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, 2012

 

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 of
incorporation 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 preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  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 15, 2012:

 

 

Class A Common Stock, $0.01 par value per share:

25,987,421

 

 

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)

 

 

 

January 31,

 

April 30,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

1,131

 

$

1,817

 

Restricted cash

 

76

 

76

 

Accounts receivable - trade, net of allowance for doubtful accounts of $1,355 and $920

 

48,032

 

54,914

 

Refundable income taxes

 

1,284

 

 

Prepaid expenses

 

6,976

 

5,856

 

Inventory

 

3,830

 

3,461

 

Deferred income taxes

 

2,860

 

5,600

 

Other current assets

 

606

 

681

 

 

 

 

 

 

 

Total current assets

 

64,795

 

72,405

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation and amortization of $667,776 and $624,044

 

461,904

 

453,361

 

Goodwill

 

101,773

 

101,204

 

Intangible assets, net

 

3,139

 

2,455

 

Restricted assets

 

400

 

334

 

Notes receivable - related party/employee

 

721

 

1,297

 

Investments in unconsolidated entities

 

21,753

 

38,263

 

Other non-current assets

 

19,884

 

21,262

 

 

 

 

 

 

 

 

 

609,574

 

618,176

 

 

 

 

 

 

 

 

 

$

674,369

 

$

690,581

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

2



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(Unaudited)

(in thousands, except for share and per share data)

 

 

 

January 31,

 

April 30,

 

 

 

2012

 

2011

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current maturities of long-term debt and capital leases

 

$

1,213

 

$

1,217

 

Current maturities of financing lease obligations

 

332

 

316

 

Accounts payable

 

45,252

 

42,499

 

Accrued payroll and related expenses

 

4,069

 

3,702

 

Accrued interest

 

8,470

 

9,776

 

Current accrued capping, closure and post-closure costs

 

4,668

 

1,702

 

Income taxes payable

 

 

3,786

 

Other accrued liabilities

 

20,186

 

20,923

 

 

 

 

 

 

 

Total current liabilities

 

84,190

 

83,921

 

 

 

 

 

 

 

Long-term debt and capital leases, less current maturities

 

470,837

 

461,418

 

Financing lease obligations, less current maturities

 

1,904

 

2,156

 

Accrued capping, closure and post-closure costs, less current portion

 

35,301

 

34,705

 

Deferred income taxes

 

4,133

 

5,578

 

Other long-term liabilities

 

11,644

 

8,816

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Casella Waste Systems, Inc. stockholders’ equity:

 

 

 

 

 

Class A common stock -

 

 

 

 

 

Authorized - 100,000,000 shares, $0.01 par value per share, issued and outstanding - 25,987,000 and 25,589,000 shares as of January 31, 2012 and April 30, 2011, respectively

 

260

 

256

 

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 as of January 31, 2012 and April 30, 2011, respectively

 

10

 

10

 

Accumulated other comprehensive (loss) income

 

(2,054

)

378

 

Additional paid-in capital

 

287,810

 

285,992

 

Accumulated deficit

 

(221,110

)

(192,649

)

 

 

 

 

 

 

Total Casella Waste Systems, Inc. stockholders’ equity

 

64,916

 

93,987

 

Noncontrolling interest

 

1,444

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

66,360

 

93,987

 

 

 

 

 

 

 

 

 

$

674,369

 

$

690,581

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands)

 

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

114,578

 

$

111,627

 

$

371,637

 

$

356,515

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of operations

 

81,398

 

76,933

 

253,248

 

237,584

 

General and administration

 

13,933

 

14,832

 

46,202

 

46,446

 

Depreciation and amortization

 

14,827

 

13,573

 

44,394

 

44,776

 

Legal settlement

 

 

 

1,359

 

 

Development project charge

 

 

 

131

 

 

Gain on sale of assets

 

 

 

 

(3,502

)

 

 

 

 

 

 

 

 

 

 

 

 

110,158

 

105,338

 

345,334

 

325,304

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

4,420

 

6,289

 

26,303

 

31,211

 

 

 

 

 

 

 

 

 

 

 

Other expense/(income), net:

 

 

 

 

 

 

 

 

 

Interest income

 

(20

)

(15

)

(32

)

(41

)

Interest expense

 

11,528

 

11,663

 

33,897

 

35,073

 

Loss (income) from equity method investments

 

6,383

 

(102

)

10,163

 

2,536

 

Impairment of equity method investment

 

10,680

 

 

10,680

 

 

Loss on debt modification

 

 

115

 

 

115

 

Other income

 

(117

)

(78

)

(549

)

(490

)

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

28,454

 

11,583

 

54,159

 

37,193

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes and discontinued operations

 

(24,034

)

(5,294

)

(27,856

)

(5,982

)

Provision for income taxes

 

601

 

1,079

 

1,330

 

2,139

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before discontinued operations

 

(24,635

)

(6,373

)

(29,186

)

(8,121

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations (net of income tax benefit of $0, $7, $0, $7)

 

 

1,376

 

 

(316

)

(Loss) gain on disposal of discontinued operations (net of income tax provision of $0, $0, $489 and $0)

 

 

(1,368

)

725

 

(1,984

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(24,635

)

$

(6,365

)

$

(28,461

)

$

(10,421

)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Unaudited)

(in thousands, except for per share data)

 

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before discontinued operations

 

$

(0.92

)

$

(0.24

)

$

(1.09

)

$

(0.31

)

Income (loss) from discontinued operations, net

 

 

0.05

 

 

(0.01

)

(Loss) gain on disposal of discontinued operations, net

 

 

(0.05

)

0.02

 

(0.08

)

 

 

 

 

 

 

 

 

 

 

Net loss per common share

 

$

(0.92

)

$

(0.24

)

$

(1.07

)

$

(0.40

)

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

26,822

 

26,115

 

26,715

 

26,026

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended
January 31,

 

 

 

2012

 

2011

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(28,461

)

$

(10,421

)

Adjustments to reconcile net loss to net cash provided by operating activities -

 

 

 

 

 

Loss from discontinued operations, net

 

 

316

 

(Gain) loss on disposal of discontinued operations, net

 

(725

)

1,984

 

Gain on sale of assets

 

 

(3,502

)

Gain on sale of property and equipment

 

(902

)

(399

)

Depreciation and amortization

 

44,394

 

44,776

 

Depletion of landfill operating lease obligations

 

6,570

 

6,013

 

Interest accretion on landfill and environmental remediation liabilities

 

2,613

 

2,487

 

Development project charges

 

131

 

 

Amortization of premium on senior subordinated notes

 

 

(584

)

Amortization of discount on term loan and second lien notes

 

712

 

683

 

Loss from equity method investments

 

10,163

 

2,536

 

Impairment of equity method investment

 

10,680

 

 

Loss on debt modification

 

 

115

 

Stock-based compensation

 

1,307

 

2,052

 

Excess tax benefit on the vesting of share based awards

 

(254

)

(122

)

Deferred income taxes

 

1,548

 

1,827

 

Changes in assets and liabilities, net of effects of acquisitions and divestitures -

 

 

 

 

 

Accounts receivable

 

6,882

 

3,767

 

Accounts payable

 

2,753

 

(197

)

