Casella Waste Systems, Inc. — Q1 2023 10-Q
Business context and period. Regional, vertically integrated waste collection, disposal, transfer, recycling and resource-renewal company operating primarily in seven northeastern states. This summary covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Financial amounts are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $262.6 | $234.0 |
| Operating income | $10.3 | $10.2 |
| Operating margin | 3.9% | 4.3% |
| Net income | $3.5 | $4.2 |
| Diluted EPS | $0.07 | $0.08 |
| Operating cash flow | $16.1 | $24.7 |
| Capital expenditures | $17.9 | $12.9 |
- Revenue grew 12.2%. Solid waste revenue increased 16.6%, led by pricing (+$14.7 million), surcharges and fees (+$10.3 million), and acquisitions (+$3.1 million); volume contributed modestly. Resource Solutions revenue was nearly flat at $67.7 million.
- Cost of operations rose to $180.2 million but declined as a share of revenue to 68.6% from 69.4%. Higher labor, hauling, disposal, maintenance and inflation-related costs remained pressures. Higher general and administrative expense and depreciation also weighed on margins.
- Segment operating results diverged: Eastern improved to $2.1 million from a $2.2 million loss, Western rose to $12.4 million from $9.3 million, while Resource Solutions fell to a $1.9 million loss from $3.7 million income.
- Interest expense increased to $7.0 million from $5.2 million, primarily due to higher rates and average debt. Cash income-tax payments were $4.8 million versus $0.2 million a year earlier.
- Cash and cash equivalents were $60.2 million at quarter-end, down from $71.2 million at year-end 2022. Total debt carrying value, net of issuance costs, was $586.8 million; principal debt was $596.1 million. The company had $272.3 million available under its revolving facility, net of letters of credit, and reported compliance with debt covenants.
- Current assets were $187.8 million and current liabilities $145.1 million. The company’s defined working capital excluding cash was negative $17.5 million, an improvement of $23.8 million from year-end.
Material changes and notable items
- Operating cash flow decreased $8.6 million year over year, mainly reflecting less favorable changes in accrued expenses and accounts payable, including incentive compensation and tax payments. Investing cash outflow was lower than in Q1 2022, when the company completed acquisitions; Q1 2023 capital spending increased.
- Acquisition-related expenses were $2.9 million, versus $2.0 million. The Southbridge Landfill closure charge was $0.1 million.
- After quarter-end, Casella agreed to acquire four GFL Environmental subsidiaries operating in Pennsylvania, Maryland and Delaware for approximately $525 million in cash. The proposed transaction includes nine hauling operations, one transfer station and one material recovery facility, and was expected to close by Q3 2023 subject to customary conditions, including regulatory approvals. Casella arranged commitments for bridge financing and a potential term loan to help fund it.
- Q1 2023 comprehensive income was $1.8 million, compared with $10.3 million, reflecting a $1.8 million after-tax loss in other comprehensive income, principally related to hedging activity.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management expects available cash, operating cash flows and financing capacity to fund operations and planned cash commitments for at least the next 12 months and thereafter for the foreseeable future.
- Management cites inflation in fuel, labor and other costs, regional economic conditions, severe weather, commodity-price volatility, seasonality and interest rates as risks. Pricing, customer fees and cost-recovery programs are intended to offset some cost increases, but may not fully do so; increased pricing has also contributed to collection customer churn.
- Interest-rate exposure remains: approximately $160 million of long-term debt was variable-rate at quarter-end, with a weighted average rate of about 6.1%. Management estimated a 100-basis-point rate change could alter annual interest expense by up to approximately $1.6 million. The company uses swaps to hedge part of this exposure and was transitioning LIBOR-referenced agreements ahead of LIBOR’s planned discontinuation.
- Landfill final capping, closure and post-closure liabilities totaled $116.2 million; environmental remediation liabilities totaled $6.3 million. The company also recorded an $0.8 million accrual for outstanding legal proceedings.
- Litigation continues over the expansion permit for the North Country Environmental Services landfill in New Hampshire, including appeals and related proceedings. The outcome could affect disposal capacity; the filing does not quantify a potential loss.
Investor verification priorities
- Confirm the GFL transaction’s closing status, final purchase price, financing mix, integration costs and expected contribution.
- Track whether pricing and fees continue to offset labor, fuel, disposal and maintenance inflation without worsening customer churn.
- Monitor Resource Solutions profitability, including recycled-commodity pricing and costs associated with the Boston facility retrofit.
- Review operating cash conversion, capital spending, debt levels and covenant headroom as acquisition financing is completed.
- Follow New Hampshire landfill-permit litigation and changes in landfill closure, remediation and other environmental obligations.