Casella Waste Systems, Inc. — Form 10-Q
Business context and reporting period. This filing covers the three months ended July 31, 2011, the first quarter of fiscal 2012 (not calendar 2011 Q1), with comparisons to the three months ended July 31, 2010. Casella provides integrated solid-waste collection, transfer, disposal, recycling and organics services, primarily in the eastern United States. Financial amounts below are in millions unless noted.
Key financial results
| Metric | Quarter ended July 31, 2011 | Prior-year quarter |
|---|---|---|
| Revenue | $127.2 | $122.0 |
| Operating income | $10.3; 8.1% margin | $12.7; 10.4% margin |
| Loss from continuing operations | $(3.7) | $(1.9) |
| Net loss attributable to common stockholders | $(3.1); $(0.12) per share | $(2.9); $(0.11) per share |
| Cash provided by operating activities | $13.9 | $11.4 |
| Cash and cash equivalents at period end | $2.9 | $2.3 |
Cost of operations was $85.2 million, or 67.0% of revenue, versus $81.3 million, or 66.7%. General and administrative expense was $16.2 million (12.7% of revenue), compared with $15.9 million (13.0%). Depreciation and amortization declined to $14.5 million from $15.6 million. Net interest expense was $11.2 million, down from $11.8 million.
Cash flow and investment. Investing activities used $17.9 million, including $14.9 million of property and equipment additions and $0.7 million for acquisitions. Financing activities provided $4.4 million; the company received $48.5 million of borrowings and repaid $44.4 million of debt principal. Cash increased $1.1 million during the quarter.
Debt and liquidity. Long-term debt and capital leases were $465.7 million, with $1.3 million current maturities; financing lease obligations totaled a further $2.4 million. The company reported $405 million principal outstanding in its 11% Second Lien Notes and 7.75% 2019 Notes, plus $25 million of Maine bonds and $62.1 million drawn on its revolver. The $227.5 million revolver had $114.2 million available after letters of credit, with no amount drawn under the facility stated as of July 31. Current assets were $78.0 million and current liabilities $86.7 million. Management reported a $11.6 million working-capital deficit using its stated definition, which excludes cash from current assets.
Material changes versus the prior comparable period
- Revenue increased 4.3%, driven by improved pricing and commodity prices, recycling activity and acquisitions, partly offset by lower volumes and divestitures.
- Reported operating income fell $2.4 million, but comparison was affected by a $3.5 million asset-sale gain in the prior-year quarter and a $1.0 million legal settlement in the current quarter. Excluding those items, operating income was $11.3 million (8.9% margin), versus $9.2 million (7.5%).
- Recycling segment revenue rose 21.7% to $12.9 million and operating income increased to $2.2 million from $0.7 million, primarily reflecting higher commodity pricing. Eastern and Western segment operating income declined.
- Operating cash flow increased 21.9%. Investing cash outflow rose from $7.8 million to $17.9 million, partly because the prior-year period included $7.5 million of asset-sale proceeds.
Outlook, commentary and risks
- No specific revenue, earnings or cash-flow guidance is provided. Management expects to remain compliant with its credit-facility covenants, while noting that its total funded debt-to-bank-defined cash flow ratio was 4.58 against a 4.75 maximum and could rise in the following quarter.
- Management cited higher fuel, hauling, materials and leachate-treatment costs as pressures, partly offset by pricing, cost reductions and lower landfill amortization. It noted exposure to commodity prices, fuel costs, weather, regional economic conditions, permitting and landfill closure obligations.
- Hurricane Irene struck Vermont and New York on August 28, 2011. Flood damage to roads and infrastructure could impair service routes, reduce revenue and margins, or require unrecoverable rerouting costs; the impact was still being assessed.
- The Vermont Attorney General settlement requires a $1.0 million civil penalty, accrued at quarter-end, paid in stages through December 2011. A Town of Seneca settlement includes construction materials valued at approximately $0.1 million and resident septic-system reimbursements capped at approximately $0.1 million.
- PERC is pursuing a disputed $3.2 million invoice in arbitration. The company believes a loss of zero to $3.2 million is reasonably possible but not probable. A New York tax assessment of $3.9 million, including interest and penalties, remained unreserved; management believes its position is more likely than not to prevail.
- The company recorded a $5.2 million environmental remediation liability for a New York site; management stated actual costs could be significantly higher than estimates. It also had a $95,000 liability for a guarantee of up to $1.5 million supporting its GreenFiber joint venture.
- GreenFiber, in which Casella holds 50%, reported a $4.5 million quarterly net loss; Casella recorded a $2.3 million equity-method loss. Management attributed continuing weakness to the housing market and new-home construction.
Important facts for investors to verify
- Subsequent filings and results for Hurricane Irene’s effect on routes, costs, revenue and operating margins.
- Progress against the 4.75 maximum leverage covenant, available revolver capacity and refinancing needs, particularly the 2014 Second Lien Notes maturity.
- Resolution and potential exposure from the PERC arbitration, environmental remediation, landfill permitting litigation and other disclosed contingencies.
- Whether commodity-price benefits and reported adjusted operating improvement are sustainable as fuel, hauling and landfill costs evolve.
- GreenFiber’s operating performance and any further funding or guarantee exposure.