Prepaid expenses, inventories and other assets

 

(758

)

483

 

Accrued expenses and other liabilities

 

(6,911

)

(5,956

)

 

 

 

 

 

 

Net Cash Provided By Operating Activities

 

49,742

 

45,858

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Acquisitions, net of cash acquired

 

(2,102

)

 

Additions to property, plant and equipment attributable to acquisitions

 

(168

)

 

Additions to property, plant and equipment - growth

 

(9,833

)

(1,175

)

- maintenance

 

(39,279

)

(40,268

)

Payments on landfill operating lease contracts

 

(6,052

)

(4,977

)

Proceeds from sale of assets

 

 

7,533

 

Proceeds from sale of property and equipment

 

1,337

 

631

 

Investments in unconsolidated entities

 

(4,146

)

 

 

 

 

 

 

 

Net Cash Used In Investing Activities

 

(60,243

)

(38,256

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from long-term borrowings

 

127,900

 

134,100

 

Principal payments on long-term debt

 

(119,433

)

(136,349

)

Payments of financing costs

 

(142

)

(340

)

Proceeds from exercise of share based awards

 

337

 

412

 

Excess tax benefit on the vesting of share based awards

 

254

 

122

 

Contributions from noncontrolling interest holder

 

174

 

 

 

 

 

 

 

 

Net Cash Provided By (Used In) Financing Activities

 

9,090

 

(2,055

)

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

Net cash provided by operating activities

 

 

3,246

 

Net cash provided by (used in) investing activities

 

725

 

(1,905

)

Net cash used in financing activities

 

 

(3,392

)

 

 

 

 

 

 

Net Cash Provided By (Used In) Discontinued Operations

 

725

 

(2,051

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(686

)

3,496

 

Cash and cash equivalents, beginning of period

 

1,817

 

2,035

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

1,131

 

$

5,531

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended
January 31,

 

 

 

2012

 

2011

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for -

 

 

 

 

 

Interest

 

$

31,952

 

$

32,124

 

Income taxes, net of refunds

 

$

5,314

 

$

142

 

 

 

 

 

 

 

Supplemental Disclosures of Non-Cash Investing and Financing Activities:

 

 

 

 

 

Summary of entities acquired in purchase business combinations -

 

 

 

 

 

Fair value of assets acquired

 

$

2,284

 

$

 

Cash paid, net

 

$

2,102

 

$

 

 

 

 

 

 

 

Holdbacks to sellers

 

$

182

 

$

 

 

 

 

 

 

 

Equipment contributed by noncontrolling interest

 

$

1,270

 

$

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

7



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except for per share data)

 

1.             BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements include the accounts of Casella Waste Systems, Inc. (the “Parent”) and its subsidiaries and an entity in which it has a controlling financial interest (collectively, “we”, “us” or “our”). For the consolidated subsidiary that is less than wholly owned, the third-party holding of equity interests is referred to as a noncontrolling interest. The portion of net income (loss) attributable to the noncontrolling interest of this subsidiary will be presented as Net income (loss) attributable to noncontrolling interest once operations begin. The portion of stockholders’ equity of this subsidiary attributable to the noncontrolling interest is presented as Noncontrolling interest in the unaudited consolidated balance sheets.

 

We are a regional, integrated solid waste services company that provides collection, transfer, disposal, landfill, landfill gas-to-energy, recycling and organics services, in the northeastern United States. We market recyclable metals, aluminum, plastics, paper and corrugated cardboard, which have been processed at our recycling facilities, as well as recyclables purchased from third parties. We also generate and sell electricity under a contract at a waste-to-energy facility, Maine Energy Recovery Company LP (“Maine Energy”). We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which includes a full range of solid waste services, and our larger-scale, non-solid waste recycling and commodity brokerage operations through our Recycling segment. Ancillary operations, major customer accounts, discontinued operations and earnings from equity method investees are included in our Other segment.

 

The consolidated balance sheet as of January 31, 2012, the consolidated statements of operations for the three and nine months ended January 31, 2012 and 2011 and the consolidated statements of cash flows for the nine months ended January 31, 2012 and 2011 are unaudited. In the opinion of management, such unaudited consolidated financial statements, together with the consolidated balance sheet as of April 30, 2011, 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 our unaudited consolidated 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 unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Our significant accounting policies are more fully discussed in Item 8 of our Annual Report on Form 10-K for the year ended April 30, 2011, which was filed with the Securities and Exchange Commission (the “SEC”) on June 20, 2011. The unaudited consolidated financial statements presented herein should be read in conjunction with our audited consolidated financial statements as of and for the twelve months ended April 30, 2011 included in our Annual Report on Form 10-K for the year ended April 30, 2011. The results for the three and nine months ended January 31, 2012 may not be indicative of the results that may be expected for any other interim period or the fiscal year ending April 30, 2012.

 

We consider events or transactions that have occurred after the unaudited consolidated balance sheet date of January 31, 2012, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.

 

Adoption of New Accounting Pronouncements

 

Goodwill Impairment Test

 

In December 2010, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update which modifies the requirements of Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This guidance was effective for fiscal years beginning after December 15, 2010. We adopted this guidance effective May 1, 2011 with no impact on our consolidated financial position or results of operations. We annually assess goodwill impairment at the end of the fourth quarter of our fiscal year, or if events or circumstances change between annual tests indicating a possible impairment.

 

New Accounting Pronouncements Pending Adoption

 

Goodwill Impairment Test

 

In September 2011, the FASB issued an accounting standards update on goodwill impairment testing. This guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal

 

8



 

years beginning after December 15, 2011 with early adoption permitted. We anticipate that it will not have a material impact on our consolidated financial position or results of operations.

 

Fair Value Measurements and Disclosures

 

In May 2011, the FASB issued an accounting standards update on fair value disclosures. This guidance is intended to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”). This guidance is effective for the first interim or annual reporting period beginning after December 15, 2011, and we anticipate that it will not have a material impact on our consolidated financial position or results of operations.

 

Other Comprehensive Income

 

In June 2011, the FASB issued an accounting standards update for the presentation of comprehensive income. This guidance requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will only impact the presentation of our financial statements and will not impact our consolidated financial position or results of operations.

 

In October 2011, the FASB proposed a deferral of a portion of the guidance issued in June 2011 that requires reclassification adjustments from other comprehensive income be measured and presented by income statement line item in net income and also in other comprehensive income. The proposed deferral of this guidance was finalized by the FASB in December 2011. The deferral is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

 

Disclosures About Offsetting Assets and Liabilities

 

In December 2011, the FASB issued an accounting standards update regarding the disclosure of offsetting assets and liabilities in financial statements. This guidance requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, and will only impact the presentation of our financial statements and will not impact our consolidated financial position or results of operations.

