Casella(CWST) - 2022 Q2 - Quarterly Report

PART I Financial Statements Unaudited consolidated financial statements for Q2 2022 show total assets at $1.37 billion, revenues at $283.7 million, and net income at $17.8 million, with detailed notes on key accounting policies and segment performance Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $181,156 | $146,479 | | Total assets | $1,370,719 | $1,283,580 | | Total current liabilities | $163,014 | $152,193 | | Total liabilities | $913,153 | $861,123 | | Total stockholders' equity | $457,566 | $422,457 | Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $283,666 | $215,875 | $517,693 | $405,406 | | Operating income | $31,719 | $21,946 | $41,887 | $33,955 | | Net income | $17,796 | $11,783 | $21,986 | $16,094 | | Diluted earnings per common share | $0.34 | $0.23 | $0.43 | $0.31 | Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $92,251 | $79,013 | | Net cash used in investing activities | $(110,611) | $(61,147) | | Net cash provided by (used in) financing activities | $24,866 | $(5,031) | Note 1: Basis of Presentation The company operates as a regional, vertically integrated solid waste services company in seven northeastern U.S. states, managing operations through three segments: Eastern, Western, and Resource Solutions, with financial statements prepared under U.S. GAAP - The company provides integrated solid waste services in Vermont, New Hampshire, New York, Massachusetts, Connecticut, Maine, and Pennsylvania[23] - Operations are managed through two geographic solid waste segments (Eastern and Western) and one resource-renewal segment (Resource Solutions)[23] Note 3: Revenue Recognition Total revenues for Q2 2022 increased to $283.7 million from $215.9 million in Q2 2021, with growth across all segments and collection services as the largest revenue source Revenues by Operating Segment (in thousands) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Eastern | $87,263 | $61,058 | | Western | $114,884 | $98,852 | | Resource Solutions | $81,519 | $55,965 | | Total revenues | $283,666 | $215,875 | - Accounts receivable, net, increased to $108.3 million as of June 30, 2022, from $87.0 million as of December 31, 2021, reflecting revenue growth[6][33] Note 4: Business Combinations In H1 2022, the company acquired eight businesses for $58.9 million, adding $28.8 million in goodwill, a significant increase from four businesses acquired for $4.9 million in H1 2021 Acquisition Summary (in thousands) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total consideration | $58,895 | $4,883 | | Cash used in acquisitions | $55,053 | $4,378 | | Excess purchase price allocated to goodwill | $28,761 | $1,757 | - Acquisitions in H1 2022 included a full-service collection business, a closed waste-to-energy facility being converted to a transfer station, and several tuck-in collection businesses[34] Note 7: Debt Total principal debt increased to $593.7 million as of June 30, 2022, primarily due to a $35.0 million issuance of Vermont Bonds, with $190.0 million of debt hedged by interest rate swaps - In Q2 2022, the company issued $35.0 million of Vermont Economic Development Authority Solid Waste Disposal Revenue Bonds (Series 2022A-1) with a 5.00% interest rate, maturing in 2052[46] Debt Composition (in thousands) | Debt Instrument | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Term Loan Facility | $350,000 | $350,000 | | Tax-Exempt Bonds | $197,000 | $162,000 | | Finance leases & Notes payable | $46,662 | $50,570 | | Total Principal Debt | $593,662 | $562,570 | - As of June 30, 2022, the company had active interest rate derivative agreements with a total notional amount of $190.0 million to hedge variable rate debt[48] Note 13: Segment Reporting All operating segments reported year-over-year revenue growth for Q2 2022, with the Western region generating the highest outside revenues at $114.9 million and operating income at $19.9 million, while Resource Solutions saw the largest percentage revenue growth Segment Performance - Three Months Ended June 30, 2022 (in thousands) | Segment | Outside Revenues | Operating Income (loss) | Total Assets | | :--- | :--- | :--- | :--- | | Eastern | $87,263 | $6,150 | $362,942 | | Western | $114,884 | $19,897 | $697,252 | | Resource Solutions | $81,519 | $6,235 | $189,820 | | Corporate entities | $— | $(563) | $120,705 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses a 31.4% YoY revenue increase in Q2 2022 to $283.7 million, driven by acquisitions, pricing, and volumes, alongside rising operating costs due to inflation, while maintaining strong liquidity Results of Operations Q2 2022 revenues increased by $67.8 