Casella(CWST) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for Casella Waste Systems, Inc. and its subsidiaries, including the balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 (Unaudited) | December 31, 2019 | | :-------------------------- | :------------------------ | :---------------- | | Total Assets | $966,971 | $932,182 | | Total Current Assets | $98,079 | $102,813 | | Total Current Liabilities | $128,956 | $130,589 | | Total Stockholders' Equity | $130,745 | $122,753 | - Total assets increased by $34.79 million from December 31, 2019, to June 30, 2020, while total current assets decreased by $4.73 million. Total stockholders' equity increased by $7.99 million[9][12] Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands) | Metric (3 Months Ended June 30) | 2020 | 2019 | Change | | :------------------------------ | :---------- | :---------- | :---------- | | Revenues | $188,767 | $187,459 | $1,308 | | Operating Income | $17,444 | $15,544 | $1,900 | | Net Income | $12,113 | $11,915 | $198 | | Basic EPS | $0.25 | $0.25 | $0.00 | | Diluted EPS | $0.25 | $0.25 | $0.00 | | | | | | | Metric (6 Months Ended June 30) | 2020 | 2019 | Change | | :------------------------------ | :---------- | :---------- | :---------- | | Revenues | $371,676 | $351,123 | $20,553 | | Operating Income | $24,456 | $19,986 | $4,470 | | Net Income | $13,072 | $10,201 | $2,871 | | Basic EPS | $0.27 | $0.22 | $0.05 | | Diluted EPS | $0.27 | $0.22 | $0.05 | - For the three months ended June 30, 2020, revenues increased by $1.3 million, and operating income increased by $1.9 million compared to the prior year. Net income saw a slight increase of $0.2 million, with basic and diluted EPS remaining flat at $0.25[15] - For the six months ended June 30, 2020, revenues increased by $20.6 million, operating income by $4.5 million, and net income by $2.9 million compared to the prior year, leading to a $0.05 increase in both basic and diluted EPS[15] Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric (3 Months Ended June 30) | 2020 | 2019 | Change | | :------------------------------ | :---------- | :---------- | :---------- | | Net Income | $12,113 | $11,915 | $198 | | Other Comprehensive Loss | $(1,569) | $(2,959) | $1,390 | | Comprehensive Income | $10,544 | $8,956 | $1,588 | | | | | | | Metric (6 Months Ended June 30) | 2020 | 2019 | Change | | :------------------------------ | :---------- | :---------- | :---------- | | Net Income | $13,072 | $10,201 | $2,871 | | Other Comprehensive Loss | $(8,758) | $(4,516) | $(4,242) |\n| Comprehensive Income | $4,314 | $5,685 | $(1,371) | - For the three months ended June 30, 2020, comprehensive income increased by $1.6 million, driven by a smaller other comprehensive loss compared to the prior year. However, for the six months ended June 30, 2020, comprehensive income decreased by $1.4 million due to a significantly larger other comprehensive loss[18] Consolidated Statements of Stockholders' Equity (Deficit) Stockholders' Equity (Deficit) Changes (in thousands) | Metric | Balance, Dec 31, 2019 | Balance, June 30, 2020 | | :----------------------------------- | :-------------------- | :--------------------- | | Total Stockholders' Equity | $122,753 | $130,745 | | Class A Common Stock (shares) | 46,803 | 47,382 | | Additional Paid-In Capital | $485,332 | $489,193 | | Accumulated Deficit | $(357,016) | $(344,133) | | Accumulated Other Comprehensive Loss | $(6,041) | $(14,799) | - Total stockholders' equity increased by $7.99 million from December 31, 2019, to June 30, 2020, primarily due to net income and stock-based compensation, partially offset by an increase in accumulated other comprehensive loss[21] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | Change | | :-------------------------------------- | :---------- | :---------- | :---------- | | Net Cash Provided by Operating Activities | $62,493 | $38,251 | $24,242 | | Net Cash Used in Investing Activities | $(71,461) | $(73,983) | $2,522 | | Net Cash Provided by Financing Activities | $8,570 | $34,882 | $(26,312) | | Net Decrease in Cash & Cash Equivalents | $(398) | $(850) | $452 | | Cash & Cash Equivalents, End of Period | $3,073 | $3,157 | $(84) | - Net cash provided by operating activities significantly increased by $24.2 million for the six months ended June 30, 2020, compared to the prior year. However, net cash provided by financing activities decreased by $26.3 million, primarily due to lower proceeds from debt borrowings and public stock issuance compared to the prior year[23] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION - Casella Waste Systems, Inc. is a regional, vertically-integrated solid waste services company operating in the northeastern United States, providing collection, transfer, disposal, landfill, landfill gas-to-energy, recycling, and organics services[26] - Effective January 1, 2020, the company reorganized its operations into a single 'Resource Solutions' segment, combining larger-scale recycling, commodity brokerage, organics, and major account/industrial services. Solid waste operations continue to be managed geographically through Eastern and Western regions[26] - The COVID-19 pandemic has caused significant economic disruption, negatively impacting revenues due to service level changes and declining landfill volumes, while increasing costs for employee protection. The company has taken measures to reduce costs and preserve liquidity, but the full impact remains uncertain[27] 2. ACCOUNTING CHANGES - The company adopted ASU No. 2016-13 (Financial Instrument Credit Losses, Topic 326) effective January 1, 2020, using a modified-retrospective approach, resulting in a cumulative effect adjustment of $(189) thousand to retained earnings. This guidance replaces the incurred loss methodology with the current expected credit loss (CECL) methodology[30] - The company is assessing ASU No. 2020-04 (Reference Rate Reform) and ASU No. 2019-12 (Income Taxes) but does not currently expect a material impact on its financial statements from their adoption[32] 3. REVENUE RECOGNITION Revenues by Service and Segment (Three Months Ended June 30, in thousands) | Service/Segment | Eastern | Western | Resource Solutions | Total Revenues | | :----------------- | :-------- | :-------- | :----------------- | :------------- | | Collection | $37,115 | $58,546 | — | $95,661 | | Landfill | $4,568 | $15,218 | — | $19,786 | | Transfer | $11,451 | $9,016 | — | $20,467 | | Customer solutions | — | — | $20,239 | $20,239 | | Recycling | $4 | $332 | $12,487 | $12,823 | | Organics | — | — | $15,419 | $15,419 | | Transportation | — | $3,454 | — | $3,454 | | Landfill gas-to-energy | $198 | $720 | — | $918 | | Total Revenues | $53,336 | $87,286 | $48,145 | $188,767 | Revenues by Service and Segment (Six Months Ended June 30, in thousands) | Service/Segment | Eastern | Western | Resource Solutions | Total Revenues | | :----------------- | :-------- | :-------- | :----------------- | :------------- | | Collection | $73,944 | $117,185 | — | $191,129 | | Landfill | $8,112 | $31,528 | — | $39,640 | | Transfer | $20,834 | $15,722 | — | $36,556 | | Customer solutions | — | — | $41,902 | $41,902 | | Recycling | $6 | $571 | $23,453 | $24,030 | | Organics | — | — | $30,351 | $30,351 | | Transportation | — | $6,124 | — | $6,124 | | Landfill gas-to-energy | $583 | $1,361 | — | $1,944 | | Total Revenues | $103,479| $172,491| $95,706 | $371,676 | - The majority of revenues are transferred over time, accounting for $180.1 million (Q2 2020) and $358.3 million (YTD Q2 2020) of total revenues[35][36] 4. BUSINESS COMBINATIONS Business Combinations (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | | :------------------------------------ | :---------- | :---------- | | Cash used in acquisitions, net | $19,212 | $25,546 | | Notes payable | — | $2,250 | | Contingent consideration and holdbacks| $2,837 | $1,120 | | Total Purchase Price | $22,049 | $28,916 | | Excess purchase price to goodwill | $5,147 | $7,132 | - The company completed acquisitions with a total purchase price of $22.0 million in the first six months of 2020, a decrease from $28.9 million in the same period of 2019. A significant portion of the purchase price was allocated to goodwill ($5.1 million in 2020)[39] 5. ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES Allowance for Credit Losses (Six Months Ended June 30, in thousands) | Metric | 2020 | | :-------------------------------------- | :------ | | Balance at beginning of period | $1,468 | | Cumulative effect of new accounting principle | $189 | | Additions - charged to expense | $1,697 | | Deductions - bad debts written off, net | $(739) | | Balance at end of period | $2,615| - The allowance for credit losses increased to $2.6 million as of June 30, 2020, reflecting the adoption of the CECL methodology and increased additions charged to expense due to current economic conditions related to the COVID-19 pandemic[42] 6. LEASES Total Lease Cost (in thousands) | Period (Ended June 30) | 2020 | 2019 | | :--------------------- | :---------- | :---------- | | Three Months | $5,973 | $6,133 | | Six Months | $12,102 | $11,590 | Weighted-Average Lease Terms and Discount Rates (June 30, 2020) | Lease Type | Remaining Lease Term (years) | Discount Rate | | :--------- | :--------------------------- | :------------ | | Finance | 6.1 | 4.6% | | Operating | 11.8 | 5.1% | - The company leases vehicles, equipment, property, and operates three landfill operation and management agreements. Total lease cost for the six months ended June 30, 2020, was $12.1 million, an increase from $11.6 million in the prior year[43][45] 7. GOODWILL AND INTANGIBLE ASSETS Goodwill by Reporting Segment (in thousands) | Segment | December 31, 2019 | Acquisitions | June 30, 2020 | | :--------------- | :---------------- | :----------- | :------------ | | Eastern region | $30,720 | — | $30,720 | | Western region | $141,055 | $5,147 | $146,202 | | Resource solutions | $14,044 | — | $14,044 | | Total | $185,819 | $5,147 | $190,966 | Intangible Assets, Net (in thousands) | Asset Type | June 30, 2020 | December 31, 2019 | | :--------------- | :------------ | :---------------- | | Covenants Not-to-Compete | $6,896 | $7,194 | | Client Lists | $53,512 | $51,527 | | Total, Net | $60,408 | $58,721 | - Goodwill increased by $5.1 million due to acquisitions in the Western region, reaching $191.0 million as of June 30, 2020. Net intangible assets also increased to $60.4 million, primarily driven by client lists[47] 8. ACCRUED FINAL CAPPING, CLOSURE AND POST CLOSURE Accrued Final Capping, Closure and Post-Closure Liabilities (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | | :--------------------- | :---------- | :---------- | | Beginning balance | $71,927 | $73,075 | | Obligations incurred | $1,764 | $1,217 | | Revision in estimates | $152 | — | | Accretion expense | $3,204 | $3,194 | | Obligations settled | $(1,650) | $(2,947) | | Ending balance | $75,397 | $74,539 | - Accrued final capping, closure, and post-closure liabilities increased to $75.4 million as of June 30, 2020, primarily due to new obligations incurred and accretion expense, with a revision in estimates adding $152 thousand[50] 9. DEBT Summary of Debt (in thousands) | Debt Type | June 30, 2020 | December 31, 2019 | | :------------------------ | :------------ | :---------------- | | Revolving line of credit | $37,700 | $26,900 | | Term loan A facility | $350,000 | $350,000 | | Tax-Exempt Bonds | $117,000 | $117,000 | | Finance leases | $28,263 | $18,364 | | Notes payable | $5,104 | $5,464 | | Principal amount of debt| $543,067 | $522,728 | | Debt, less current portion| $527,757 | $509,021 | - Total principal amount of debt increased by $20.3 million to $543.1 million as of June 30, 2020, primarily driven by an increase in the revolving line of credit and finance leases[51] - The company uses interest rate derivative agreements to hedge against interest rate risk on its variable rate long-term debt, with a total notional amount of $190.0 million as of June 30, 2020. New forward-starting agreements totaling $60.0 million were entered into, and existing agreements were amended to replace 1.0% floors with 0.0% floors[55][56][163] 10. COMMITMENTS AND CONTINGENCIES - The company is involved in various legal and administrative proceedings common in the solid waste industry, including those related to operating permits, environmental damage, and alleged violations[59] - For the Southbridge Landfill, the company is involved