Casella Waste Systems, Inc. — Q2 2022 Form 10-Q
Business context and period. Regional, vertically integrated solid-waste and resource-management company operating in seven northeastern states. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods. Amounts are U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $283.7 million | $215.9 million | $517.7 million | $405.4 million |
| Operating income | $31.7 million | $21.9 million | $41.9 million | $34.0 million |
| Net income | $17.8 million | $11.8 million | $22.0 million | $16.1 million |
| Diluted EPS | $0.34 | $0.23 | $0.43 | $0.31 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $92.3 million | $79.0 million |
| Capital expenditures | Not stated by quarter | Not stated by quarter | $54.9 million | $56.1 million |
- Q2 revenue grew 31.4%; operating income grew 44.5% and net income 51.0%. Q2 operating margin was approximately 11.2%, versus 10.2%; net margin was approximately 6.3%, versus 5.5%.
- For the first half, revenue grew 27.7%, operating income 23.4%, and net income 36.6%. Operating margin was approximately 8.1%, versus 8.4%; net margin was approximately 4.2%, versus 4.0%.
- First-half operating cash flow less capital expenditures was approximately $37.4 million, compared with $22.9 million in 2021. Cash used in investing was $110.6 million, including $56.3 million for acquisitions.
- At June 30, cash and cash equivalents were $39.3 million; cash, cash equivalents and restricted cash totaled $40.3 million. Current assets were $181.2 million and current liabilities $163.0 million, for working capital of $18.1 million.
- Debt principal was $593.7 million, compared with $562.6 million at year-end 2021. The company had $271.8 million available on its $300 million revolving facility, net of letters of credit; none was drawn. It reported compliance with debt covenants.
Changes, outlook and material matters
- Solid-waste revenue growth reflected pricing, surcharges, acquisitions and higher disposal volumes. Management attributed first-half solid-waste revenue growth of $71.3 million primarily to acquisitions ($36.6 million), price ($18.9 million) and surcharges and other fees ($10.2 million). Resource Solutions revenue increased $41.0 million, including $26.5 million from acquisitions.
- Eight businesses were acquired in the first half for total consideration of $58.9 million. Goodwill rose to $262.5 million from $232.9 million at December 31, 2021.
- Cost of operations increased to 65.6% of revenue in Q2 and 67.3% for the first half, up 1.4 and 1.8 percentage points, respectively. Management cited fuel and wage inflation, maintenance costs, third-party transportation and disposal costs, and acquisition-related expenses. Pricing structures and fuel-related fees are intended to recover some costs, but competitive conditions may require the company to absorb some increases.
- In June, the company issued $35 million of Vermont tax-exempt bonds at 5.00%, with a 2052 maturity. The term loan and revolving facility mature in December 2026 and bear interest at LIBOR plus 1.375%, subject to a lower spread if leverage conditions are met. Interest-rate swaps hedge part of variable-rate debt; management estimated a 100-basis-point rate change could affect annual interest expense by up to approximately $1.6 million.
- Management said cash, operating cash flows and financing capacity should cover operating needs and cash commitments for at least the next 12 months and thereafter for the foreseeable future. No quantified revenue or earnings guidance is provided. The filing cautions that interim results may not indicate full-year performance.
- Seasonality generally reduces activity in late fall, winter and early spring. Management cited current inflation, regional economic conditions and severe weather as factors that can affect costs, volumes, margins and cash flow.
- A challenge to the North Country Environmental Services landfill expansion permit remained pending. After a May 2022 decision remanded one public-benefit determination to the state environmental agency, reconsideration and rehearing motions were pending; the decision had been suspended. The company said it would continue to defend the matter.
- Landfill closure, capping and post-closure liabilities totaled $92.4 million; environmental remediation liabilities totaled $5.9 million. The company also reported ordinary-course legal and regulatory proceedings, with a $1.3 million aggregate accrual for outstanding legal proceedings.
Investor verification priorities
- Assess how much revenue and earnings growth is organic versus acquisition-driven, and whether pricing and surcharges offset inflation without worsening customer churn.
- Track operating-cost ratios, particularly fuel, labor, maintenance and third-party disposal costs, and the effect on margins and cash conversion.
- Review acquisition integration, returns on the $58.9 million of first-half consideration, and the assumptions underlying acquired goodwill and intangible assets.
- Monitor debt, interest-rate exposure, covenant headroom and liquidity needs, including seasonal borrowing and planned capital spending.
- Follow the NCES expansion-permit proceedings and changes in landfill closure, environmental remediation and other contingency estimates.