million (31.4%) YoY, with solid waste up 26.4% and Resource Solutions up 45.7%, despite operating expenses rising due to inflation in fuel, labor, and third-party costs, leading to operating income growth to $31.7 million Solid Waste Revenues Growth Drivers (Q2 2022 vs Q2 2021) (in millions) | Driver | Amount (in millions) | % Growth Contribution | | :--- | :--- | :--- | | Price | $11.1 | 6.9% | | Volume | $2.6 | 1.6% | | Surcharges and other fees | $8.4 | 5.3% | | Acquisitions | $19.4 | 12.1% | | Total Solid Waste Growth | $42.2 | 26.4% | - Resource Solutions revenues grew by $25.6 million in Q2 2022, driven by acquisition activity ($17.2 million), higher non-processing revenues ($5.9 million), and favorable recycling commodity pricing ($3.1 million)[89] - Cost of operations as a percentage of revenues increased by 140 basis points in Q2 2022 YoY, mainly due to higher fuel costs (+200 bps), third-party direct costs (+90 bps), and direct labor costs (+10 bps)[92] Liquidity and Capital Resources The company maintains strong liquidity with $271.8 million available under its Revolving Credit Facility, with net cash from operations increasing to $92.2 million in H1 2022, while major cash uses included $56.3 million for acquisitions and $54.9 million for capital expenditures - The company has $271.8 million of undrawn capacity from its $300.0 million Revolving Credit Facility as of June 30, 2022[118] Summary of Cash Flow Activity (in millions) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $92.2 | $79.0 | | Net cash used in investing activities | $(110.6) | $(61.1) | | Net cash provided by (used in) financing activities | $24.9 | $(5.0) | - Cash used for acquisitions increased significantly to $56.3 million in H1 2022 from $5.5 million in H1 2021, reflecting an active growth strategy[125] Inflation Inflationary pressures, particularly in fuel and labor, materially affected operating margins and cash flows in H1 2022, but management believes flexible pricing, cost recovery fees, and efficiency programs help mitigate these impacts - Inflationary increases in costs, especially for fuel and labor, materially affected operating margins and cash flows during the first half of 2022[132] - The company utilizes flexible pricing, pass-through contract clauses, and an Energy and Environmental Fee (E&E Fee) to recover escalating costs[132] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate volatility and commodity price fluctuations, managing interest rate risk on its variable-rate debt through derivative instruments, with $190.0 million of debt hedged as of June 30, 2022 - The company has interest rate risk related to approximately $160.0 million of unhedged variable-rate long-term debt as of June 30, 2022[139] - A hypothetical 100 basis point increase in interest rates would change annual interest expense by approximately $1.6 million[139] - The company uses interest rate derivative agreements with a total notional amount of $190.0 million to hedge against adverse movements in interest rates[139] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during Q2 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[141] - No changes in internal control over financial reporting occurred during Q2 2022 that materially affected, or are reasonably likely to materially affect, internal controls[141] PART II Legal Proceedings The company is subject to various legal proceedings, including an ongoing appeal by the Conservation Law Foundation (CLF) against a landfill expansion permit, with an aggregate accrual of $1.291 million for outstanding legal proceedings as of June 30, 2022 - The company is defending against an appeal by the Conservation Law Foundation (CLF) regarding the expansion permit for the North Country Environmental Services, Inc. (NCES) landfill in Bethlehem, New Hampshire[54] - An aggregate accrual of $1.291 million has been recorded for outstanding legal proceedings as of June 30, 2022[52] Risk Factors This section updates the company's risk factors, emphasizing significant risks from extensive and evolving government and environmental regulations, with potential negative impacts from non-compliance and recent changes to solid waste laws in Maine - The waste industry is subject to extensive government regulations, and non-compliance could lead to fines, penalties, and limits on the ability to operate and expand[146] - The company faces potential liability from environmental issues at acquired businesses and risks related to obtaining or renewing operating permits[146] - Recent changes in solid waste laws in the State of Maine may negatively impact operating results through lower revenues or increased costs[146]