UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2010
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
03-0338873
(State or other jurisdiction ofincorporation or organization)
(I.R.S. Employer Identification No.)
25 Greens Hill Lane, Rutland, Vermont
05701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (802) 775-0325
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of February 28, 2010:
Class A Common Stock, $0.01 par value per share:
24,944,483
Class B Common Stock, $0.01 par value per share:
988,200
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
April 30,
January 31,
2009
2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
1,838
2,171
Restricted cash
508
76
Accounts receivable - trade, net of allowance for doubtful accounts of $2,014 and $1,896
51,296
56,676
Notes receivable - officer/employees
136
138
Refundable income taxes
1,195
1,326
Prepaid expenses
6,679
6,352
Inventory
3,114
3,556
Deferred income taxes
4,392
4,964
Other current assets
7,577
4,756
Total current assets
76,735
80,015
Property, plant and equipment, net of accumulated depreciation and amortization of $549,952 and $588,180
490,360
482,567
Goodwill
125,709
Intangible assets, net
2,635
2,433
Restricted assets
127
220
1,128
1,143
428
462
Investments in unconsolidated entities
41,798
42,405
Other non-current assets
12,042
18,123
674,227
673,062
750,962
753,077
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except for share and per share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and capital leases
1,718
1,888
Current maturities of financing lease obligations
1,344
1,422
Accounts payable
34,623
31,401
Accrued payroll and related expenses
4,180
4,545
Accrued interest
6,407
10,939
Current accrued capping, closure and post-closure costs
6,426
8,786
Other accrued liabilities
22,337
21,582
Total current liabilities
77,035
80,563
Long-term debt and capital leases, less current maturities
547,145
559,178
Financing lease obligations, less current maturities
12,281
11,205
Accrued capping, closure and post-closure costs, less current portion
35,464
33,604
2,684
4,712
Other long-term liabilities
10,043
9,025
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Class A common stock -
Authorized - 100,000,000 shares, $0.01 par value per share, issued and outstanding - 24,679,000 and 24,944,000 shares as of April 30, 2009 and January 31, 2010, respectively
247
249
Class B common stock -
Authorized - 1,000,000 shares, $0.01 par value per share, 10 votes per share, issued and outstanding - 988,000 shares
10
Accumulated other comprehensive (loss) income
3,828
(958
)
Additional paid-in capital
279,444
281,413
Accumulated deficit
(217,219
(225,924
Total stockholders’ equity
66,310
54,790
3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
Revenues
120,945
126,056
434,673
391,607
Operating expenses:
Cost of operations
85,254
84,764
292,829
258,690
General and administration
13,885
15,104
50,463
46,084
Depreciation and amortization
16,995
15,016
55,896
52,817
Environmental remediation charge
2,823
—
Development project charge
(20
118,937
114,884
401,991
357,591
Operating income
2,008
11,172
32,682
34,016
Other expense/(income), net:
Interest income
(178
(25
(445
(86
Interest expense
9,773
14,888
30,267
39,740
Loss (income) from equity method investments
(263
(73
1,911
1,305
Loss on debt modification
511
Other income
(396
(195
(549
(487
Other expense, net
8,936
14,595
31,184
40,983
(Loss) income from continuing operations before income taxes and discontinued operations
(6,928
(3,423
1,498
(6,967
Provision (benefit) for income taxes
(3,174
1,179
1,489
2,231
(Loss) income from continuing operations before discontinued operations
(3,754
(4,602
9
(9,198
Discontinued Operations:
Income (loss) from discontinued operations (net of income tax provision (benefit) of ($44), ($8), $272 and $143)
(63
(13
396
213
Income on disposal of discontinued operations (net of income tax provision of $161, $297 and $189)
239
20
280
Net (loss) income (applicable) available to common stockholders
(3,817
(4,376
425
(8,705
4
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(in thousands, except for per share data)
Earnings Per Share:
Basic:
(Loss) income from continuing operations before discontinued operations (applicable) available to common stockholders
(0.15
(0.18
(0.36
Income (loss) from discontinued operations, net
0.02
0.01
Income on disposal of discontinued operations, net
Net (loss) income per common share (applicable) available to common stockholders
(0.17
(0.34
Basic weighted average common shares outstanding
25,606
25,748
25,547
25,705
Diluted:
Diluted weighted average common shares outstanding
25,632
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands )
Cash Flows from Operating Activities:
Net (loss) income
Income from discontinued operations, net
(213
(280
Adjustments to reconcile net (loss) income to net cash provided by operating activities -
Gain on sale of equipment
(274
(1,087
Depletion of landfill operating lease obligations
5,018
4,936
Interest accretion on landfill and environmental remediation liabilities
2,414
2,668
Income from assets under contractual obligation
(81
Amortization of premium on senior subordinated notes
(501
(540
Amortization of discount on term loan and second lien notes
1,141
Loss from equity method investments
Stock-based compensation
1,383
1,727
Excess tax benefit on the exercise of stock options
(157
1,494
2,380
Changes in assets and liabilities, net of effects of acquisitions and divestitures -
Accounts receivable
7,529
(5,380
(15,874
(3,222
Prepaid expenses, inventories and other assets
2,730
21
Accrued expenses and other liabilities
(14,227
(382
50,140
56,814
Net Cash Provided by Operating Activities
50,149
47,616
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired
(2,196
Additions to property, plant and equipment
- growth
(10,165
(2,973
- maintenance
(39,415
(36,346
Payments on landfill operating lease contracts
(4,401
(7,803
Proceeds from divestitures
670
Proceeds from sale of equipment
948
2,782
Investment in unconsolidated entities
(2,527
Proceeds from assets under contractual obligation
25
81
Net Cash Used In Investing Activities
(57,061
(44,279
Cash Flows from Financing Activities:
Proceeds from long-term borrowings
105,400
450,644
Principal payments on long-term debt
(100,559
(440,444
Payment of financing costs
(14,072
Proceeds from exercise of stock options
1,462
260
157
Net Cash (Used in) Provided by Financing Activities
6,460
(3,612
567
328
Net Cash Provided by Investing Activities
53
Cash Provided by Discontinued Operations
620
608
Net increase in cash and cash equivalents
168
333
Cash and cash equivalents, beginning of period
2,814
Cash and cash equivalents, end of period
2,982
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest
25,982
31,775
Income taxes, net of refunds
361
345
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Summary of entities acquired in purchase business combinations -
Fair value of assets acquired
2,504
Cash paid, net
Notes payable, liabilities assumed and holdbacks to sellers
308
Property, plant and equipment acquired through lease obligations
14,115
404
7
(In thousands, except for per share data)
1. BASIS OF PRESENTATION
Casella Waste Systems, Inc. (“the Parent”) and its subsidiaries (collectively, the “Company”) is a regional, integrated solid waste services company which provides a full range of solid waste services including collection, transfer, recycling and disposal of non-hazardous solid waste. The Company also generates electricity through its solid waste processing facilities and markets recyclable paper, metals, aluminum, plastics and glass which have been processed at its facilities or purchased from third parties.
The consolidated balance sheet of the Company as of January 31, 2010, the consolidated statements of operations for the three and nine months ended January 31, 2009 and 2010 and the consolidated statements of cash flows for the nine months ended January 31, 2009 and 2010 are unaudited. In the opinion of management, such financial statements, together with the consolidated balance sheet as of April 30, 2009, include all adjustments (which include normal recurring and nonrecurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented.
The preparation of the Company’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant accounting policies are more fully discussed in Item 7 of the Company’s Annual Report on Form 10-K/A for the year ended April 30, 2009 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on July 24, 2009. The consolidated financial statements presented herein should be read in conjunction with the Company’s audited consolidated financial statements as of and for the twelve months ended April 30, 2009 included in the Annual Report. The results for the three and nine month periods ended January 31, 2010 may not be indicative of the results that may be expected for any other interim period or the fiscal year ending April 30, 2010.
Adoption of New Accounting Pronouncements
Fair Value Measurements and Disclosures
In February 2008, the Financial Accounting Standards Board (“FASB”) issued fair value measurement guidance to allow filers to defer for one year the effective date of previously issued guidance as it relates to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This additional guidance does not defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. Effective May 1, 2009, the Company adopted the fair value guidance with respect to non-financial assets and liabilities measured on a non-recurring basis. The adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.
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Business Combinations
In December 2007, the FASB issued new guidance on business combinations, which revised previous guidance on accounting for business combinations and retains the fundamental concept of the purchase method of accounting and introduces new requirements for the recognition and measurement of assets acquired, liabilities assumed and noncontrolling interests. This guidance also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. This guidance applies prospectively to business combinations for which the acquisition date is on or after the Company’s adoption date. The Company adopted this guidance on May 1, 2009 (See Note 3).
Derivatives and Hedging Disclosures
In March 2008, the FASB issued guidance which amends and expands the disclosure requirements for derivative instruments and hedging activities. This guidance requires entities to provide enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and disclosures about credit-risk-related contingent features in derivative agreements. The Company adopted this guidance on May 1, 2009. As this guidance relates specifically to disclosures, the adoption had no impact on the Company’s financial position, results of operations or cash flows.
Intangible Assets
In April 2008, the FASB issued guidance on determining the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value. The Company adopted this guidance on May 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.
Subsequent Events
In May 2009, the FASB issued guidance on subsequent events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance addresses the period after the balance sheet date during which the management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted this guidance during the quarter ended July 31, 2009. The Company evaluated subsequent events through March 5, 2010, which was the date the accompanying financial statements were available to be issued. No material subsequent events have occurred since January 31, 2010 that require recognition or disclosure in the Company’s current period financial statements other than that disclosed in Note 16.
2. NEW ACCOUNTING PROUNOUNCEMENTS PENDING ADOPTION
Variable Interest Entities
In June 2009, the FASB issued guidance for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a VIE. Under this guidance, an enterprise has a controlling financial interest when it has (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This guidance requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. This guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. This guidance is effective for annual reporting periods beginning after November 15, 2009. The Company does not believe the impact of adopting this guidance will have a material effect on the Company’s consolidated financial position or results of operations.
3. BUSINESS COMBINATIONS
As disclosed in Note 1, the Company adopted new guidance on accounting for business combinations on May 1, 2009. Assets and liabilities that arose from business combinations that preceded the application of this guidance were not adjusted upon application of the new standard.
For all acquisitions completed prior to the Company’s adoption of this guidance, acquisition purchase prices were allocated to the identified intangible assets and tangible assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. The time period for finalizing purchase price allocations did not exceed one year from the consummation of a business combination. Any adjustments made during the one year allocation period were recorded prospectively as an adjustment to the acquired goodwill from the business combination.
For all acquisitions completed after the adoption of this guidance, as of the respective acquisition dates, the Company recognizes, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition-date fair values. The Company measures and recognizes goodwill as of the acquisition date as the excess of: (a) the aggregate of the fair value of consideration transferred, the fair value of any noncontrolling interest in the acquiree (if any) and the acquisition-date fair value of the Company’s previously held equity interest in the acquiree (if any), over (b) the fair value of net assets acquired and liabilities assumed. If information about facts and circumstances existing as of the acquisition date is incomplete by the end of the reporting period in which a business combination occurs, the Company will report provisional amounts for the items for which the accounting is incomplete. The measurement period ends once the Company receives the information it was seeking; however, this period will not extend beyond one year from the acquisition date. Any material adjustments recognized during the measurement period will be recognized retrospectively in the consolidated financial statements of the then current period. All acquisition-related transaction and restructuring costs are to be expensed as incurred rather than capitalized as part of the cost of the acquisition.
