Casella Waste Systems, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Casella is a vertically integrated solid waste services company operating in seven northeastern states, with Eastern, Western and Resource Solutions segments.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $295.3 | $242.0 | $813.0 | $647.4 |
| Operating income | $36.3 | $27.4 | $78.2 | $61.3 |
| Operating margin | 12.3% | 11.3% | 9.6% | 9.5% |
| Net income | $22.7 | $15.9 | $44.7 | $32.0 |
| Diluted EPS | $0.44 | $0.31 | $0.86 | $0.62 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $152.4 | $134.1 |
- Revenue grew 22.0% in Q3 and 25.6% year to date. Solid waste revenue growth reflected pricing, surcharges, acquisitions and higher volumes; Resource Solutions also benefited from acquisitions and non-processing growth.
- Q3 operating margin improved year over year, while cost of operations rose to 64.4% of revenue from 63.6%. For the nine-month period, that ratio increased to 66.3% from 64.8%.
- Nine-month investing cash use was $161.1, including $74.0 for acquisitions and $87.7 in property and equipment additions. Financing provided $22.8; cash increased $14.1 to $47.9.
- At September 30, total debt principal was $596.8; carrying value after debt issuance costs was $586.8. Debt principal included $350.0 under the term loan, $197.0 in tax-exempt bonds, and $49.1 in finance leases. Cash was $47.9. The company reported $271.8 of available revolver capacity, net of letters of credit, and no revolver borrowings.
- Total current assets were $191.5 and current liabilities $162.8. Management said cash, operating cash flow and financing availability should fund operations and commitments for at least 12 months and thereafter for the foreseeable future. The company reported compliance with credit agreement covenants.
Material changes and management commentary
- Q3 revenue increased $53.3 year over year; operating income rose $8.9 and net income rose $6.8. Nine-month revenue increased $165.6 and net income increased $12.7.
- Solid waste pricing contributed $11.9 of Q3 revenue growth and acquisitions contributed $9.0. Fuel and environmental surcharges contributed $11.5. Higher fuel, labor, maintenance and third-party hauling/disposal costs pressured expenses.
- Casella acquired 12 businesses in the first nine months for $78.1 of total consideration, including $72.7 cash, compared with eight businesses and $155.2 of consideration in the prior-year period.
- Capital spending increased year over year, driven by landfill development, acquired operations and facility investments. The company also issued $35.0 of Vermont bonds at 5.00% in June 2022 to finance or reimburse Vermont capital projects.
- Management said inflation, particularly in fuel, labor and other operating costs, materially affected margins and cash flows. Pricing structures and cost-recovery fees offset some costs, but competitive conditions may require the company to absorb some increases.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management highlighted acquisition plans, capital needs, landfill capacity and permitting, pricing, fuel and commodity prices, and general economic and weather conditions as factors affecting future results.
- Q3 included a $0.8 environmental remediation charge for investigation of a potentially contaminated inactive site adjoining a landfill, and a $0.2 Southbridge Landfill closure charge. The filing also reports $3.9 of acquisition-activity expense for the nine-month period.
- The company recorded environmental remediation liabilities of $6.4 at September 30. Landfill capping, closure and post-closure liabilities totaled $94.6; estimates may change as costs and timing assumptions are updated.
- A challenge to the Stage VI expansion permit at the North Country Environmental Services landfill remains unresolved. Motions and a related declaratory judgment petition were pending at the time described in the filing; permitting delays or adverse outcomes could affect disposal capacity.
- Interest-rate exposure remains: about $160.0 of long-term debt was variable rate after hedging, with a reported weighted average rate of approximately 4.2%. Management estimated a 100-basis-point rate change could affect annual interest expense by up to $1.6.
- Operations face seasonality, severe-weather, environmental-regulation, permit, litigation, fuel-price and recycled-commodity risks. A $10-per-ton change in recycled commodity prices was estimated to change annual operating income by about $0.8, though actual effects may vary.
Important facts for investors to verify
- Whether revenue growth and pricing continue to outpace fuel, labor, maintenance and disposal-cost inflation, and whether customer churn affects volumes.
- Acquisition integration, cash returns and capital requirements, including planned landfill and facility investments.
- Available revolver capacity, debt levels, interest-rate exposure and continued compliance with debt covenants.
- Developments in the North Country landfill expansion permit proceedings and the potential impact on permitted disposal capacity.
- Changes to environmental remediation and landfill closure estimates, and the timing and magnitude of related cash payments.