Casella Waste Systems, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Regional, vertically integrated solid-waste services company operating primarily in the northeastern United States. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $147.5 | $133.8 |
| Operating income | $0.8; 0.6% margin | $6.6; 4.9% margin |
| Net loss | $(3.9); $(0.09) per share | $(0.2); $(0.01) per share |
| Cash from operations | $12.8 | $10.7 |
| Cash and cash equivalents | $2.4 | $2.0 at December 31, 2017 |
| Long-term debt and capital leases, principal | $514.5 | $497.7 at December 31, 2017 |
| Total assets | $631.4 | $614.9 at December 31, 2017 |
- Revenue increased 10.2%. Solid-waste revenue rose $15.8 million, led by higher volumes, pricing and acquisitions; recycling revenue fell $6.4 million, primarily from weaker commodity prices and lower volumes.
- Cost of operations increased $11.1 million to $105.6 million; general and administration rose $2.2 million to $21.0 million; depreciation and amortization rose $2.1 million to $16.0 million. Together with special charges, higher costs compressed operating margin.
- Investing cash outflow was $28.0 million, including $19.0 million for acquisitions and $7.9 million of property, plant and equipment additions. Financing provided $15.6 million; cash increased $0.4 million during the quarter.
- At March 31, current assets were $84.9 million and current liabilities $84.6 million. The company reported $84.9 million of additional revolver availability, net of letters of credit. It was in compliance with debt covenants: net leverage ratio 3.77 versus a 5.00 maximum; interest coverage 5.97 versus a 2.50 minimum.
Material changes versus Q1 2017
- Operating income declined $5.7 million, and net loss widened $3.7 million. Q1 2018 included $2.1 million for a commodities-agreement buyout, $1.6 million in Southbridge landfill closure-related charges and $0.3 million in development costs written off. Q1 2017 included a $0.5 million debt-extinguishment loss.
- Segment operating results diverged: Western region income rose to $7.2 million from $4.1 million; Eastern reported a $1.8 million loss versus near break-even; Recycling swung to a $5.2 million loss from $1.6 million income. Other segment income declined to $0.6 million from $0.9 million.
- Acquisition spending rose substantially: the company acquired Complete Disposal and a tuck-in collection business for total consideration of $19.3 million, compared with $0.5 million in the prior-year quarter.
Outlook, commentary, risks and unusual items
- No numerical full-year financial guidance is provided. Management notes that results are seasonal, with lower activity generally in late fall, winter and early spring; Q1 results may not indicate full-year performance.
- The company expects to cease operations at the Southbridge Landfill when permitted capacity is exhausted, expected no later than December 31, 2018. Closure, contractual obligations and related litigation could materially affect results, cash flows and financial condition.
- Southbridge matters include groundwater contamination claims and litigation, a recorded $5.7 million waterline-related remediation liability, and a $1.2 million reserve for a Charlton zoning claim. The company says a loss in the broader litigation is reasonably possible but cannot estimate it. The Town filed a separate motion in April 2018 concerning the parties’ rights and municipal waste services.
- The Potsdam remediation liability was $5.8 million; significant remediation spending is not expected until fiscal 2019. The company also received notice of intent to sue regarding alleged Clean Water Act violations at its North Country landfill.
- Interest-rate exposure remains: approximately $338.2 million of debt was variable-rate, with a 4.4% weighted-average rate; management estimates a 100-basis-point rate change could affect quarterly interest expense by up to $0.8 million. Commodity-price sensitivity was estimated at about $0.2 million of quarterly operating income per $10-per-ton change.
- After quarter-end, the company issued $15.0 million of Maine revenue bonds and remarketed $16.0 million of Vermont bonds. Adoption of the new revenue-recognition standard did not significantly change revenue timing; the company was still assessing the balance-sheet effects of the new lease standard, effective in 2019.
Important facts for investors to verify
- Whether solid-waste volume and pricing gains can offset higher labor, transportation, disposal and maintenance costs.
- Recycling segment recovery, including commodity prices, volumes, processing quality and related costs.
- Southbridge closure timing, total closure and waterline costs, litigation exposure, and any liability when capacity is exhausted.
- Acquisition integration and funding needs, debt growth, revolver availability, interest-rate exposure and continued covenant compliance.
- Whether Q1 cash generation is sustainable given seasonality, capital intensity and future landfill remediation and closure spending.