Casella Waste Systems, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods. Amounts are in millions of dollars unless stated otherwise. Casella is a regional, vertically integrated waste-services company operating primarily in the northeastern United States. In 2020 it reorganized recycling, organics, and related activities into its Resource Solutions segment.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $188.8 | $187.5 | $371.7 | $351.1 |
| Operating income | $17.4 | $15.5 | $24.5 | $20.0 |
| Net income | $12.1 | $11.9 | $13.1 | $10.2 |
| Diluted EPS | $0.25 | $0.25 | $0.27 | $0.22 |
| Operating margin | 9.2% | 8.3% | 6.6% | 5.7% |
| Net margin | 6.4% | 6.4% | 3.5% | 2.9% |
For the six months, operating cash flow was $62.5 versus $38.3; investing cash outflow was $71.5, including $51.6 of property and equipment additions and $20.1 for acquisitions. Financing provided $8.6. Cash declined $0.4 from year-end to $3.1. The filing reports no formal free-cash-flow measure.
At June 30, total debt principal was $543.1 (including finance leases), compared with $522.7 at year-end; debt net of issuance costs was $534.7. Current maturities were $6.9. The company had $135.9 available on its $200.0 revolving facility, net of letters of credit, and was compliant with debt covenants. Its reported net leverage ratio was 3.08 against a 4.00 maximum; interest coverage was 7.98 against a 3.00 minimum. Current assets of $98.1 were below current liabilities of $129.0.
Changes versus the prior comparable periods
- Q2 revenue increased 0.7%; first-half revenue rose 5.9%. First-half growth reflected acquisitions, pricing, and Resource Solutions growth, while Q2 solid-waste revenue fell 1.1%.
- Management attributed lower collection and landfill volumes to COVID-19. In Q2, solid-waste pricing added $6.3 and acquisitions added $9.7, offset by a $17.7 volume decline. First-half solid-waste price and acquisitions likewise helped offset volume pressure.
- Operating income increased 12% in Q2 and 22% for the first half. Cost of operations declined as a share of revenue, but general and administrative costs and depreciation and amortization increased.
- First-half net income benefited from improved operating results and lower interest expense. Comparisons of income taxes were also affected by a $2.1 deferred tax benefit recorded in Q2 2019; 2020 first-half tax expense was $0.5 versus a $1.9 tax benefit in 2019.
Outlook, risks, and unusual items
- COVID-19: Waste services continued as an essential service, and demand improved as economies reopened. However, collection and disposal volumes remained depressed, employee-protection costs increased, and management expected COVID-related effects to continue. The company said it could not predict the pandemic’s overall duration or financial impact. It reduced discretionary spending and delayed some capital expenditures to preserve liquidity.
- Acquisitions and operations: Four businesses were acquired in the first half for total consideration of $22.0, including three Western-region collection businesses and one recycling operation. No quantitative full-year earnings or revenue guidance is provided in the supplied filing text.
- Environmental and legal matters: Southbridge-related litigation was considered reasonably capable of producing a loss, but the amount could not be estimated; related costs could be material. The recorded Southbridge waterline remediation liability was $4.2. A separate New Hampshire landfill expansion application was pending, with a $1.424 loss considered reasonably possible but not probable. The Hakes Landfill expansion challenge was dismissed on July 31, 2020.
- Other items: Q2 included a $0.6 Southbridge closure charge; first-half charges were $1.2. The company adopted the expected-credit-loss standard in January 2020, recording a $0.2 cumulative adjustment and increasing its credit-loss allowance to $2.6. Interest-rate swaps had a $14.6 fair-value liability; management estimated that a 100-basis-point rate change could alter annual interest expense by up to $2.0.
- Debt and operating risks: The credit facility matures in May 2023, is secured by substantially all assets, and includes financial and other restrictive covenants. Seasonality can increase borrowing needs in late fall, winter, and early spring. The business is also exposed to regional economic conditions, weather, commodity prices, permitting, and environmental liabilities.
Key facts for investors to verify
- Whether collection and landfill volumes recover, and whether COVID-related service changes, customer credit losses, and safety costs persist.
- How much of revenue and operating-income growth reflects durable pricing and organic growth versus acquisitions, and how Resource Solutions performs.
- Liquidity, seasonal revolver usage, covenant headroom, and debt levels as capital spending and acquisition activity continue.
- Updates on Southbridge and other environmental litigation, remediation obligations, and the New Hampshire landfill expansion permit and potential loss.
- Whether management provides updated quantitative guidance; none is stated in the supplied filing text.