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 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 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

 

125,709

 

Intangible assets, net

 

2,635

 

2,433

 

Restricted assets

 

127

 

220

 

Notes receivable - officer/employees

 

1,128

 

1,143

 

Deferred income taxes

 

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



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(Unaudited)

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

 

 

 

April 30,

 

January 31,

 

 

 

2009

 

2010

 

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

 

Deferred income taxes

 

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

 

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

 

 

 

 

 

 

 

 

 

$

750,962

 

$

753,077

 

 

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

 

Nine Months Ended

 

 

 

January 31,

 

January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

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

 

 

2,823

 

 

Development project charge

 

(20

)

 

(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

)

 

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

 

Nine Months Ended

 

 

 

January 31,

 

January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

 

 

 

 

 

 

 

 

 

 

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

 

 

0.01

 

 

0.01

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share (applicable) available to common stockholders

 

$

(0.15

)

$

(0.17

)

$

0.02

 

$

(0.34

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

25,606

 

25,748

 

25,547

 

25,705

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

(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

 

 

0.01

 

 

0.01

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share (applicable) available to common stockholders

 

$

(0.15

)

$

(0.17

)

$

0.02

 

$

(0.34

)

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

25,606

 

25,748

 

25,632

 

25,705

 

 

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,

 

 

 

2009

 

2010

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net (loss) income

 

$

425

 

$

(8,705

)

Income from discontinued operations, net

 

(396

)

(213

)

Income on disposal of discontinued operations, net

 

(20

)

(280

)

Adjustments to reconcile net (loss) income to net cash provided by operating activities -

 

 

 

 

 

Gain on sale of equipment

 

(274

)

(1,087

)

Depreciation and amortization

 

55,896

 

52,817

 

Depletion of landfill operating lease obligations

 

5,018

 

4,936

 

Interest accretion on landfill and environmental remediation liabilities

 

2,414

 

2,668

 

Environmental remediation charge

 

2,823

 

 

Income from assets under contractual obligation

 

(25

)

(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

 

1,911

 

1,305

 

Loss on debt modification

 

 

511

 

Stock-based compensation

 

1,383

 

1,727

 

Excess tax benefit on the exercise of stock options

 

(157

)

 

Deferred income taxes

 

1,494

 

2,380

 

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

 

 

 

 

 

Accounts receivable

 

7,529

 

(5,380

)

Accounts payable

 

(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

)

(20

)

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

 

Excess tax benefit on the exercise of stock options

 

157

 

 

Net Cash (Used in) Provided by Financing Activities

 

6,460

 

(3,612

)

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

Net Cash Provided by Operating Activities

 

567

 

328

 

Net Cash Provided by Investing Activities

 

53

 

280

 

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

 

1,838

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

2,982

 

$

2,171

 

 

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,

 

 

 

2009

 

2010

 

 

 

 

 

 

 

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

 

$

(2,196

)

$

 

 

 

 

 

 

 

Notes payable, liabilities assumed and holdbacks to sellers

 

$

308

 

$

 

 

 

 

 

 

 

Property, plant and equipment acquired through lease obligations

 

$

14,115

 

$

404

 

 

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

 

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.

 

8



 

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

 

9



 

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 assumedThe 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.

 

10



 

4.             GOODWILL AND INTANGIBLE ASSETS

 

The following table shows the balances related to goodwill at April 30, 2009 and January 31, 2010:

 

Eastern
Region

 

Central
Region

 

Western
Region

 

FCR
Recycling

 

Total

 

$

 —

 

$

32,951

 

$

55,302

 

$

37,456

 

$

125,709

 

 

Intangible assets at April 30, 2009 and January 31, 2010 consist of the following:

 

 

 

Covenants
not to
compete

 

Client Lists

 

Licensing
Agreements

 

Contract
Acquisition
Costs

 

Patents

 

Total

 

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

 

$

 

$

2,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

$

14,142

 

$

1,597

 

$

920

 

$

424

 

$

250

 

$

17,333

 

Less accumulated amortization

 

(13,552

)

(885

)

(285

)

(103

)

(75

)

(14,900

)

 

 

$

590

 

$

712

 

$

635

 

$

321

 

$

175

 

$

2,433

 

 

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:

 

2010

 

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

 

Weighted
Average
Exercise
Price

 

Restricted Stock -
Restricted /
Performance
Stock 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

 

(75

)

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 Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

Stock Options:

 

 

 

 

 

 

 

 

 

Expected life

 

6.7 years

 

 

6.7 years

 

 

Risk-free interest rate

 

1.67%

 

 

1.74%

 

