UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2020
Or
| 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
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(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code: (802 ) 775-0325
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| (Nasdaq Global Select Market) | ||||||||||||||
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by checkmark 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Act. ☐
Indicate by check mark whether the registrant has filed a report and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates of the registrant, based on the last reported sale price of the registrant’s Class A common stock on the Nasdaq Stock Market at the close of business on June 30, 2020 was approximately $2,396 million. The registrant does not have any non-voting common stock outstanding.
There were 50,101,351 shares of Class A common stock, $0.01 par value per share, of the registrant outstanding at February 15, 2021. There were 988,200 shares of Class B common stock, $0.01 par value per share, of the registrant outstanding at February 15, 2021.
Documents Incorporated by Reference
CASELLA WASTE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Unless the context requires otherwise, all references in this Annual Report on Form 10-K to “Casella Waste Systems, Inc.”, “Casella”, the “Company”, “we”, “us” or “our” refer to Casella Waste Systems, Inc. and its consolidated subsidiaries.
Forward-Looking Statements
This Annual Report on Form 10-K contains or incorporates a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, including statements regarding:
•the projected development of additional disposal capacity or expectations regarding permits for existing capacity;
•the outcome of any legal or regulatory matter;
•the expected and potential direct or indirect impacts of the novel coronavirus ("COVID-19") pandemic on our business;
•expected liquidity and financing plans;
•expected future revenues, operations, expenditures and cash needs;
•fluctuations in the commodity pricing of our recyclables, increases in landfill tipping fees and fuel costs and general economic and weather conditions;
•projected future obligations related to final capping, closure and post-closure costs of our existing landfills and any disposal facilities which we may own or operate in the future;
•our ability to use our net operating losses and tax positions;
•our ability to service our debt obligations;
•the recoverability or impairment of any of our assets or goodwill;
•estimates of the potential markets for our products and services, including the anticipated drivers for future growth;
•sales and marketing plans or price and volume assumptions;
•potential business combinations or divestitures; and
•projected improvements to our infrastructure and the impact of such improvements on our business and operations.
In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, as well as management’s beliefs and assumptions, and should be read in conjunction with our consolidated financial statements and notes thereto. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made. The occurrence of the events described and the achievement of the expected results depends on many events, some or all of which are not predictable or within our control. Actual results may differ materially from those set forth in the forward-looking statements.
There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those detailed in Item 1A, “Risk Factors” of this Annual Report on Form 10-K. We explicitly disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by law.
ITEM 1. BUSINESS
Overview
Founded in 1975 with a single truck, Casella Waste Systems, Inc. is a regional, vertically integrated solid waste services company. We provide resource management expertise and services to residential, commercial, municipal and industrial customers, primarily in the areas of solid waste collection and disposal, transfer, recycling and organics services. We provide integrated solid waste services in six states: Vermont, New Hampshire, New York, Massachusetts, Maine and Pennsylvania, with our headquarters located in Rutland, Vermont. We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services. We manage our larger-scale recycling and commodity brokerage operations along with our organics services and large scale commercial and industrial services through our single resource-renewal focused Resource Solutions operating segment.
As of January 31, 2021, we owned and/or operated 46 solid waste collection operations, 58 transfer stations, 20 recycling facilities, eight Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition ("C&D") materials.
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Growth Strategy
Our goal is to build a sustainable and profitable company by providing exemplary service to our customers, while operating safe and environmentally sound facilities. Over the last decade, we have worked with many of our key customers to improve their environmental footprint and to meet sustainability goals by increasing their recycling rates, diverting organic materials out of the waste stream into beneficial use processes, and partnering to develop resource solutions within their organizations. Since we first began operating in Vermont in 1975, our business strategy has been firmly tied to creating a sustainable resource management model and we continue to be rooted in these same tenets today.
We continue to invest in resources (team, technology, and capital) to further develop this important long-term strategy that we believe will continue to differentiate our service offerings to our customers, make us an employer of choice for our people, and improve our economic returns. We strive to create long-term value for all of our stakeholders, including customers, employees, communities and shareholders.