in litigation regarding groundwater contamination and has an Administrative Consent Order (ACO) to share costs for a municipal waterline. An environmental remediation liability of $4.2 million was recorded as of June 30, 2020[62][64] - The Potsdam site has an environmental remediation liability of $1.2 million as of June 30, 2020, with the majority of remediation work completed. The company is jointly and severally liable with other parties[66] - Other ongoing legal proceedings include the North Country Environmental Services CWA litigation, Ontario County class action litigation regarding landfill odors, and Hakes Landfill litigation challenging expansion permits (motion to dismiss granted)[67][68][70] - A loss contingency of $1.4 million is reasonably possible but not probable related to the Stage VI Expansion permit application for the NCES Landfill, which was refiled after NHDES concerns[71] 11. STOCKHOLDERS' EQUITY Stock Option Activity (in thousands, except price and term) | Metric | Stock Options | Weighted Average Exercise Price | | :-------------------------- | :------------ | :------------------------------ | | Outstanding, Dec 31, 2019 | 98 | $9.20 | | Exercised | (8) | $12.48 | | Outstanding, June 30, 2020| 90 | $8.91 | | Exercisable, June 30, 2020 | 90 | $8.91 | Restricted Stock, Restricted Stock Units, and Performance Stock Units Activity (in thousands, except price and term) | Metric | Units | Weighted Average Grant Date Fair Value | | :-------------------------- | :---- | :------------------------------------- | | Outstanding, Dec 31, 2019 | 393 | $28.23 | | Granted | 149 | $47.39 | | Vested | (125) | $21.95 | | Forfeited | (6) | $35.18 | | Outstanding, June 30, 2020| 411 | $37.01 | | Unvested, June 30, 2020 | 700 | $37.62 | - Total unrecognized stock-based compensation expense as of June 30, 2020, was $41 thousand for restricted stock, $4.9 million for restricted stock units, and $6.3 million for performance stock units, to be recognized over weighted average periods of 1.9 to 2.5 years[79] 12. EARNINGS PER SHARE Earnings Per Share Calculation (in thousands, except per share data) | Metric (3 Months Ended June 30) | 2020 | 2019 | | :------------------------------ | :---------- | :---------- | | Net Income | $12,113 | $11,915 | | Basic WA Common Shares | 48,348 | 47,464 | | Basic EPS | $0.25 | $0.25 | | Diluted WA Common Shares | 48,563 | 48,221 | | Diluted EPS | $0.25 | $0.25 | | | | | | Metric (6 Months Ended June 30) | 2020 | 2019 | | :------------------------------ | :---------- | :---------- | | Net Income | $13,072 | $10,201 | | Basic WA Common Shares | 48,176 | 46,693 | | Basic EPS | $0.27 | $0.22 | | Diluted WA Common Shares | 48,411 | 47,424 | | Diluted EPS | $0.27 | $0.22 | - Basic and diluted EPS for the three months ended June 30, 2020, remained flat at $0.25 compared to the prior year. For the six months ended June 30, 2020, both basic and diluted EPS increased to $0.27 from $0.22 in the prior year[82] 13. OTHER ITEMS AND CHARGES Expense from Acquisition Activities (in thousands) | Period (Ended June 30) | 2020 | 2019 | | :--------------------- | :---------- | :---------- | | Three Months | $352 | $464 | | Six Months | $1,360 | $1,140 | Southbridge Landfill Closure Charge (in thousands) | Period (Ended June 30) | 2020 | 2019 | | :--------------------- | :---------- | :---------- | | Three Months | $559 | $917 | | Six Months | $1,172 | $1,472 | - Acquisition-related expenses increased for the six months ended June 30, 2020, to $1.4 million, while Southbridge Landfill closure charges decreased to $1.2 million for the same period, reflecting ongoing legal and other costs related to the landfill's early closure[83][84] 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Recurring Fair Value Measurements (June 30, 2020, in thousands) | Instrument | Level 1 | Level 2 | Level 3 | | :---------------------------------------- | :------ | :-------- | :------ | | Restricted investment securities - landfill closure | $1,555 | — | — | | Interest rate swaps | — | $14,598 | — | - The fair value of restricted investment securities for landfill closure is $1.6 million (Level 1), and interest rate