Casella Waste Systems, Inc. — Q2 2016 Form 10-Q
Business context and period. Casella is a vertically integrated waste services company operating primarily in six northeastern states, with Eastern, Western, Recycling and Other segments. This unaudited report covers the three and six months ended June 30, 2016; financial statement amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $144.7 | $143.7 | $270.1 | $260.3 |
| Operating income | $15.6 | $11.3 | $17.6 | $14.5 |
| Net income (loss) attributable to common stockholders | $5.2 | $1.0 | $(2.4) | $(8.2) |
| EPS, diluted | $0.12 | $0.03 | $(0.06) | $(0.20) |
| Cash provided by operating activities | Not presented by quarter | $35.6 | $23.9 |
- Calculated operating margin was about 10.8% in Q2 versus 7.9% a year earlier, and 6.5% for the first half versus 5.6%. Net margin was about 3.6% and 0.7% in Q2, respectively; first-half net margin was about (0.9)% versus (2.7)%.
- First-half capital expenditures were $23.5 million, compared with $16.3 million. Operating cash flow less reported property, plant and equipment additions was approximately $12.1 million; this is a simple calculation, not company-defined free cash flow. Investing cash use was $28.3 million, including $2.4 million of acquisition cash outflow.
- Cash was $2.4 million at June 30. Current assets were $78.6 million and current liabilities $84.6 million, implying negative working capital of about $6.0 million. Restricted assets were $1.8 million.
- Debt and capital leases had $519.0 million principal outstanding, or $503.2 million net of unamortized discount and issuance costs. Net carrying debt declined from $507.4 million at year-end 2015. Cash interest paid in the first half was $18.4 million.
- ABL borrowing availability was $56.3 million, above the $23.8 million threshold that would trigger additional financial ratio covenants. The company reported compliance with its covenants. First-half interest expense was $20.0 million.
Material changes versus prior period
- Revenue rose 0.7% in Q2 and 3.8% for the first half. First-half solid-waste revenue increased $6.8 million, led by pricing and Eastern-region growth; Q2 solid-waste revenue fell $1.6 million as lower volumes outweighed favorable pricing.
- Management attributed Western-region volume weakness partly to lower drill-cutting activity, including at the McKean landfill, and route changes intended to improve profitability. Q2 Western solid-waste revenue declined $2.2 million; first-half Western revenue increased $0.9 million.
- Operating income improved, while comparisons were affected by prior-year divestiture gains: the 2015 periods included divestiture-related benefits, including $5.6 million in the first half. Cost of operations fell $3.5 million in Q2 and $1.0 million in the first half, with lower fuel and certain direct costs among the factors; first-half general and administrative expense rose $1.8 million.
- Operating cash flow increased $11.7 million year over year. Management cited improved operating performance and more favorable working-capital cash effects. Higher landfill-development and growth spending contributed to increased capital expenditures.
- The company acquired three Western-region transfer stations for total consideration of $2.8 million, including $2.4 million cash, and recorded $0.9 million of goodwill.
Outlook, risks and unusual items
- No specific full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management cautions that interim results may not indicate full-year results. It describes seasonal weakness in late fall, winter and early spring, and exposure to severe weather, regional economic conditions, fuel costs, landfill tipping fees and recycling commodity prices.
- In Q2, Casella redeemed $12.5 million and repurchased $3.0 million principal of its 7.75% notes due 2019, recording a $0.6 million debt-extinguishment loss. It issued $15.0 million of New York tax-exempt bonds at 3.125%; the notes balance was $350.6 million at quarter-end. A further $5.0 million note repurchase occurred in July 2016. If the 2019 notes are not refinanced by November 16, 2018, the ABL facility maturity accelerates to that date.
- Southbridge landfill groundwater samples showed contaminants above regulatory notification and response thresholds. The company is investigating and undertaking response actions; it had incurred $1.5 million of expenditures by July 2016 and expects the Town to reimburse costs it attributes to the site. Residents near the landfill had issued a notice of intent to sue. The company said a loss related to the potential matter was reasonably possible but could not be estimated; permitting delays or material costs could result.
- The company recorded a $5.2 million Potsdam environmental remediation liability and disclosed joint and several liability with other parties; significant onsite remediation spending was not expected until 2017. A separate Old Town contract dispute was settled, with $1.4 million of the recorded reserve remaining at June 30.
- Management reported no material changes to the risk factors in its 2015 Form 10-K and stated disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether Western-region disposal and transportation volumes recover, particularly drill-cutting volumes, and whether route optimization continues to affect collection volumes.
- ABL borrowing availability and covenant headroom through seasonal low-cash-flow periods, plus the plan and timing for refinancing the $350.6 million of notes due in 2019.
- Southbridge investigation findings, allocation of responsibility with the Town, potential resident claims, and any effect on permitting or remediation costs.
- Whether first-half operating cash-flow improvement is sustained as capital spending remains elevated; cash at quarter-end was only $2.4 million.
- The effects of recycling commodity prices, energy pricing, fuel costs and landfill closure obligations on margins and cash requirements.