 

2.             BUSINESS ACQUISITIONS

 

During the nine months ended January 31, 2012, we acquired five solid waste hauling operations and completed the acquisition of the McKean County landfill business in Pennsylvania by acquiring additional equipment not included in the original transaction for total consideration of $2,284, including $2,102 in cash and $182 in holdbacks to sellers. During the nine months ended January 31, 2011, there were no business acquisitions. The operating results of these businesses are included in the accompanying unaudited consolidated statements of operations from the dates of acquisition, and the purchase prices have been allocated to the net assets acquired based on fair values at the dates of acquisition, with the residual amounts allocated to goodwill. Acquired intangible assets other than goodwill that are subject to amortization include client lists and non-compete covenants. These are amortized over a five to ten year period from the date of acquisition. All amounts allocated to goodwill are expected to be deductible for tax purposes. The purchase price allocated to net assets acquired during the nine months ended January 31, 2012 and 2011 is as follows:

 

 

 

January 31,

 

 

 

2012

 

2011

 

Equipment

 

$

605

 

$

 

Goodwill

 

569

 

 

Intangible assets

 

1,136

 

 

Current liabilities

 

(26

)

 

Total

 

$

2,284

 

$

 

 

9



 

The following unaudited pro forma combined financial information shows the results of our operations for the three and nine months ended January 31, 2012 and 2011 as though each of the acquisitions made in the nine months ended January 31, 2012 and the twelve months ended April 30, 2011 had occurred as of May 1, 2010.

 

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue

 

$

114,833

 

$

113,184

 

$

372,710

 

$

361,186

 

Operating income

 

$

4,433

 

$

6,487

 

$

26,362

 

$

31,806

 

Net loss attributable to common stockholders

 

$

(24,641

)

$

(6,279

)

$

(28,482

)

$

(10,163

)

Basic and diluted net loss per common share attributable to common stockholders

 

$

(0.92

)

$

(0.24

)

$

(1.07

)

$

(0.39

)

Basic and diluted weighted average shares outstanding

 

26,822

 

26,115

 

26,715

 

26,026

 

 

The pro forma results set forth in the table above have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions occurred as of May 1, 2010 or the results of our future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the completed acquisitions.

 

3.             GOODWILL AND INTANGIBLE ASSETS

 

The following table shows the activity and balances related to goodwill from April 30, 2011 through January 31, 2012:

 

 

 

April 30, 2011

 

Acquisitions

 

January 31, 2012

 

Eastern region

 

$

38

 

$

22

 

$

60

 

Western region

 

88,976

 

547

 

89,523

 

Recycling

 

12,190

 

 

12,190

 

Total

 

$

101,204

 

$

569

 

$

101,773

 

 

Intangible assets as of January 31, 2012 and April 30, 2011 consist of the following:

 

 

 

Covenants
Not to
Compete

 

Client Lists

 

Total

 

Balance, January 31, 2012

 

 

 

 

 

 

 

Intangible assets

 

$

15,601

 

$

3,093

 

$

18,694

 

Less accumulated amortization

 

(14,229

)

(1,326

)

(15,555

)

 

 

$

1,372

 

$

1,767

 

$

3,139

 

 

 

 

 

 

 

 

 

Balance, April 30, 2011

 

 

 

 

 

 

 

Intangible assets

 

$

15,076

 

$

2,474

 

$

17,550

 

Less accumulated amortization

 

(13,966

)

(1,129

)

(15,095

)

 

 

$

1,110

 

$

1,345

 

$

2,455

 

 

Intangible amortization expense for the three and nine months ended January 31, 2012 and 2011 was $156, $204, $460 and $636, respectively. The intangible amortization expense estimated for the five fiscal years following fiscal year 2011 and thereafter is as follows:

 

2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

$

 688

 

$

651

 

$

603

 

$

552

 

$

372

 

$

733

 

 

10



 

4.                                      ACCRUED CAPPING, CLOSURE AND POST CLOSURE

 

Accrued capping, closure and post-closure costs include the current and non-current portion of costs associated with obligations for closure and post-closure of our landfills. We estimate our future capping, closure and post-closure costs in order to determine the capping, closure and post-closure expense per ton of waste placed into each landfill. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill, as well as the duration of the post-closure monitoring period. The changes to accrued capping, closure and post-closure liabilities for the nine months ended January 31, 2012 and 2011 are as follows:

 

 

 

Nine Months Ended January 31,

 

 

 

2012

 

2011

 

Beginning balance

 

$

36,407

 

$

40,002

 

Obligations incurred

 

2,350

 

2,188

 

Revisions in estimates (1)

 

 

(1,120

)

Accretion expense

 

2,510

 

2,384

 

Payments

 

(1,298

)

(6,140

)

Ending balance

 

$

39,969

 

$

37,314

 

 


(1)                                  The revision in estimates for capping, closure and post-closure for the nine months ended January 31, 2011 consists of changes in cost estimates and timing of capping and closure events, as well as changes to expansion airspace and tonnage placement assumptions.

 

5.                                      LONG-TERM DEBT

 

For the quarter ending April 30, 2012, the Total Funded Debt/Bank-defined cash flow metric covenant requirement will be reduced under the terms of our amended and restated senior secured credit facility (the “2011 Revolver”) from a maximum of 4.75 to a maximum of 4.50. Based on the low end of the range of results forecasted by us for the quarter ending April 30, 2012, we have been working with our lenders to amend the terms of the 2011 Revolver to give us additional flexibility under this covenant. We believe that we will be able to procure such an amendment at a reasonable cost.

 

On February 1, 2012, we converted the interest rate period on, and remarketed, $21,400 aggregate principal amount of $25,000 Finance Authority of Maine (the “Authority”) Solid Waste Disposal Revenue Bonds Series 2005 (the “Bonds”). The mandatorily tendered Bonds (the “Converted Bonds”) were converted from a variable rate to a five year fixed term interest rate of 6.25% per annum and included credit support for the benefit of the holders of those Converted Bonds, including guarantees by certain of our subsidiaries. The Converted Bonds are no longer secured by a bank letter of credit. The remaining $3,600 of outstanding Bonds will remain as variable rate bonds secured by a bank letter of credit. The Bonds were originally issued on December 28, 2005 and mature on January 1, 2025. We expect to record a charge of approximately $300 as a loss on debt extinguishment in the fourth quarter of fiscal year 2012 related primarily to the non-cash write off of unamortized deferred financing costs associated with the original issuance of the Bonds.

 

6.                                      CONTINGENCIES

 

(a)                                  Legal Proceedings

 

In the ordinary course of our business and as a result of the extensive governmental regulation of the solid waste industry, we are subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines or to revoke or deny renewal of an operating permit held by us. From time to time, we may also be subject to actions brought by special interest or other groups, adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which we operate. In addition, we are party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business.

 

In accordance with Accounting Standard Codification (“ASC”) 450-20, we accrue for legal proceedings when losses become probable and reasonably estimable. As of the end of each applicable reporting period, we review each of our legal proceedings to determine whether it is probable, reasonably possible or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can be reasonably estimated under the provisions of ASC 450-20-25-2. In instances where we determine that a loss is probable and we can reasonably estimate a range of losses we may incur with respect to such a matter, we record an accrual for the amount within the range that constitutes our best estimate of the possible loss. If we are able to reasonably estimate a range but no amount within the range appears to be a better estimate than any other, we record an accrual in the amount that is the low end of such range. When a loss is reasonably possible, but not probable, we will not record an accrual but we will disclose our estimate of the possible range of loss where such estimate can be made in accordance with ASC 450-20-25-3.