swaps are valued at $14.6 million (Level 2) as of June 30, 2020[88] - The fair value of fixed-rate debt was approximately $125.9 million (carrying value $122.0 million) as of June 30, 2020, classified as Level 2. The fair values of the Term Loan Facility ($350.0 million) and Revolving Credit Facility ($37.7 million) approximate their carrying values[89] 15. SEGMENT REPORTING - The company operates through three reportable segments: Eastern region (solid waste), Western region (solid waste), and Resource Solutions (resource-renewal services). Corporate Entities include administrative functions[91] Segment Operating Income (Three Months Ended June 30, in thousands) | Segment | 2020 | 2019 | | :----------------- | :---------- | :---------- | | Eastern | $4,366 | $4,227 | | Western | $11,863 | $10,372 | | Resource Solutions | $1,801 | $1,604 | | Corporate Entities | $(586) | $(659) | | Total | $17,444 | $15,544 | Segment Operating Income (Six Months Ended June 30, in thousands) | Segment | 2020 | 2019 | | :----------------- | :---------- | :---------- | | Eastern | $5,341 | $3,600 | | Western | $17,505 | $15,749 | | Resource Solutions | $2,804 | $2,005 | | Corporate Entities | $(1,194) | $(1,368) | | Total | $24,456 | $19,986 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and results of operations, including an overview of the business, detailed analysis of revenues and operating expenses by segment, liquidity and capital resources, and discussions on market risks, seasonality, and critical accounting policies, highlighting the ongoing impact of the COVID-19 pandemic Company Overview - Casella Waste Systems, Inc. is a regional, vertically-integrated solid waste services company providing collection, disposal, transfer, recycling, and organics services across six northeastern states. It operates 48 collection operations, 58 transfer stations, 20 recycling facilities, 8 Subtitle D landfills, 4 landfill gas-to-energy facilities, and 1 C&D landfill[100] - Operations are managed through two geographic solid waste segments (Eastern and Western regions) and a single resource-renewal focused segment (Resource Solutions)[100] Results of Operations Recent Events (COVID-19 Impact) - The waste services industry is deemed an essential service, allowing the company to continue full operations during the COVID-19 pandemic, with a focus on employee safety[101] - COVID-19 negatively impacted revenues from late Q1 2020 through Q2 2020 due to reduced service levels for collection customers and lower landfill volumes. Demand improved in Q2 as economies reopened, but collection and disposal volumes remain negatively impacted[101] - Increased costs for employee protection (safety equipment, hygiene, cleaning) are expected to continue. The company has implemented cost reduction measures and liquidity preservation strategies, but the full impact of COVID-19 is still uncertain[101] Revenues Total Revenues by Service (in millions) | Service | Q2 2020 ($) | Q2 2020 (%) | Q2 2019 ($) | Q2 2019 (%) | Change ($) | | :----------------- | :---------- | :---------- | :---------- | :---------- | :--------- | | Collection | 94.0 | 49.8% | 92.1 | 49.1% | 1.9 | | Disposal | 43.7 | 23.1% | 48.1 | 25.7% | (4.4) | | Power | 0.9 | 0.5% | 0.7 | 0.4% | 0.2 | | Processing | 2.0 | 1.1% | 1.9 | 1.0% | 0.1 | | Solid Waste | 140.6 | 74.5% | 142.8 | 76.2% | (2.2) | | Organics | 15.5 | 8.2% | 15.0 | 7.9% | 0.5 | | Customer solutions | 20.2 | 10.7% | 19.2 | 10.3% | 1.0 | | Recycling | 12.5 | 6.6% | 10.5 | 5.6% | 2.0 | | Resource Solutions| 48.2 | 25.5% | 44.7 | 23.8% | 3.5 | | Total Revenues | 188.8 | 100.0% | 187.5 | 100.0% | 1.3 | Revenue Change Drivers (Q2 2020 vs. Q2 2019, in millions) | Driver | Solid Waste ($) | Solid Waste (%) | | :----------------------- | :-------------- | :-------------- | | Price | 6.3 | 4.4% | | Volume | (17.7) | (12.4)% | | Surcharges & other fees | — | —% | | Commodity price & volume | 0.1 | 0.1% | | Acquisitions | 9.7 | 6.8% | | Total Change | (1.6) | (1.1)% | - Total revenues increased by $1.3 million for Q2 2020 and $20.6 million year-to-date. Solid waste revenues decreased quarterly by $2.2 million due to lower volumes from