Business context and reporting period
Casella Waste Systems, Inc. is a vertically integrated waste-services company operating primarily in the northeastern United States. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the first quarter of 2019. Effective January 1, 2020, the company reorganized its reporting segments, combining recycling, organics, and major-account and industrial services into Resource Solutions; prior-period segment data was reclassified.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $182.9 | $163.7; up 11.8% |
| Operating income | $7.0 | $4.4 |
| Operating margin | 3.8% | 2.7% |
| Net income (loss) | $1.0 | $(1.7) |
| Diluted earnings per share | $0.02 | $(0.04) |
| Cash from operating activities | $14.8 | $4.8 |
| Capital expenditures | $19.9 | $18.2 |
| Cash and cash equivalents, March 31 | $26.2 | $3.5 at December 31, 2019 |
| Total debt, principal amount | $562.0 | $522.7 at December 31, 2019 |
- Revenue growth reflected $10.3 million from acquisitions and $7.1 million from favorable pricing, partly offset by a $3.4 million volume decline. COVID-19 contributed to lower collection and landfill volumes late in the quarter.
- Cost of operations was $128.5 million, or 70.3% of revenue, versus $117.8 million, or 72.0%. General and administrative expense was $24.4 million; depreciation and amortization was $21.4 million.
- Operating cash flow less capital expenditures was approximately negative $5.1 million, before acquisition spending and financing. Investing cash use was $24.9 million; financing provided $32.9 million.
- Cash increased during the quarter alongside increased borrowing. The company had $113.6 million available under its revolving facility, net of letters of credit. Debt was primarily a $350 million term loan and $61 million drawn on a $200 million revolver; the credit facility matures in May 2023.
- At March 31, the company reported compliance with its credit covenants: net leverage of 3.10x against a 4.00x maximum and interest coverage of 7.65x against a 3.00x minimum.
- Comprehensive loss was $6.2 million, including $7.2 million of net-of-tax other comprehensive loss, principally from interest-rate hedging fair-value changes.
Material changes, outlook, and risks
- Management said COVID-19 had adversely affected business and was expected to continue doing so. The company reported customer service-level reductions, lower landfill volumes, higher employee-safety costs, and cost-control and capital-spending measures to preserve liquidity. It expected a more significant financial impact in Q2 2020 than in Q1, but could not predict the pandemic’s overall duration or effect. No quantified full-year guidance is provided in the filing text.
- Revenue growth was also supported by acquisitions; the company acquired a Western-region collection business and a recycling operation in the quarter for total consideration of $5.4 million, including holdbacks.
- Southbridge-related litigation was considered reasonably likely to result in a loss, but the company said an estimate could not be reasonably provided. The company also disclosed recorded Southbridge waterline remediation liability of $4.6 million and potential for higher costs than estimated.
- For the proposed NCES landfill Stage VI expansion, the company disclosed a $1.415 million loss as reasonably possible but not probable. Permit timing and approval remained uncertain. Hakes landfill expansion permits were being challenged in litigation; the company said construction was not restricted at the filing date.
- Other risks include a New Hampshire Clean Water Act case, an Ontario County landfill odor class action, landfill permitting and capacity risks, customer payment risk, seasonal cash-flow needs, variable interest rates, and environmental and regulatory liabilities. Management estimated a 100-basis-point change in variable borrowing rates could change annual interest expense by up to approximately $2.2 million.
- The company adopted the expected-credit-loss standard on January 1, 2020, recording a $0.189 million cumulative-effect adjustment to retained earnings. It also recorded an $0.880 million bad-debt expense addition to the allowance in Q1, considering COVID-19-related customer credit risk.
Important facts for investors to verify
- How Q2 and subsequent-period collection and landfill volumes, pricing, customer payment behavior, and COVID-related safety costs compared with management’s stated expectations.
- Whether operating cash flow can fund capital expenditures and acquisitions without further material borrowing, and the remaining revolver availability and covenant headroom.
- Debt balances, interest-rate exposure, hedge valuations, and the May 2023 credit-facility maturity.
- Developments in Southbridge and other environmental litigation, remediation estimates, and the NCES and Hakes landfill expansion permitting matters.
- How much of reported revenue and operating improvement reflects acquisitions and pricing versus underlying volume and organic growth.