Casella Waste Systems, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended April 30, 2014. This is an annual filing, not a standalone 2013 Q4 filing; fourth-quarter FY2014 results are noted below. Unless stated otherwise, amounts are in U.S. dollars.
Business context and reporting period
Casella is a regional, vertically integrated waste collection, transfer, disposal, recycling and organics services company operating mainly in six northeastern states. Its reporting segments are Eastern, Western, Recycling and Other. During FY2014, the company continued to exit or wind down lower-return activities and focus on core collection and landfill operations and customer resource solutions.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $497.6 million | $455.3 million |
| Operating income | $11.9 million; 2.4% margin | $12.4 million; 2.7% margin |
| Net loss attributable to common stockholders | $23.1 million; $0.58 per share | $54.1 million; $1.59 per share |
| Cash from operating activities | $49.6 million | $43.9 million |
| Capital expenditures | $46.0 million | $55.0 million |
| Cash and cash equivalents at year-end | $2.5 million | $1.8 million |
| Working capital, net | $(21.4) million | $(25.3) million |
| Long-term debt and capital leases, less current maturities | $507.1 million | $495.0 million |
Revenue increased 9.3%, primarily from higher solid-waste volumes, acquisitions and growth in Customer Solutions; pricing contributed modestly. Operating income declined slightly as operating costs rose faster than revenue. FY2014 included a $7.5 million CARES impairment, a $1.4 million abandoned gas-pipeline project charge and a $0.4 million Southbridge environmental remediation charge; a $1.1 million gain on acquisition-related contingent consideration partly offset charges. Interest expense fell to $37.9 million from $41.4 million. The company reported a $27.4 million consolidated net loss; the smaller common-stockholder loss reflects attribution of loss to noncontrolling interests.
For the fourth quarter, revenue was $118.9 million, operating loss $6.0 million and net loss attributable to common stockholders $11.8 million. By comparison, FY2013 fourth-quarter revenue was $108.7 million, operating income $2.1 million and common-stockholder net loss $13.4 million.
Operating cash flow exceeded capital expenditures by approximately $3.7 million, a simple difference that does not account for acquisitions, debt service or other investing needs. Cash used in investing activities was $57.9 million; cash provided by financing activities was $9.0 million. The company had $509.5 million of outstanding principal debt, excluding $34.7 million of letters of credit, and $58.9 million of available revolver commitments at year-end.
Material changes versus the prior comparable period
- Revenue rebounded from a 2.7% FY2013 decline. Solid-waste revenue rose $30.4 million, with reported volume growth of $19.0 million and acquisitions and divestitures adding $9.3 million net.
- Collection and disposal revenue increased; Recycling revenue rose 3.5% after a 19.0% decline in FY2013, but the segment remained loss-making. FY2014’s Western region operating income fell to $13.3 million from $20.1 million, while Eastern region operating loss narrowed to $1.1 million from $5.3 million.
- Operating cash flow improved by $5.7 million, while capital expenditures decreased by $9.1 million. Year-end debt increased, and stockholders’ equity moved from positive $15.5 million to a deficit of $8.5 million.
- The company sold its GreenFiber interest, disposed of BioFuels, and acquired several hauling businesses, a transfer station, an MRF and an industrial service management business. CARES was marked for wind-down following an impairment.
Outlook, commentary, risks and contingencies
- Management identified FY2015 priorities: improve landfill returns, increase collection profitability, execute the Eastern region strategy and expand differentiated resource solutions. It gave no consolidated numerical revenue, earnings or cash-flow guidance in the provided filing text.
- Management reported landfill volumes up approximately 0.4 million tons annually versus FY2013, excluding Worcester closure-project volumes, against a goal of 0.5 million tons by FY2015. It expected to balance incremental volume sourcing with improved pricing and anticipated potential above-CPI disposal price increases in some markets.
- The $227.5 million senior secured revolving facility matures March 18, 2016. The filing says refinancing is expected before the facility would need to be classified as current, but gives no assurance that refinancing will be available on favorable terms or at all. The company was in covenant compliance at April 30, 2014; reported covenant measures included total funded debt to the bank-defined cash-flow metric of 5.04 against a 5.85 maximum and interest coverage of 2.82 against a 2.25 minimum.
- Liquidity is constrained by low cash, negative working capital, substantial debt service and significant contractual commitments. Disclosed obligations total $959.6 million, including debt, interest, operating leases and landfill capping, closure and post-closure costs.
- Environmental and permitting risks include the Southbridge wetlands remediation, for which the company accrued $0.4 million and estimated a probable net loss range of $0.4–$2.1 million, and a Potsdam remediation liability of $5.3 million. Southbridge’s Attorney General matter and related site-stability work remained subject to resolution. The filing also describes extensive regulatory, landfill-permit, commodity-price, fuel-cost, severe-weather, regional-concentration and competition risks.
- Juniper Ridge’s municipal-waste permit conditions were appealed; a June 19, 2014 decision extended the permit term to March 31, 2018. The company also announced a change in fiscal year-end to December 31, with an eight-month transition period ending December 31, 2014.
Most important facts for investors to verify
- Progress and terms of refinancing the revolver before the March 2016 maturity, as well as covenant headroom and actual revolver availability.
- Whether volume growth, landfill pricing and the Eastern region’s improvement translate into stronger operating margins and cash generation.
- Remaining Southbridge and Potsdam remediation costs, reimbursements and regulatory outcomes; closure and demolition costs associated with Maine Energy.
- Execution and economics of the CARES wind-down, the McKean rail project and other landfill capacity and permitting plans.
- Recycling commodity-price exposure, capital needs and landfill closure obligations, including estimates that depend on future airspace, costs and permits.