COVID-19 impacts, partially offset by favorable pricing and acquisitions. Resource Solutions revenues increased by $3.5 million quarterly, driven by organics, customer solutions, and recycling growth[104][105][107][108] Operating Expenses Operating Expenses (in millions and as % of revenues) | Expense (Q2) | 2020 ($) | 2020 (%) | 2019 ($) | 2019 (%) | Change ($) | | :--------------------------- | :------- | :------- | :------- | :------- | :--------- | | Cost of operations | 123.5 | 65.4% | 128.7 | 68.6% | (5.2) | | General and administration | 24.9 | 13.2% | 22.1 | 11.8% | 2.8 | | Depreciation and amortization| 22.1 | 11.7% | 19.7 | 10.5% | 2.4 | | | | | | | | | Expense (YTD) | 2020 ($) | 2020 (%) | 2019 ($) | 2019 (%) | Change ($) | | :--------------------------- | :------- | :------- | :------- | :------- | :--------- | | Cost of operations | 252.0 | 67.8% | 246.4 | 70.2% | 5.6 | | General and administration | 49.2 | 13.2% | 44.9 | 12.8% | 4.3 | | Depreciation and amortization| 43.5 | 11.7% | 37.2 | 10.6% | 6.3 | - Cost of operations decreased by $5.2 million quarterly (320 basis points as % of revenues) but increased by $5.6 million year-to-date (240 basis points decrease as % of revenues). Quarterly decrease was due to lower third-party direct costs, direct operational costs, fuel, and labor, partially offset by higher maintenance[110][112] - General and administration expense increased by $2.8 million quarterly and $4.3 million year-to-date, mainly due to higher labor costs from acquisitions, increased bad debt expense due to COVID-19, and higher incentive compensation[110][115] - Depreciation and amortization expense increased by $2.4 million quarterly and $6.3 million year-to-date, driven by increased investment in fleet, acquisition activity, and higher landfill amortization, partially offset by lower landfill volumes due to COVID-19[110][116] Other Expenses - Interest expense, net, decreased by $0.6 million quarterly and $1.0 million year-to-date, primarily due to lower average interest rates from changes in LIBOR and the remarketing of certain bonds[119] Provision for Income Taxes - The provision for income taxes increased by $2.3 million quarterly and $2.4 million year-to-date, compared to the prior year. This was influenced by a deferred tax benefit recognized in Q2 2019 and the impact of the CARES Act in Q1 2020[121] - The CARES Act allowed for the carryback of minimum tax credit carryforwards to 2018, resulting in a $1.0 million current income tax benefit offset by a deferred tax provision in Q1 2020. Federal net operating losses generated after 2017 can offset up to 80% of taxable income and are carried forward indefinitely[121] Segment Reporting Revenues by Operating Segment (in millions) | Segment | Q2 2020 ($) | Q2 2019 ($) | Change ($) | | :----------------- | :---------- | :---------- | :--------- | | Eastern | 53.3 | 57.1 | (3.8) | | Western | 87.3 | 85.7 | 1.6 | | Resource Solutions | 48.2 | 44.7 | 3.5 | | Total Revenues | 188.8 | 187.5 | 1.3 | | | | | | | Segment | YTD 2020 ($)| YTD 2019 ($)| Change ($) | | :----------------- | :---------- | :---------- | :--------- | | Eastern | 103.5 | 104.1 | (0.6) | | Western | 172.5 | 159.9 | 12.6 | | Resource Solutions | 95.7 | 87.1 | 8.6 | | Total Revenues | 371.7 | 351.1 | 20.6 | - Eastern Region operating results improved by $0.2 million quarterly and $1.7 million year-to-date, despite lower revenues due to COVID-19, primarily driven by reduced cost of operations (disposal, hauling, labor, fuel, fleet maintenance) partially offset by higher general and administration expenses[137] - Western Region operating results improved by $1.5 million quarterly and $1.8 million year-to-date, driven by revenue growth. Cost of operations increased year-to-date due to higher disposal costs, hauling, maintenance, and labor from acquisitions, partially offset by lower direct operational and fuel costs[138] - Resource Solutions operating results improved by $0.2 million quarterly and $0.8 million year-to-date, primarily from recycling revenue growth and lower operating costs, and organics revenue growth. Customer solutions declined due to higher costs outpacing