During the nine months ended January 31, 2009, the Company acquired three solid waste hauling operations. The transactions were in exchange for total consideration of $2,504 including $2,196 in cash and $308 in liabilities assumed. The operating results of these businesses are included in the consolidated statements of operations from the dates of acquisition. The purchase price has been allocated to the net assets acquired based on their fair values at the dates of acquisition, including the value of non-compete agreements, with the residual amounts allocated to goodwill. Fair value of tangible assets is determined by the Company based on fair market value of similar property using industry accepted sources. The pro forma results, as if these acquisitions had been made on May 1, 2008, do not vary materially from actual reported results for the three and nine months ended January 31, 2009.
4. GOODWILL AND INTANGIBLE ASSETS
The following table shows the balances related to goodwill at April 30, 2009 and January 31, 2010:
EasternRegion
CentralRegion
WesternRegion
FCRRecycling
Total
32,951
55,302
37,456
Intangible assets at April 30, 2009 and January 31, 2010 consist of the following:
Covenantsnot tocompete
Client Lists
LicensingAgreements
ContractAcquisitionCosts
Patents
Balance, April 30, 2009
Intangible assets
14,125
1,597
920
424
17,066
Less accumulated amortization
(13,308
(817
(235
(71
(14,431
817
780
685
353
Balance, January 31, 2010
14,142
250
17,333
(13,552
(885
(285
(103
(75
(14,900
590
712
635
321
175
Intangible amortization expense for the three and nine months ended January 31, 2009 and 2010 was $170, $199, $471 and $485, respectively. The intangible amortization expense estimated for the five fiscal years following fiscal year 2009 and thereafter is as follows:
2011
2012
2013
2014
Thereafter
701
487
331
269
221
909
5. LONG-TERM DEBT
On July 9, 2009, the Company successfully completed the refinancing of its existing senior credit facility with a senior secured first lien credit facility (the “Senior Secured Credit Facility”), consisting of a $177,500 revolving credit facility (the “New Revolver”) and a $130,000 aggregate principal term loan (the “New Term Loan”). In connection with the Senior Secured Credit Facility, the Company simultaneously completed the offering of $180,000 aggregate principal amount of 11% senior second lien notes due 2014 (the “Second Lien Notes”). The net proceeds from the Senior Secured Credit Facility and from the Second Lien Notes offering were used to refinance the borrowings under the Company’s $525,000 senior credit facility due April 2010.
For the first two fiscal quarters after July 9, 2009, the interest rate for borrowings under the New Revolver was LIBOR plus a margin of 4.50% per annum, and thereafter the applicable margin will be determined in accordance with the pricing grid as set forth in the Senior Secured Credit Facility Agreement dated July 9, 2009. The interest rate for the New Term Loan is LIBOR plus a margin of 5.00% per annum, provided
11
that LIBOR shall not be less than 2.00% per annum. The New Term Loan was issued at an original issue price of 94.5% of the principal amount of the loan.
The Senior Secured Credit Facility is subject to customary affirmative, negative, and financial covenants, generally consistent with the Company’s prior credit agreement. The New Revolver is due December 31, 2012 and the New Term Loan is due April 9, 2014. If the Company fails to refinance the Company’s 9.75% Senior Subordinated Notes due February 2013 on or before October 31, 2012, the due date for the New Term Loan shall be December 31, 2012. The Company has the right to request an increase to the amount of the Senior Secured Credit Facility by an aggregate amount of $42,500, in its discretion, subject to certain conditions of the Senior Secured Credit Facility Agreement.
Further advances were available under the New Revolver in the amount of $89,013 as of January 31, 2010. The available amount is net of outstanding irrevocable letters of credit totaling $49,987 million as of January 31, 2010, at which date no amount had been drawn.
The Second Lien Notes were issued at an original issue price of 97.2% of the principal amount. The Second Lien Notes will pay interest on a semi-annual basis and are due on July 15, 2014.
The Second Lien Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States under Regulation S under the Securities Act.
The Second Lien Notes have not been registered under the Securities Act, and unless so registered, may not be offered or sold in the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable securities laws.
The Company recorded a charge of $511 as a loss on debt modification in the quarter ended July 31, 2009 relating to the unamortized deferred financing costs associated with the refinancing of its existing senior credit facility.
6. COMMITMENTS AND CONTINGENCIES
(a) Legal Proceedings
North Country Landfill Expansion
The North Country Environmental Services, Inc. (“NCES”) landfill is located in Bethlehem, New Hampshire, and is currently permitted to accept municipal solid waste and construction and demolition (“C&D”) material from a wide geographic region. NCES projects that its permitted and uncontested capacity will last into fiscal year 2012.
NCES and the Town of Bethlehem (the “Town”) have been in prolonged zoning litigation over NCES’s expansion of the landfill. Currently, there are two court actions between NCES and the Town: a declaratory judgment action initiated by NCES on September 12, 2001, and a zoning enforcement action initiated by the Town on February 2, 2009. In the declaratory judgment action, the New Hampshire Supreme Court ruled that NCES has all necessary local approvals to expand its landfill within a 51-acre area, but remanded to the Superior Court issues related to the validity of the Town’s zoning ordinance as it relates to a proposed landfill expansion outside that 51-acre area. In the enforcement action, the Town has requested an injunction requiring NCES to remove a leachate force main, a landfill gas line, stormwater drainage lines, catch basins and outfalls, a landfill liner anchor trench, and storm water detention ponds that are located outside the 51-acre area. NCES and the Town filed cross-motions for
12
summary judgment on the validity of the ordinance the Town is attempting to enforce, and the court denied both motions in October 2009. On February 5, 2010, the court granted NCES’s motion to consolidate the remanded action with the enforcement action and continued the March 2010 trial date that had been set in the enforcement action. No new trial date has been set for the consolidated action.
On December 12, 2008, the New Hampshire Department of Environmental Services (“NHDES”) denied a request by NCES to modify its standard permit to develop approximately eight years of capacity within the bounds of the 51-acre area. NCES revised and resubmitted its request, and the NHDES denied the revised request on March 25, 2009. NCES appealed each of these denials to the New Hampshire Waste Management Council (“WMC”). NCES obtained a stay of both appeals pending the outcome of the action for declaratory and injunctive relief described below.
NCES filed a petition for declaratory and injunctive relief with the Superior Court on February 10, 2009, related to the NHDES’s December 12, 2008 denial. NCES amended this petition following NHDES’s March 25, 2009 denial. In its amended petition, NCES sought declarations that NHDES’s denials were unlawful on several grounds. NCES also sought preliminary injunctive relief that would have required NHDES to immediately resume its consideration of NCES’s request to modify its standard permit. In addition, NCES sought permanent injunctive relief that would require NHDES to review the permit modification application in conformity with the Superior Court’s declarations. On June 11, 2009, the Superior Court denied NCES’s request for a preliminary injunction and also denied NHDES’s request to dismiss the petition. Subsequently, NCES filed a motion for partial summary judgment on two of its claims for declaratory relief and NHDES filed a cross-motion for partial summary judgment. In October 2009, NCES agreed to the dismissal of one of its claims without prejudice, and moved successfully — with NHDES’s concurrence — to stay the litigation so that NHDES may consider the results of certain remedial work NCES undertook during the 2009 construction season. NCES sought the stay because the outcome of this review by NHDES could affect the scope of the litigation.
In the event that the Company is unsuccessful obtaining the permits, the Company will assess the need for a potential landfill impairment charge (the carrying value of the NCES landfill assets as of January 31, 2010 was approximately $6,898). The Company would also assess the need for additional closure and post-closure charges.
GR Technologies, Inc. Litigation
The Company, on behalf of itself, its subsidiary FCR, LLC (“FCR”), and as a Majority Managing Member of Green Mountain Glass, LLC (“GMG”), initiated a declaratory judgment action against GR Technologies, Inc. (“GRT”), Anthony C. Lame and Robert Cameron Billmyer (“the Defendants”) on June 8, 2007 to resolve issues raised by GRT as the minority member of GMG. The issues addressed in the action included exercise of management discretion, right to intellectual property, and other related disputes. The Defendants counterclaimed in May 2008, seeking unspecified damages on a variety of allegations including, among others, breach of contract, breach of fiduciary duty, fraud, tortious interference with business relations, induced infringement and other matters. Additionally, the Defendants filed a Derivative Action in Rutland Superior Court as a Managing Member of GMG on July 2, 2008 against several employees of the Company and its subsidiary, FCR, LLC, making similar allegations. On September 16, 2008, the Company filed a Motion for Summary Judgment, and a Proposed Order Decreeing Dissolution and Appointing a Special Master, alleging that the relationship of GRT and FCR in GMG is irretrievably broken in the Rutland Superior Court and subsequently in the Delaware Chancery Court. A hearing had been set by the Delaware Chancery Court for the second week of March 2010.
The parties agreed to submit this dispute to voluntary mediation in February 2010, and on February 11, 2010, the parties agreed to the terms of a Settlement Agreement. There was no cash component in the terms of the Settlement, and the company retained all interests in intellectual property developed in FCR’s name in
13
exchange for relinquishing its interests in GMG and a related venture. The parties have filed the necessary documentation to dismiss all litigations between the parties (including individual defendants) with prejudice, and have entered into complete releases of any and all claims among the parties.
New York Department of Labor Prevailing Wage Dispute
The Company has been involved in an inquiry by the New York Department of Labor (“DOL”) regarding the applicability of certain state “Prevailing Wage” laws pertaining to work being undertaken by the Company at certain landfill sites operated by the Company in New York State that are owned by municipalities (Chemung, Ontario and Clinton Counties). On August 21, 2009, the DOL issued a letter opinion with regard to cell construction and capping work and other activities at these landfills, concluding that: (1) the construction activity necessary for the recovery, use and sale of gases created by the landfill is not a public work project to which the Prevailing Wage Law applies; (2) cell construction and capping activities are public work where that work takes place on publicly owned lands in the furtherance of the operation of a publicly accessible landfill facility; (3) construction on lands acquired by Casella which adjoin a County-owned landfill are akin to a privately owned and operated landfill and would not be subject to the Prevailing Wage Law. The Company is negotiating with the DOL to resolve this matter and though a negotiated settlement appears more likely than not, the Company has not ruled out administrative or litigation relief. Any charge, excluding interest or penalties, incurred by the Company related to these claims will be capitalized as part of the related landfill asset, and amortized prospectively over the remaining life of the landfill as tons of waste are placed at each landfill site. The Company does not believe that the outcome of this matter will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Southbridge Landfill Site Assignment Appeal
On June 9, 2008, the Southbridge Board of Health (“Southbridge BOH”) issued a Decision and Statement of Findings pursuant to Massachusetts General Laws ch.111, §§150A and 150 A1/2 and 310 CMR 16.00 (“2008 Site Assignment”) granting the Company’s subsidiary, Southbridge Recycling and Disposal Park, Inc. (“SRD”), a minor modification to the existing site assignment for the Southbridge Sanitary Landfill (the “Landfill”). The 2008 Site Assignment allows SRD, subject to numerous conditions, to accept into the Landfill up to 405,000 tons of municipal solid waste per year without regard to geographic origin.