Our primary objective is to maximize long-term shareholder value through a combination of financial performance and strategic asset positioning. Annually, we complete a comprehensive strategic planning process to assess and refine our strategic objectives in the context of our asset mix and the current market environment. This process helps the management team allocate resources to a range of business opportunities with the goal to maximize long-term financial returns and competitive positioning.
In early August 2017, we announced an updated long-term strategic plan through our fiscal year ending December 31, 2021 (the “2021 Plan”). The 2021 Plan is focused on enhancing shareholder returns by improving cash flows and reducing debt leverage through the following strategic initiatives:
•Increasing landfill returns by driving pricing in excess of inflation in the disposal capacity constrained markets in the Northeast and working to maximize capacity utilization.
•Driving additional profitability in our collection operations through profitable revenue growth and operating efficiencies.
•Creating incremental value through our resource solutions offerings in our recycling, organics, and customer solutions lines-of-business.
•Using technology to drive profitable growth and efficiencies through our efforts to update key systems to drive back office transformation, operating efficiencies and sales force effectiveness.
•Allocating capital to balance debt delevering with smart growth through continued capital discipline and selective acquisitions of complementary businesses and assets.
To support our efforts, we continue to invest in our employees through leadership development, our career paths program that helps to build long-term development for our employees, technical training for key roles such as drivers and mechanics, and incentive compensation structures that seek to align our employees’ incentives with our long-term goal to improve cash flows and returns on invested capital. Over the last four years our workforce has increased by approximately 32%, and we believe that continuing to invest in our team and culture is key to our continued success.
Increasing Landfill Returns
Disposal capacity continues to tighten in the Northeast market as permanent site closures are reducing capacity and stronger economic and construction activity are driving higher volumes. Given this supply-demand imbalance and the positioning of our assets, we were able to advance landfill pricing by 7.0% (or average price per ton by 8.92%) for the fiscal year ended December 31, 2020 ("fiscal year 2020"), as compared to the fiscal year ended December 31, 2019 ("fiscal year 2019").
We believe that this positive pricing backdrop will continue as additional site closures are expected over the next several years, and as we reset multi-year contracts we expect to advance pricing in excess of the Consumer Price Index on a larger percentage of our inbound waste streams. In addition, we continue to focus our acquisition efforts on businesses and markets that are expected to increase vertical integration to our landfills in order to drive higher cash flows and to lower market risk.
On the landfill development side, we continue to advance key permitting activities across our landfills to increase annual capacity limits at select sites and expand total permitted capacity across our footprint. Since early 2016, we have been successful in advancing permit increases at our Subtitle D landfills located in Angelica, New York (“Hyland Landfill”), Seneca, New York (“Ontario County Landfill”), Chemung, New York ("Chemung County Landfill"), West Old Town, Maine ("Juniper Ridge Landfill"), Schuyler Falls, New York (“Clinton County Landfill”), Coventry, Vermont ("Waste USA Landfill"), Campbell, New York (“Hakes Landfill”) and Bethlehem, New Hampshire ("NCES Landfill"). Cumulatively, these efforts have added 462,000 tons per year of permitted capacity and approximately 50.9 million cubic yards of permitted airspace.
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Driving Additional Profitability in Collection Operations
Collection pricing was up 4.2% for fiscal year 2020, as compared to fiscal year 2019, with sustained execution against our strategic pricing programs. On the operating side, we continue to advance several key areas, including route optimization, fleet standardization and automation, and maintenance programs to further reduce our operating costs in the collection line-of-business. We are in the sixth year of our comprehensive fleet plan, which is designed to optimize our fleet and target truck replacements to maximize returns, reduce our operating expenses through lower maintenance costs, improve our service levels through reduced down times, and conduct additional automation and optimization of trucks and service types.
The combination of these operating advancements and pricing programs are driving improved results in our collection line-of-business, with our cost of operations as a percentage of revenues down approximately 680 basis points from the twelve months ended December 31, 2014 to fiscal year 2020.
Creating Incremental Value Through Resource Solutions
In early fiscal year 2020, we combined our resource-oriented business units (customer solutions, recycling and organics) under a newly formed operating segment called Resource Solutions. By combining our resource and sustainability-oriented businesses into the Resource Solutions operating segment, we now have a dedicated team and business strategy focused on driving value-added resource solutions to our customers. These solutions range from professional services to large industrial, institutional or multi-site retail customers, to our organics business, which is a leader in organics processing and disposal in the Northeast, and to our large scale, technology-driven recycling business.
