Casella Waste Systems, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 21, 2020. The company provides integrated waste collection, transfer, disposal, recycling and organics services across six northeastern states.
Financial performance
Amounts are in millions of dollars except per-share data, percentages and ratios.
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $743.3 | $660.7 | +12.5% |
| Operating income | $53.1 | $39.7 | +33.6% |
| Operating margin | 7.1% | 6.0% | +1.1 percentage points |
| Net income | $31.7 | $6.4 | Higher by $25.2 |
| Diluted EPS | $0.66 | $0.15 | +$0.51 |
| Operating cash flow | $116.8 | $120.8 | Down $4.0 |
| Capital expenditures | $103.2 | $73.2 | Up $29.9 |
Operating cash flow less capital expenditures was approximately $13.7 million, compared with $47.6 million in FY2018. Revenue growth reflected $57.9 million from acquisitions, $25.3 million from pricing, and lower revenue from closed operations and volumes. Collection pricing rose 5.3%; disposal pricing rose 5.1% (average price per ton rose 7.1%). Solid-waste volume declined 1.0%.
Fourth quarter: Revenue was $193.6 million versus $174.7 million a year earlier. Operating income was $14.6 million versus an operating loss of $5.1 million; net income was $9.1 million versus a net loss of $13.7 million. Quarterly results were seasonal, with the largest revenue reported in the third quarter.
Margins and segments: Cost of operations was 68.4% of revenue versus 68.6%; general and administration was 12.5% versus 12.8%; depreciation and amortization was 10.7% in both years. Operating income by segment was Eastern $9.5 million (up from $4.7 million), Western $41.9 million (up from $41.5 million), Recycling a loss of $0.8 million (improved from a $7.8 million loss), and Other $2.5 million (up from $1.3 million).
Liquidity, debt and capital
- Cash was $3.5 million at year-end; working capital, excluding cash, was negative $31.2 million.
- Principal debt totaled $522.7 million, down from $555.2 million. The company had $148.6 million of unused revolving-credit commitments, net of letters of credit.
- Credit-facility covenant ratios were 3.07x net leverage (maximum 4.50x) and 7.33x interest coverage (minimum 3.00x); the company reported compliance at year-end.
- Total assets were $932.2 million, up from $732.4 million; stockholders’ equity was $122.8 million versus a $15.8 million deficit.
- The company raised $100.4 million net through a public offering of 3.6 million Class A shares. Cash provided by financing activities was $60.1 million.
Material changes, outlook and management commentary
- Nine businesses were acquired during 2019 for total consideration of $82.2 million; nine were acquired in 2018. Management expected approximately $30 million of FY2020 revenue from the full-year contribution of 2019 acquisitions. The stated strategic goal was to add $20–$40 million in annualized revenue per year through acquisitions or development.
- The company continued its 2021 strategic plan: increase landfill pricing and utilization, improve collection efficiency, expand resource-solutions offerings, modernize technology, and balance debt reduction with selective growth. Management targeted a 75–100 basis-point reduction in general and administration expense as a share of revenue by 2021 through its technology plan.
- Recycling commodity markets remained depressed; management expected weak conditions to continue. Processing fees, revenue-sharing arrangements and a floating Sustainability Recycling Adjustment fee are intended to reduce exposure. Commodity sales declined to 36.8% of Recycling segment revenue in 2019 from 77.6% in 2015.
- The New Hampshire regulator raised public-benefit and technical concerns about the proposed 1.2-million-cubic-yard NCES landfill expansion. The company withdrew its application in February 2020, expected delay and refiling, and disclosed a reasonably possible, not probable, loss of approximately $1.2 million. A permit is not assured.
- The company recorded $3.6 million of multiemployer pension withdrawal expense. An agreement capped gross payments at $4.2 million over approximately 17 years, compared with a potential $18.5 million liability for complete withdrawal; $1.8 million remained payable at year-end.
- Southbridge landfill closure-related charges were $2.7 million in 2019, following $8.1 million in 2018 and $65.2 million in 2017. The landfill reached capacity and closed in November 2018. The company reported a $4.6 million waterline-related remediation liability and said remaining closure and environmental costs could be material.
- Other material proceedings include resident claims relating to alleged Southbridge groundwater contamination, a stayed Clean Water Act case concerning the NCES landfill, and a putative class action alleging odors from the Ontario County landfill. The Southbridge resident case remains in discovery; the company says it intends to defend the matters. A loss estimate for the Southbridge litigation was not reasonably determinable.
Risks and unusual items
- Key risks include landfill permits and expansion capacity, environmental compliance and remediation, landfill closure obligations, weak recycling commodity prices, regional economic and weather exposure, fuel and labor costs, competition, acquisition integration, and cybersecurity.
- Landfill final capping, closure and post-closure liabilities totaled $71.9 million; disclosed contractual cash obligations for those activities were $174.5 million, including estimated future commitments.
- Interest-rate swaps covered $190 million of debt at year-end. Management estimated a 100-basis-point rate change could affect annual interest expense by up to $1.9 million. No commodity hedges were in place; a $10-per-ton commodity price change was estimated to affect annual operating income by about $0.3 million.
- FY2019 net income included a $1.9 million income-tax benefit. Results also reflect acquisitions, increased depreciation, and the pension withdrawal charge. The company reported no goodwill impairment; annual testing found each reporting unit’s fair value exceeded carrying value by more than 34.4%.
- The independent auditor issued unqualified opinions on the financial statements and internal controls. Certain 2019 acquisitions—representing 7.1% of assets and 2.0% of revenue—were excluded from management’s internal-control assessment because their controls had not yet been fully integrated.
Important facts for investors to verify
- Progress, timing, costs and permitting prospects for the NCES expansion, and any impairment exposure if the permit becomes unlikely.
- Final exposure from Southbridge remediation and litigation, the NCES Clean Water Act case, and the Ontario County odor class action.
- Whether acquisition-driven growth and the expected approximately $30 million FY2020 contribution translate into improved margins and cash generation.
- Recycling commodity conditions and the effectiveness of pricing and fee mechanisms in offsetting market weakness.
- Capital expenditure requirements, cash conversion, debt repayment and headroom under credit covenants, particularly through seasonal low-cash-flow periods.
- Integration of acquired businesses into financial controls and the achievement of management’s technology-efficiency targets.