Casella Waste Systems, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts below are in millions of dollars except per-share data. Casella provides integrated waste collection, transfer, disposal, recycling and organics services, primarily in the northeastern United States.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $215.9 | $188.8 | $405.4 | $371.7 |
| Operating income | $21.9 | $17.4 | $34.0 | $24.5 |
| Operating margin | 10.2% | 9.2% | 8.4% | 6.6% |
| Net income | $11.8 | $12.1 | $16.1 | $13.1 |
| Diluted EPS | $0.23 | $0.25 | $0.31 | $0.27 |
| Operating cash flow | Not separately stated | Not separately stated | $79.0 | $62.5 |
| Capital expenditures | Not separately stated | Not separately stated | $56.1 | $51.6 |
Q2 revenue rose 14.4% year over year; first-half revenue rose 9.1%. First-half revenue growth reflected higher solid-waste prices and volumes, acquisitions, and improved Resource Solutions commodity pricing and volumes. Solid-waste revenue growth was 13.7% in Q2 and 8.0% year to date; management attributed the Q2 increase principally to pricing, recovering collection and disposal volumes, and acquisitions. Collection remained the largest service category.
Operating income improved in both periods, but Q2 net income and diluted EPS declined. The Q2 effective tax rate was reported as 31% before certain one-time adjustments; higher income-tax provision offset the operating-income gain. First-half results also include $7.0 million of deferred tax expense. Comparisons are affected by the substantial valuation-allowance release recorded in Q4 2020, which generated a $61.3 million tax benefit in that quarter.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $167.2 million, versus $154.3 million at year-end 2020. Current assets were $269.3 million and current liabilities $147.6 million.
- Total debt principal was $549.2 million, compared with $548.4 million at December 31, 2020; reported debt net of issuance costs was $541.5 million. Debt included $348.3 million under the term loan, $162.0 million of tax-exempt bonds, $34.5 million of finance leases and $4.5 million of notes payable.
- The $200 million revolving facility had no borrowings; $173.6 million remained available after letters of credit. The credit facility matures in May 2023. The company reported compliance with its financial covenants at quarter-end.
- First-half operating cash flow of $79.0 million exceeded investing cash outflows of $61.1 million, which included $56.1 million of capital expenditures and $5.5 million for acquisitions. Cash increased $12.8 million during the half.
Material changes, outlook and risks
- Management said demand and collection and disposal volumes had improved as local economies reopened, and the business was less affected by COVID-19 in the 2021 periods. It could not predict the pandemic’s continuing effects, including variant spread, customer impacts and operating costs.
- Costs increased with activity, wage inflation, fuel prices, health insurance and fleet and facility maintenance. Management noted that customer pass-through provisions, fuel surcharges and efficiency programs are intended to offset inflation, but competitive pressures may require the company to absorb some increases.
- Seasonality is material: waste volumes and operating results are generally lower in late fall, winter and early spring. Severe weather, regional economic conditions, commodity prices, landfill tipping fees and fuel costs may affect results.
- On July 26, 2021, after quarter-end, Casella acquired Willimantic Waste Paper Co. The filing gives no purchase price or quantified financial outlook for this acquisition.
- Environmental and permitting matters remain relevant. The company reported $4.0 million of Southbridge environmental remediation liability and $0.9 million for Potsdam remediation. It also described ongoing New Hampshire litigation concerning landfill groundwater discharges and an appeal of an NCES landfill permit. A separate Ontario County odor class-action settlement received final judgment in July 2021 and includes $0.75 million for a settlement fund plus $0.9 million of remediation measures and capital improvements.
- Interest-rate exposure is partly hedged. Management estimated that a 100-basis-point rate change could change annual interest expense by up to approximately $1.5 million. A $10-per-ton change in commodity prices was estimated to affect annual operating income by approximately $0.7 million.
- The filing provides no formal numerical earnings or revenue guidance. Management stated it expects positive operating cash flows from stable revenue sources and believed available cash and credit capacity would support liquidity needs.
Important facts for investors to verify
- How much of revenue and margin growth reflects durable pricing and volume recovery versus acquisitions and comparison with COVID-affected 2020 periods.
- Whether labor, fuel and maintenance inflation, and higher operating costs, are being offset by pricing, surcharges and productivity measures.
- The impact of the elevated 2021 tax provision and the prior-year valuation-allowance release on earnings comparisons and future cash taxes.
- Capital spending, landfill development returns, debt refinancing needs ahead of the May 2023 facility maturity, and covenant headroom during seasonal cash-flow lows.
- Developments in environmental remediation, landfill permitting and litigation, including associated costs and potential operating restrictions.
- The financial contribution, integration costs and purchase accounting for the post-quarter Willimantic acquisition.