revenue growth[141][142] Liquidity and Capital Resources Recent Events (COVID-19 Impact on Liquidity) - The company expects to maintain positive operating cash flows due to essential services. Measures to reduce discretionary spending and delay capital expenditures are in place to manage liquidity during COVID-19 uncertainty[143] - As of June 30, 2020, the company had $135.9 million of undrawn capacity on its $200.0 million revolving line of credit and expects to remain compliant with all debt covenants. The next significant debt maturity is in May 2023[143] Summary of Cash Flow Activity Summary of Cash Flows (Six Months Ended June 30, in millions) | Activity | 2020 ($) | 2019 ($) | Change ($) | | :-------------------------------------- | :------- | :------- | :--------- | | Net cash provided by operating activities | 62.5 | 38.3 | 24.2 | | Net cash used in investing activities | (71.5) | (74.0) | 2.5 | | Net cash provided by financing activities | 8.6 | 34.9 | (26.3) | - Operating cash flows increased by $24.2 million, driven by improved operational performance and favorable changes in assets and liabilities, particularly a $20.3 million favorable impact from accounts receivable collection efforts[146] - Investing cash flows decreased by $2.5 million, with acquisitions (net of cash acquired) decreasing to $20.1 million in 2020 from $27.7 million in 2019. Capital expenditures increased by $4.9 million, mainly for newly acquired operations and landfill infrastructure[148] - Financing cash flows decreased by $26.3 million, primarily due to lower proceeds from debt borrowings and the absence of a public issuance of Class A Common Stock, which occurred in the prior year[149][150] Outstanding Long-Term Debt - As of June 30, 2020, the company had $350.0 million outstanding under its Term Loan Facility and $37.7 million under its Revolving Credit Facility, with $135.9 million available for further advances[151] Credit Agreement Covenants (Twelve Months Ended June 30, 2020) | Covenant | Actual | Requirement | | :-------------------------------- | :----- | :---------- | | Maximum consolidated net leverage ratio | 3.08 | 4.00 | | Minimum interest coverage ratio | 7.98 | 3.00 | - The company was in compliance with all financial covenants of its Credit Agreement as of June 30, 2020. Various tax-exempt bonds (New York, Maine, Vermont, New Hampshire) totaling $169.0 million were also outstanding[151][154][155] Inflation - Inflation has not significantly impacted operating results historically, as most contracts allow for pass-through of costs like landfill tipping fees and fuel. Operating efficiency programs and fuel surcharges are also in place to mitigate inflationary effects[156] Regional Economic Conditions - The company's business is concentrated in the northeastern United States, making it susceptible to regional economic downturns, state regulations, and severe weather conditions. There is no assurance that the region will recover from COVID-19 impacts at the same rate as other areas[157] Seasonality and Severe Weather - Transfer and disposal revenues are typically higher in late spring, summer, and early fall due to decreased waste volumes from C&D activities and tourism in winter months. Operating income is similarly affected by this seasonality[158] - Inclement weather can adversely affect operations by increasing costs, delaying services, and reducing waste volumes, while severe weather can also favorably increase waste volumes for additional services[158] Critical Accounting Policies and Estimates - The preparation of financial statements requires management to make estimates and assumptions, which are evaluated on an ongoing basis. No material changes to critical accounting policies and estimates occurred in Q2 2020, except for the adoption of new accounting standards[159] New Accounting Pronouncements - Information on new accounting standards that may affect the company is detailed in Note 2, Accounting Changes, within the consolidated financial statements[160] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily interest rate volatility and commodity price volatility, and the strategies employed to mitigate