On or about July 14, 2008, the Sturbridge Board of Health (“Sturbridge BOH”), an abutting municipality to Southbridge, together with several 10-citizen groups, filed a complaint in Worcester County Superior Court contesting the 2008 Site Assignment (the “Appeal”). The Appeal names as defendants the Southbridge BOH and its individual members at the time of the 2008 Site Assignment, and SRD. On August 21, 2008, SRD reached a settlement with the Sturbridge BOH, pursuant to which SRD agreed to fund an escrow account to be controlled by the Sturbridge BOH, in the amount of $50. The Sturbridge BOH Appeal was formally withdrawn as to all parties on August 22, 2008.
On December 11, 2009, the Court dismissed the remaining plaintiffs’ complaint (by denying plaintiffs’ “motion for judgment on the pleadings”). Plaintiffs filed an appeal from this decision, which the Company and the Board of Health have filed a joint motion to dismiss based upon their contention that the appeal was filed late and is subject to dismissal as a matter of law. While it is too early to assess the outcome of the appellate action, SRD will continue to aggressively defend the appellate action.
Port of Albany, New York Project Development
Casella Albany Renewables, LLC (“CAR”), a wholly-owned subsidiary of Casella Renewable Systems, LLC, entered into an Option Agreement with Albany Renewable Energy, LLC (“ARE”) in September,
14
2008 (“Option Agreement”). In March 2008, ARE was the successful bidder to the Albany Port District Commission (“Port”) for the development of an ethanol facility to be located on a site owned by the Port (“Project”). ARE has entered into a lease agreement with the Port, and CAR has the option pursuant to the Option Agreement of entering into a sublease with ARE should CAR elect to become involved in the development of the Project.
On or about September 18, 2009, Empire State Ethanol & Energy, LLC (“Empire”), a putative member of a non-selected bidder for the Project, filed litigation in Albany County Supreme Court against the Port and certain of its officers, ARE and certain of its affiliates, and CAR and certain of its affiliates, seeking a declaratory judgment that the bidding process for the Project was flawed and an order finding the selection of ARE was illegal and requiring the Port to rebid the Project. Empire also moved on an expedited basis for a preliminary injunction in order to maintain the Project’s status quo until a hearing could be held on the merits of the declaratory judgment action. Oral arguments were held on the preliminary injunction motion on October 30, 2009.
On December 24, 2009, the Court denied Empire’s motion for injunctive relief, and issued a decision granting all defendants’ motions, and dismissing Empire’s complaint in its entirety. Empire has not timely appealed the Court’s decision.
Blue Mountain Recycling Class Action Litigation
In November 2008, a class action lawsuit was filed in United States District Court Eastern District of Pennsylvania against Blue Mountain Recycling, LLC (“BMR”) and the Company, alleging discriminatory hiring practices at BMR’s facility in Philadelphia. A companion complaint was filed in February 2009 with the Equal Employment Opportunity Commission. On November 12, 2009, following the successful and non-material resolution of the matter through a negotiated settlement and release of claims, the Court dismissed Plaintiffs’ action with prejudice. The court is retaining jurisdiction for two years to enforce the terms of the settlement. The federal Equal Employment Opportunity Commission and the Pennsylvania Human Relations Commission have also closed the cases filed by Plaintiffs.
CRMC Bethlehem, LLC Litigation
CRMC Bethlehem, LLC and Commonwealth Bethlehem Energy, LLC (collectively, “CRMC”), has filed claims in the US District Court for the District of New Hampshire against NCES. CRMC seeks declaratory and injunctive relief and damages. CRMC alleges that NCES has breached the terms of a Gas Lease and Easement Agreement by and between CRMC and NCES, entered into on September 10, 1998, as amended on March 1, 2000 (the “Gas Lease”). CRMC alleges that NCES has inappropriately interfered with CRMC rights pursuant to the Gas Lease to develop a landfill gas-to-energy project to be sited on the Landfill. NCES denies these allegations, and intends to vigorously defend against these claims. The Company does not believe that this matter will have a material adverse effect on the Company’s business, financial condition or results of operations or cash flows.
Other
The Company is a defendant in certain other lawsuits alleging various claims incurred in the ordinary course of business, none of which, either individually or in the aggregate, the Company believes are material to its financial condition, results of operations or cash flows.
The Company offers no prediction of the outcome of any of the proceedings or negotiations described above. The Company is vigorously defending each of these lawsuits and claims. However, there can be no guarantee the Company will prevail or that any judgments against the Company, if sustained on appeal,
15
will not have a material adverse effect on the Company’s business, financial condition or results of operations or cash flows.
(b) Environmental Liability
The Company is subject to liability for environmental damage, including personal injury and property damage, that its solid waste, recycling and power generation facilities may cause to neighboring property owners, particularly as a result of the contamination of drinking water sources or soil, possibly including damage resulting from conditions existing before the Company acquired the facilities. The Company may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants or hazardous substances if the Company or its predecessors arrange or arranged to transport, treat or dispose of those materials.
On December 20, 2000, the State of New York Department of Environmental Conservation (“DEC”) issued an Order on Consent (“Order”) which named Waste- Stream, Inc. (“WSI”), a Casella subsidiary, General Motors Corporation (“GM”) and Niagara Mohawk Power Corporation (“NiMo”) as Respondents. The Order required that the Respondents undertake certain work on a 25-acre scrap yard and solid waste transfer station owned by WSI, including the drafting of a Remedial Investigation and Feasibility Study (the “Study”). A draft of the Study was submitted to DEC in January 2009 (followed by a final Report in May 2009). The Study estimates that the undiscounted costs associated with implementing the preferred remedies will be approximately $10,219 and it is unlikely that any costs relating to onsite remediation will be incurred until fiscal year 2011. WSI is jointly and severally liable for the total cost to remediate but expected to be responsible for approximately 30% upon implementation of a cost-sharing agreement. Based on these estimates, the Company recorded an environmental remediation charge of $2,823 in third quarter of fiscal 2009. In the fourth quarter of fiscal year 2009, the Company recognized an additional charge of $1,532, representing an additional 15% of the estimated costs, in recognition of the deteriorating financial condition and eventual bankruptcy filing of GM. Such charges could be significantly higher if costs exceed estimates, one or more of the other responsible parties are not able to meet their obligation, or one or more of the other responsible parties declared bankruptcy. The Company inflates the cost in current dollars until the expected time of payment and discounts the cost to present value using an appropriate discount rate (average of 6.6%. in fiscal years 2009 and 2010). As of April 30, 2009 and January 31, 2010, the Company has recorded $4,018 and $4,163, respectively, related to this liability including the recognition of $57 and $168 of accretion expense in the three and nine months ended January 31, 2010.
7. STOCK-BASED COMPENSATION
In the nine months ended January 31, 2010, the Company granted a combination of restricted stock units and performance stock units under the 2006 Stock Incentive Plan (the “2006 Plan”) to certain employees. The stock units are subject to vesting, one half of which is based on the attainment by the Company of a targeted annual return on assets in fiscal year 2012 (performance stock units) and the other half of which vests based on continued employment over a three year period starting on the first anniversary of the grant (restricted stock grants). As of January 31, 2010, the performance stock units could result in the issuance of up to 1,136 shares of Class A Common Stock based on the attainment of a targeted annual return on assets in fiscal 2012 and the restricted stock could result in the issuance of up to 568 shares of Class A Common Stock based on vesting over a three year period starting on the first anniversary of the grant.
The initial grant date of these awards was June 11, 2009. Subsequent to the initial grant, the Company determined that due to a clerical error, the number of awards made on June 11, 2009 exceeded the number of shares that were available for issuance under the 2006 Plan. As a result, the Company asked officers and certain employees who received a performance stock unit award on June 11, 2009 and July 28, 2008
16
to agree to a termination of the agreements evidencing such awards. Upon stockholder approval on October 13, 2009 to increase the number of shares authorized for issuance under the 2006 Plan, the Company granted performance stock units under the 2006 Plan for the same number of shares and subject to the same terms as those awards that had been terminated.
The performance and restricted stock units were granted at an average grant date fair value of $2.73 per share. As of January 31, 2010 there were 3,543 Class A Common Stock equivalents authorized for future grant under the 2006 Plan inclusive of additional Class A Common Stock equivalents which were previously issued under the Company’s terminated plans, and which have become available for grant because such awards expired or otherwise resulted in shares not being issued.
On October 13, 2009, the Company granted 104 shares of restricted stock under the 2006 Plan to non-employee directors of the Company. These shares were issued at a grant date fair value of $2.89 and will vest in equal amounts over a three year period starting on the first anniversary of the grant date.
Stock options granted generally vest over a one to four year period from the date of grant and are granted at prices at least equal to the prevailing fair market value at the issue date. In general, options are issued with a life not to exceed ten years. Shares issued by the Company upon exercise of stock options are issued from the pool of authorized shares of Class A Common Stock.
A summary of stock option, restricted stock and restricted / performance stock unit activity for the nine months ended January 31, 2010 is as follows:
Stock Options
WeightedAverageExercisePrice
Restricted Stock - Restricted /PerformanceStock Units -Unvested (1)
Outstanding, April 30, 2009
3,522
11.88
275
Granted
1,304
Exercised
Class A Common Stock Issued
(34
Forfeited
(888
13.48
Outstanding, January 31, 2010
2,634
11.73
1,470
Exercisable, January 31, 2010
2,464
11.28
(1) Performance stock units are included at the 100% attainment level. Attainment of performance metrics at maximum levels could result in the issuance of an additional 672 shares of Class A Common Stock.
The Company recorded $410, $596, $1,309 and $1,550 of stock-based compensation expense related to stock options, performance stock units, restricted stock units and restricted stock during the three and nine months ended January 31, 2009 and 2010, respectively. The Company also recorded $19, $90, $74 and $177 of stock-based compensation expense for the Company’s Employee Stock Purchase Plan during the three and nine months ended January 31, 2009 and 2010, respectively.
Stock-based compensation expense is included in general and administration expenses in the consolidated statement of operations. The unrecognized stock-based compensation expense at January 31, 2010 related to unvested stock options and restricted stock units was $1,999, to be recognized over a weighted average period of 1.3 years. Maximum unrecognized stock-based compensation expense at January 31, 2010 related to performance stock units was $6,616, to be recognized over a weighted average period of 2.1 years subject to the attainment of performance metrics. The Company expects to recognize $1,498 of
17
expense related to performance stock units over the weighted average period based on expected metrics at January 31, 2010.
The Company’s calculations of stock-based compensation expense associated with stock options and the Company’s Employee Stock Purchase Plan for the three and nine months ended January 31, 2009 and 2010 were made using the Black-Scholes valuation model. The fair value of the Company’s stock option grants was estimated assuming no expected dividend yield and the following weighted average assumptions were used for the three and nine months ended January 31, 2009 and 2010:
Three Months EndedJanuary 31,
Nine Months EndedJanuary 31,
Stock Options:
Expected life
6.7 years
Risk-free interest rate
1.67%
1.74%
Expected volatility
36.80%
Stock Purchase Plan:
0.5 years
1.71%
0.18%
2.07%
36.11%
242.50%
36.36%
Expected life is calculated based on the weighted average historical life of the vested stock options, giving consideration to vesting schedules and historical exercise patterns. Risk-free interest rate is based on the U.S. treasury yield curve for the period of the expected life of the stock option. For stock options granted during the nine months ended January 31, 2010, expected volatility is calculated using the average of weekly historical volatility of the Company’s Class A Common Stock over the last six years.
The Black-Scholes valuation model requires extensive use of accounting judgment and financial estimation, including estimates of the expected term option holders will retain their vested stock options before exercising them, the estimated volatility of the Company’s Class A Common Stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the consolidated statements of operations.
