Business context and reporting period
Casella Waste Systems, Inc. is a regional integrated waste collection, disposal, recycling and resource-management company operating primarily in the northeastern United States. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended January 31, 2012; the comparable periods ended January 31, 2011. Amounts below are in millions unless noted.
Financial performance and position
- Revenue: Q3 revenue increased 2.7% to $114.6 million; nine-month revenue rose 4.2% to $371.6 million. Growth reflected solid-waste pricing, disposal volumes and acquisitions, partly offset by weaker recycling commodity prices in Q3.
- Operating results: Q3 operating income declined to $4.4 million from $6.3 million, with operating margin falling to 3.8% from 5.6%. Nine-month operating income was $26.3 million versus $31.2 million, and margin was 7.1% versus 8.8%. Higher operating costs, including fuel, hauling, landfill and vehicle expenses, contributed to margin pressure.
- Net results: Q3 net loss attributable to common stockholders was $24.6 million, or $0.92 per share, compared with a $6.4 million loss, or $0.24 per share. Nine-month net loss was $28.5 million, or $1.07 per share, versus a $10.4 million loss, or $0.40 per share.
- Unusual investment charges: Q3 included a $10.7 million impairment of Casella’s GreenFiber investment and $6.4 million of equity-method investment losses, including $5.1 million related to GreenFiber’s goodwill impairment. These charges materially weighed on reported earnings.
- Cash flow and investment: Nine-month operating cash flow was $49.7 million, up from $45.9 million. Investing cash outflow increased to $60.2 million from $38.3 million, including $49.1 million of growth and maintenance property, plant and equipment additions, $6.1 million of landfill lease payments, and $4.1 million invested in unconsolidated entities. Financing provided $9.1 million. Cash declined to $1.1 million from $1.8 million at April 30, 2011.
- Debt and liquidity: Balance-sheet long-term debt and capital leases, including current maturities, totaled approximately $472.1 million; financing lease obligations totaled approximately $2.2 million. The company reported $67.0 million drawn on its revolving facility and $109.4 million available after letters of credit. Working capital, as defined by management excluding cash, was a deficit of $20.5 million, compared with a $13.3 million deficit at fiscal year-end.
- Margins and segments: Cost of operations rose to 71.0% of revenue in Q3 from 68.9%; for nine months it rose to 68.1% from 66.6%. Q3 Western region operating income was $5.4 million, while Eastern reported a $1.0 million operating loss; Recycling earned $0.6 million.
Material changes versus the prior comparable periods
- Revenue grew, but operating income and margins weakened in both the quarter and year-to-date periods. Cost increases included higher fuel, hauling, landfill and vehicle maintenance expenses.
- Q3 and nine-month losses widened substantially, principally reflecting GreenFiber-related equity losses and impairment. Interest expense declined modestly year over year.
- Nine-month cash from operations improved, but investing outflows rose, and ending cash was lower than at April 30, 2011.
- Recycling revenue increased 18.2% year to date, mainly on stronger commodity pricing earlier in the year; Q3 revenue was nearly flat as lower prices offset higher volumes.
Outlook, risks and contingencies
- Covenant risk: At January 31, the total funded debt to bank-defined cash-flow covenant ratio was 4.72 against a 4.75 maximum. The limit was scheduled to tighten to 4.50 for the quarter ending April 30, 2012. Management said it was seeking an amendment, expected to obtain one at reasonable cost, but noted that forecast results could create a compliance risk without relief. The company was compliant with covenants at January 31.
- Debt refinancing and rates: The $180 million 11% second-lien notes mature July 2014; the $200 million 7.75% notes mature February 2019. On February 1, 2012, $21.4 million of Maine bonds were converted to a five-year fixed rate of 6.25%; management expected an approximately $0.3 million fourth-quarter debt-extinguishment charge. Interest-rate derivatives with $150 million notional are intended to hedge a forecasted transaction related to redeeming the second-lien notes.
- Contingencies: A New York environmental remediation liability of $5.2 million was recorded. The DEC’s estimated present-worth cost for the site remedy was approximately $12.1 million; potential recoveries from the Motors Liquidation Trust are in GM stock and warrants, with timing and value uncertain. The PERC dispute was settled in principle with no cash payout required, though until final execution and dismissal a $0–$3.2 million loss remained reasonably possible but not probable.
- Other settlements and legal matters: The company recorded a $1.0 million Vermont Attorney General penalty and a $0.4 million Town of Seneca settlement. The North Country landfill expansion zoning settlement became effective after local approval, and the company reported that related litigation was dismissed with prejudice. Other permitting, environmental and regulatory proceedings remain potential risks.
- Operating risks: Management cited exposure to fuel and landfill costs, recyclable commodity prices, regional economic conditions and severe weather, as well as the need to fund capital expenditures, landfill closure obligations and debt service. No specific earnings or revenue guidance was provided.
Most important facts for investors to verify
- Whether lenders amended the revolving-credit covenant before the April 30, 2012 test, and the company’s resulting covenant headroom and borrowing availability.
- Cash generation after capital spending, given low cash balances and a growing working-capital deficit.
- The trajectory of operating margins and costs, especially fuel, hauling, landfill expenses and recycling commodity prices.
- GreenFiber’s operating and financial performance, the valuation assumptions behind the $10.7 million impairment, and any further exposure under the $2.2 million guaranty.
- Final execution and dismissal of the PERC settlement, and developments in the environmental remediation and related recovery claims.
- Plans and ability to refinance or redeem the $180 million second-lien notes due in 2014.