Casella Waste Systems, Inc. — Q2 2019 Form 10-Q
Business and period: Regional, vertically integrated waste-services company operating primarily in the northeastern U.S. This quarterly report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Amounts below are in millions of dollars unless otherwise stated.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $187.5 | $165.6 | $351.1 | $313.1 |
| Operating income | $15.5 | $15.1 | $20.0 | $16.0 |
| Net income (loss) | $11.9 | $1.7 | $10.2 | ($2.2) |
| Diluted EPS | $0.25 | $0.04 | $0.22 | ($0.05) |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $38.3 | $48.1 |
- Q2 revenue increased 13.2%; operating income rose 2.6%. Operating margin was approximately 8.3%, versus 9.1% a year earlier. Net margin was approximately 6.4%, versus 1.0%.
- For the first half, revenue increased 12.1%, operating income 25.0%, and net income improved from a loss. Operating margin was approximately 5.7%, versus 5.1%; net margin was approximately 2.9%, versus negative 0.7%.
- Q2 results included a $0.9 million Southbridge landfill closure charge and $0.5 million of acquisition-related costs. The $1.9 million income-tax benefit included a deferred benefit from reducing the valuation allowance. First-half 2018 included a $7.4 million debt-extinguishment loss, which did not recur.
- First-half operating cash flow fell $9.8 million, or about 20%, despite higher earnings. Management attributed the decline principally to working-capital and liability payment timing, including higher closure-related payments and operating lease cash-flow classification changes.
- Investing cash outflow was $74.0 million, including $46.7 million of property and equipment additions and $27.7 million for acquisitions, net of cash acquired. Cash declined by $0.9 million to $3.2 million.
- At June 30, total debt and finance leases at principal amounts were $496.7 million, down from $555.2 million at year-end. The company had $3.1 million drawn on its $200 million revolving facility and reported $172.3 million of further availability, net of letters of credit. Current assets of $105.4 million were below current liabilities of $120.0 million.
Material changes and operating drivers
- Solid-waste revenue growth reflected higher pricing and acquisitions: price contributed $6.4 million and acquisitions $14.8 million in Q2. Closed operations reduced revenue by $3.7 million; commodity price and volume effects reduced it by $1.7 million.
- Collection revenue was a major growth contributor. Q2 collection revenue increased to $92.1 million from $74.6 million; customer-solutions revenue rose to $19.2 million from $16.0 million.
- Higher labor, fuel, maintenance, disposal, hauling and insurance costs pressured operating performance. Cost of operations rose to 68.6% of revenue in Q2 from 67.5%. The Western region’s operating income declined despite revenue growth; Recycling improved but remained loss-making.
- The company acquired three Eastern collection businesses and one Western business involving collection, transfer and recycling during the first half, for total consideration of $28.9 million, including $25.5 million cash.
- A public offering of 3.565 million Class A shares generated $100.4 million net proceeds. The proceeds were designated for general corporate purposes, including acquisitions, development, working capital and capital expenditures. Class A shares outstanding increased to 46.6 million from 41.9 million at December 31, 2018.
- Adoption of lease accounting in 2019 brought operating lease right-of-use assets of $103.8 million and operating lease liabilities onto the balance sheet; prior-period figures were not restated.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management notes that results are seasonal, with lower activity generally in late fall, winter and early spring, and cautions interim results may not indicate full-year performance.
- Management cites risks from regional economic conditions, severe weather, labor and operating cost inflation, fuel and commodity prices, landfill capacity and permitting, and the ability to service debt. A $10-per-ton commodity-price change was estimated to affect annual operating income by about $0.7 million. A 100-basis-point change in variable borrowing rates was estimated to change quarterly interest expense by up to about $0.4 million.
- Southbridge landfill groundwater-related litigation remains unresolved. The court dismissed citizen-group claims under federal environmental statutes, but residents’ claims remain and an appeal was intended. The company says a loss is reasonably possible but cannot estimate it; potential costs could be material. The company’s recorded Southbridge waterline-related remediation liability was approximately $4.8 million.
- The company also reported a Potsdam remediation liability of approximately $3.9 million and a separate New Hampshire landfill Clean Water Act case, which was stayed pending Supreme Court proceedings. The company intends to defend both matters.
- The company reported compliance with its credit-facility covenants at June 30, 2019: net leverage ratio 3.18 against a 4.50 maximum and interest coverage 6.48 against a 3.00 minimum. It cautioned that seasonality and capital needs can tighten liquidity and covenant headroom.
Important facts for investors to verify
- Whether revenue and pricing gains can translate into sustained margin improvement as acquisition, labor, disposal, fuel and maintenance costs rise.
- Underlying operating cash generation and capital spending needs, including the effect of seasonal working capital and lease-payment classification.
- Use of the $100.4 million equity-offering proceeds, dilution, acquisition returns and integration performance.
- Debt reduction, revolver availability, covenant headroom and exposure to variable rates as hedges mature.
- Potential financial exposure and developments in Southbridge, Potsdam and New Hampshire environmental matters, including remediation estimates and litigation outcomes.