these risks, including the use of derivative instruments Interest Rate Volatility - The company uses interest rate derivative agreements to hedge against adverse movements in interest rates on its variable rate long-term debt, with a total notional amount of $190.0 million as of June 30, 2020[163] - New forward-starting interest rate derivative agreements totaling $60.0 million were entered into, and existing agreements were amended to replace 1.0% floors with 0.0% floors, with hedging relationships designated as highly effective[163] - As of June 30, 2020, the company had $155.4 million of fixed-rate debt in addition to the $190.0 million fixed through derivatives, with approximately $197.7 million of long-term debt exposed to interest rate risk. A 100 basis points change in variable interest rates would impact annual interest expense by approximately $2.0 million[163] Commodity Price Volatility - Information regarding commodity price market volatility risk as of June 30, 2020, is consistent with disclosures in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019[164] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal controls over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020[166] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2020[166] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section details the various legal and administrative proceedings the company is involved in, particularly focusing on environmental remediation liabilities and other significant litigations Environmental Remediation Liability (including related litigation) - The company is subject to environmental damage liability from its facilities and off-site contamination. Material outstanding claims include those related to the Southbridge Landfill and Potsdam site[170] - For the Southbridge Landfill, the company is defending against a lawsuit alleging groundwater contamination and has an Administrative Consent Order (ACO) to share costs for a municipal waterline. An environmental remediation liability of $4.2 million was recorded as of June 30, 2020[172] - The Potsdam site has an environmental remediation liability of $1.2 million as of June 30, 2020, with the majority of remediation work completed. The company is jointly and severally liable with other parties for remediation costs[174] Legal Proceedings (Specific cases) - The North Country Environmental Services (NCES) landfill is facing a CWA lawsuit, which was stayed pending a Supreme Court ruling. The company intends to vigorously defend against the litigation[175] - A class action lawsuit was filed in Ontario County, New York, alleging damages due to odors from a landfill operated by the company. The company intends to present a vigorous defense[176] - Litigation challenging permits for the Hakes Landfill expansion was dismissed on July 31, 2020, confirming that all procedural requirements were met[178] ITEM 1A. RISK FACTORS This section highlights the significant risks affecting the company's business, with a particular emphasis on the adverse impacts of the COVID-19 pandemic - The COVID-19 pandemic has heightened existing risks and introduced new ones, adversely affecting the company's business, outlook, liquidity, and results of operations, including reductions in demand for services and lower landfill volumes[180] - Expected negative impacts from COVID-19 include higher costs for employee safety, potential layoffs/furloughs, employee illness, remote work challenges, customer payment issues, facility closures, and increased borrowing costs. The full extent of these impacts remains uncertain[180] ITEM 6. EXHIBITS This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL-formatted financial data - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act of 2002) and various XBRL taxonomy documents for financial statements[183][184] SIGNATURES This section contains the official signatures authorizing the filing of the Quarterly Report on Form 10-Q - The report was signed on August 4, 2020, by Christopher B. Heald, Vice President and Chief Accounting Officer, and Edmond R. Coletta, Principal Financial Officer, on behalf of Casella Waste Systems, Inc[186][187]