 

11



 

We offer no prediction of the outcome of any of the proceedings or negotiations described below. We are vigorously defending each of these lawsuits and claims. However, there can be no guarantee we will prevail or that any judgments against us, if sustained on appeal, will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

Town of Seneca Matter

 

Casella Waste Services of Ontario, LLC operates the Ontario County Landfill and recycling facilities located in the Town of Seneca (the “Town”), New York, pursuant to an Operation, Management and Lease Agreement with Ontario County (the “OMLA”), and a Host Agreement with the Town of Seneca (the “Host Agreement”).

 

On May 6, 2011, the Town filed a complaint in Ontario County Supreme Court naming Ontario County (the “County”) and various entities of ours as defendants, alleging that we and the County breached obligations to the Town under both the Host Agreement and the OMLA. The Town’s complaint alleged a variety of contract breaches stemming from our decision to pay the County stipulated in-lieu fees for certain projects described in the OMLA rather than constructing those projects. In September 2011, we, the County and the Town executed a global settlement, and the Town’s suit was dismissed with prejudice. Under the terms of the settlement, we provided certain construction materials to the Town valued at $99 and engineering studies completed to date valued at $260, thus recording a charge against operations amounting to $359 in the second quarter of fiscal year 2012. We also established a protection plan whereby we agree to reimburse certain Town residents for approved costs to repair septic systems. Our exposure under this protection plan shall not exceed $75.

 

Vermont Attorney General Matter

 

We entered into an Assurance of Discontinuance (“AOD”) with the Vermont Attorney General’s Office (“AG”) on or about May 17, 2002, concerning, among other matters, the conduct of our business in Vermont as related to certain contract terms applicable to our small commercial container customers. On March 23, 2010, we received a Civil Investigative Subpoena (“CIS”) from the AG requesting information and documents regarding our compliance with the AOD. In the course of responding to the AG’s requests, we discovered that some of our small commercial container customers were mistakenly issued contracts which did not strictly comply with the terms of the AOD. This error occurred during a one year period starting in 2009 and ending in 2010, and only a portion of our small commercial container customers in Vermont were affected. We terminated the use of these noncompliant contracts, and issued revised contracts to those affected customers. We had not sought to enforce the terms of any of these contracts.

 

We worked with the AG to resolve these technical violations of the AOD, and reached an agreement on August 12, 2011 with the AG for us to pay a civil penalty in the amount of $1,000, in staged payments starting in September 2011, and concluding on December 30, 2011. This amount was recorded in the first quarter of fiscal year 2012 and all payments to the AG have been timely made by us. A Revised Final Judgment of Consent and Order was entered on August 15, 2011 (the “Revised Order”) by the Vermont Superior Court Washington Unit, Civil Division. The Revised Order extended some of the conditions of the AOD for ten years from entry of the Revised Order, and requires us to institute certain policies, procedures and employee training regimens applicable to our affected Vermont employees to ensure that all contracts used by us for the provision of services to our small commercial container customers comply with the AOD.

 

Penobscot Energy Recovery Company Matter

 

On May 31, 2011 we received formal written notice from the Penobscot Energy Recovery Company (“PERC”) submitting to arbitration what it alleges is a disputed invoice in the amount of approximately $3,195 dated March 2, 2011. PERC contended that Pine Tree Waste, Inc., our subsidiary, failed since 2001 to honor a “put-or-pay” waste disposal arrangement. Arbitration of this matter was initiated, but in January 2012 a global settlement was reached in principle and memorialized in a letter of intent dated February 1, 2012, which documented the final terms of the settlement and dismissal of the arbitration action. If necessary, we will aggressively defend against this claim in arbitration and/or the courts. Pursuant to the terms of the settlement no cash payout is required. We anticipate that there may be nonmaterial incremental operational expenses that arise from implementing the terms of the settlement with regard to waste deliveries. We believe that until the terms of the settlement are fully agreed upon and executed and the arbitration dismissed, a loss in the range of $0 to $3,195 is still reasonably possible but not probable.

 

(b)                             Tax Matters

 

During the third quarter of fiscal year 2011, we received an income tax assessment from the State of New York for the fiscal years ending April 30, 2004 through April 30, 2006 of $3,852, which includes $1,632 in interest and penalties related to the filing of combined returns in the state. The assessment is currently under appeal. Under ASC 740, we believe our position will more likely than not be successful in contesting the assessment and consequently, we have not established any reserve.

 

12



 

(c)                              Environmental Liability

 

We are subject to liability for environmental damage, including personal injury and property damage, that our 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 we acquired the facilities. We may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants or hazardous substances if we or our 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”), our 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 2012. On February 28, 2011, the DEC issued a Proposal Remedial Action Plan (the “PRAP”) for the site and accepted public comments on the proposed remedy through March 29, 2011. We submitted extensive comments. In April 2011, the DEC issued the final Record of Decision (“ROD”) for the site. The ROD was subsequently rescinded for failure to respond to all submitted comments. The preliminary ROD, however, estimated that the present worth cost associated with implementing the preferred remedies would be approximately $12,130. The DEC issued the final ROD in June 2011 with proposed remedies consistent with the earlier ROD that had been rescinded.

 

WSI is jointly and severally liable for the total cost to remediate and we initially expected to be responsible for approximately 30% upon implementation of a cost-sharing agreement with NiMo and GM. Based on these estimates, we recorded an environmental remediation charge of $2,823 in the third quarter of fiscal year 2009. In the fourth quarter of fiscal year 2009, we 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. In the fourth quarter of fiscal year 2010, we recognized an additional charge of $335 based on changes in the expected timing of cash outflows. Based on the estimated costs in the ROD, and changes in the estimated timing of cash flows, we recorded an environmental remediation charge of $549 in the fourth quarter of fiscal year 2011. Such charges could be significantly higher if costs exceed estimates. We inflate these estimated costs in current dollars until the expected time of payment and discount the cost to present value using a risk free interest rate (2.31%). At January 31, 2012 and April 30, 2011, we have recorded $5,188 and $5,147, respectively, related to this liability including the recognition of $34, $34, $103 and $103 of accretion expense in the three and nine months ended January 31, 2012 and 2011, respectively.

 

In September 2011, DEC settled its environmental claim against the estate of the former GM (known as the “Motors Liquidation Trust”) for future remediation costs relating to the WSI site for face value of $3,000. In addition, in November 2011 we settled our own claim against the Motors Liquidation Trust for face value of $100. These claims will, however, be paid in stocks and warrants of the “new” GM. There is at this time no way to accurately estimate when these claims will be paid or what the value of the actual recovery will be and we have not assumed that the payment of these claims will materially reduce our exposure.

 

7.                                      NONCONTROLLING INTEREST

 

In September 2011, we entered into a joint venture with Altela, Inc. to form Casella-Altela Regional Environmental Services, LLC (“CARES”), a joint venture that develops, owns and operates water and leachate treatment projects for the natural gas drilling industry in Pennsylvania and New York. As a part of the joint venture, we retained a 51% membership interest in CARES in exchange for an initial cash contribution to CARES of $1,322. Altela, Inc. made an initial contribution of equipment valued at $1,270 and retained a 49% membership interest in CARES. In the three months ended January 31, 2012, we and Altela, Inc. made additional cash contributions, in line with our membership interests, of $181 and $174, respectively, for the purchase of additional equipment. Income and losses are to be allocated to members based on membership interest percentage.

