K
Business context and period: Casella is a vertically integrated solid-waste services company operating primarily in six Northeastern states. This filing reports the fiscal year ended December 31, 2016; FY 2015 is the comparable 12-month period. The filing also provides unaudited fourth-quarter results.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $565.0 million | $546.5 million | +3.4% |
| Operating income | $44.9 million | $31.9 million | +41.0% |
| Operating margin | 8.0% | 5.8% | +2.2 percentage points |
| Net loss attributable to common stockholders | $(6.8) million; $(0.17) per share | $(13.0) million; $(0.32) per share | Loss narrowed |
| Cash from operations | $80.4 million | $70.5 million | +14.1% |
| Capital expenditures | $54.2 million | $50.0 million | +$4.2 million |
| Cash less capital expenditures | Approximately $26.2 million | Approximately $20.5 million | Improved |
| Net interest expense | $38.7 million | $40.1 million | Down $1.4 million |
Cost of operations fell to 67.6% of revenue from 70.0%. Revenue growth reflected stronger collection pricing and recycling commodity prices, partly offset by lower solid-waste volumes, particularly Western-region disposal and transportation volumes associated with reduced drill-cutting activity. Collection pricing increased 4.9%; overall landfill pricing increased 2.1%.
At the segment level, operating income improved in Eastern ($9.7 million versus $7.4 million), Western ($30.6 million versus $26.0 million), Recycling ($2.5 million versus a $2.4 million loss), and Other ($2.1 million versus $0.9 million).
Fourth quarter: Revenue was $143.8 million versus $140.0 million a year earlier; operating income was $10.0 million versus $4.7 million. The company reported a net loss of $12.0 million versus $7.0 million. The annual filing attributes $13.7 million of FY 2016 expense to debt extinguishment; the quarterly table does not clearly state the portion attributable specifically to Q4.
Debt, liquidity and balance sheet
- Year-end principal debt and capital leases were $525.6 million, compared with $525.0 million; cash was $2.5 million. Stockholders’ deficit was $24.6 million.
- In October 2016, Casella refinanced its prior facilities and redeemed its remaining 7.75% notes with a $350 million Term Loan B and a $160 million revolving facility. Management expected approximately $11 million of annual cash-interest savings and extended maturities.
- At year-end, $62.6 million was drawn on the revolver; $72.1 million remained available after letters of credit. The credit facility’s maximum net leverage covenant was 5.375x; the reported ratio was 4.22x. Interest coverage was 3.75x against a 2.50x minimum. The company reported compliance with its covenants.
- Operating cash flow exceeded capital expenditures by approximately $26.2 million. The company stated that excess cash flow would primarily be used to repay debt. It does not anticipate paying cash dividends in the foreseeable future.
Outlook, risks and unusual items
- No numerical FY 2017 revenue, earnings or cash-flow guidance is provided. Management said it would continue focusing on landfill returns, collection profitability, resource solutions, and balance-sheet improvement.
- Management cited tightening disposal capacity in its markets, including estimated permanent closures representing over 20% of market capacity across certain Northeastern states over recent and coming years. Further capacity closures and permit outcomes may affect volumes and pricing.
- Southbridge landfill groundwater investigations and potential claims remain material uncertainties. Casella had incurred over $2.5 million in response costs, said potential losses were reasonably possible but not estimable, and described an agreement in principle for the company to share up to $5 million of a municipal-waterline project. The landfill expansion’s economics and permitting remain under review; closure is a possible outcome.
- The Potsdam remediation liability was $5.9 million at year-end, after a $0.9 million estimate-related charge. Casella is jointly and severally liable with other parties, and actual costs could exceed estimates.
- Other key risks include substantial debt and variable-rate exposure, competition, commodity-price volatility, fuel costs, environmental regulation and permitting, weather and seasonality, regional concentration, and landfill closure and post-closure obligations. A 100-basis-point increase in variable borrowing rates was estimated to raise annual interest expense by up to $4.2 million.
- FY 2016 included a $13.7 million debt-extinguishment loss and a $0.9 million environmental remediation charge. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether collection pricing and recycling commodity improvements can offset continuing weakness in Western-region volumes and disposal activity.
- Actual interest savings, refinancing costs, variable-rate exposure, revolver availability, and covenant headroom after the refinancing.
- Updates on Southbridge groundwater findings, potential litigation, insurance recovery, waterline cost-sharing, and landfill expansion or closure decisions.
- Changes in the Potsdam remediation estimate and the timing and amount of future environmental expenditures.
- Permits, remaining landfill capacity, closure obligations, and the assumptions used to include expansion airspace in landfill accounting.