Casella Waste Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended July 31, 2013, the first quarter of fiscal 2014, compared with the three months ended July 31, 2012. Casella provides collection, transfer, disposal, landfill, recycling, organics and related services, primarily in the northeastern United States. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $128.6 | $117.6 |
| Operating income | $9.7 | $5.8 |
| Operating margin | 7.6% | 4.9% |
| Loss from continuing operations | $(0.1) | $(8.2) |
| Net loss attributable to common stockholders | $(0.2) | $(8.4) |
| Net loss per common share | $(0.00) | $(0.31) |
| Cash provided by operating activities | $19.5 | $7.7 |
| Cash used in investing activities | $(18.4) | $(22.8) |
- Revenue increased 9.4%; management attributed growth mainly to higher solid-waste volumes and acquisitions. Collection revenue rose to $58.3 million and disposal revenue to $35.1 million. Recycling revenue was essentially flat as higher volumes were offset by weaker commodity prices.
- Cost of operations was $88.4 million, or 68.9% of revenue, compared with $81.3 million, or 69.2%. General and administrative expense was $15.1 million (11.7% of revenue), down from $15.2 million (12.9%). Depreciation and amortization was $15.2 million.
- Operating income improved by $3.9 million. Interest expense fell to $9.4 million from $11.7 million, mainly reflecting lower rates after redemption of $180 million of 11% second-lien notes in October and November 2012. The company also recorded a $0.7 million gain on derivative instruments.
- Cash from operations included non-cash items and working-capital movements; the filing cites lower cash interest payments and improved results as important year-over-year factors. Cash and equivalents were $2.9 million at July 31, versus $1.8 million at April 30.
- Cash capital expenditures were $14.5 million: $11.6 million maintenance, $1.8 million growth and $1.1 million acquisition-related. Investing also included $2.1 million invested in unconsolidated entities.
- At July 31, current assets were $73.8 million and current liabilities $97.8 million, a working-capital deficit of $23.9 million. The company reported $68.4 million available under its revolving facility after letters of credit; no revolver borrowings were outstanding under that facility at quarter-end.
- Long-term debt and capital leases, excluding financing lease obligations, totaled $497.4 million on the balance sheet; financing lease obligations were another $1.7 million. Cash is low relative to debt. Stockholders’ equity was $15.9 million.
Material changes versus the prior comparable period
- Revenue grew by $11.0 million, with $7.0 million attributed to solid-waste volume, $3.3 million to acquisitions and divestitures, and $1.1 million to organics. BBI acquisition growth was partly offset by the Maine Energy divestiture.
- Operating margin improved to 7.6% from 4.9%, helped by revenue growth, lower G&A as a share of revenue, and reduced interest burden below operating income. Higher hauling, labor, direct operating and third-party disposal costs partly offset gains.
- Net loss narrowed substantially, from $8.4 million to $0.2 million attributable to common stockholders. The current quarter included $0.3 million income from discontinued operations and a $0.4 million loss on disposal.
- Operating cash flow rose by $11.8 million. Investing outflows declined by $4.4 million, while financing cash flow fell from $14.5 million provided to $0.2 million provided, reflecting lower net debt borrowing activity and repayment patterns.
- The weighted-average share count increased to 39.7 million from 27.0 million; therefore, the year-over-year loss-per-share comparison also reflects a larger share base.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management cautions that the quarter’s results may not indicate results for other interim periods or the full fiscal year.
- On June 25, 2013, the company amended its senior credit facility and revised financial covenants. At quarter-end, it was compliant: interest coverage was 2.61 against a 2.25 minimum; total funded debt to the bank-defined cash-flow measure was 5.20 against a 5.85 maximum; senior funded debt was 1.83 against a 2.50 maximum. The facility also restricts capital expenditures and certain investments, debt, liens and distributions.
- Bio Fuels was classified as discontinued operations. The company agreed to sell certain assets for $2.0 million, payable in equal quarterly installments over five years beginning November 1, 2013, and recorded a $0.4 million disposal loss.
- The Maine Energy sale closed in November 2012; the company remains responsible for demolition and site-related obligations. A multiemployer pension withdrawal liability is considered probable, but the amount cannot yet be reasonably estimated; no accrual was recorded, and management expected to record an obligation in fiscal 2014.
- Environmental remediation exposure at the Waste-Stream site includes a recorded liability of $5.4 million. The company is jointly and severally liable for remediation costs; the filing notes estimates could be higher if costs exceed assumptions. The Consent Order deadline was extended to September 30, 2013, and onsite remediation costs were not expected until fiscal 2015.
- No accruals were established for other outstanding legal proceedings as of July 31, 2013. The filing describes routine regulatory, permitting, environmental and other litigation risks.
- GreenFiber, a 50%-owned equity-method investee, reported a $2.0 million quarterly net loss. Casella and its joint-venture partner each guaranteed up to $0.75 million under GreenFiber’s new loan and agreed to fund their pro-rata share of certain covenant-related liquidity shortfalls.
- Other risk factors include variable interest rates, recycling commodity-price volatility, regional economic conditions, severe weather, seasonality, landfill closure and post-closure costs, and regulatory and permitting risks. The company estimated that a 100-basis-point change in rates would change annual interest expense by about $0.3 million.
Most important facts for investors to verify
- Whether revenue and operating-margin gains persist after separating acquisition effects, volume growth, pricing and divested operations.
- Revolver availability, covenant headroom and the company’s ability to manage substantial debt alongside low cash and a working-capital deficit.
- Cash conversion and future capital needs, including maintenance spending and landfill development obligations.
- The final cost and timing of Waste-Stream remediation, Maine Energy demolition and the unquantified pension withdrawal liability.
- Bio Fuels installment collections and GreenFiber’s financial condition, guarantee exposure and potential funding requirements.