 

Expected volatility

 

36.80%

 

 

36.80%

 

 

Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

Expected life

 

0.5 years

 

0.5 years

 

0.5 years

 

0.5 years

 

Risk-free interest rate

 

1.71%

 

0.18%

 

2.07%

 

0.18%

 

Expected volatility

 

36.11%

 

242.50%

 

36.36%

 

242.50%

 

 

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 Months
Ended January 31,

 

Nine Months
Ended January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

Numerator:

 

 

 

 

 

 

 

 

 

Net (loss) income (applicable) available to common stockholders

 

$

(3,817

)

$

(4,376

)

$

425

 

$

(8,705

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Number of shares outstanding, end of period:

 

 

 

 

 

 

 

 

 

Class A common stock

 

24,651

 

24,944

 

24,651

 

24,944

 

Class B common stock

 

988

 

988

 

988

 

988

 

Unvested restricted stock

 

 

(122

)

 

(122

)

Effect of weighted average shares outstanding during period

 

(33

)

(62

)

(92

)

(105

)

Weighted average number of common shares used in basic EPS

 

25,606

 

25,748

 

25,547

 

25,705

 

Impact of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Dilutive effect of options and restricted stock units

 

 

 

85

 

 

Weighted average number of common shares used in diluted EPS

 

25,606

 

25,748

 

25,632

 

25,705

 

 

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:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31,

 

January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

Net (loss) income

 

$

(3,817

)

$

(4,376

)

$

425

 

$

(8,705

)

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,

 

 

 

2009

 

2010

 

 

 

Gross

 

Tax
effect

 

Net of Tax

 

Gross

 

Tax
effect

 

Net of Tax

 

Changes in fair value of marketable securities during the period

 

$

277

 

$

96

 

$

181

 

$

7

 

$

 

$

7

 

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

 

2,667

 

1,074

 

1,593

 

(1,801

)

 

(1,801

)

Reclassification to earnings for interest rate derivatives and commodity hedge contracts

 

(1,686

)

(679

)

(1,007

)

(439

)

(177

)

(262

)

 

 

$

1,258

 

$

491

 

$

767

 

$

(2,233

)

$

(177

)

$

(2,056

)

 

 

 

Nine Months Ended January 31,

 

 

 

2009

 

2010

 

 

 

Gross

 

Tax
effect

 

Net of Tax

 

Gross

 

Tax
effect

 

Net of Tax

 

Changes in fair value of marketable securities during the period

 

$

91

 

$

31

 

$

60

 

$

25

 

$

 

$

25

 

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

 

9,785

 

3,939

 

5,846

 

(3,391

)

 

(3,391

)

Reclassification to earnings for interest rate derivatives and commodity hedge contracts

 

1,394

 

571

 

823

 

(2,377

)

(957

)

(1,420

)

 

 

$

11,270

 

$

4,541

 

$

6,729

 

$

(5,743

)

$

(957

)

$

(4,786

)

 

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

 

Commodity
Type

 

Contract Date Range

 

Monthly
Notional Ton
Range

 

Fixed Price
Per Ton
Received
Range

 

December 2007 - September 2009

 

OCC

 

April 2008 - June 2011

 

75 - 750

 

$85 - $127

 

June 2007 - September 2009

 

ONP

 

June 2007 - December 2011

 

400 - 1500

 

$85 - $127

 

 

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

 

20



 

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 in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant Unobservable
Inputs (Level 3)

 

Assets:

 

 

 

 

 

 

 

Restricted assets

 

$

220

 

$

 

$

 

Commodity derivatives

 

 

37

 

 

Total

 

$

220

 

$

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.

 

21



 

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:

 

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

Revenues

 

$

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

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (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

 

Other

 

8,750

 

 

332

 

(681

)

101,560

 

Eliminations

 

 

(26,731

)

 

 

 

Total

 

$

120,945

 

$

 

$

16,995

 

$

2,008

 

$

845,152

 

 

Three Months Ended January 31, 2010

 

Segment

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

43,600

 

$

10,807

 

$

5,269

 

$

2,120

 

$

229,623

 

Central

 

25,532

 

9,488

 

3,270

 

2,932

 

158,100

 

Western

 

23,903

 

5,794

 

3,827

 

3,997

 

177,207

 

FCR recycling

 

23,607

 

23

 

1,957

 

2,941

 

108,611

 

Other

 

9,414

 

 

693

 

(818

)

79,536

 

Eliminations

 

 

(26,112

)

 

 

 

Total

 

$

126,056

 

$

 

$

15,016

 

$

11,172

 