 

In accordance with ASC 810-10-15, we consolidate the assets, liabilities, noncontrolling interest, and results of operations of CARES into our consolidated financial statements due to our controlling financial interest in the joint venture. As of January 31, 2012, the noncontrolling interest associated with CARES relates solely to investments in the joint venture made by Altela, Inc. as no operational activity has commenced.

 

13



 

The change in stockholders’ equity for the three and nine months ended January 31, 2012 is as follows:

 

 

 

Three Months Ended January 31, 2012

 

 

 

Casella Waste
Systems, Inc.

 

Noncontrolling
Interest

 

Total

 

Beginning balance

 

$

91,325

 

$

1,270

 

$

92,595

 

Issuance of Class A common stock from the vesting of restricted stock units and the employee stock purchase plan

 

173

 

 

173

 

Stock-based compensation expense

 

(59

)

 

(59

)

Contributions from noncontrolling interest holder

 

 

174

 

174

 

Net loss

 

(24,635

)

 

(24,635

)

Change in fair value of commodity hedges, marketable securities, and interest rate derivatives, net and reclassification adjustments

 

(1,888

)

 

(1,888

)

Total comprehensive loss

 

(26,523

)

 

(26,523

)

Ending balance

 

$

64,916

 

$

1,444

 

$

66,360

 

 

 

 

Nine Months Ended January 31, 2012

 

 

 

Casella Waste
Systems, Inc.

 

Noncontrolling
Interest

 

Total

 

Beginning balance

 

$

93,987

 

$

 

$

93,987

 

Issuance of Class A common stock from the vesting of restricted stock units and the employee stock purchase plan

 

515

 

 

515

 

Stock-based compensation expense

 

1,307

 

 

1,307

 

Contributions from noncontrolling interest holder

 

 

1,444

 

1,444

 

Net loss

 

(28,461

)

 

(28,461

)

Change in fair value of commodity hedges, marketable securities, and interest rate derivatives, net and reclassification adjustments

 

(2,432

)

 

(2,432

)

Total comprehensive loss

 

(30,893

)

 

(30,893

)

Ending balance

 

$

64,916

 

$

1,444

 

$

66,360

 

 

8.                                      STOCK-BASED COMPENSATION

 

In June 2011, we granted an equal number of restricted stock units and performance stock units under the 2006 Stock Incentive Plan (the “2006 Plan”) to certain employees. The vesting of the performance stock units is based on our attainment of targeted annual returns on net assets in fiscal year 2014 and the vesting of the restricted stock units is based on continued employment over a three year period beginning on the grant date. As of January 31, 2012, the performance stock units included in the June 2011 grant could result in the issuance of up to 365 shares of Class A Common Stock based on the attainment of a targeted maximum annual return on net assets in fiscal year 2014 and the restricted stock units could result in the issuance of an aggregate of up to 243 shares of Class A Common Stock based on continued employment over the remainder of the three year service period. The performance stock units and the restricted stock units were granted at a grant date fair value of $6.06 per share.

 

As of January 31, 2012 there were 819 Class A Common Stock equivalents available for future grant under the 2006 Plan inclusive of additional Class A Common Stock equivalents which were previously issued under our terminated plans but which have become available for grant because such awards expired or otherwise resulted in shares not being issued.

 

Stock options granted generally vest over a one to four year period from the date of grant and are granted at prices equal to the prevailing fair market value at the issue date. In general, stock options are issued with a life not to exceed ten years. Shares issued by us upon exercise of stock options are issued from the pool of authorized shares of Class A Common Stock.

 

14



 

A summary of stock option activity for the nine months ended January 31, 2012 is as follows:

 

 

 

Stock Options

 

Weighted
Average
Exercise
Price

 

Outstanding, April 30, 2011

 

2,254

 

$

10.89

 

Granted

 

 

$

 

Exercised

 

 

$

 

Forfeited

 

(455

)

$

11.46

 

Outstanding, January 31, 2012

 

1,799

 

$

10.75

 

Exercisable, January 31, 2012

 

1,626

 

$

11.49

 

 

A summary of restricted stock, restricted stock unit and performance stock unit activity for the nine months ended January 31, 2012 is as follows:

 

 

 

Restricted Stock /
Restricted Stock
Units

 

Performance
Stock Units (1)

 

Outstanding, April 30, 2011

 

825

 

805

 

Granted

 

344

 

255

 

Class A Common Stock Vested

 

(357

)

 

Forfeited

 

(36

)

(60

)

Outstanding, January 31, 2012

 

776

 

1,000

 

 


(1) Performance stock units are included at the 100% attainment level. Attainment of maximum annual returns on net assets could result in the issuance of an additional 613 shares of Class A Common Stock.

 

We recorded ($91), $656, $1,222, and $1,956 of stock-based compensation expense related to stock options, performance stock units, restricted stock units and restricted stock, respectively, during the three and nine months ended January 31, 2012 and 2011. We also recorded $33, $49, $85, and $96 of stock-based compensation expense related to our Employee Stock Purchase Plan during the three and nine months ended January 31, 2012 and 2011, respectively.

 

Stock-based compensation expense is included in general and administration expenses in the unaudited consolidated statements of operations. The unrecognized stock-based compensation expense at January 31, 2012 related to unvested stock options, restricted stock and restricted stock units was $2,547, to be recognized over a weighted average period of 1.48 years. Maximum unrecognized stock-based compensation expense at January 31, 2012 related to outstanding performance stock units, and subject to the attainment of targeted maximum annual returns on net assets, was $5,644, to be recognized over a weighted average period of 0.98 years. We do not expect to recognize any expense related to outstanding performance stock units over the weighted average period based on our expectation that we will not meet our attainment levels as of January 31, 2012.

 

Our calculations of stock-based compensation expense associated with stock options and our Employee Stock Purchase Plan for the three and nine months ended January 31, 2012 and 2011 were made using the Black-Scholes valuation model. The fair values of our stock option grants and stock options related to shares issued under our Employee Stock Purchase Plan were estimated assuming no expected dividend yield using the following weighted average assumptions for the three and nine months ended January 31, 2012 and 2011:

 

15



 

 

 

Three Months Ended January 31,

 

Nine Months Ended January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Stock Options:

 

 

 

 

 

 

 

 

 

Expected life

 

 

 

 

6.53 years

 

Risk-free interest rate

 

 

 

 

1.80%

 

Expected volatility

 

 

 

 

85.59%

 

Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

Expected life

 

0.5 years

 

0.5 years

 

0.5 years

 

0.5 years

 

Risk-free interest rate

 

0.06%

 

0.19%

 

0.12%

 

0.21%

 

Expected volatility

 

53.78%

 

44.24%

 

47.54%

 

47.15%

 

 

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. Expected volatility is calculated using the average of weekly historical volatility of our Class A Common Stock over the expected life.

 

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 our Class A Common Stock price over the expected term, and the number of stock 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.