8. EARNINGS PER SHARE
The following table sets forth the numerator and denominator used in the computation of earnings per share (“EPS”):
18
Three MonthsEnded January 31,
Nine MonthsEnded January 31,
Numerator:
Denominator:
Number of shares outstanding, end of period:
Class A common stock
24,651
24,944
Class B common stock
988
Unvested restricted stock
(122
Effect of weighted average shares outstanding during period
(33
(62
(92
(105
Weighted average number of common shares used in basic EPS
Impact of potentially dilutive securities:
Dilutive effect of options and restricted stock units
85
Weighted average number of common shares used in diluted EPS
For the three and nine months ended January 31, 2009, 3,848 and 3,813 Class A Common Shares related to options, warrants and restricted stock units, respectively, were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.
For the three and nine months ended January 31, 2010, 3,977 Class A Common Shares related to options and restricted stock units were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.
9. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive (loss) income included in the accompanying balance sheets consists of changes in the fair value of the Company’s interest rate derivatives and commodity hedge agreements. Also included in accumulated other comprehensive (loss) income is the change in fair value of certain securities classified as available for sale as well as the Company’s portion of the change in the fair value of commodity hedge agreements of the Company’s equity method investment, US GreenFiber, LLC (“GreenFiber”).
Comprehensive (loss) income for the three and nine months ended January 31, 2009 and 2010 is as follows:
Other comprehensive (loss) income
767
(2,056
6,729
(4,786
Comprehensive (loss) income
(3,050
(6,432
7,154
(13,491
The components of other comprehensive (loss) income for the three and nine months ended January 31, 2009 and 2010 are shown as follows:
19
Three Months Ended January 31,
Gross
Taxeffect
Net of Tax
Changes in fair value of marketable securities during the period
277
96
181
Change in fair value of interest rate derivatives and commodity hedges during period
2,667
1,074
1,593
(1,801
Reclassification to earnings for interest rate derivatives and commodity hedge contracts
(1,686
(679
(1,007
(439
(177
(262
1,258
491
(2,233
Nine Months Ended January 31,
91
31
60
9,785
3,939
5,846
(3,391
1,394
571
823
(2,377
(957
(1,420
11,270
4,541
(5,743
The Company’s strategy to hedge against fluctuations in the commodity prices of recycled paper is to enter into hedges to mitigate the variability in cash flows generated from the sales of recycled paper at floating prices, resulting in a fixed price being received from these sales. The Company has evaluated these hedges and believes that these instruments qualify for hedge accounting pursuant to derivative and hedging guidance. Designated as effective cash flow hedges, the changes in the fair value of these derivatives are recognized in other comprehensive (loss) income until the hedged item is settled and recognized as part of commodity revenue. The Company recognizes all derivatives on the balance sheet at fair value.
At January 31, 2010, the Company was party to six commodity hedge contracts for old corrugated cardboard (“OCC”) and eight commodity hedge contracts for old newsprint (“ONP”) as follows:
Inception Date Range
CommodityType
Contract Date Range
MonthlyNotional TonRange
Fixed PricePer TonReceivedRange
December 2007 - September 2009
OCC
April 2008 - June 2011
75 - 750
$85 - $127
June 2007 - September 2009
ONP
June 2007 - December 2011
400 - 1500
If the price per short ton of the underlying commodity as reported on the Official Board Market is less than the contract price per short ton, the Company receives the difference between the average price and the contract price (multiplied by the notional tons) from the respective counter-party. If the price of the commodity exceeds the contract price per short ton, the Company pays the calculated difference to the counter-party.
The fair values of the commodity hedges are obtained or derived from third-party counter-parties and are determined using valuation models with assumptions about market prices for commodities being based on those in underlying active markets. The gross carrying value of the Company’s commodity hedges was $1,164 at January 31, 2010 with $600 recorded in other current assets and $564 recorded in other non-current assets in the Company’s Consolidated Balance Sheets. In accordance with derivative and hedging
guidance, the offset to this, net of taxes of $2,328, is recorded to accumulated other comprehensive (loss) income.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
On May 1, 2008, the Company adopted FASB guidance relating to financial assets and liabilities that are being measured and reported at fair value on a recurring basis.
This guidance provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The Company’s financial assets and liabilities recorded at fair value on a recurring basis include restricted assets and derivative instruments. The Company’s derivative instruments include commodity hedges. As of January 31, 2010, the Company had no interest rate derivatives. The Company uses commodity hedges to hedge against fluctuations in commodity pricing. The fair value of these hedges is based on futures pricing in the underlying commodities.
The Company uses valuation techniques that maximize the use of market prices and observable inputs and minimize the use of unobservable inputs. In measuring the fair value of the Company’s financial assets and liabilities, the Company relies on market data or assumptions that the Company believes market participants would use in pricing an asset or liability. As of January 31, 2010, the Company’s assets that are measured at fair value on a recurring basis included the following:
Fair Value Measurement at January 31, 2010 Using:
Quoted Prices inActive Markets forIdentical Assets(Level 1)
Significant OtherObservable Inputs(Level 2)
Significant UnobservableInputs (Level 3)
Assets:
Commodity derivatives
37
During the three and nine months ended January 31, 2010 there were no nonrecurring fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis subsequent to initial measurement.
The Company’s financial instruments include cash and cash equivalents, trade receivables, investments in closure trust funds and trade payables. The carrying values of these financial instruments approximate their respective fair values. At January 31, 2010, the fair market value of the Company’s fixed rate debt including the Second Lien Notes and the 9.75% Senior Subordinated Notes due February 2013 was approximately $389,813 and the carrying value was $372,912. At January 31, 2010, the fair market value of the Company’s Senior Secured Credit Facility which includes the New Revolver and New Term Loan was approximately $168,497 and the carrying value was $161,414.
11. DISCONTINUED OPERATIONS
The Company completed the divestiture of its FCR Greenville operation in the quarter ended July 31, 2008 for cash proceeds of $670. The Company recorded a loss on disposal of discontinued operations (net of tax) of $34 for the nine months ended January 31, 2009.
The Company completed the divestiture of its FCR Great Northern Recycling Canadian operation in the quarter ended January 31, 2010 for a settlement amount of $400 in cash. The Company had previously accounted for this transaction as an asset under contractual obligation (See Note 14). This resulted in a gain on disposal of discontinued operations (net of tax) amounting to $0, $239, $54 and $280 for the three and nine months ended January 31, 2009 and 2010.
The Company’s contract with its FCR Cape May operation expired in the quarter ended January 31, 2010. Accordingly, this operation has been treated as a discontinued operation.
The operating results of these operations for the three and nine months ended January 31, 2009 and 2010 have been reclassified from continuing to discontinued operations in the accompanying consolidated financial statements. Revenues and income (loss) before income taxes attributable to discontinued operations for the three and nine months ended January 31, 2009 and 2010 were as follows:
207
274
2,202
1,557
Income (loss) before income taxes
(107
(21
668
356
The Company has recorded liabilities associated with previous divestitures amounting to approximately $427 at January 31, 2010.
The Company allocates interest expense to discontinued operations. The Company has also eliminated certain immaterial inter-company activity associated with discontinued operations.
12. SEGMENT REPORTING
The Company manages and evaluates its solid waste operations on a geographic basis through three regions, designated as the Eastern, Central and Western regions, which include a full range of solid waste services including collection, transfer, recycling and disposal of non-hazardous solid waste. Solid waste operations also includes the Company’s power generation operations. The Company’s revenues in the FCR recycling segment are derived primarily from the processing and recycling and sale of paper, metals, aluminum, plastics and glass. Ancillary operations, major customer accounts, discontinued operations and earnings from equity method investments are included in Other.
22
Three Months Ended January 31, 2009 (1)
Segment
Outsiderevenues
Inter-companyrevenue
Depreciation andamortization
Operatingincome (loss)
Total assets
Eastern
44,139
8,713
7,765
738
295,552
Central
25,906
12,006
3,689
3,113
158,243
Western
23,000
5,778
3,555
680
181,255
FCR recycling
19,150
234
1,654
(1,842
108,542
8,750
332
(681
101,560
Eliminations
(26,731
845,152
Three Months Ended January 31, 2010
43,600
10,807
5,269
2,120
229,623
25,532
9,488
3,270
2,932
158,100
23,903
5,794
3,827
3,997
177,207
23,607
23
1,957
2,941
108,611
9,414
693
(818
79,536
(26,112
Nine Months Ended January 31, 2009 (1)
152,359
35,351
26,175
2,178
91,315
42,503
12,225
12,528
83,928
18,980
11,644
12,414
FCR
80,702
619
4,718
7,272
26,369
1,134
(1,710
(97,453
Nine Months Ended January 31, 2010
136,845
32,829
23,682
1,956
84,154
32,365
10,434
12,705
74,176
17,941
11,350
13,772
67,531
300
5,818
7,369
28,901
1,533
(1,786
(83,435
(1) Segment data as of and for the three and nine months ended January 31, 2009 has been revised to reflect a change in the Company’s internal reporting structure and a realignment of certain operations between segments.
Sources of the Company’s total revenue are as follows:
Collection
50,748
49,127
169,466
155,588
Disposal
23,181
23,992
89,232
82,367
Power generation
7,291
7,314
21,390
20,842
Processing and recycling
11,825
12,602
47,514
36,378
Solid waste operations
93,045
93,035
327,602
295,175
Major accounts
Total revenues
The Company has revised its table of revenue by source to more closely align the types of revenue generated by its operating segments. Amounts for the three and nine months ended January 31, 2009 have been revised to conform to this presentation.
13. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company entered into an agreement in July 2000 with Louisiana-Pacific Corporation (“LP”) to combine their respective cellulose insulation businesses into a single operating entity, GreenFiber, under a joint venture agreement effective August 1, 2000. The Company’s investment in GreenFiber amounted to $26,723 and $27,310 at April 30, 2009 and January 31, 2010, respectively. The Company accounts for its 50% ownership in GreenFiber using the equity method of accounting.
Summarized financial information for GreenFiber is as follows:
April 30,2009
January31, 2010
Current assets
22,326
20,439
Noncurrent assets
63,529
59,163
Current liabilities
14,576
15,093
Noncurrent liabilities
16,324
8,964
36,424
32,528
102,153
82,545
Gross profit
8,743
8,056
17,817
19,747
525
146
(3,822
(2,610
The Company also has a 10.6% interest in RecycleRewards, Inc., a company that markets an incentive based recycling service, and a 19.9% interest in Evergreen National Indemnity Company, a surety company which provides surety bonds to secure contractual performance for municipal solid waste collection contracts and landfill closure and post-closure obligations. The Company’s investment in these interests amounted to $15,095 at April 30, 2009 and January 31, 2010. The Company accounts for these investments under the cost method of accounting.
24
14. NET ASSETS UNDER CONTRACTUAL OBLIGATION
Effective June 30, 2003, the Company transferred its domestic brokerage operations, as well as a commercial recycling business to former employees who had been responsible for managing those businesses. Consideration for the transaction was in the form of two notes receivable amounting up to $6,925. These notes are payable within twelve years of the anniversary date of the transaction, to the extent of free cash flow generated from the operations.
