Casella Waste Systems, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Casella provides integrated solid waste collection, transfer, disposal, recycling and organics services, primarily in the northeastern United States. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $163.7 | $147.5 |
| Operating income | $4.4 | $0.8 |
| Operating margin | 2.7% | 0.6% |
| Net loss | $(1.7) | $(3.9) |
| Basic and diluted loss per share | $(0.04) | $(0.09) |
| Cash from operating activities | $4.8 | $12.8 |
| Capital expenditures | $18.2 | $8.9 |
- Revenue increased 11.0%. Collection revenue rose $16.6 million, with acquisitions and pricing contributing to growth; lower disposal volumes and weaker recycling commodity prices partly offset it.
- Cost of operations increased to $117.8 million, or 72.0% of revenue, from $105.6 million, or 71.6%. Higher acquisition-related labor, disposal, hauling, fuel and maintenance costs weighed on results.
- Operating income improved by $3.6 million. Net loss narrowed despite interest expense of $6.5 million; Q1 2018 included a $1.6 million income-tax benefit, while Q1 2019 recorded a $0.03 million tax provision.
- Operating cash flow fell $8.0 million, principally reflecting larger cash outflows from payables, accrued and other liabilities, and prepaid expenses, inventories and other assets.
Financial position, debt and liquidity
- At March 31, cash was $19.9 million, versus $4.0 million at year-end 2018. Current assets were $109.2 million and current liabilities $107.1 million.
- Principal debt and finance leases totaled $487.8 million, compared with $555.2 million at December 31, 2018. The balance-sheet carrying amount, net of unamortized discounts and issuance costs, was $477.4 million, including $2.7 million current. The company had $350.0 million outstanding under its term loan and no revolving-credit borrowings.
- Revolving-credit availability was $175.4 million after $24.6 million of letters of credit. The facility matures in May 2023. The company reported compliance with its covenants: net leverage was 3.10x against a 4.50x maximum; interest coverage was 6.26x against a 3.00x minimum.
- Q1 financing included a $100.4 million net public offering of 3.6 million Class A shares. The company also made $80.7 million of principal payments. Cash generation and equity proceeds supported the debt paydown; Q1 investing cash use was $19.4 million.
- Adoption of the new lease standard added $106.9 million of operating lease right-of-use assets and $77.6 million of operating lease liabilities to the balance sheet. The filing says comparative periods were not restated.
- Stockholders’ equity was $83.0 million at March 31, compared with a $15.8 million deficit at year-end, substantially reflecting the stock offering.
Changes, outlook and significant risks
- Growth included acquisitions completed during 2018 and a smaller 2019 acquisition. Solid-waste revenue growth included $11.9 million from acquisitions and $5.5 million from pricing, offset in part by $4.4 million from lower volumes.
- The Southbridge landfill ceased operations in Q4 2018. Q1 2019 included $0.6 million of closure-related legal and other costs, versus $1.6 million of closure charges in Q1 2018. Q1 2019 also included $0.7 million of acquisition-related charges; Q1 2018 had $2.1 million of contract-settlement charges and $0.3 million of development-project charges.
- Management provided no specific full-year revenue, earnings or cash-flow guidance in the supplied filing text. It noted that results are seasonal, with lower activity generally in late fall, winter and early spring, and warned that quarterly results may not indicate full-year performance.
- Southbridge groundwater-related litigation remains unresolved. The company says a loss is reasonably possible but cannot estimate a loss range. A waterline project is expected to be completed in 2019; the company’s share of costs is capped at $5.0 million under the agreement, subject to estimates and potential cost overruns. Recorded Southbridge remediation liability was $5.1 million.
- At the Potsdam remediation site, the recorded liability was $5.6 million; significant remediation spending was expected in 2019, and actual costs could exceed estimates. A separate New Hampshire Clean Water Act case remains pending after denial of the company’s motion to dismiss; its request to stay proceedings was pending.
- Other disclosed sensitivities include variable-rate debt exposure (management estimated a 100-basis-point rate change could affect quarterly interest expense by up to $0.4 million) and commodity exposure (a $10-per-ton price change was estimated to affect annual operating income by about $0.7 million). Weather, regional economic conditions, fuel and disposal costs, permitting, and environmental obligations are also risks.
Important facts for investors to verify
- Whether acquisition-led revenue growth can translate into improved margins as labor, maintenance, disposal and transportation costs rise.
- Why operating cash flow declined despite higher revenue, and whether working-capital outflows persist.
- Debt repayment, available revolver capacity, covenant headroom and sensitivity to interest rates and seasonal cash needs.
- Actual Southbridge and Potsdam remediation costs, litigation developments, and whether the Southbridge waterline stays within the company’s stated cost cap.
- Capital expenditure requirements and the effects of the new lease accounting presentation on comparisons with prior periods.