Casella Waste Systems, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 3, 2018. Casella is a regional, vertically integrated solid-waste services company operating primarily in the northeastern United States. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $165.6 | $154.0 | $313.1 | $287.8 |
| Operating income (loss) | $15.1 | $(47.3) | $16.0 | $(40.7) |
| Net income (loss) | $1.7 | $(53.7) | $(2.2) | $(53.9) |
| Diluted EPS | $0.04 | $(1.28) | $(0.05) | $(1.29) |
| Operating cash flow | Not separately provided | Not separately provided | $48.1 | $40.0 |
- Q2 revenue rose 7.6% year over year; first-half revenue rose 8.8%. Calculated operating margin was 9.1% in Q2 and 5.1% for the first half. Q2 net margin was approximately 1.0%.
- Q2 cost of operations was $111.8 (67.5% of revenue), general and administration was $20.8 (12.6%), and depreciation and amortization was $17.4 (10.5%). First-half amounts were $217.4, $41.8, and $33.4, respectively.
- First-half capital expenditures were $35.5; operating cash flow less capital expenditures was approximately $12.6. Investing cash outflow was $57.9, including $19.4 for acquisitions. Cash increased $0.1 to $2.1.
- At June 30, gross principal debt and capital leases were $516.0, including $33.3 drawn on the revolving facility. Balance-sheet debt, net of unamortized discount and issuance costs, was $503.9. Total liabilities were $687.3 and stockholders’ deficit was $34.7.
- Revolving-facility availability was $144.2, net of $22.5 in letters of credit. The company reported compliance with its debt covenants: leverage ratio 3.68 against a 4.75 maximum, and interest coverage 6.09 against a 3.00 minimum.
Changes versus prior period
- Solid-waste revenue grew $13.3 in Q2 and $29.1 in the first half, supported by pricing, volumes, surcharges, and acquisitions. Collection revenue increased $8.3 in Q2; disposal revenue increased $5.0.
- Recycling revenue declined $6.6 in Q2 and $13.0 in the first half, mainly due to lower commodity prices and volumes, partly offset by higher tipping fees. The Recycling segment reported operating losses of $2.2 for Q2 and $7.4 for the first half.
- Organics revenue increased $3.6 in Q2 and $6.6 year to date, primarily due to a new sludge transportation and disposal contract and higher commodity pricing. Management noted that the contract also brought higher third-party costs.
- Operating results improved sharply against 2017, when a $64.1 Southbridge closure charge—including a $48.0 impairment—was recorded in the first half. The 2018 first-half Southbridge charge was $1.8. Thus, the year-over-year improvement is substantially affected by the prior-year unusual charge.
- Q2 2018 included a $7.4 loss on debt extinguishment related to refinancing and bond remarketing, versus $0.05 in Q2 2017. First-half 2018 also included a $2.1 contract-settlement charge related to a commodities marketing agreement.
Outlook, risks and unusual items
- No specific revenue, earnings, or cash-flow guidance was provided. Management expects to stop Southbridge Landfill operations when permitted capacity is exhausted, no later than early 2019, and has filed a closure plan.
- Southbridge-related matters include groundwater contamination investigations and litigation, a municipal waterline obligation capped at $5.0 for Casella’s share, and a Charlton settlement with approximately $0.9 cash plus services over five years. The company says related costs and liabilities could be material; it cannot reasonably estimate potential loss from the residents’ and citizen groups’ litigation.
- On July 17, 2018, after quarter-end, Casella reached a conditional $10.0 settlement with Steadfast Insurance intended to reimburse certain Southbridge response, investigation, and litigation costs. The settlement remained subject to definitive documentation and court approval.
- A separate Clean Water Act lawsuit concerning the North Country landfill was being contested; Casella said it intended to defend the matter vigorously.
- Management cited seasonal operating patterns: volumes and results are generally lower in late fall, winter, and early spring, potentially increasing borrowing needs. Other key exposures include severe weather, diesel fuel and commodity prices, interest rates, landfill permitting and closure costs, and regional economic conditions.
- Seven interest-rate derivatives with $145.0 notional amount hedged variable-rate debt. Management estimated a 100-basis-point rate change could affect quarterly interest expense by up to approximately $0.6. A $10-per-ton commodity-price change was estimated to affect annual operating income by approximately $1.2.
- The company adopted the new revenue-recognition standard with no opening retained-earnings adjustment and said timing of revenue recognition was not significantly changed. It was assessing the effect of the lease-accounting standard, effective in 2019.
Key facts for investors to verify
- How much of ongoing revenue and operating-profit growth is attributable to pricing and recurring volumes versus acquisitions and the large contaminated-soil project.
- Whether Recycling performance, commodity pricing, and contamination-related operating costs improve or continue to pressure margins.
- Progress toward Southbridge closure, actual closure and remediation costs, litigation outcomes, and receipt and approval of the $10.0 insurance settlement.
- Debt levels, seasonal revolver usage, covenant headroom, and the interest-cost impact of variable rates and refinancing.
- Capital spending, acquisition spending, and cash conversion relative to operating cash flow and the company’s substantial debt burden.