Casella Waste Systems, Inc. — Q1 2017 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2017, compared with the same period in 2016. Casella provides integrated solid-waste collection, transfer, disposal, recycling and organics services primarily in the northeastern United States.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $133.8 million | $125.4 million |
| Operating income | $6.6 million | $2.0 million |
| Operating margin | 4.9% | 1.6% |
| Net loss attributable to common stockholders | $0.2 million; $0.01 per share | $7.6 million; $0.19 per share |
| Cash from operating activities | $10.7 million | $1.7 million |
| Property and equipment additions | $8.6 million | $9.8 million |
- Revenue rose $8.4 million, or about 6.7%. Recycling revenue increased $6.0 million, mainly from stronger commodity prices; solid-waste revenue grew $1.3 million, with pricing gains partly offset by lower disposal volumes.
- Cost of operations increased $4.1 million, but declined to 70.7% of revenue from 72.1%. Management cited higher direct costs, labor and fuel, partly offset by lower depreciation and amortization.
- Interest expense declined to $6.5 million from $10.0 million, reflecting prior debt refinancing and repayment activity. A $0.5 million loss on debt extinguishment related to the Maine bond remarketing.
- Cash and cash equivalents were $2.2 million at quarter-end. Debt principal was $524.9 million, including $63.0 million drawn on the revolving facility; reported debt carrying value, net of discounts and issuance costs, was $508.4 million. Stockholders’ deficit was $23.2 million.
- Revolver availability was $74.1 million after letters of credit. The company reported compliance with debt covenants: leverage ratio 4.07 against a 5.375 maximum; interest coverage 4.30 against a 2.50 minimum.
Material changes and management commentary
- Operating income improved by $4.6 million year over year. Recycling moved from a $1.1 million operating loss to $1.6 million of operating income, driven by higher commodity pricing and volumes. Western-region operating income increased $1.1 million; Eastern results improved by $0.8 million but remained approximately break-even.
- Operating cash flow improved by $9.0 million. Investing cash use was $10.0 million, including $8.6 million of property and equipment additions and $0.4 million for an acquisition. Financing cash use was $1.0 million.
- In April 2017, after quarter-end, the company reduced the Term Loan B interest margin by 25 basis points. The term-loan LIBOR margin was set at 2.75%, subject to further reduction if the specified leverage threshold is met.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It cautioned that first-quarter results may not indicate full-year performance. Business is seasonal, with generally lower activity in late fall, winter and early spring; severe weather can affect volumes, costs and operations.
Risks, contingencies and unusual items
- Southbridge landfill: Groundwater contamination matters remain under investigation, with potential claims and insurance litigation. The company had incurred approximately $2.8 million in related costs through March 31 and said potential future costs could be material, but a loss estimate could not be reasonably provided. Subsequent to quarter-end, an agreement required the company to fund up to $5.0 million toward a municipal waterline, with payments to be reimbursed over 20 years through a town-issued bond. Management said it continues to assess landfill expansion economics and could reconsider development or operations.
- Potsdam remediation: The recorded environmental liability was $5.9 million. The company is jointly and severally liable with other parties, and costs could exceed estimates.
- Variable-rate debt exposure was approximately $352.1 million. Management estimated that a 100-basis-point rate change could change quarterly interest expense by up to approximately $0.9 million. Interest-rate swaps cover $60.0 million notional through 2021–2022.
- Other key risks include permitting and landfill capacity, commodity prices, fuel and labor costs, regional economic conditions, and the ability to service debt. The filing reported no material change to the risk factors in the 2016 Form 10-K.
Important facts for investors to verify
- Track whether recycling commodity prices and volumes sustain the revenue and margin improvement, and whether disposal-volume declines continue.
- Review developments in the Southbridge contamination matter, waterline funding, insurance coverage, and landfill expansion permits; the ultimate exposure remains uncertain.
- Monitor cash generation, capital spending, liquidity and seasonal borrowing needs against the company’s substantial debt and covenant requirements.
- Confirm the realized interest savings from the April 2017 repricing and the effect of variable rates after hedges.