Our professional services business continues to make progress pivoting from the legacy waste and recycling brokerage model to an advisory services organization focused on helping large industrial and institutional customers meet their resource management and sustainability goals.
Over the last five years, we have worked to reshape our recycling business model to drive higher returns in all market cycles and reduce exposure to recycling commodity price volatility. We have accomplished this goal by: (1) restructuring most third-party processing contracts to limit downside risk by charging processing fees; (2) implementing our sustainability recycling adjustment Fee (“SRA Fee”) for our collection customers (the SRA Fee floats inversely to changes in recycling commodity prices); (3) making key investments in recycling processing infrastructure to reduce operating costs and improve the quality of the end commodities; and (4) developing strong partnerships with industrial consumers of recycled materials to ensure that the materials our customers recycle make their way into new products and beneficial uses. Our risk mitigation programs have offset most of the recent commodity price declines driven primarily by China’s National Sword program that banned the import of certain recycled materials and imposed strict new contamination standards for others, and we expect these programs to continue to reduce our commodity risk exposure.
Using Technology to Drive Profitable Growth and Efficiencies
We launched a five-year technology plan in August 2017 to drive profitable growth, reduce our general and administration costs by 75 to 100 basis points as a percentage of revenues by 2021, and improve our operating efficiencies. We have focused our efforts on improving our overall technology platform, driving salesforce effectiveness, and increasing efficiencies in our back-office and across our operations.
To date as part of our technology plan, we have successfully implemented: the Microsoft Dynamics Customer Resource Management system to help manage and drive higher salesforce effectiveness; the Microsoft Dynamics Case Management system to ensure strong integration between our salesforce, customer care group and operating teams; and the cloud-based NetSuite Enterprise Resource Planning system as the new financial backbone to our business.
During fiscal year 2020, we focused our technology efforts on: piloting a new on-board computing system and dynamic routing system for our collection fleet; developing a new modernized service management system for taking customer orders and dispatching our collection fleet; and launching a technology upgrade to digitize and streamline our procurement processes. We plan to continue to advance these important initiatives through the fiscal year ending December 31, 2021 ("fiscal year 2021").
Allocating Capital to Balance Debt Delevering with Smart Growth
Over the last seven years we made significant progress in simplifying our business structure, improving cash flows and reducing risk exposure by: (1) divesting, or in certain cases, closing underperforming operations that did not enhance or complement our core operations; (2) refinancing debt to lower interest costs and improve financial flexibility; and (3) adhering to strict capital discipline and debt repayment. As a result of these actions, we have significantly reduced our consolidated net leverage ratio by approximately 50% over the last six years to 2.76x as of December 31, 2020. See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K for more disclosure over our consolidated net leverage ratio.
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Given our progress in each area and as part of the 2021 Plan, we shifted our capital strategy to use our capital in a manner that balances continued delevering with smart acquisition and development growth. As part of this strategy, we set a goal of adding $20 million to $40 million per year of annualized revenues through acquisition or development activity. We believe that acquisition or development activity should be opportunistic, and we plan to strictly adhere to our disciplined capital return hurdles and rigorous review process.
We have made significant progress ramping up our strategic growth initiative, as we have acquired 29 solid waste collection, transfer and recycling businesses during the fiscal year ended December 31, 2018 ("fiscal year 2018"), fiscal year 2019 and fiscal year 2020, with approximately $148 million of annualized revenues. We expect revenue growth of approximately $7 million in fiscal year 2021 from the full year of revenue from acquisitions completed in fiscal year 2020, but which contributed to our revenues for only part of the year in fiscal year 2020.
We are focused on acquiring well-run businesses in strategic markets across our footprint and in adjacent markets that will drive additional internalization to our facilities, operating synergies, and opportunities to grow profitably into new market areas. We are also focused on more effectively optimizing waste placement around the Northeast as the ever-tightening disposal market is creating additional opportunities to source new volumes at higher prices.
Recent Developments
With the global outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization in March 2020, the U.S. Government and all of the states in which we operate have declared the waste services industry as an essential services provider and as a result we are committed to continue to operate and provide our full breadth of services. We have prioritized the safety and well-being of our employees by strictly adhering to recommendations of the Centers for Disease Control and Prevention as well as executive orders of the states in which we operate.
