Casella Waste Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2011. The filing was signed December 1, 2011. Casella provides integrated solid-waste, recycling, landfill, energy and organics services, primarily in the northeastern United States. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Oct. 31, 2011 | Prior year quarter | Six months ended Oct. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $129.9 | $122.9 | $257.1 | $244.9 |
| Operating income | $11.6 | $12.3 | $21.9 | $24.9 |
| Operating margin | 8.9% | 10.0% | 8.5% | 10.2% |
| Net loss attributable to common stockholders | $(0.8) | $(1.2) | $(3.8) | $(4.1) |
| Net loss per share | $(0.03) | $(0.04) | $(0.14) | $(0.16) |
| Cash from operating activities | Not separately reported for the quarter | Not separately reported for the quarter | $41.5 | $34.2 |
- Quarterly revenue rose 5.7%, while operating income declined 5.2%. Cost of operations grew 9.2%, faster than revenue, increasing to 66.7% of revenue from 64.5%. Management cited higher hauling, fuel, recycling-material, leachate-treatment and vehicle-maintenance costs.
- For the six months, revenue increased 5.0%, but operating income fell 12.2%. Results included $1.4 million of legal settlements and a $0.1 million development-project charge in 2011; the prior-year period included a $3.5 million asset-sale gain.
- Revenue growth reflected collection pricing, processing and organics activity, acquisitions and better recycling commodity prices. Landfill volume declines partially offset growth. Recycling revenue increased 32.7% in the quarter and 27.1% year to date, primarily on higher commodity prices; its operating income also improved.
- GreenFiber, a 50%-owned equity-method investee, reported a six-month net loss of $7.6 million, versus $5.3 million a year earlier. Casella’s equity-method investment loss increased to $3.8 million year to date from $2.6 million.
- Six-month capital spending was $36.0 million: $6.4 million for growth and $29.6 million for maintenance. Net investing cash outflow was $39.8 million. Operating cash flow benefited from working-capital movements, particularly accounts payable.
Balance sheet, debt and liquidity
- At October 31, 2011, cash and cash equivalents were $4.4 million, total current assets $76.5 million and total current liabilities $94.4 million. The company reported a $22.4 million net working-capital deficit using its stated measure, which excludes cash.
- Long-term debt and capital leases, including current maturities, totaled approximately $463.2 million; financing lease obligations were an additional $2.3 million. Major borrowings included $180 million of 11% second-lien notes due July 2014, $200 million of 7.75% notes due February 2019, $25 million of Maine bonds and $58.2 million drawn on the revolver.
- The $227.5 million revolving facility matures in March 2016, but its maturity moves to March 2014 if the second-lien notes are not refinanced by March 1, 2014. Revolver availability was $118.2 million after letters of credit; no amount was drawn under those letters. The company reported compliance with its financial and debt covenants.
- Cash increased $2.6 million from April 30. Six-month financing cash flow was slightly positive, as borrowing proceeds and principal repayments were nearly offsetting.
- Variable-rate debt was approximately $83.2 million, with a weighted average rate of 4.1%. Management estimated that a 100-basis-point rate change would alter quarterly interest expense by about $0.2 million. Two forward-starting interest-rate agreements cover $150 million of notional exposure related to a planned second-lien refinancing transaction.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or cash-flow guidance. Management says interim results may not indicate full-year results and identifies economic conditions, weather, fuel and landfill tipping costs, recycling commodity prices, permits and disposal capacity as important uncertainties.
- The Town of Seneca lawsuit was settled and dismissed. The settlement included materials and engineering work valued at about $0.4 million and a resident septic-repair protection plan capped at $75,000. A $1.0 million Vermont Attorney General penalty was recorded and was being paid in scheduled installments.
- PERC is pursuing an approximately $3.2 million disputed put-or-pay invoice in arbitration. Casella considers a loss of zero to $3.2 million reasonably possible but not probable.
- Environmental remediation liability for a New York site was $5.2 million. A separate claim against the former GM estate was settled for face value of $0.1 million in November 2011, payable in new GM stock and warrants; timing and actual recovery value were uncertain.
- GreenFiber-related risk includes continued operating losses and a guarantee that was increased to $3.4 million during the period. After quarter-end, Casella invested another $3.0 million and reduced the guarantee to $2.2 million, extended through December 1, 2014.
- North Country landfill expansion litigation remained material. The company reported an agreement in principle with the Town of Bethlehem, subject to voter approval projected for early 2012. Other permitting and appeal proceedings also remained pending.
- Management stated that disclosure controls were effective at the reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether Casella can refinance or otherwise address the $180 million second-lien notes before the revolver’s conditional 2014 maturity trigger.
- Whether revenue growth can translate into stronger operating income, given rising costs and landfill volume declines, particularly in the Western region.
- Progress and financial outcomes in the PERC arbitration, Bethlehem landfill matter and New York environmental remediation, including the value and timing of any GM recovery.
- GreenFiber’s operating performance and Casella’s exposure under the joint-venture guarantee.
- Future operating cash flow, maintenance and growth capital needs, and the company’s capacity to manage its working-capital deficit and debt obligations.