Casella Waste Systems, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Regional, vertically integrated solid-waste services provider operating primarily in six northeastern states, with collection, disposal, transfer, recycling and organics businesses. This filing covers the three months ended March 31, 2016; financial statement amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $125.4 | $116.6 |
| Operating income | $2.0 | $3.1 |
| Operating margin | 1.6% | 2.7% |
| Net loss | $(7.6) | $(8.0) |
| Net loss attributable to common stockholders | $(7.6) | $(9.3) |
| Basic and diluted loss per share | $(0.19) | $(0.23) |
| Cash from operating activities | $1.7 | $(5.7) |
| Capital expenditures | $9.8 | $4.4 |
Revenue increased 7.6%. Solid-waste revenue rose $8.5 million, driven by $4.0 million of favorable pricing and $5.3 million of higher volume, partly offset by $0.5 million from commodity price and volume effects and $0.3 million from acquisitions and divestitures. Collection and disposal revenue each increased $4.5 million. Cost of operations increased 2.9% to $90.4 million; as a share of revenue it declined to 72.1% from 75.3%. General and administration expense rose 10.6% to $18.6 million, and depreciation and amortization rose 5.1% to $14.5 million.
Operating cash flow improved by $7.4 million year over year, reflecting stronger operating results and more favorable working-capital movements. Investing cash outflow was $10.0 million, mainly due to increased capital spending on landfill development and fleet and equipment. Operating cash flow less property and equipment additions was approximately negative $8.1 million, before landfill lease payments and other investing activity. Cash declined $0.7 million in the quarter to $1.6 million.
Balance sheet, debt and liquidity
- At March 31, 2016, total assets were $620.4 million, versus $633.7 million at December 31, 2015. Current assets were $70.7 million and current liabilities $70.4 million; reported cash was $1.6 million.
- Debt and capital leases had a carrying value of $514.7 million, including $1.5 million current, compared with $507.4 million at year-end. Principal outstanding was $531.2 million before $16.6 million of unamortized discounts and issuance costs. Stockholders’ deficit was $28.5 million.
- The $190 million asset-based revolving facility had $68.0 million drawn and $43.8 million of borrowing availability at quarter-end, after borrowing-base limits and $26.3 million of letters of credit. The company reported compliance with its covenants. Twelve-month covenant EBITDA was $114.4 million against a $75.0 million minimum; the stated leverage ratio of 4.64 sets pricing and is not itself a financial covenant.
- The 7.75% senior subordinated notes mature in February 2019; $366.1 million principal remained after a $4.2 million principal repurchase during the quarter. The ABL facility matures in February 2020, but its maturity accelerates to November 2018 if the 2019 notes are not refinanced by November 16, 2018.
Material changes and management commentary
- Operating income declined despite revenue growth; the prior-year quarter included a $4.9 million divestiture gain, while Q1 2016 had none. The company reported higher landfill, maintenance, labor and administrative costs, partly offset by lower diesel prices.
- Segment operating income was $3.0 million in Western (down from $5.0 million), a loss of $0.8 million in Eastern (versus a $0.5 million loss), a loss of $1.1 million in Recycling (improved from a $2.0 million loss), and $0.8 million in Other (up from $0.6 million).
- Management describes the business as seasonal: late fall, winter and early spring generally bring lower volumes and operating results. The filing provides no specific full-year revenue or earnings guidance.
- During Q1, the company repurchased $4.2 million principal of its 2019 notes below par, recording a gain on extinguishment of less than $0.1 million. The interest-rate swap matured during the quarter.
- A settlement reached in April 2016 with MFGR resolved claims tied to a former fuel-supply contract. The company recorded a $2.6 million reserve at March 31, 2016; agreed payments are $1.25 million upon execution and $0.35 million annually for five years.
Risks, contingencies and unusual items
- At the Southbridge landfill, nearby private-well samples showed contaminants above regulatory response thresholds. The company is investigating and conducting response actions; residents near the landfill had indicated intent to sue. A loss is reasonably possible, but the filing says it cannot currently be reasonably estimated. The matter could affect costs, liabilities and permitting activities.
- The company recorded a $5.2 million liability for the Potsdam environmental remediation. It is jointly and severally liable with other parties; significant onsite expenditures are not expected before 2017, and costs could exceed estimates.
- The filing identifies ongoing exposure to waste-industry regulation, environmental claims, severe weather, regional economic conditions, commodity pricing, fuel costs, seasonality, landfill capacity and debt-service requirements. Management reported no material change to the risk factors in its 2015 Form 10-K.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue and volume gains translate into sustained operating income, particularly given the Western segment decline and higher operating costs.
- Capital spending, seasonal cash needs and working-capital trends, alongside the low cash balance and available ABL borrowing capacity.
- Debt refinancing progress before the November 2018 ABL maturity trigger and repayment or refinancing of the 2019 notes.
- Developments, potential costs and permitting effects related to the Southbridge matter, and actual remediation costs at Potsdam.
- Execution and cash-payment timing for the MFGR settlement, and any subsequent material developments disclosed in later filings.