The COVID-19 pandemic has caused, and will to continue to cause, economic disruption across our geographic footprint and has adversely affected, and is expected to continue to adversely affect, our business. The COVID-19 pandemic negatively impacted our revenues starting at the end of the first quarter of fiscal year 2020, as many small business and construction collection customers required service level changes and volumes into our landfills declined due to lower economic activity. Even with the continued negative impact of the COVID-19 pandemic, we did experience improved demand for services as local economies started to reopen as allowed by State Governments. This positive trend continued through December 31, 2020, as additional small business collection customers increased service levels, construction activity continued to rebound, and overall higher economic activity across the northeast led to higher landfill volumes. Despite these positive trends, our collection and disposal operations were negatively impacted by lower volumes attributable to the COVID-19 pandemic in fiscal year 2020, extending into the first quarter of fiscal year 2021.
The COVID-19 pandemic has negatively impacted and will continue to impact our business in other ways, as we have experienced and continue to experience increased costs in response to the COVID-19 pandemic, including, but not limited to, higher costs associated with providing a safe working environment for our employees (such as increased costs associated with the protection of our employees, including costs for additional safety equipment, hygiene products and enhanced facility cleaning), potential employee layoffs or furloughs, employee impacts from illness, supporting a remote administration workforce, community response measures, the inability of customers to continue to pay for services, and temporary closures of our facilities or the facilities of our customers. In early September 2020, we also paid a special bonus to all our hourly employees (both frontline and administrative) to recognize their hard work and commitment to safety, environmental compliance and high customer service standards as essential service providers during the COVID-19 pandemic. We have taken measures to reduce costs in other areas and preserve liquidity during this period of uncertainty. As of the date of this filing, we are unable to determine or predict the nature, duration or scope of the overall impact that the COVID-19 pandemic will have on our business, results of operations, liquidity and capital resources. For further information regarding the impact of the COVID-19 pandemic on us, see Item 1A, “Risk Factors” included in this Annual Report on Form 10-K.
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Operational Overview
We manage our solid waste operations, which are vertically integrated and include a full range of solid waste services, on a geographic basis through two regional operating segments, which we designate as the Eastern and Western regions. Within each geographic region, we organize our solid waste services around smaller areas that we refer to as “wastesheds.” A wasteshed is an area that comprises the complete cycle of activities in the solid waste services process, from collection to transfer operations and recycling to disposal in landfills, some of which may be owned and/or operated by third parties. We typically operate several divisions within each wasteshed, each of which provides a particular service, such as collection, recycling, disposal or transfer. Each division operates interdependently with the other divisions within the wasteshed. Each wasteshed generally operates autonomously from adjoining wastesheds.
Our Eastern region consists of wastesheds located in Maine, northern, central and southeastern New Hampshire and central and eastern Massachusetts. We began entering into these wastesheds beginning in 1996 and have expanded primarily through acquisitions and organic growth since. Our Western region includes wastesheds located in Vermont, southwestern New Hampshire, eastern, western and upstate New York, northwestern Massachusetts, and in Pennsylvania around our Subtitle D landfill located in Mount Jewett, Pennsylvania ("McKean Landfill"). We began entering into these wastesheds in 1997 and have expanded primarily through tuck-in acquisitions and organic growth. Our Western region collection operations include leadership positions in nearly every secondary market outside of the larger metropolitan markets. We remain focused on increasing our vertical integration in our Western region through extension of our reach into new markets and managing new materials.
We classify our resource-renewal services by service in our Resource Solutions operating segment. Our Resource Solutions operating segment derives its revenues from our recycling, customer solutions and organics lines-of-business. We restructured and formed the Resource Solutions operating segment as of January 1, 2020 to be able to leverage our core competencies in materials processing, industrial recycling, clean energy, and organics service offerings in order to generate additional value from the waste stream for larger commercial and industrial customers with more diverse needs.