$

753,077

 

 

Nine Months Ended January 31, 2009 (1)

 

Segment

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

152,359

 

$

35,351

 

$

26,175

 

$

2,178

 

$

295,552

 

Central

 

91,315

 

42,503

 

12,225

 

12,528

 

158,243

 

Western

 

83,928

 

18,980

 

11,644

 

12,414

 

181,255

 

FCR

 

80,702

 

619

 

4,718

 

7,272

 

108,542

 

Other

 

26,369

 

 

1,134

 

(1,710

)

101,560

 

Eliminations

 

 

(97,453

)

 

 

 

Total

 

$

434,673

 

$

 

$

55,896

 

$

32,682

 

$

845,152

 

 

Nine Months Ended January 31, 2010

 

Segment

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

136,845

 

$

32,829

 

$

23,682

 

$

1,956

 

$

229,623

 

Central

 

84,154

 

32,365

 

10,434

 

12,705

 

158,100

 

Western

 

74,176

 

17,941

 

11,350

 

13,772

 

177,207

 

FCR

 

67,531

 

300

 

5,818

 

7,369

 

108,611

 

Other

 

28,901

 

 

1,533

 

(1,786

)

79,536

 

Eliminations

 

 

(83,435

)

 

 

 

Total

 

$

391,607

 

$

 

$

52,817

 

$

34,016

 

$

753,077

 

 


(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:

 

23



 

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

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

 

8,750

 

9,414

 

26,369

 

28,901

 

FCR recycling

 

19,150

 

23,607

 

80,702

 

67,531

 

Total revenues

 

$

120,945

 

$

126,056

 

$

434,673

 

$

391,607

 

 

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

 

January
31, 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

 

 

 

 

 

 

 

 

Three Months Ended
January 31,

 

Nine Months Ended
January 31,

 

 

 

2009

 

2010

 

2009

 

2010

 

Revenues

 

$

36,424

 

$

32,528

 

$

102,153

 

$

82,545

 

Gross profit

 

8,743

 

8,056

 

17,817

 

19,747

 

Net (loss) income

 

$

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.

 

25



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF APRIL 30, 2009

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

 

 

 

Parent

 

Guarantors

 

Non-Guarantors

 

Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

873

 

$

965

 

$

 

$

 

$

1,838

 

Restricted cash

 

432

 

76

 

 

 

508

 

Accounts receivable - trade, net of allowance for doubtful accounts

 

3

 

51,293

 

 

 

51,296

 

Refundable income taxes

 

1,195

 

 

 

 

1,195

 

Deferred taxes

 

4,392

 

 

 

 

4,392

 

Other current assets

 

8,718

 

8,788

 

 

 

17,506

 

Total current assets

 

15,613

 

61,122

 

 

 

76,735

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2,922

 

487,438

 

 

 

490,360

 

Goodwill

 

 

125,709

 

 

 

125,709

 

Restricted cash

 

 

127

 

 

 

127

 

Deferred income taxes

 

428

 

 

 

 

428

 

Investment in subsidiaries

 

(49,753

)

 

 

49,753

 

 

Other non-current assets

 

26,587

 

32,828

 

120

 

(1,932

)

57,603

 

 

 

(19,816

)

646,102

 

120

 

47,821

 

674,227

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany receivable

 

647,299

 

(641,415

)

(7,816

)

1,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

643,096

 

$

65,809

 

$

(7,696

)

$

49,753

 

$

750,962

 

 

 

 

Parent

 

Guarantors

 

Non - Guarantors

 

Elimination

 

Consolidated

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and capital leases

 

$

1,109

 

$

609

 

$

 

$

 

$

1,718

 

Current maturities of financing lease obligations

 

 

1,344

 

 

 

1,344

 

Accounts payable

 

3,070

 

31,542

 

11

 

 

34,623

 

Accrued payroll and related expenses

 

497

 

3,683

 

 

 

4,180

 

Accrued interest

 

6,402

 

5

 

 

 

6,407

 

Accrued closure and post-closure costs, current portion

 

 

6,426

 

 

 

6,426

 

Other current liabilities

 

13,126

 

9,209

 

2

 

 

22,337

 

Total current liabilities

 

24,204

 

52,818

 

13

 

 

77,035

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases, less current maturities

 

546,145

 

1,000

 

 

 

547,145

 

Financing lease obligations, less current maturities

 

 

12,281

 

 

 

12,281

 

Deferred income taxes

 

2,684

 

 

 

 

2,684

 

Other long-term liabilities

 

3,753

 

41,723

 

31

 

 

45,507

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY: