Casella Waste Systems, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Casella is a regional, vertically integrated solid-waste services company operating primarily in the northeastern United States. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $151.1 | $146.2 | $421.2 | $406.5 |
| Operating income | $17.4 | $12.7 | $34.9 | $27.2 |
| Operating margin | 11.5% | 8.7% | 8.3% | 6.7% |
| Net income (loss) | $7.5 | $2.3 | $5.1 | $(4.8) |
| Net income (loss) attributable to common stockholders | $7.5 | $2.3 | $5.1 | $(6.0) |
| Basic EPS | $0.18 | $0.06 | $0.12 | $(0.15) |
- Revenue grew 3.4% in Q3 and 3.6% year to date. For the first nine months, solid-waste revenue growth was led by collection pricing; weaker disposal volumes, particularly drill-cutting-related transportation, partly offset the gains. Recycling revenue also benefited from improved commodity prices.
- Q3 operating income increased $4.7 million; nine-month operating income increased $7.8 million. Lower operating costs and improved Recycling performance supported the gains. General and administration expense rose, including higher incentive compensation.
- Interest expense was $9.6 million in Q3 and $29.7 million year to date. Nine-month loss on debt extinguishment was $0.7 million. The filing reports no 2016 derivative loss.
- Cash from operations was $56.1 million for the nine months, versus $40.5 million in 2015. Additions to property, plant and equipment were $37.4 million, versus $31.0 million; cash from operations less those additions was approximately $18.6 million versus $9.5 million. Investing cash outflow was $43.7 million, including capital spending, landfill lease payments and acquisitions.
- At September 30, cash was $3.6 million and current assets were $83.1 million, compared with current liabilities of $80.9 million. Total debt and capital leases, net of unamortized discount and issuance costs, were $500.6 million; principal was $515.3 million. Stockholders’ deficit was $13.9 million.
Material changes and financing
- In Q3, solid-waste revenue growth reflected favorable pricing, partly offset by weaker volumes. The Western region’s operating income improved, while Eastern-region operating income was approximately flat. Recycling operating income increased year over year.
- Casella acquired three Western-region transfer stations during the first nine months for total consideration of $2.8 million, including $2.4 million cash; $0.9 million was allocated to goodwill.
- After quarter-end, in October 2016, Casella entered into a credit agreement for a $350 million term loan B and a $160 million revolving facility. Proceeds repaid the existing ABL facility; the company said it would redeem its remaining $345.6 million principal amount of 7.75% notes in November at 101.938% of principal, plus accrued interest. The term loan initially bears interest at LIBOR plus 3.00%, subject to a 1.00% LIBOR floor; the revolver initially bears LIBOR plus 3.00%.
- As of September 30, the company reported a 4.41x consolidated net leverage ratio against a 5.375x maximum covenant, calculated using the agreement’s specified adjustments. The new facility includes financial tests and customary restrictive covenants.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management notes that waste volumes and operating results are seasonal, generally weaker in late fall, winter and early spring; severe weather can also affect costs, volumes and operations.
- Southbridge landfill-area wells showed contaminants above levels triggering response obligations. Casella was investigating the source and had incurred approximately $2.0 million in response costs by September 30. Residents representing about 40 homes had issued a notice of intent to sue; the company said a loss was reasonably possible but could not be estimated. The Town disputed responsibility, and the company’s insurer denied coverage; related litigation could materially affect results, financial condition, permitting or operations.
- The Potsdam environmental remediation liability was $5.0 million at September 30. The company is jointly and severally liable with other parties, and actual remediation costs could exceed estimates.
- A 2015 contract dispute involving the Old Town facility was settled; $1.4 million of the recorded settlement reserve remained at September 30. The company also identifies debt covenant compliance, regional economic conditions, commodity pricing, fuel costs, permitting and landfill obligations as relevant risks.
- Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2016; no material change in internal control over financial reporting was reported for the quarter.
Investor verification priorities
- Review the October refinancing and November note redemption disclosures, including final debt balances, redemption costs, interest terms and covenant headroom.
- Track Southbridge investigation findings, potential claims, insurance coverage and any impact on landfill permitting or operations; assess the uncertainty around future costs.
- Monitor operating cash generation against capital spending and landfill development requirements, especially given low cash on hand and seasonal borrowing needs.
- Assess whether pricing gains can continue to offset disposal-volume weakness, including lower drill-cutting-related activity, and how recycling commodity prices affect results.
- Compare reported earnings with cash generation and distinguish the impact of prior-year divestiture gains and other nonrecurring items.