The Company has not accounted for this transaction as a sale based on an assessment that the risks and other incidents of ownership have not sufficiently transferred to the buyers. The net assets of the operation were disclosed in the balance sheet as “net assets under contractual obligation”, and were being reduced as payments are made. During the three and nine months ended January 31, 2009 and 2010, the Company recognized income on the transactions in the amount of $0, $0, $25 and $81, respectively, as payments received on the notes receivable exceeded the balance of the net assets under contractual obligation. Minimum amounts owed to the Company under these notes amounted to $1,469 and $1,388 at April 30, 2009 and January 31, 2010, respectively.
Effective August 1, 2005, the Company transferred a certain Canadian recycling operation to a former employee who had been responsible for managing that business. Consideration for this transaction was in the form of a note receivable amounting up to $1,313, which was payable within six years of the anniversary date of the transaction to the extent of free cash flow generated from the operations. The Company had accounted for this transaction similar to the transaction above since the risks and other incidents of ownership had not sufficiently transferred to the buyers. The Company completed the sale of this operation in the quarter ended January 31, 2010 as a result of the payment of amounts due under the note. Accordingly, all proceeds received on the notes receivable that exceeded the balance of the net assets under contractual obligation have been reclassified from continuing to discontinued operations (See Note 11).
15. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company’s Senior Subordinated Notes due 2013 and Second Lien Notes are guaranteed jointly and severally, fully and unconditionally, by the Company’s significant wholly-owned subsidiaries. The Parent is the issuer and a non-guarantor of the senior subordinated notes. The information which follows presents the condensed consolidating financial position as of April 30, 2009 and January 31, 2010, and the condensed consolidating results of operations for the three and nine months ended January 31, 2009 and 2010 and the condensed consolidating statements of cash flows for the nine months ended January 31, 2009 and 2010 of (a) the Parent company only, (b) the combined guarantors (“the Guarantors”), each of which is 100% wholly-owned by the Parent, (c) the combined non-guarantors (“the Non-Guarantors”), (d) eliminating entries and (e) the Company on a consolidated basis.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 30, 2009
Parent
Guarantors
Non-Guarantors
Elimination
Consolidated
873
965
432
Accounts receivable - trade, net of allowance for doubtful accounts
51,293
Deferred taxes
8,718
8,788
17,506
15,613
61,122
Property, plant and equipment, net of accumulated depreciation and amortization
2,922
487,438
Investment in subsidiaries
(49,753
49,753
26,587
32,828
120
(1,932
57,603
(19,816
646,102
47,821
Intercompany receivable
647,299
(641,415
(7,816
1,932
643,096
65,809
(7,696
Non - Guarantors
1,109
609
3,070
31,542
497
3,683
6,402
Accrued closure and post-closure costs, current portion
Other current liabilities
13,126
9,209
24,204
52,818
546,145
1,000
3,753
41,723
45,507
Authorized - 100,000,000 shares, $0.01 par value; issued and outstanding - 24,679,000 shares
100
(100
Authorized - 1,000,000 shares, $0.01 par value, 10 votes per share, issued and outstanding - 988,000 shares
Accumulated other comprehensive income (loss)
(1,494
46,392
1,679
(48,071
(87,011
(9,419
96,430
(42,013
(7,740
26
AS OF JANUARY 31, 2010
(10
2,181
56,662
9,643
11,449
21,092
9,647
70,368
3,359
479,208
(27,019
27,019
33,741
32,637
64,566
10,081
637,774
25,087
633,044
(627,150
(7,826
652,772
80,992
(7,706
4,826
26,574
1
10,892
47
15,859
13,555
29,437
31,577
48,962
558,331
847
3,362
50,440
32
53,834
Authorized - 100,000,000 shares, $0.01 par value; issued and outstanding - 24,944,000 shares
208
(208
(65,957
(9,441
75,398
(19,257
(7,762
27
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2009
1,694
(1,694
85,126
1,822
(19
13,809
95
272
16,723
Development project cost
350
(370
603
118,111
1,917
Operating income (loss)
(603
2,834
(223
(7,745
(41
(130
7,738
9,683
7,828
(7,738
(Income) loss from equity method investments
4,606
(4,606
(206
(190
Other expense/(income), net
6,338
7,334
(6,941
(4,500
(93
Benefit for income taxes
(3,124
(50
(43
Discontinued operations:
Loss from discontinued operations, net
Net (loss) income applicable to common stockholders
(4,563
THREE MONTHS ENDED JANUARY 31, 2010
(1
84,760
(74
15,169
459
14,557
384
114,486
(384
11,570
(14
(8,131
8,125
14,654
8,359
(8,125
(3,703
3,703
(7
(188
2,813
8,079
(3,197
3,491
Provision for income taxes
3,717
28
NINE MONTHS ENDED JANUARY 31, 2009
5,081
(5,081
245
292,212
5,453
(152
50,410
205
921
54,975
1,364
400,050
5,658
(1,364
(577
(23,205
(109
(293
23,162
30,305
23,124
(23,162
(10,155
10,155
(248
(301
(3,303
24,625
Income (loss) from continuing operations before income taxes and discontinued operations
1,939
9,998
(284
1,514
Income (loss) from continuing operations before discontinued operations
(259
Loss on disposal of discontinued operations, net
Net income (loss) applicable to common stockholders
10,414
NINE MONTHS ENDED JANUARY 31, 2010
258,710
197
45,842
45
856
51,961
1,058
356,513
(1,058
35,094
(23,349
(68
23,331
38,890
24,181
(23,331
(10,418
10,418
(218
(269
5,416
25,149
(6,474
9,945
10,438
29
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Net Cash Provided by (Used in) Operating Activities
(14,775
65,168
(244
Additions to property, plant and equipment- growth
(1,351
(38,064
(2,396
842
(1,554
(3,747
(53,314
(99,873
(686
1,619
Intercompany borrowings
10,538
(10,908
370
Net Cash Provided by (Used in) Financing Activities
17,684
(11,594
Net increase (decrease) in cash and cash equivalents
(838
880
126
1,260
1,306
248
422
2,186
374
(1,688
49,306
(2
(1,758
(34,588
61
2,843
(1,697
(42,582
(438,974
(1,470
Deferred financing costs
4,644
(4,646
2,502
(6,116
Provided by Operating Activities
Provided by Investing Activities
(883
1,216
16. SUBSEQUENT EVENT
Effective February 18, 2010, the Company completed the sale of its domestic brokerage operations upon receipt of cash proceeds amounting to $1,350. Effective June 30, 2003, the Company transferred this operation to former employees who had been responsible for managing those businesses. The Company had not accounted for this transaction as a divestiture since the risks and other incidents of ownership had not sufficiently transferred to the buyers (See Note 14). All proceeds received on the notes receivable that exceeded the balance of the net assets under contractual obligation will be reclassified from continuing to discontinued operations.
30
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included under Item 1. In addition, reference should be made to the Company’s audited Consolidated Financial Statements and Notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company’s Annual Report on Form 10-K/A for the year ended April 30, 2009.
This Quarterly Report on Form 10-Q and, in particular, this Management’s Discussion and Analysis may contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”), including:
· expected future revenues, operations, expenditures and cash needs;
· expectations as to fluctuations in the commodity pricing of the Company’s recyclables, increases in landfill tipping fees and fuel costs, and general economic and weather conditions;
· projected future obligations related to capping, closure and post-closure costs of the Company’s existing landfills and any disposal facilities which the Company may own or operate in the future;
· the Company’s ability to use its net operating losses and tax positions;
· the projected development of additional disposal capacity or expectations regarding permits of existing capacity;
· the recoverability or impairment of any of the Company’s assets or goodwill;
· estimates of the potential markets for the Company’s products and services, including the anticipated drivers for future growth;
· sales and marketing plans or price and volume assumptions;
· the outcome of any legal or permitting matter;
· potential business combinations or divestitures; and
· projected improvements to the Company’s infrastructure and impact of such improvements on the Company’s business and operations.
In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. Forward-looking statements can be identified by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates as well as management’s beliefs and assumptions, and should be read in conjunction with the Company’s consolidated financial statements and notes to consolidated financial statements included in this report. The Company cannot guarantee that it will actually achieve the plans, intentions or expectations disclosed in the forward-looking statements made. The occurrence of the events described and the achievement of the expected results, depends on many events, some or all of which are not predictable or within the Company’s control. Actual results may differ materially from those set forth in forward-looking statements.
There are a number of important risks and uncertainties that could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those detailed in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K/A for the year ended April 30, 2009. The Company does not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by law.
Company Overview
Founded in 1975 with a single truck, Casella Waste Systems, Inc. is a vertically-integrated company. The Company provides resource management expertise and services to residential, commercial, municipal, and industrial customers, primarily in the areas of solid waste collection, transfer, disposal and recycling services. The Company operates in 14 states— including vertically integrated solid waste operations in Vermont, New Hampshire, New York, Massachusetts and Maine; and stand alone materials processing facilities in Connecticut, Pennsylvania, New Jersey, North Carolina, Tennessee, Georgia, Florida, Michigan and Wisconsin.
As of February 28, 2010, the Company owned and/or operated 32 solid waste collection operations, 31 transfer stations, 35 recycling facilities, eight Subtitle D landfills, one landfill permitted to accept construction and demolition materials, and one waste-to-energy facility. In addition, the Company holds a 50% interest in US Green Fiber, LLC (“GreenFiber”), a joint venture that manufactures, markets and sells cellulose insulation made from recycled fiber. The Company also holds a 10.6% interest in RecycleRewards, Inc. (“RecycleRewards”), a company that markets an incentive based recycling service, and a 19.9% interest in Evergreen National Indemnity Company (“Evergreen”), a surety company which provides surety bonds to secure contractual performance for municipal solid waste collection contracts and landfill closure and post-closure obligations.
Refinancing
On July 9, 2009, the Company completed (i) the refinancing of its existing senior credit facility with a senior first lien credit facility (the “Senior Secured Credit Facility”), consisting of a $177.5 million revolving credit facility and a $130.0 million aggregate principal term loan and (ii) the placement of $180.0 million aggregate principal amount of 11% senior second lien notes due 2014 (the “Second Lien Notes”). The net proceeds from the Senior Secured Credit Facility and from the Second Lien Notes offering were used to refinance the borrowings under the $525.0 million senior credit facility due April 2010.
Operating Results
Revenue and operating income (loss) based on the Company’s segments for the three months ended January 31, 2009 and 2010 are as follows (in millions):
Operating Income (Loss)
44.1
43.6
0.7
2.1
25.9
25.5
3.1
2.9
23.0
23.9
4.0
Solid Waste Operations
93.0
4.5
9.0
19.2
23.6
(1.8
8.7
9.5
(0.7
120.9
126.1
2.0
11.2
For the quarter ended January 31, 2010, the Company reported revenues of $126.1 million, an increase of $5.2 million, or 4.2%, from $120.9 million for the quarter ended January 31, 2009. As a percentage of total solid waste revenues, including the Company’s major accounts program, solid waste revenues increased 0.6%, with higher collection, disposal, processing and recycling volumes accounting for 0.4% of the increase and 1.3% of the increase from the positive effect of price increases. These increases were
partially offset by the negative effect of commodity prices and volumes of 0.2% and 0.9% from lower fuel recovery surcharges. As a percentage of total FCR recycling revenues, FCR revenues increased 23.3%, with 24.6% coming from higher commodity prices offset by 1.3% from lower volumes in the quarter. The total increase in FCR recycling revenues was partially offset by decreased tipping fee revenue, lower revenue share payments and the negative effect of commodity hedge contracts, which reduce the impact of pricing fluctuations on a portion of FCR’s fiber volumes.