 

9.             EARNINGS PER SHARE

 

The following table sets forth the numerator and denominator used in the computation of basic and diluted earnings per share (“EPS”):

 

 

 

Three Months
Ended January 31,

 

Nine Months
Ended January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Loss from continuing operations before discontinued operations attributable to common stockholders

 

$

(24,635

)

$

(6,373

)

$

(29,186

)

$

(8,121

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Number of shares outstanding, end of period:

 

 

 

 

 

 

 

 

 

Class A common stock

 

25,987

 

25,317

 

25,987

 

25,317

 

Class B common stock

 

988

 

988

 

988

 

988

 

Unvested restricted stock

 

(127

)

(141

)

(127

)

(141

)

Effect of weighted average shares outstanding during period

 

(26

)

(49

)

(133

)

(138

)

Weighted average number of common shares used in basic and diluted EPS

 

26,822

 

26,115

 

26,715

 

26,026

 

 

For the three and nine months ended January 31, 2012 and 2011, 2,576 and 4,357 shares of potential common stock related to restricted stock, restricted stock units, performance stock units, and stock options were excluded from the calculation of dilutive shares since we experienced a loss from continuing operations in each fiscal year period and the inclusion of potential shares would be anti-dilutive.

 

10.          COMPREHENSIVE LOSS

 

Comprehensive loss 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 unaudited consolidated balance sheets consists of changes in the fair value of our interest rate and commodity

 

16



 

hedges, our marketable securities, as well as our portion of the changes in fair value of US GreenFiber LLC’s (“GreenFiber”) commodity hedge agreements.

 

Comprehensive loss for the three and nine months ended January 31, 2012 and 2011 is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,

 

January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss attributable to common stockholders

 

$

(24,635

)

$

(6,365

)

$

(28,461

)

$

(10,421

)

Other comprehensive (loss) income

 

(1,888

)

269

 

(2,432

)

711

 

Comprehensive loss

 

$

(26,523

)

$

(6,096

)

$

(30,893

)

$

(9,710

)

 

The components of other comprehensive (loss) income for the three and nine months ended January 31, 2012 and 2011 are shown as follows:

 

 

 

Three Months Ended January 31,

 

 

 

2012

 

2011

 

 

 

Gross

 

Tax
effect

 

Net of
Tax

 

Gross

 

Tax
effect

 

Net of
Tax

 

Changes in fair value of marketable securities during the period

 

$

(16

)

$

 

$

(16

)

$

(1

)

$

 

$

(1

)

Change in fair value of interest rate and commodity hedges during the period

 

(1,981

)

 

(1,981

)

56

 

(251

)

307

 

Reclassification to earnings for commodity hedge contracts during the period

 

109

 

 

109

 

10

 

47

 

(37

)

 

 

$

(1,888

)

$

 

$

(1,888

)

$

65

 

$

(204

)

$

269

 

 

 

 

Nine Months Ended January 31,

 

 

 

2012

 

2011

 

 

 

Gross

 

Tax
effect

 

Net of
Tax

 

Gross

 

Tax
effect

 

Net of
Tax

 

Changes in fair value of marketable securities during the period

 

$

(27

)

$

 

$

(27

)

$

(21

)

$

 

$

(21

)

Change in fair value of interest rate and commodity hedges during the period

 

(1,699

)

99

 

(1,798

)

182

 

(832

)

1,014

 

Reclassification to earnings for commodity hedge contracts during the period

 

(706

)

(99

)

(607

)

(141

)

141

 

(282

)

 

 

$

(2,432

)

$

 

$

(2,432

)

$

20

 

$

(691

)

$

711

 

 

Our strategy to hedge against fluctuations in variable interest rates involves entering into interest rate derivative agreements to hedge against adverse movements in interest rates. In the second quarter of fiscal year 2012, we entered into two forward starting interest rate derivative agreements to hedge interest rate risk of a forecasted transaction effective January 15, 2013. The forecasted transaction will be used to redeem our outstanding $180,000 11% senior second lien notes due July 15, 2014 (the “Second Lien Notes”). The forecasted transaction is expected to occur between July 15, 2012 and October 31, 2012 as the Second Lien Notes become callable on July 15, 2012. The total notional amount of these agreements is $150,000 and require us to receive interest based on changes in the London Interbank Offered Rate (“LIBOR”) index and pay interest at a rate of approximately 1.40%. The agreements mature in March 2016, which is when the 2011 Revolver becomes due.

 

For each interest rate derivative deemed to be an effective cash flow hedge, the change in fair value is recorded in our stockholders’ equity as a component of accumulated other comprehensive (loss) income and included in interest expense at

 

17



 

the same time as interest expense is affected by the hedged transaction. Differences paid or received over the life of the agreements are recorded as additions to or reductions of interest expense of the underlying debt.

 

If the interest rate derivatives become ineffective due to the inability to complete the forecasted transaction under the expected terms, the ineffective portion would be included in earnings in the period it was deemed to be ineffective.

 

Our 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. We evaluate the hedges and ensure 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.

 

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, we receive 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, we pay 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. We are not party to any commodity hedge contracts at January 31, 2012.

 

We recognize all derivatives on the balance sheet at fair value.

 

11.          FAIR VALUE OF FINANCIAL INSTRUMENTS

 

We use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. These tiers include: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, and Level 3, defined as unobservable inputs that are not corroborated by market data.

 

Our financial assets and liabilities recorded at fair value on a recurring basis include restricted assets and derivative instruments. Our derivative instruments at January 31, 2012 include two forward starting interest rate derivatives. We use interest rate derivatives to hedge against adverse movements in interest rates. The fair value of our interest rate derivatives is based primarily on the LIBOR index.

 

Our financial assets and liabilities recorded at fair value on a non-recurring basis include our investment in GreenFiber and our guaranty of GreenFiber’s modified and restated loan and security agreement. The fair value of our investment in GreenFiber was determined by a third party valuation that calculated the enterprise value based on the income approach, using discounted cash flows taking into account current expectations for asset utilization, housing starts and the remaining useful life of related assets. The fair value of our guaranty is based primarily on an estimated bond rate that would be incurred to collateralize a bond of similar nature to the guaranty. See Note 16 regarding the investment in GreenFiber and the guaranty.

 

We use 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 our financial assets and liabilities, we rely on market data or assumptions which we believe market participants would use in pricing an asset or a liability.

 

As of January 31, 2012, our assets and liabilities that are measured at fair value on a recurring basis included the following:

 

 

 

Fair Value Measurement at January 31, 2012 Using:

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

Restricted assets

 

$

400

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

Interest rate derivatives

 

 

2,487

 

 

Total

 

$

400

 

$

2,487

 

$

 

 

18



 

As of January 31, 2012, our assets and liabilities that are measured at fair value on a nonrecurring basis included the following:

 

 

 

Fair Value Measurement at January 31, 2012 Using:

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

Investment in unconsolidated entity - GreenFiber

 

$

 

$

 

$

5,953

 

Liabilities:

 

 

 

 

 

 

 

Guaranty

 

 

 

 

 

 

264

 

Total

 

$

 

$

 

$

264

 

 

Our 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, 2012, the fair value of our fixed rate debt including the Second Lien Notes and the senior subordinated notes due February 15, 2019 (the “2019 Notes”) was approximately $387,351 and the carrying value was $377,176. At January 31, 2012, the fair value of the 2011 Revolver approximates its carrying value of $67,000.

 

12.          DEVELOPMENT PROJECT CHARGE

 

In the second quarter of fiscal year 2012, we recorded a charge of $131 for deferred costs associated with certain development projects no longer deemed viable.

