Casella Waste Systems, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The company provides integrated solid-waste collection, transfer, disposal, recycling and organics services, primarily in the northeastern United States. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $154.0 | $144.7 | $287.8 | $270.1 |
| Operating income (loss) | $(47.3) | $15.6 | $(40.7) | $17.6 |
| Net income (loss) attributable to common stockholders | $(53.7) | $5.2 | $(53.9) | $(2.4) |
| Diluted earnings (loss) per share | $(1.28) | $0.12 | $(1.29) | $(0.06) |
| Operating cash flow | Not stated separately | Not stated separately | $40.0 | $35.6 |
Revenue increased 6.5% in Q2 and 6.6% year to date. Reported operating margin was approximately (30.7)% for Q2 and (14.1)% for the first half, versus 10.8% and 6.5%, respectively, in the prior-year periods. The reported losses include a $64.1 million Southbridge landfill closure charge. Excluding that charge arithmetically, Q2 operating income would have been about $16.8 million; this is a calculation from reported figures, not a company-reported adjusted measure.
Revenue growth reflected pricing, collection and disposal activity, acquisitions, and stronger recycling commodity prices and volumes. For the first half, recycling revenue rose to $32.8 million from $23.5 million; organics revenue declined to $20.2 million from $21.1 million. Cost of operations rose $11.5 million year to date, while general and administrative expense increased $0.9 million. Interest expense fell to $12.8 million from $20.0 million for the first half, primarily reflecting lower average debt and financing changes.
Balance sheet, debt and liquidity
At June 30, 2017, cash and cash equivalents were $2.7 million and current assets were $82.7 million, compared with $2.5 million and $78.6 million at December 31, 2016. Total assets were $588.9 million. Total debt and capital leases at principal amount were $519.2 million, including $5.0 million current; long-term debt and leases, net of current maturities and unamortized costs, were $497.6 million. Stockholders’ deficit was $74.6 million.
Six-month capital expenditures were $24.4 million; net cash used in investing activities was $30.0 million and net cash used in financing activities was $9.8 million. The company reported $81.5 million of additional revolving-credit availability after letters of credit. It was in compliance with its debt covenants at quarter end: consolidated net leverage ratio 3.92 against a maximum of 5.375, and interest coverage ratio 4.95 against a minimum of 2.50. The company noted that seasonal downturns can tighten liquidity and covenant headroom.
Material developments, outlook and risks
- Southbridge closure: The company decided to stop operating its Southbridge, Massachusetts landfill when permitted capacity is exhausted, expected no later than December 31, 2018. The $64.1 million charge comprised $48.0 million of asset impairment, $9.1 million of deferred permitting-cost write-offs, $6.4 million of waterline remediation expense and $0.6 million of legal and transaction costs. Management estimated about $21 million of related cash outflows over five years and more than $50 million of additional tax deductions over that period; it said it did not expect the closure to materially impair future operations or liquidity.
- Environmental and legal exposure: Groundwater contamination near Southbridge is under investigation. Residents and environmental groups filed suit in June 2017, seeking remedies that include remediation, damages, fines and restrictions on landfill operations. The company said a loss was reasonably possible but could not estimate it. A consent order provides for the company and Massachusetts environmental authorities to share up to $10 million of waterline costs; the company recorded a $6.4 million related liability. It also reported $3.7 million of Southbridge response costs incurred to date and a $5.9 million Potsdam remediation liability. The company is pursuing insurance coverage in separate litigation; coverage and allocation of liabilities remain uncertain.
- Other landfill obligations: The company disclosed potential Southbridge lease-related future cash payments of $3.1 million and said a loss may be recognized when operations cease. Closure and post-closure estimates depend on future costs, timing and landfill assumptions.
- Debt and interest rates: A 2017 credit amendment reduced the Term Loan B interest margin by 25 basis points; the LIBOR margin was 2.75% at quarter end. The company had $343.9 million of variable-rate debt exposure and estimated a 100-basis-point rate change could affect quarterly interest expense by up to about $0.9 million. It entered into $60 million of interest-rate swaps, with weighted-average fixed payments of approximately 1.95%.
- Outlook: The filing provides no specific revenue or earnings guidance. Management cited seasonality, severe weather, regional economic conditions, recycling commodity prices, fuel costs, permitting constraints and environmental regulation as factors that may affect results. Management said cash outflows associated with Southbridge closure activities were not expected to harm liquidity over the next five years.
Most important facts for investors to verify
- Progress, timing and final costs of the Southbridge closure, waterline project and post-closure obligations.
- Developments in the Southbridge litigation, groundwater investigation, Town cost allocation and insurer coverage dispute; potential losses remain unquantified.
- Whether revenue growth and operating performance continue after separating the one-time closure charge from reported results.
- Cash conversion, capital spending, seasonal revolver usage and covenant headroom, particularly given low cash balances and substantial debt.
- Recycling commodity pricing and volumes, landfill permitting capacity, and exposure to interest-rate and weather changes.