Casella Waste Systems, Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended October 31, 2013; comparative periods ended October 31, 2012. Financial statement amounts below are in millions of dollars unless noted. The company provides integrated solid-waste collection, transfer, disposal, recycling and organics services in the northeastern United States.
Financial performance
| Metric | Three months ended Oct. 31, 2013 | Three months ended Oct. 31, 2012 | Six months ended Oct. 31, 2013 | Six months ended Oct. 31, 2012 |
|---|---|---|---|---|
| Revenue | $132.3 | $116.8 | $260.9 | $234.5 |
| Operating income | $9.5 | $4.4 | $19.2 | $10.2 |
| Operating margin | 7.2% | 3.8% | 7.3% | 4.3% |
| Net loss attributable to common stockholders | $(0.3) | $(21.0) | $(0.5) | $(29.3) |
| Loss per common share | $(0.01) | $(0.68) | $(0.01) | $(1.01) |
Operating expenses were $122.8 million for the quarter and $241.7 million year to date. Cost of operations declined as a share of revenue to 68.4% from 70.3% for the quarter and to 68.7% from 69.7% for the six-month period. General and administration expense rose to 12.5% of quarterly revenue from 11.9%.
For the six months, operating cash flow was $28.1 million, compared with $22.8 million. Investing cash use was $34.9 million, versus $42.4 million; financing provided $10.2 million, versus $18.0 million. Cash increased by $3.2 million to $5.0 million. Capital spending included $22.8 million of maintenance and $3.2 million of growth expenditures.
Balance sheet, debt and liquidity
- At October 31, 2013, cash was $5.0 million, current assets $76.4 million and current liabilities $89.6 million. Total assets were $678.5 million and stockholders’ equity $15.8 million.
- Long-term debt and capital leases, including current maturities, totaled approximately $507.6 million on the balance sheet; financing lease obligations added approximately $1.6 million. The company reported $325.0 million of 7.75% senior subordinated notes due 2019 and $134.7 million drawn on its revolver.
- Further revolver availability was $58.1 million, net of $34.7 million in outstanding letters of credit; no revolver amount was undrawn due to a borrowing restriction stated in the filing. The Senior Credit Facility matures March 18, 2016.
- The company reported compliance with debt covenants. At October 31, its interest coverage ratio was 2.86 against a 2.25 minimum; total funded debt to the bank-defined cash flow metric was 5.06 against a 5.85 maximum; and senior funded debt to that metric was 1.85 against a 2.50 maximum.
Material changes and management commentary
- Revenue rose 13.3% for the quarter and 11.3% year to date. Management attributed growth mainly to higher solid-waste volumes and acquisitions, including BBI; pricing gains were comparatively modest. Acquisition and divestiture effects contributed $3.7 million of quarterly revenue growth, including acquisition growth partly offset by the Maine Energy divestiture.
- Operating income improved substantially in both periods. Lower cost of operations as a percentage of revenue, higher volumes and reduced interest expense helped; the prior-year comparisons included $9.7 million of debt-extinguishment loss and $3.9 million of derivative loss in the quarter, as well as $1.8 million of reorganization costs.
- Interest expense declined year over year, which management attributed largely to the 2012 redemption of $180 million of 11% second-lien notes. The filing does not provide formal revenue or earnings guidance.
- Segment results improved in Eastern and Western operations and in Other; Recycling remained loss-making, with a smaller operating loss. Management cited increased volumes, acquisitions, and cost savings, while also noting higher hauling, disposal, labor, maintenance and other operating costs.
Outlook, unusual items and risks
- On December 5, 2013, after quarter-end, Casella and Louisiana-Pacific agreed to sell their GreenFiber interests for $18.0 million in cash, subject to working-capital adjustments and reductions for debt and transaction costs. Casella expected to recognize a gain in fiscal Q3 2014; the transaction had not closed as of the filing date.
- Bio Fuels assets were sold for $2.0 million, payable in quarterly installments over five years beginning November 1, 2013. The company recorded a $0.4 million disposal loss in the first quarter of fiscal 2014.
- Environmental exposures include a $5.4 million recorded Potsdam remediation liability. At Southbridge, stockpiled earth entered wetlands; estimated remediation costs were $0.5–$1.0 million, and the company recorded a $0.15 million charge after anticipated reimbursements. Management considered a net loss of $0.1–$0.4 million probable; costs could exceed estimates.
- The company said a Maine Energy multiemployer pension withdrawal obligation was probable but could not yet be reasonably estimated; no accrual had been recorded. Maine Energy demolition was nearly complete but awaited final EPA approval, and remaining costs could result in a gain or loss.
- Management cited exposure to interest rates, recyclable commodity prices, regional economic conditions, severe weather and landfill permitting, closure and post-closure costs. A 100-basis-point change in variable rates would change quarterly interest expense by about $0.4 million. The company had no commodity hedge contracts at October 31; management estimated a 10% commodity-price change could affect quarterly operating income by up to $0.4 million.
- The June 2013 credit-facility amendment revised financial covenants. The filing says the company was compliant, but its leverage measures were relatively close to the maximum limits. The company also noted that covenant restrictions may limit additional investment in non-wholly-owned entities.
Important facts for investors to verify
- Whether operating cash generation and the $58.1 million of reported revolver availability are sufficient for debt service, capital spending and seasonal working-capital needs.
- Compliance headroom under credit covenants and the effect of future operating results, cash-flow adjustments or additional borrowing on that headroom.
- Progress and final proceeds from the GreenFiber sale, including debt, transaction costs and working-capital adjustments, and whether the anticipated gain is realized.
- Final costs and timing for Potsdam, Southbridge and Maine Energy obligations, and the amount and timing of the unestimated multiemployer pension withdrawal liability.
- How much revenue and operating improvement is organic versus acquisition-related, and whether cost increases, Recycling results and landfill capacity affect margins.
- Cash collection and receivable quality: trade receivables increased to $54.3 million from $48.7 million, and management cited collectability issues with two disposal customers.