Business context and reporting period
Casella Waste Systems, Inc. is a regional, vertically integrated solid-waste services company operating primarily in six northeastern states. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the same periods in 2014. Amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $146.2 | $141.9 | $406.5 | $392.4 |
| Operating income | $12.7 | $10.6 | $27.2 | $6.5 |
| Operating margin | 8.7% | 7.5% | 6.7% | 1.7% |
| Net income (loss) attributable to common stockholders | $2.3 | $1.1 | $(6.0) | $(19.0) |
| Basic EPS | $0.06 | $0.03 | $(0.15) | $(0.47) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $40.5 | $37.3 |
- Q3 revenue rose 3.0%; nine-month revenue rose 3.6%. Solid-waste revenue growth reflected higher price and volume, partly offset by lower fuel recovery fees and weaker recycling commodity prices.
- Cost of operations was 68.2% of revenue in Q3 versus 69.2% a year earlier, and 70.4% year to date versus 71.8%. Lower fuel costs helped; labor, maintenance and certain landfill operating costs increased.
- Interest expense was $10.1 million in Q3 and $30.4 million year to date, up from $9.5 million and $28.7 million, respectively. The nine-month loss includes $0.9 million of debt-extinguishment charges.
- Cash and equivalents were $2.0 million at September 30, 2015, versus $2.2 million at year-end 2014. Current assets were $85.8 million and current liabilities $80.9 million. Total debt and capital leases were approximately $531.7 million, including current maturities.
- Nine-month investing cash use was $27.5 million, including $31.0 million of property and equipment additions and $5.3 million of divestiture proceeds. Operating cash flow less property and equipment additions was approximately $9.5 million, before landfill lease payments and other investing items.
Material changes versus comparable periods
- Q3 operating income increased $2.1 million; nine-month operating income increased $20.7 million. The year-to-date comparison was substantially affected by 2015 divestiture-related credits of $5.6 million, including gains from the CARES asset sale and reversal of excess Maine Energy completion reserves, versus $7.5 million of divestiture charges in 2014, including the CARES impairment.
- Eastern-region revenue increased 9.5% in Q3 and 9.0% year to date. Western-region revenue grew 3.1% and 3.0%, respectively. Recycling revenue declined in both periods as lower commodity prices outweighed volume growth.
- Nine-month operating cash flow increased $3.3 million; investing cash use decreased $17.8 million, mainly reflecting lower capital spending and divestiture proceeds. Financing cash flow shifted to $13.2 million used from $8.1 million provided, including refinancing-related costs.
- Debt was refinanced in February 2015: the company replaced its near-term senior revolving facility with a $190 million borrowing-base ABL facility maturing in 2020, issued an additional $60 million of 7.75% notes due 2019, and issued $15 million of Maine tax-exempt bonds. It repurchased and retired $9.7 million principal amount of the 2019 notes in September.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management notes that late fall, winter and early spring are typically seasonally weaker, and that severe weather can affect volumes, operating costs, collection and facility efficiency.
- At September 30, ABL borrowing availability was $57.3 million, above the $23.8 million threshold that would trigger additional financial-ratio covenants. Covenant EBITDA was $107.1 million against a $75.0 million minimum; the company reported compliance with its debt covenants. Availability and covenant headroom can tighten seasonally.
- Substantial debt and interest costs, low cash balances, recycling commodity-price volatility, regional economic conditions, fuel and operating costs, landfill development and closure obligations, and environmental regulation are relevant risks. A 100-basis-point change in variable rates was estimated to change quarterly interest expense by about $0.2 million; a 10% commodity-price change was estimated to affect Q3 operating income by about $0.2 million.
- The company recorded a $5.2 million liability for the Potsdam environmental remediation matter; actual costs could exceed estimates. A separate Massachusetts landfill order carries a $172,000 penalty, of which $129,000 is to be paid through a supplemental environmental project.
- JCP Investment Partnership, which reported approximately 5.7% ownership of Class A shares, pursued a proxy contest seeking two board seats. The company warns that a contest could consume management time, incur costs and create business or market uncertainty.
- Other notable items include a $4.9 million combined gain on the CARES-related asset and equipment/property sales, a $1.2 million reversal of excess estimated Maine Energy completion costs, and $0.3 million Q3 loss on repurchasing debt. Management reported no subsequent events requiring disclosure.
Important facts for investors to verify
- How much of the operating-income improvement is sustainable after excluding divestiture credits and prior-year impairment and other unusual charges.
- Current borrowing-base availability, seasonal covenant headroom, and the 2019 notes refinancing requirement that can accelerate the ABL maturity to November 2018 if not met.
- Cash conversion and capital needs, including landfill development, closure obligations and required spending beyond reported property and equipment additions.
- Exposure and estimates for the Potsdam remediation, landfill closure costs and other environmental or legal contingencies.
- Trends in disposal and collection volumes, recycling commodity prices, and costs as winter seasonality affects results.