The following table provides information about each operating segment (as of January 31, 2021 except revenue information, which is for fiscal year 2020):
Eastern Region | Western Region | Resource Solutions | |||||||||||||||
| Revenues (in millions) | $220.3 | $358.0 | $196.3 | ||||||||||||||
| Number of Properties: | |||||||||||||||||
| Solid waste collection facilities | 17 | 29 | — | ||||||||||||||
| Transfer stations | 24 | 34 | — | ||||||||||||||
| Recycling facilities | 3 | 6 | 11 | ||||||||||||||
| Subtitle D landfills | 2 | 6 | — | ||||||||||||||
| C&D landfills | — | 1 | — | ||||||||||||||
See our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for our financial results for fiscal years 2020, 2019 and 2018, and our financial position as of December 31, 2020 and December 31, 2019.
Solid Waste Operations
Solid waste operations within our Eastern and Western regions comprise a full range of non-hazardous solid waste services, including collections, transfer stations, and disposal facilities. Revenues in our Eastern and Western regions consist primarily of fees charged to customers for solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services. We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual households. Landfill and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations. We also generate and sell electricity at certain of our landfill facilities.
Collections. A majority of our commercial and industrial collection services are performed under one-to-five year service agreements, with prices and fees determined by such factors as: collection frequency; type of equipment and containers furnished; type, volume and weight of solid waste collected; distance to the disposal or processing facility; and cost of disposal or processing. Our residential collection and disposal services are performed either on a subscription basis (with no underlying contract) with individuals, or through contracts with municipalities, homeowner associations, apartment building owners or mobile home park operators.
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Transfer Stations. Our transfer stations receive, compact and transfer solid waste, collected primarily by our various residential and commercial collection operations, for transport to disposal facilities by larger vehicles. We believe that transfer stations benefit us by: (1) increasing the size of the wastesheds which have access to our landfills; (2) reducing costs by improving utilization of collection personnel and equipment; and (3) helping us build relationships with municipalities and other customers by providing a local physical presence and enhanced local service capabilities.
Landfills. We operate eight solid waste Subtitle D landfills and one landfill permitted to accept C&D materials. Revenues are received from municipalities and other customers in the form of tipping fees. The estimated capacity at our landfills is subject to change based on engineering factors, requirements of regulatory authorities, our ability to continue to operate our landfills in compliance with applicable regulations and our ability to successfully renew operating permits and obtain expansion permits at our sites.
The following table (in thousands) reflects the aggregate landfill capacity and airspace changes, in tons, for landfills we operated during fiscal years 2020, 2019 and 2018:
| Fiscal Year 2020 | Fiscal Year 2019 | Fiscal Year 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Estimated Remaining Permitted Capacity (1) | Estimated Additional Permittable Capacity (1)(2) | Estimated Total Capacity | Estimated Remaining Permitted Capacity (1) | Estimated Additional Permittable Capacity (1)(2) | Estimated Total Capacity | Estimated Remaining Permitted Capacity (1) | Estimated Additional Permittable Capacity (1)(2) | Estimated Total Capacity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of year | 44,434 | 34,139 | 78,573 | 35,810 | 47,053 | 82,863 | 36,159 | 46,301 | 82,460 | ||||||||||||||||||||||||||||||||||||||||||||
New expansions pursued (3) | — | — | — | — | 648 | 648 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Permits granted (4) | 993 | (993) | — | 12,675 | (12,675) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Airspace consumed | (3,594) | — | (3,594) | (4,048) | — | (4,048) | (4,160) | — | (4,160) | ||||||||||||||||||||||||||||||||||||||||||||
Changes in engineering estimates (5) | 848 | (1,907) | (1,059) | (3) | (887) | (890) | 3,811 | 752 | 4,563 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of year | 42,681 | 31,239 | 73,920 | 44,434 | 34,139 | 78,573 | 35,810 | 47,053 | 82,863 | ||||||||||||||||||||||||||||||||||||||||||||
(1)We convert estimated remaining permitted capacity and estimated additional permittable capacity from cubic yards to tons generally by assuming a compaction factor derived from historical average compaction factors, with modification for future anticipated changes. In addition to a total capacity limit, certain permits place a daily and/or annual limit on capacity.