 

13.          ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

 

Assets held for sale:

 

In the first quarter of fiscal year 2011, we completed the sale of certain assets in Southeastern Massachusetts and recorded a gain on sale of assets of $3,502. Total consideration amounted to $7,750 with cash proceeds of $7,533.

 

Discontinued operations:

 

On January 23, 2011, we entered into a purchase and sale agreement and related agreements to sell non-integrated recycling assets and select intellectual property assets to a new company (the “Purchaser”) formed by Pegasus Capital Advisors, L.P. and Intersection LLC for $130,400 in gross proceeds. Pursuant to these agreements, we divested non-integrated recycling assets located outside our core operating regions of New York, Massachusetts, Vermont, New Hampshire, Maine and northern Pennsylvania, including 17 Material Recovery Facilities (“MRFs”), one transfer station and certain related intellectual property assets. Following the transaction, we retained four integrated MRFs located in our core operating regions. As a part of the disposition, we also entered into a ten-year commodities marketing agreement with the Purchaser to market 100% of the tonnage from three of our remaining integrated MRFs.

 

We completed the transaction on March 1, 2011 for $134,195 in gross cash proceeds. This included an estimated $3,795 working capital and other purchase price adjustment, which was subject to further adjustment, as defined in the purchase and sale agreement. The final working capital adjustment, along with additional legal expenses related to the transaction, of $646 was recorded to (loss) gain on disposal of discontinued operations, net of income taxes in the first quarter of fiscal year 2012.

 

In the second quarter of fiscal year 2012, we recorded an additional working capital adjustment of $79 to (loss) gain on disposal of discontinued operations, net of income taxes, which related to our subsequent collection of receivable balances that were released to us for collection by the Purchaser.

 

During the third quarter of fiscal year 2011, we also completed the sale of the assets of the Trilogy Glass business for cash proceeds of $1,840.

 

The operating results of these operations, which relate only to prior fiscal year periods, have been reclassified from continuing to discontinued operations in the accompanying unaudited consolidated financial statements. Revenues and loss before income tax provision attributable to discontinued operations for the three and nine months ended January 31, 2011 were $20,159, $1,369, $56,122, and ($323), respectively.

 

19



 

We allocate interest expense to discontinued operations. We have also eliminated certain immaterial inter-company activity associated with discontinued operations.

 

14.          RELATED PARTY TRANSACTION

 

In connection with the sale of non-integrated recycling assets and select intellectual property assets discussed in Note 13, an officer and director ceased serving for us in that capacity. Following the termination of his employment, he agreed to surrender to us as payment against his outstanding loan with us stock awards that vested in connection with his resignation and the discretionary bonus that was awarded to him in June 2011. Such amounts, net of income taxes withheld, totaling $583, were applied against his loan with us in the first quarter of fiscal year 2012. As of January 31, 2012, an aggregate of $577 in principal and interest was outstanding under this loan.

 

15.          SEGMENT REPORTING

 

We report selected information about operating segments in a manner consistent with that used for internal management reporting. We classify our solid waste operations on a geographic basis through regional operating segments. Revenues are derived mainly from collection, transfer, disposal, landfill, landfill-gas-to energy, recycling and organic services in the northeastern United States. The Eastern region also includes Maine Energy, which generates electricity from non-hazardous solid waste. Our revenues in the Recycling segment are derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales. During fiscal year 2011, we consolidated the Central and Western regions into a single segment as the Western region. Furthermore, the four remaining MRFs that were previously included in the FCR Recycling operating segment, along with the two MRFs from the Central region and our commodity brokerage operations, were brought together to form the newly created Recycling operating segment. Therefore, segment data for the three and nine months ended January 31, 2011 has been revised to reflect these changes in our segment classifications. Ancillary operations, major customer accounts, discontinued operations, and earnings from equity method investees are included in our “Other” reportable segment.

 

 

 

Three Months Ended January 31, 2012

 

 

 

Outside
revenues

 

Inter-company
revenue (1)

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

42,208

 

$

7,818

 

$

6,272

 

$

(975

)

$

213,058

 

Western

 

50,746

 

16,274

 

6,922

 

5,354

 

348,317

 

Recycling

 

10,872

 

(75

)

1,074

 

562

 

56,844

 

Other

 

10,752

 

821

 

559

 

(521

)

56,150

 

Eliminations

 

 

(24,838

)

 

 

 

Total

 

$

114,578

 

$

 

$

14,827

 

$

4,420

 

$

674,369

 

 

 

 

Three Months Ended January 31, 2011

 

 

 

Outside
revenues

 

Inter-company
revenue (1)

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

40,917

 

$

8,684

 

$

5,497

 

$

(486

)

$

220,876

 

Western

 

48,673

 

15,642

 

6,647

 

5,947

 

334,686

 

Recycling

 

10,838

 

(138

)

892

 

1,296

 

40,309

 

Other

 

11,199

 

682

 

537

 

(468

)

149,288

 

Eliminations

 

 

(24,870

)

 

 

 

Total

 

$

111,627

 

$

 

$

13,573

 

$

6,289

 

$

745,159

 

 

20



 

 

 

Nine Months Ended January 31, 2012

 

 

 

Outside
revenues

 

Inter-company
revenue (1)

 

Depreciation and
amortization

 

Operating 
income (loss)

 

Total assets

 

Eastern

 

$

132,158

 

$

27,111

 

$

18,301

 

$

(87

)

$

213,058

 

Western

 

167,154

 

55,395

 

21,652

 

24,175

 

348,317

 

Recycling

 

37,595

 

(179

)

2,935

 

4,905

 

56,844

 

Other

 

34,730

 

1,897

 

1,506

 

(2,690

)

56,150

 

Eliminations

 

 

(84,224

)

 

 

 

Total

 

$

371,637

 

$

 

$

44,394

 

$

26,303

 

$

674,369

 

 

 

 

Nine Months Ended January 31, 2011

 

 

 

Outside
revenues

 

Inter-company
revenue (1)

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

128,557

 

$

28,368

 

$

17,749

 

$

1,853

 

$

220,876

 

Western

 

162,052

 

51,142

 

22,354

 

28,293

 

334,686

 

Recycling

 

31,789

 

(252

)

2,651

 

2,898

 

40,309

 

Other

 

34,117

 

2,040

 

2,022

 

(1,833

)

149,288

 

Eliminations

 

 

(81,298

)

 

 

 

Total

 

$

356,515

 

$

 

$

44,776

 

$

31,211

 

$

745,159

 

 


(1) Inter-segment revenues reflect transactions with and between segments that are generally made on a basis intended to reflect the market value of such services.

 

Amounts of our total revenue attributable to services provided are as follows:

 

 

 

Three Months Ended January 31,

 

Nine Months Ended January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Collection

 

$

48,875

 

$

48,068

 

$

157,265

 

$

152,628

 

Disposal

 

30,220

 

26,889

 

96,645

 

93,548

 

Power generation

 

3,182

 

3,891

 

9,415

 

9,848

 

Processing and organics

 

12,231

 

12,035

 

40,961

 

38,255

 

Solid waste operations

 

94,508

 

90,883

 

304,286

 

294,279

 

Major accounts

 

9,198

 

9,906

 

29,756

 

30,447

 

Recycling

 

10,872

 

10,838

 

37,595

 

31,789

 

Total revenues

 

$

114,578

 

$

111,627

 

$

371,637

 

$

356,515

 

 

We have revised our table of revenue by source to more closely align the types of revenue generated by our operating segments. Amounts for the three and nine months ended January 31, 2011 have been revised to conform to this presentation.