Operating income for the quarter ended January 31, 2010 was $11.2 million compared to $2.0 million in the prior year comparable period and increased as a percentage of revenue to 8.9% from 1.7%. FCR recycling operating income increased $4.7 million compared to the prior year period as higher revenues, due to the impact of higher commodity prices, more than offset an increase in purchased material costs. Western region operating income increased $3.3 million compared to the prior year period due the impact of recording an environmental remediation charge of $2.8 million associated with the Company’s Potsdam location in the quarter ended January 31, 2009.
The Company recorded a net loss of $4.4 million for the quarter ended January 31, 2010 compared to a net loss of $3.8 million in the prior year. Higher operating income was more than offset by increased interest expense of $5.1 million compared to the quarter ended January 31, 2009 due to higher interest rates associated with the Company’s new capital structure as discussed above along with increased tax provision of $4.4 million due mainly to the Company changing its assessment of the realizability of deferred tax assets in the fourth quarter of fiscal year 2009.
Divestitures
The Company completed the divestiture of its FCR Greenville operation in the quarter ended July 31, 2008 for cash proceeds of $0.7 million. The Company recorded a loss on disposal of discontinued operations (net of tax) of $0.03 million.
The Company completed the divestiture of its FCR Great Northern Recycling Canadian operation in the quarter ended January 31, 2010 for a settlement amount of $400 in cash. The Company had previously accounted for this transaction as an asset under contractual obligation (See Note 14 of Notes to Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q). This resulted in a gain on disposal of discontinued operations (net of tax) amounting to $0, $0.2 million, $.05 million and $0.3 million for the three and nine months ended January 31, 2009 and 2010.
The operating results of these operations for the three and nine months ended January 31, 2009 and 2010 have been reclassified from continuing to discontinued operations in the accompanying consolidated financial statements. Revenues and income (loss) before income taxes attributable to discontinued operations for the three and nine months ended January 31, 2009 and 2010 were as follows (in millions):
0.2
0.3
2.2
1.6
(0.1
(0.02
0.4
33
Critical Accounting Policies and Estimates
The preparation of the Company’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and assumptions which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of its evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. The Company’s significant accounting policies are more fully discussed in Item 7 of the Company’s Annual Report on Form 10-K/A for the year ended April 30, 2009.
For a description of the new accounting standards adopted that affect the Company, see Note 1 to the Company’s consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
General
The Company’s revenues in our Eastern, Central and Western regions are attributable primarily to fees charged to customers for solid waste disposal and collection, landfill, landfill gas-to energy, waste-to-energy, transfer, as well as processing and recycling services. The Company derives a substantial portion of its collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of the Company’s residential collection services are performed on a subscription basis with individual households. Landfill, waste-to-energy facility and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at the Company’s landfill facilities and transfer stations. Recycling revenues, which are included in FCR recycling and the Central and Western regions, consist of revenues from the sale of recyclable commodities and operations and maintenance contracts of recycling facilities for municipal customers. The Company also generates and sells electricity under a contract at our waste-to-energy facility and at certain of its landfill facilities.
GreenFiber’s business is conducted through a 50/50 joint venture with Louisiana-Pacific Corporation, and accordingly, the Company recognizes half of the joint venture’s net income on the equity method in its results of operations. The Company’s investments in RecycleRewards and Evergreen are accounted under the cost method of accounting. Also, in the “Other” segment, the Company has ancillary revenues, including major customer accounts.
The Company’s revenues are shown net of inter-company eliminations. The Company typically establishes its inter-company transfer pricing based upon prevailing market rates. The table below shows, for the periods indicated, the percentages and dollars (in millions) of revenue attributable to services provided.
34
50.7
42.0
%
49.1
39.0
169.5
155.6
39.7
23.2
24.0
19.0
89.2
20.5
82.4
21.0
7.3
6.0
5.8
21.4
4.9
20.8
5.3
11.8
9.8
12.6
10.0
47.5
10.9
36.4
9.3
77.0
73.8
327.6
75.3
295.2
7.2
7.5
26.3
6.1
28.9
15.8
18.7
80.7
18.6
67.5
17.2
100.0
434.6
391.6
Solid waste operations revenues decreased as a percentage of total revenues in the three months ended January 31, 2010 compared to the same period in the prior year mainly due to the decrease in collection revenues as a result of lower volumes, higher revenues from Major accounts and FCR recycling, offset by the positive effect of collection price increases. The dollar decrease in collection revenues in the three and nine months ended January 31, 2010 compared to the prior year is primarily due to lower volumes, partially offset by collection price increases. The dollar decrease in disposal in the nine months ended January 31, 2010 is related to lower prices and volumes. Processing and recycling revenues were higher in the three months ended January 31, 2010 due to improvements in pricing. Processing and recycling revenues were lower in the nine months ended January 31, 2010 due to lower prices and volumes. FCR recycling revenues were higher in the three months ended January 31, 2010 primarily due to commodity price increases partially offset by lower volumes. FCR recycling revenues were lower in the nine months ended January 31, 2010 due to lower commodity prices and volumes.
Operating Expenses
Cost of operations includes labor, tipping fees paid to third-party disposal facilities, fuel, maintenance and repair of vehicles and equipment, worker’s compensation and vehicle insurance, the cost of purchasing materials to be recycled, third party transportation expense, district and state taxes, host community fees and royalties. Cost of operations also includes accretion expense related to landfill capping, closure and post closure, leachate treatment and disposal costs and depletion of landfill operating lease obligations.
General and administration expenses include management, clerical and administrative compensation and overhead, professional services and costs associated with marketing, sales force and community relations efforts.
Depreciation and amortization expense includes depreciation of fixed assets over the estimated useful life of the assets using the straight-line method, amortization of landfill airspace assets under the units-of-consumption method, and the amortization of intangible assets (other than goodwill) using the straight-line method.
The following table sets forth for the periods indicated the percentage relationship that certain items from the Company’s consolidated financial statements bear to revenues.
35
Nine Months EndedOctober 31,
70.5
67.2
67.4
66.1
11.5
12.0
11.6
14.1
11.9
12.9
13.5
2.3
0.0
0.6
8.9
8.6
Interest expense, net
7.9
6.9
10.1
-0.2
0.1
Other income, net
-0.3
-0.1
-2.6
0.9
(Loss) income before discontinued operations
-3.2
-3.7
-2.4
Three months ended January 31, 2010 versus January 31, 2009
Revenues - Revenues increased $5.2 million, or 4.2%, to $126.1 million in the quarter ended January 31, 2010 from $120.9 million in the quarter ended January 31, 2009. Solid waste revenues, including the Company’s major accounts program, increased $0.7 million, with $0.4 million coming from solid waste volume increases, $2.0 million from higher collection prices and $0.4 million coming from higher processing and recycling prices. These increases were partially offset by lower disposal prices amounting to $1.0 million, $0.2 from lower commodity price and volume and declines in fuel recovery fees of $0.9 million. FCR recycling revenues increased $4.5 million mainly due to sharp increases in commodity prices offset slightly by lower volumes.
Cost of operations - Cost of operations decreased $0.5 million, or 0.5%, to $84.8 million in the quarter ended January 31, 2010 from $85.3 million in the quarter ended January 31, 2009 and decreased as a percentage of revenue between periods to 67.2% from 70.5%. The dollar decrease in cost of operations is attributable to a decrease in direct labor costs in the solid waste segments.
General and administration - General and administration expenses increased $1.2 million, or 8.6%, to $15.1 million in the quarter ended January 31, 2010 from $13.9 million in the quarter ended January 31, 2009. The increase in general and administration expenses is primarily from higher incentive compensation costs, offset by lower salary, legal, bad debt and consulting expenses. General and administration expenses as a percentage of revenues increased to 12.0% in the quarter ended January 31, 2010 from 11.5% in the quarter ended January 31, 2009.
Depreciation and amortization - Depreciation and amortization expense decreased $2.0 million, or 11.8%, to $15.0 million in the quarter ended January 31, 2010 from $17.0 million in the quarter ended January 31, 2009. Landfill amortization expense decreased by $2.0 million in the quarter ended January 31, 2010 associated with the planned closure of the Pine Tree landfill which ceased operations in the quarter ended January 31, 2010. Depreciation expense was relatively flat between periods. Depreciation and amortization expense as a percentage of revenue decreased to 11.9% in the quarter ended January 31, 2010 from 14.1% in the quarter ended January 31, 2009.
Environmental remediation charge — During the quarter ended January 31, 2009, the Company recorded an environmental remediation charge of $2.8 million for the estimated cost of its share of work associated
36
with a consent order issued by the State of New York to remediate the scrap yard and solid waste transfer station owned by Waste-Stream, Inc., a subsidiary of the Company.
Interest expense, net - Net interest expense increased $5.1 million, or 52.0%, to $14.9 million in the quarter ended January 31, 2010 from $9.8 million in the quarter ended January 31, 2009. This increase is primarily attributable to higher average interest rates associated with the Company’s new capital structure which was put in place on July 9, 2009. Net interest expense, as a percentage of revenues, increased to 11.8% in the quarter ended January 31, 2010 from 7.9% in the quarter ended January 31, 2009.
Loss (income) from equity method investments - The income from equity method investments in the quarter ended January 31, 2010 is attributable to the Company’s 50% joint venture interest in GreenFiber. GreenFiber reported net income for the quarter ended January 31, 2010, of which the Company’s share was $0.1 million, compared to net income in the quarter ended January 31, 2009, of which the Company’s share was $0.3 million.
Provision (benefit) for income taxes — Provision for income taxes increased $4.4 million to $1.2 million for the quarter ended January 31, 2010 from ($3.2) million for the quarter ended January 31, 2009. The effective tax rate changed to (34.4%) for the quarter ended January 31, 2010 from 45.8% in the quarter ended January 31, 2009. The rate variance between the periods is due mainly to the Company’s change in its assessment of the realizability of deferred tax assets in the fourth quarter of fiscal year 2009. As a result of this change in assessment, the Company is no longer providing a tax benefit for its current operating losses. The change in the effective tax rate between periods is primarily a result of an increase in the valuation allowance related to the book loss projected for the year and the provision of deferred tax liabilities related to indefinite lived intangible asset amortization for tax purposes.
Nine Months Ended January 31, 2010 versus January 31, 2009
Revenues - Revenues decreased $43.1 million, or 9.9%, to $391.6 million in the nine months ended January 31, 2010 from $434.7 million in the nine months ended January 31, 2009. Solid waste revenues, including the Company’s major accounts program, decreased $29.9 million, with $20.2 million coming from solid waste volume decreases, $7.9 million from lower fuel recovery fees, $2.6 million from lower disposal prices, and $8.2 million from lower commodity prices and volumes within the solid waste group. These decreases were partially offset by price increases in the Company’s collection, processing and recycling operations of $7.8 million, major accounts price increases of $0.4 and the rollover effect of acquisitions of $0.8 million. FCR recycling revenues decreased $13.2 million mainly due to sharp declines in commodity prices and to a lesser extent, lower volumes.
Cost of operations - Cost of operations decreased $34.1 million, or 11.6%, to $258.7 million in the nine months ended January 31, 2010 from $292.8 million in the nine months ended January 31, 2009 and decreased as a percentage of revenue between periods to 66.1% from 67.4%. The dollar decrease in cost of operations is attributable to a decrease in the cost of purchased materials associated with lower FCR recycling revenues as well as lower fuel costs, vehicle maintenance costs and direct labor costs in the solid waste segments partially offset by a benefit in the prior year period of $0.8 million related to the reimbursement from the Town of Southbridge for previously paid and expensed closure and post closure costs at the Southbridge landfill site in the Eastern region.
