Casella Waste Systems, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Casella provides integrated solid-waste and resource-renewal services primarily in the northeastern United States.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $202.7 | $198.5 | $574.3 | $549.7 |
| Operating income | $20.6 | $18.5 | $45.1 | $38.5 |
| Net income | $15.1 | $12.4 | $28.2 | $22.6 |
| Diluted EPS | $0.31 | $0.26 | $0.58 | $0.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $111.9 | $71.5 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $77.3 | $76.0 |
Revenue increased 2.1% in Q3 and 4.5% year to date. Operating margin was approximately 10.2% in Q3 versus 9.3%; year-to-date margin was approximately 7.8% versus 7.0%. Net margin was approximately 7.5% in Q3 versus 6.2%, and 4.9% year to date versus 4.1%. Margins are calculated from reported revenue and income.
Operating cash flow rose $40.4 million year to date, which management attributed to improved operating performance and more favorable working-capital movements, including better receivable collections. Investing used $102.2 million, mainly for capital expenditures and acquisitions; financing provided $8.0 million. Cash ended the period at $21.1 million, compared with $3.5 million at year-end 2019.
At September 30, principal debt was $549.1 million, up from $522.7 million at December 31, 2019; cash was $21.1 million. The company had $173.6 million available on its revolving facility, net of letters of credit, and was in compliance with its debt covenants. Current assets of $115.7 million were below current liabilities of $137.5 million.
Changes and operating drivers
- Q3 solid-waste revenue was nearly flat: favorable pricing and acquisitions largely offset lower volumes. Management estimated a $12.7 million Q3 volume-related revenue decline, principally associated with COVID-19.
- Collection revenue and Resource Solutions revenue increased; disposal revenue declined. For the nine months, Western-region and Resource Solutions revenue grew, while Eastern-region revenue fell slightly.
- Cost of operations declined as a share of revenue, but general and administrative expense and depreciation and amortization increased. Higher bad-debt expense, employee bonuses, acquisition-related costs, maintenance, and depreciation contributed to cost pressure.
- Six businesses were acquired in the first nine months for total consideration of $26.4 million. Acquisition cash outlay was lower than in the comparable 2019 period.
- The company issued $40 million of New York tax-exempt bonds at 2.75% in September; proceeds helped increase cash and repay the revolving facility. Debt expense declined year over year, partly reflecting lower rates.
Outlook, risks, and unusual items
- COVID-19: Demand improved through September as business and construction activity recovered, but collection and disposal volumes remained below prior-year levels. Management said the pandemic was expected to continue to negatively affect performance, with the extent and duration uncertain. Employee safety and cleaning costs were expected to continue through year-end. The filing provides no quantitative earnings or revenue guidance.
- Liquidity and seasonality: Management expected positive operating cash flow and said discretionary spending and some capital expenditures could be reduced or delayed. It noted that the late fall, winter, and early spring are typically weaker periods, which can increase borrowing needs.
- Southbridge: A $2.0 million reserve was recorded for the company’s share of a settlement resolving claims related to the closed landfill. Separate waterline and closure obligations remain; the filing warns costs could exceed estimates and be material.
- Other legal and permitting matters: A New Hampshire landfill water-discharge lawsuit remained pending, as did an odor-related class action in New York. An appeal remained pending in the Hakes landfill expansion matter. The New Hampshire Stage VI expansion permit was granted October 9, subject to pre-construction conditions.
- Post-quarter equity offering: In October 2020, the company sold 2.703 million Class A shares at $56 per share and expected net proceeds of approximately $144.7 million for general corporate purposes, including acquisitions, working capital, and capital expenditures. This was after the reporting date.
- Interest-rate exposure: The company estimated that a 100-basis-point change in rates on its variable-rate debt could change annual interest expense by up to approximately $1.6 million.
Important facts for investors to verify
- Whether COVID-related volume recovery continued after September, and how volumes, pricing, and safety costs affected subsequent results.
- Post-offering share count, use of the approximately $144.7 million proceeds, and any resulting change in leverage or acquisition plans.
- Progress and final costs for Southbridge closure, remediation, and settlement obligations, plus outcomes of the remaining environmental and landfill-related legal matters.
- Revolver availability and covenant headroom through seasonal cash-flow lows and the May 2023 credit-facility maturity.
- Whether acquisition growth and Resource Solutions revenue translated into sustained operating-margin and cash-flow improvement.