 

16.          INVESTMENTS IN UNCONSOLIDATED ENTITIES

 

Effective August 1, 2000, we entered into a joint venture agreement with Louisiana-Pacific Corporation to combine our respective cellulose insulation businesses into a single operating entity, GreenFiber. In April 2011, we issued a guaranty of up to $1,500 in support of GreenFiber’s amended and restated loan and security agreement in order to induce the lender to enter into a waiver and amend the agreement. In August 2011, we were required to increase the guaranty to up to $3,400 and make an additional investment of $500 in order to again induce the lender to enter into a waiver and amend the agreement.

 

On December 1, 2011, GreenFiber finalized amendment no. 2 to their modified and restated loan and security agreement. Upon closing, we made an additional investment of $3,000 in GreenFiber and reduced our guaranty associated with the credit facility to $2,200. The guaranty can be drawn on upon an event of default and remains in place through December 1, 2014, the extended term of their modified and restated loan and security agreement. Our membership interest in GreenFiber remains unchanged at 50%. As of January 31, 2012, we have recorded a $264 liability as the fair value of the guaranty.

 

21



 

As of December 31, 2011, GreenFiber performed a test for goodwill impairment. The goodwill impairment analysis indicated that the carrying value of their equity exceeded the fair value of their equity and GreenFiber determined that the entire amount of their goodwill was impaired. Consequently, we recorded our portion of the goodwill impairment charge amounting to $5,090 as loss on equity method investment in the three months ended January 31, 2012.

 

Based on the analysis performed, we determined that the current book value of our investment in GreenFiber exceeded its fair value.  The analysis calculated GreenFiber’s enterprise value based on the income approach using discounted cash flows taking into account current expectations for asset utilization, housing starts and the remaining useful life of related assets. Because the conditions resulting in the impairment existed as of January 31, 2012, we recorded a charge amounting to $10,680 as impairment on equity method investment in the three months ended January 31, 2012.

 

We account for our 50% membership interest in GreenFiber using the equity method of accounting. Our investment in GreenFiber amounted to $5,953 and $23,137 at January 31, 2012 and April 30, 2011, respectively.

 

Summarized financial information for GreenFiber is as follows:

 

 

 

January 31,
2012

 

April 30,
2011

 

Current assets

 

$

19,580

 

$

20,077

 

Noncurrent assets

 

$

36,686

 

$

49,618

 

Current liabilities

 

$

10,151

 

$

10,756

 

Noncurrent liabilities

 

$

13,308

 

$

12,863

 

 

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue

 

$

23,460

 

$

28,470

 

$

61,317

 

$

66,488

 

Gross profit

 

$

(5,597

)

$

6,594

 

$

(2,082

)

$

12,172

 

Net loss

 

$

(12,818

)

$

205

 

$

(20,382

)

$

(5,071

)

 

During the second quarter of fiscal year 2012, we finalized the terms of a joint venture agreement with FCR, LLC (“FCR”) to form Tompkins County Recycling LLC (“Tompkins”), a joint venture that operates a MRF located in Tompkins County, NY and processes and sells commodities delivered to the Tompkins MRF. In connection with the formation of the joint venture, we acquired a 50% membership interest in Tompkins in exchange for an initial cash contribution to Tompkins of $285. FCR made an initial cash contribution of $285 as well, and acquired a 50% membership interest in Tompkins. Income and losses are allocated to members based on membership interest percentage. Our investment in Tompkins amounted to $312 at January 31, 2012. We account for our 50% membership interest in Tompkins using the equity method of accounting.

 

In the first quarter of fiscal year 2012, we entered into a renewable energy project operating agreement with AGreen Energy LLC (“AGreen”). As a part of the agreement, we will provide certain operation, maintenance, management, and administrative services, as well as procure organic materials that would otherwise be disposed of to small farm-based biogas renewable energy projects that produce renewable energy and other valuable products and services. In the first quarter of fiscal year 2012, we made an initial investment of $150 in AGreen giving us a 5.1% membership interest. In the three months ended January 31, 2012, we made an additional contribution of $200 in AGreen giving us an 11.9% membership interest as of January 31, 2012. We account for this investment under the cost method of accounting.

 

We also have a 6.4% interest in RecycleRewards, Inc. (“RecycleRewards”), 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. In October 2011 our common share interest in RecycleRewards was reduced from 8.2% to the current 6.4% due to an equity offering RecycleRewards made to a third party investor. We account for these investments under the cost method of accounting.

 

Our investments accounted for under the cost method of accounting amounted to $15,486 and $15,124 at January 31, 2012 and April 30, 2011, respectively.

 

17.          SUBSIDIARY GUARANTORS

 

Our 2019 Notes and Second Lien Notes are guaranteed jointly and severally, fully and unconditionally, by our significant wholly-owned subsidiaries. The Parent is the issuer and a non-guarantor of the 2019 Notes and Second Lien

 

22



 

Notes and the Parent has no independent assets or operations. The information which follows presents the condensed consolidating financial position as of January 31, 2012 and April 30, 2011, the condensed consolidating results of operations for the three and nine months ended January 31, 2012 and 2011, and the condensed consolidating statements of cash flows for the nine months ended January 31, 2012 and 2011 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 consolidated total.

 

23



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JANUARY 31, 2012

(in thousands, except for share and per share data)

 

ASSETS

 

Parent

 

Guarantors

 

Non-
Guarantors

 

Elimination

 

Consolidated

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

942

 

$

138

 

$

51

 

$

 

$

1,131

 

Accounts receivable - trade, net of allowance for doubtful accounts

 

24

 

48,008

 

 

 

48,032

 

Refundable income taxes

 

1,284

 

 

 

 

1,284

 

Deferred income taxes

 

2,860

 

 

 

 

2,860

 

Other current assets

 

2,529

 

8,959

 

 

 

11,488

 

Total current assets

 

7,639

 

57,105

 

51

 

 

64,795

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation and amortization

 

4,424

 

454,586

 

2,894

 

 

461,904

 

Goodwill

 

 

101,773

 

 

 

101,773

 

Intangible assets

 

362

 

2,777

 

 

 

3,139

 

Restricted assets

 

 

400

 

 

 

400

 

Notes receivable - related party/employee

 

721

 

 

 

 

721

 

Investments in unconsolidated entities

 

15,486

 

8,199

 

 

(1,932

)

21,753

 

Investments in subsidiaries

 

38,046

 

 

 

(38,046

)

 

Other non-current assets

 

14,202

 

5,682

 

 

 

19,884

 

 

 

73,241

 

573,417

 

2,894

 

(39,978

)

609,574

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany receivable

 

502,572

 

(489,082

)

(15,422

)

1,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

583,452

 

$

141,440

 

$

(12,477

)

$

(38,046

)

$

674,369

 

 

LIABILITIES AND STOCKHOLDERS’
EQUITY

 

Parent<