Casella Waste Systems, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Regional, vertically integrated solid-waste services company operating primarily in six northeastern U.S. states. The filing covers the three months ended March 31, 2015; comparative results are for the three months ended March 31, 2014. Unless noted otherwise, figures below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $116.6 | $113.2; up 3.0% |
| Operating income (loss) | $3.1 | $(3.7) |
| Operating margin | 2.7% | (3.3%) |
| Net loss | $(8.0) | $(13.6) |
| Net loss attributable to common stockholders; diluted EPS | $(9.3); $(0.23) | $(13.4); $(0.34) |
| Cash from operating activities | $(5.7) | $1.4 |
| Cash from investing activities | $(0.3) | $(7.8) |
| Cash from financing activities | $6.8 | $6.6 |
- Revenue growth reflected higher solid-waste pricing and volumes and growth in customer solutions; commodity-price pressure reduced recycling and energy-related revenue.
- Cost of operations was $87.8 million, or 75.3% of revenue, versus $86.4 million, or 76.3%. Lower fuel costs helped offset higher labor, maintenance and operating costs. General and administrative expense was $16.8 million; depreciation and amortization was $13.7 million.
- Operating cash flow fell by $7.1 million year over year, primarily because changes in assets and liabilities used $10.4 million of cash, including larger outflows from accounts payable and accrued liabilities.
- At March 31, cash was $3.1 million and current assets were $73.0 million versus current liabilities of $68.1 million. Long-term debt and capital leases totaled $546.9 million, including $1.5 million current; stockholders’ deficit was $20.9 million.
- Capital expenditures were $4.4 million. Investing cash flow also included $4.6 million of divestiture proceeds.
Changes versus the prior comparable period
- Operating results improved from a $3.7 million loss to $3.1 million of income, but Q1 2015 included a $4.9 million operating-expense credit for divestiture transactions. This comprised a $1.2 million reversal of excess estimated Maine Energy completion costs and gains from CARES-related asset sales. Q1 2014 included a $1.4 million development-project charge and a $1.1 million acquisition-related contingent-consideration gain.
- Eastern region operating loss narrowed to $0.5 million from $4.9 million; Western region operating income increased to $5.0 million from $2.6 million. Recycling’s operating loss widened to $2.0 million from $1.5 million.
- The company issued $60 million of additional 7.75% senior subordinated notes due 2019 and refinanced its former revolving facility with a new asset-based revolving credit facility. The new facility had $83.1 million drawn at quarter-end.
- Debt and capital leases, net of current maturities, increased to $545.4 million from $534.1 million at December 31, 2014. Quarter-end cash increased by $0.9 million.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management notes that winter seasonality typically weakens operating results and cash flows; severe weather, fuel costs, recycling commodity prices, landfill capacity and regulatory conditions may affect performance.
- The ABL facility matures in 2020, subject to an earlier November 2018 maturity if the 2019 notes are not refinanced by November 16, 2018. Its borrowing limit is subject to a borrowing-base formula. Quarter-end availability was $33.2 million against a $23.8 million threshold; the company reported compliance with its covenants. Twelve-month covenant EBITDA was $100.9 million against a $75.0 million minimum, and consolidated leverage was 5.4 under the facility’s definition.
- The company reported $385.0 million principal amount of 7.75% notes due February 2019. Variable-rate debt was approximately $86.7 million; management estimated a 100-basis-point rate change would change quarterly interest expense by about $0.2 million. No commodity hedge contracts were outstanding; management estimated a 10% commodity-price change would have affected quarterly operating income by approximately $0.3 million.
- Environmental exposure includes the Potsdam remediation matter: the recorded liability was $5.2 million, while the filing cites earlier estimates of remediation costs of approximately $10.2 million undiscounted and $12.1 million present value. The company says expenditures could exceed its recorded estimate and that significant onsite spending is unlikely before 2016. A separate Greenwood Street landfill consent order requires a $0.2 million penalty.
- After quarter-end, an activist investor group with approximately 5% of Class A shares announced plans to nominate three directors, creating potential cost, disruption and uncertainty around the 2015 annual meeting.
- Management said disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the operating improvement is sustainable after separating the $4.9 million divestiture credit and other period-specific items.
- Whether operating cash flow recovers from the working-capital outflows and how seasonal borrowing affects ABL availability and covenant headroom.
- The company’s refinancing plan for the 2019 notes and the effect of debt costs, interest rates and the ABL’s conditional maturity provisions.
- Updated remediation cost estimates, timing and allocation of Potsdam liabilities among responsible parties, as well as completion of the Maine Energy site transfer.
- Developments in the activist proxy contest and any resulting changes to strategy, costs or board composition.