General and administration - General and administration expenses decreased $4.4 million, or 8.7%, to $46.1 million in the nine months ended January 31, 2010 from $50.5 million in the nine months ended January 31, 2009. The decrease in general and administration expenses is primarily due to lower expense associated with reduced salary, travel, legal, bad debt and consulting expenses. These reductions were partially offset by higher incentive compensation costs in the nine months ended January 31, 2010.
General and administration expenses as a percentage of revenues increased slightly to 11.8% in the nine months ended January 31, 2010 from 11.6% in the nine months ended January 31, 2009.
Environmental remediation charge — During the nine months ended January 31, 2009, the Company recorded an environmental remediation charge of $2.8 million for the estimated cost of its share of work associated with a consent order issued by the State of New York to remediate the scrap yard and solid waste transfer station owned by Waste-Stream, Inc., a subsidiary of the Company.
Depreciation and amortization - Depreciation and amortization expense decreased $3.1 million, or 5.5%, to $52.8 million in the nine months ended January 31, 2010 from $55.9 million in the nine months ended January 31, 2009. Compared to the prior year period, landfill amortization expense was lower by $3.6 million due to the closure of the Colebrook facility as well as lower volumes at other landfill sites. Depreciation expense increased between periods by $0.5 million, primarily due to the Company’s landfill energy projects and investments in FCR recycling single stream projects. Depreciation and amortization expense as a percentage of revenue increased to 13.5% in the nine months ended January 31, 2010 from 12.9% in the nine months ended January 31, 2009 due to revenue declines.
Interest expense, net - Net interest expense increased $9.4 million, or 31.0%, to $39.7 million in the nine months ended January 31, 2010 from $30.3 million in the nine months ended January 31, 2009. This increase is primarily attributable to higher average interest rates associated with the Company’s new capital structure which was put in place on July 9, 2009. Net interest expense, as a percentage of revenues, increased to 10.1% in the nine months ended January 31, 2010 from 6.9% in the nine months ended January 31, 2009.
Loss from equity method investments - The loss from equity method investments in the nine months ended January 31, 2010 is attributable to the Company’s 50% joint venture interest in GreenFiber. GreenFiber reported a loss for the nine months ended January 31, 2010, of which the Company’s share was $1.3 million, compared to a loss in the nine months ended January 31, 2009, of which the Company’s share was $1.9 million.
Loss on debt modification - The loss in the nine months ended January 31, 2010 of $0.5 million is due to the write-off of unamortized financing costs associated with the former senior credit facility, which was amended in the quarter ended July 31, 2009.
Provision (benefit) for income taxes —Provision for income taxes increased $0.7 million in the nine months ended January 31, 2010 to $2.2 million from $1.5 million in the nine months ended January 31, 2009. The effective tax rate changed to (32.0%) for the nine months ended January 31, 2010 from 99.4% in the nine months ended January 31, 2009. The rate variance between the periods is due mainly to the Company changing its assessment of the realizability of deferred tax assets in the fourth quarter of fiscal year 2009. The provision for income taxes for the nine months ended January 31, 2010 includes $2.1 million in deferred tax provision, primarily related to an increase in the valuation allowance against deferred tax assets, and $0.1 million in current tax provision. The deferred tax provision for the current period and the change in the effective tax rate between periods are primarily a result of an increase in the valuation allowance related to the book loss projected for the year and the provision of deferred tax liabilities related to indefinite lived intangible asset amortization for tax purposes.
The Company’s business is capital intensive. The Company’s capital requirements include acquisitions, fixed asset purchases and capital expenditures for landfill development and cell construction, as well as site and cell closure. The Company’s capital expenditures are broadly defined as pertaining to either growth or maintenance activities. Growth capital expenditures are defined as costs related to
38
development of new airspace, permit expansions and new recycling contracts along with incremental costs of equipment and infrastructure added to further such activities. Growth capital expenditures include the cost of equipment added directly as a result of new business, as well as expenditures associated with increasing infrastructure to increase throughput at transfer stations and recycling facilities. Growth capital expenditures also include those outlays associated with acquiring landfill operating leases, which do not meet the operating lease payment definition, but which were included as a commitment in the successful bid. Maintenance capital expenditures are defined as landfill cell construction costs not related to expansion airspace, costs for normal permit renewals and replacement costs for equipment due to age or obsolescence.
The Company had a net working capital deficit of $2.7 million at January 31, 2010 compared to a deficit of $2.1 million at April 30, 2009. Net working capital comprises current assets, excluding cash and cash equivalents, minus current liabilities. The decrease in net working capital at January 31, 2010 was primarily due to higher accrued interest, higher current accrued capping, closure and post closure costs and lower current assets offset by lower accounts payable along with higher trade receivables.
On July 9, 2009, the Company completed the refinancing of its existing senior credit facility with a Senior Secured Credit Facility, consisting of a $177.5 million revolving credit facility (the “New Revolver”), a $130.0 million aggregate principal term loan (the “New Term Loan”) and the offering of $180.0 million aggregate principal amount of Second Lien Notes. The net proceeds from the Senior Secured Credit Facility and Second Lien Notes offering were used to refinance the borrowings under the Company’s $525.0 million existing senior credit facility due April 2010.
For the first two quarters after the closing date, the interest rate for borrowings under the New Revolver was LIBOR plus a margin of 4.50% per annum, and thereafter the applicable margin will be determined in accordance with the pricing grid as set forth in the Senior Secured Credit Facility Agreement dated July 9, 2009. The interest rate for the New Term Loan will be LIBOR plus a margin of 5.00% per annum, provided that LIBOR shall not be less than 2.00% per annum. The New Term Loan was issued at an original issue price of 94.5% of the principal amount of the loan.
The Senior Secured Credit Facility is subject to customary affirmative, negative, and financial covenants, generally consistent with the Company’s prior credit agreement. The New Revolver is due December 31, 2012 and the New Term Loan is due April 9, 2014. If the Company fails to refinance the Senior Subordinated Notes due 2013 on or before January 31, 2012 the due date for the New Term Loan shall be December 31, 2012. The Company has the right to request an increase to the amount of the Senior Secured Credit Facility by an aggregate amount of $42.5 million at its discretion, subject to certain conditions.
As of January 31, 2010, the Company was in compliance with all financial covenants as follows:
Senior Secured Credit Facility Covenant
Twelve months endedJanuary 31, 2010
Covenantrequirements -January 31, 2010
Total funded debt / Bank-defined cash flow metric (1)
4.63
5.90 Max.
Senior funded debt / Bank-defined cash flow metric (1)
3.08
3.95 Max.
Interest coverage
2.75
2.10 Min.
(1) Bank-defined cash flow metric is based on operating results for the twelve months preceding the measurement date, January 31, 2010. A reconciliation of net cash provided by operating activities to bank-defined cash flow metric is as follows (dollars in thousands):
39
Twelve Months EndedJanuary 31, 2010
Net cash provided by operating activities
74,437
Changes in assets and liabilities, net of effects of acquisitions and divestitures
(2,715
1,165
Stock based compensation, net of excess tax benefit on exercise of options
(2,018
83
Goodwill impairment, environmental remediation and development project charges
(57,194
Interest expense plus amortization of premium on senior notes less discount on term loan and second lien notes
48,813
(511
Provision for income taxes, net of deferred taxes
(191
Adjustments to income as allowed by Senior Secured Credit Facility Agreement
63,921
Bank - defined cash flow metric
125,790
Further advances were available under the New Revolver in the amount of $89.0 million as of January 31, 2010. The available amount is net of outstanding irrevocable letters of credit totaling $50.0 million as of January 31, 2010, at which date no amount had been drawn.
The Second Lien Notes indenture contains negative covenants that restrict dividends, stock repurchases and other payments, and also limits the incurrence of debt and issuance of preferred stock by requiring that the Company maintain a minimum consolidated fixed charge coverage ratio. As of January 31, 2010, the Company was in compliance with all covenants under the Second Lien Notes.
As of January 31, 2010, the Company had outstanding $195.0 million of Senior Subordinated Notes which mature in February 2013. The Senior Subordinated Notes are guaranteed jointly and severally, fully and unconditionally by the Company’s significant wholly-owned subsidiaries. The Senior Subordinated Notes indenture contains negative covenants that restrict dividends, stock repurchases and other payments, and also limits the incurrence of debt and issuance of preferred stock by requiring that the Company maintain a minimum consolidated fixed charge coverage ratio. As of January 31, 2010, the Company was in compliance with all covenants under the Senior Subordinated Notes.
On December 28, 2005, the Company completed a $25.0 million financing transaction involving the issuance by the Finance Authority of Maine of $25.0 million aggregate principal amount of its Solid Waste Disposal Revenue Bonds Series 2005 (the “Bonds”) which mature in January 2025, subject to certain redemption rights. The Bonds are issued pursuant to an indenture, dated as of December 1, 2005 and are enhanced by an irrevocable, transferable direct-pay letter of credit issued by Bank of America, N.A. Pursuant to a Financing Agreement, dated as of December 1, 2005, the Company has borrowed the proceeds of the Bonds to pay for certain costs relating to equipment acquisition for solid waste collection and transportation services, all located in Maine.
On July 31, 2008, the Company completed a financing transaction for the construction of two single-stream material recovery facilities as well as engines for a landfill gas to energy project with a third-party leasing company. The balance on the facility at January 31, 2010 was $12.6 million. The financing has a seven year term at a fixed rate of interest (approximately 7.1%).
Net cash provided by operating activities amounted to $47.6 million for the nine months ended January 31, 2010 compared to $50.1 million for the same period of the prior fiscal year. Net income decreased $9.1 million in the nine months ended January 31, 2010 compared to the nine months ended January 31,
40
2009. Landfill amortization expense decreased by $3.6 million due to the closure of the Colebrook facility as well as lower volumes at other landfill sites. In the nine months ended January 31, 2009, the Company recorded an environmental remediation charge of $2.8 million associated with the Waste Stream site.
Cash from changes in assets and liabilities, net of effects of acquisitions and divestitures, increased $10.9 million for the nine months ended January 31, 2010 compared to the nine months ended January 31, 2009. Changes in accounts receivable amounted to a $12.7 million decrease for the nine months ended January 31, 2010 compared to the nine months ended January 31, 2009. Changes in accounts payable during the nine months ended January 31, 2010 amounted to $3.2 million of cash used compared with $15.9 million of cash used in the prior year comparable period due to lower capital expenditures in the period and the timing of certain payments.
Changes in prepaid expenses, inventories and other assets amounted to cash provided of $0.02 million in the nine months ended January 31, 2010 compared to cash provided of $2.7 million in the nine months ended January 31, 2009. The decrease in cash provided of $2.7 million from the prior year is due primarily to the following: (1) refundable income taxes resulting in a $0.4 million decrease, (2) inventory balances resulting in a $0.8 million decrease, (3) higher prepaid expenses at January 31, 2010 resulting in a $0.7 million decrease, (4) higher deposits at January 31, 2010 resulting in a $1.3 million decrease offset by (5) lower restricted assets at January 31, 2010 resulting in a $0.8 million increase.
Changes in accrued expenses and other liabilities amounted to cash used of $0.4 million in the nine months ended January 31, 2010 compared to cash used of $14.2 million in the nine months ended January 31, 2009. The increase in cash provided of $13.8 million is due primarily to the following: (1) an increase associated with higher payroll accruals at April 30, 2008 amounting to $8.5 million, (2) higher accrued interest at January 31, 2010 associated with higher interest rates amounting to a $1.3 million increase, (3) higher payments in the nine months ended January 31, 2009 for capping, closure and post-closure costs amounting to an increase of $0.3 million and (4) changes in other accrued expenses amounting to a $2.7 million increase.
Net cash used in investing activities was $44.3 million for the nine months ended January 31, 2010 compared to $57.1 million used in investing activities in the same period of the prior fiscal year. The reduction of $12.8 million is due primarily to (1) lower capital expenditures in the nine months ended January 31, 2010 compared to the nine months ended January 31, 2009, (2) investments in unconsolidated entities in the nine months ended January 31, 2009 amounting to $2.5 million of cash used, (3) higher proceeds from sale of equipment in the nine months ended January 31, 2010 amounting to a $1.8 million increase, (4) acquisition activity in the nine months ended January 31, 2009 amounting to $2.2 million of cash used, offset by (5) higher payments on landfill operating lease contracts in the nine months ended January 31, 2010 amounting to a decrease of $3.4 million.
Net cash used in financing activities was $3.6 million for the nine months ended January 31, 2010 compared to cash provided of $6.5 million in the same period of the prior fiscal year. The increase in cash used relates primarily to deferred financing fees associated with the refinancing as discussed above offset by higher net borrowings.
The Company generally meets liquidity needs from operating cash flow and its Senior Secured Credit Facility. These liquidity needs are primarily for capital expenditures for vehicles, containers and landfill development, debt service costs and capping, closure and post-closure expenditures and acquisitions. The Company has reacted to recent economic conditions by managing various expense categories and capital expenditures. Continued weakness in the economy will likely result in negative pressure on consumer and business spending, which could result in lower future business volumes and resulting cash flows.
41
The Company uses a variety of strategies to mitigate the impact of fluctuations in the commodity prices including entering into fixed price contracts and entering into hedges which mitigate the variability in cash flows generated from the sales of recycled paper at floating prices, resulting in a fixed price being received from these sales. As of January 31, 2010, to minimize the Company’s commodity exposure, the Company was party to fifteen commodity hedging agreements. For further discussion on commodity price volatility, see “Item 3 — Quantitative and Qualitative Disclosures about Market Risk — Commodity Price Volatility” below.
The Company has filed a universal shelf registration statement with the SEC. The Company may from time to time issue securities thereunder in an amount of up to $250.0 million. The Company’s ability and willingness to issue securities pursuant to this registration statement will depend on market conditions at the time of any such desired offering and therefore the Company may not be able to issue such securities on favorable terms, if at all.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on the Company’s operations. Consistent with industry practice, most of the Company’s contracts provide for a pass-through of certain costs, including increases in landfill tipping fees and, in some cases, fuel costs. Increases in fuel costs have been passed on through a fuel recovery program. However, competitive factors and economic conditions may require the Company to absorb at least a portion of these cost increases, particularly during periods of high inflation.
The Company’s business is located mainly in the eastern United States. Therefore, the Company’s business, financial condition and results of operations are susceptible to downturns in the general economy in this geographic region and other factors affecting the region, such as state regulations and severe weather conditions.
Limitations on Ownership of Notes
Pursuant to the first paragraph of Section 2.17 of the Indenture (the “Indenture”) dated as of July 9, 2009, by and among the Company, its guarantor subsidiaries and Wilmington Trust Company, as trustee, relating to the Second Lien Notes , each person that is a beneficial holder of the Second Lien Notes shall not knowingly acquire the Second Lien Notes such that, after giving effect thereto, such person owns 10% or more of the consolidated debt of the Company for which relevant subsidiaries of the Company are obligated (and to dispose of Notes or other debt of the Company to the extent such person becomes aware of exceeding such threshold), if such ownership would require consent of any regulatory authority under applicable law or regulation governing solid waste operators and such consent has not been obtained. Pursuant to Section 4.18 of the Indenture, the Company has agreed that, for so long as any of the Second Lien Notes remain outstanding, the Company will furnish to the holders of the Second Lien Notes, in each quarterly and annual report, the dollar amount of debt of the Company that would serve as the threshold for evaluating a beneficial holder’s compliance with the first paragraph of Section 2.17 of the Indenture. As of January 31, 2010, that dollar amount was $54.3 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate volatility
The Company had interest rate risk relating to approximately $192.9 million of long-term debt at January 31, 2010. The interest rate on the variable rate portion of long-term debt was approximately 6.5% at January 31, 2010. Should the average interest rate on the variable rate portion of long-term debt change
42
by 100 basis points, it would have an approximate interest expense change of $0.5 million for the quarter reported.
The remainder of the Company’s long-term debt is at fixed rates and not subject to interest rate risk.
Commodity price volatility
Through its FCR recycling operation, the Company markets a variety of materials, including fibers such as OCC (cardboard) and ONP (newspaper), plastics, glass, ferrous and aluminum metals. The Company uses a number of strategies to mitigate impacts from commodity price fluctuations such as indexed purchases, floor prices, fixed price agreements, and revenue share arrangements. In addition, as of January 31, 2010 the Company was party to fourteen commodity hedge contracts that manage pricing fluctuations on a portion of its OCC and ONP volumes. These contracts expire between March 2010 and December 2011. The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. The Company expects to be able to replace its expiring hedges with existing or new counterparties; however, the availability and pricing terms at any given time will be subject to prevailing market conditions.
If commodity prices were to have changed by 10% in the quarter ended January 31, 2010, management’s estimate of the impact on the Company’s operating income is between $0.7 million and $0.8 million. The Company’s sensitivity to changes in commodity prices is complex because each customer contract is unique relative to revenue sharing, tipping or processing fees and other arrangements. The above estimated ranges of operating income impact may not be indicative of future operating results and actual results may vary materially.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. The Company’s management, with the participation of its chief executive officer and principalfinancial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of January 31, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of January 31, 2010, the Company’s chief executive officer and principal financial officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
b) Changes in internal controls. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
43
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NCES and the Town of Bethlehem (the “Town”) have been in prolonged zoning litigation over NCES’s expansion of the landfill. Currently, there are two court actions between NCES and the Town: a declaratory judgment action initiated by NCES on September 12, 2001, and a zoning enforcement action initiated by the Town on February 2, 2009. In the declaratory judgment action, the New Hampshire Supreme Court ruled that NCES has all necessary local approvals to expand its landfill within a 51-acre area, but remanded to the Superior Court issues related to the validity of the Town’s zoning ordinance as it relates to a proposed landfill expansion outside that 51-acre area. In the enforcement action, the Town has requested an injunction requiring NCES to remove a leachate force main, a landfill gas line, stormwater drainage lines, catch basins and outfalls, a landfill liner anchor trench, and storm water detention ponds that are located outside the 51-acre area. NCES and the Town filed cross-motions for summary judgment on the validity of the ordinance the Town is attempting to enforce, and the court denied both motions in October 2009. On February 5, 2010, the court granted NCES’s motion to consolidate the remanded action with the enforcement action and continued the March 2010 trial date that had been set in the enforcement action. No new trial date has been set for the consolidated action.
In the event that the Company is unsuccessful obtaining the permits, the Company will assess the need for a potential landfill impairment charge (the carrying value of the NCES landfill assets as of January 31,
44
2010 was approximately $6.9 million). The Company would also assess the need for additional closure and post-closure charges.
The parties agreed to submit this dispute to voluntary mediation in February 2010, and on February 11, 2010, the parties agreed to the terms of a Settlement Agreement. There was no cash component in the terms of the Settlement, and the company retained all interests in intellectual property developed in FCR’s name in exchange for relinquishing its interests in GMG and a related venture. The parties have filed the necessary documentation to dismiss all litigations between the parties (including individual defendants) with prejudice, and have entered into complete releases of any and all claims among the parties.
On June 9, 2008, the Southbridge Board of Health (“Southbridge BOH”) issued a Decision and Statement of Findings pursuant to Massachusetts General Laws ch.111, §§150A and 150 A1/2 and 310 CMR 16.00 (“2008 Site Assignment”) granting the Company’s subsidiary, Southbridge Recycling and Disposal
Park, Inc. (“SRD”), a minor modification to the existing site assignment for the Southbridge Sanitary Landfill (the “Landfill”). The 2008 Site Assignment allows SRD, subject to numerous conditions, to accept into the Landfill up to 405,000 tons of municipal solid waste per year without regard to geographic origin.
On or about July 14, 2008, the Sturbridge Board of Health (“Sturbridge BOH”), an abutting municipality to Southbridge, together with several 10-citizen groups, filed a complaint in Worcester County Superior Court contesting the 2008 Site Assignment (the “Appeal”). The Appeal names as defendants the Southbridge BOH and its individual members at the time of the 2008 Site Assignment, and SRD. On August 21, 2008, SRD reached a settlement with the Sturbridge BOH, pursuant to which SRD agreed to fund an escrow account to be controlled by the Sturbridge BOH, in the amount of $.05 million. The Sturbridge BOH Appeal was formally withdrawn as to all parties on August 22, 2008.
Casella Albany Renewables, LLC (“CAR”), a wholly-owned subsidiary of Casella Renewable Systems, LLC, entered into an Option Agreement with Albany Renewable Energy, LLC (“ARE”) in September, 2008 (“Option Agreement”). In March 2008, ARE was the successful bidder to the Albany Port District Commission (“Port”) for the development of an ethanol facility to be located on a site owned by the Port (“Project”). ARE has entered into a lease agreement with the Port, and CAR has the option pursuant to the Option Agreement of entering into a sublease with ARE should CAR elect to become involved in the development of the Project.
46
The Company offers no prediction of the outcome of any of the proceedings or negotiations described above. The Company is vigorously defending each of these lawsuits and claims. However, there can be no guarantee the Company will prevail or that any judgments against the Company, if sustained on appeal, will not have a material adverse effect on the Company’s business, financial condition or results of operations or cash flows.
ITEM 1A. RISK FACTORS
The Company’s business is subject to a number of risks, including those identified in Item 1A, “Risk Factors” of its 2009 Annual Report on Form 10-K/A, that could have a material effect on its business, results of operations, financial condition and/or liquidity and that could cause its operating results to vary significantly from period to period. As of October 31, 2009, there have been no material changes to the risk factors disclosed in the Company’s most recent Annual Report on Form 10-K/A, although the Company may disclose changes to such factors or disclose additional factors from time to time in its future filings with the SEC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS
The exhibits that are filed as part of this Quarterly Report on Form 10-Q or that are incorporated by reference herein are set forth in the Exhibit Index hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Casella Waste Systems, Inc.
Date: March 5, 2010
By:
/s/ Paul J. Massaro
(Principal Financial and Accounting Officer and Duly Authorized Officer)
48
Exhibit Index
31.1 +
Certification of John W. Casella, Chairman of the Board of Directors and Chief Executive Officer pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
31.2 +
Certification of Paul J. Massaro, Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
32.1 ++
Certification pursuant to 18 U.S.C. Section 1350 of John W. Casella, Chairman of the Board of Directors and Chief Executive Officer, pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.
32.2 ++
Certification pursuant to 18 U.S.C. Section 1350 of Paul J. Massaro, Principal Financial and Accounting Officer, pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.
+ - - Filed Herewith
++ - - Furnished Herewith