(2)Represents capacity which we have determined to be “permittable” in accordance with the following criteria: (i) we control the land on which the expansion is sought; (ii) all technical siting criteria have been met or a variance has been obtained or is reasonably expected to be obtained; (iii) we have not identified any legal or political impediments which we believe will not be resolved in our favor; (iv) we are actively working on obtaining any necessary permits and we expect that all required permits will be received; and (v) senior management has approved the project based on a review of the engineering design and determination that the financial return profile meets our investment criteria.
(3)The increase in capacity associated with new expansions pursued in fiscal year 2019 relates to the determination of additional permittable airspace at the NCES Landfill in our Eastern region.
(4)The increase in remaining permitted airspace capacity in fiscal year 2020 was the result of a permit received at the NCES Landfill in our Eastern region and, in fiscal year 2019, was the result of permits received at the Waste USA Landfill and at the Hakes Landfill in our Western region.
(5)The variation in changes in airspace capacity associated with engineering estimates are primarily the result of changes in compaction at our landfills and estimated airspace changes associated with design changes at certain of our landfills.
Our Eastern region consists of the following landfills:
NCES Landfill. NCES Landfill is a Subtitle D landfill located in Bethlehem, New Hampshire that we purchased in 1994. NCES Landfill currently consists of approximately 52 acres of permitted or permittable landfill area, and is permitted to accept municipal solid waste, C&D material and certain pre-approved special wastes. In October 2020, we received approval for a permit modification for an additional 1.24 million cubic yards of capacity at the NCES Landfill. The permit modification included an annual permit limit of 0.23 million cubic yards per year. We are party to an agreement for the construction of a landfill gas-to-energy plant, which will be constructed, owned and operated by a third-party once completed.
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Juniper Ridge Landfill. Juniper Ridge Landfill is a Subtitle D landfill located in West Old Town, Maine. In 2004, we completed transactions with the State of Maine and Georgia-Pacific Corporation (“Georgia Pacific”), pursuant to which the State of Maine took ownership of Juniper Ridge Landfill, formerly owned by Georgia Pacific, and we became the operator under a 30-year operating and services agreement between us and the State of Maine. Juniper Ridge Landfill currently consists of approximately 179 acres of permitted or permittable landfill area, which is sufficient to permit the additional airspace required for the term of the 30-year operating and services agreement, and is permitted to accept the following waste originating from the State of Maine: C&D material, ash from municipal solid waste incinerators and fossil fuel boilers, front end processed residuals and bypass municipal solid waste from waste-to-energy facilities and certain pre-approved special waste. Outside of the limitations on municipal solid waste, there are no annual tonnage limitations at Juniper Ridge Landfill. We are party to an agreement for the construction of a landfill gas-to-energy plant at the Juniper Ridge Landfill, which will be constructed, owned and operated by a third-party.
Our Western region consists of the following landfills:
Waste USA Landfill. Waste USA Landfill is a Subtitle D landfill located in Coventry, Vermont that we purchased in 1995, and is the only operating permitted Subtitle D landfill in the State of Vermont. Waste USA Landfill consists of approximately 144 acres of permitted or permittable landfill area and is permitted to accept up to 0.6 million tons of municipal solid waste, C&D material and certain pre-approved special waste annually. The Waste USA Landfill site houses a landfill gas-to-energy plant, which is owned and operated by a third-party, that has the capacity to generate 8.0 MW of energy.
Clinton County Landfill. Clinton County Landfill is a Subtitle D landfill located in Schuyler Falls, New York. Clinton County Landfill, which currently consists of approximately 197 acres of permitted or permittable landfill area, portions of which are leased from Clinton County, is permitted to accept up to approximately 0.25 million tons of municipal solid waste, C&D material and certain pre-approved special waste annually. The Clinton County Landfill site houses a landfill gas-to-energy facility, which is owned by us and operated by a third-party, that has the capacity to generate 6.4 MW of energy.
Hyland Landfill. Hyland Landfill is a Subtitle D landfill located in Angelica, New York that we own, and that began accepting waste in 1998. Hyland Landfill currently consists of approximately 121 acres of permitted or permittable landfill area and is permitted to accept up to 0.5 million tons of municipal solid waste, C&D material and certain pre-approved special waste annually. The Hyland Landfill site houses a landfill gas-to-energy facility, which is owned by us and operated by a third-party, that has the capacity to generate 4.8 MW of energy.
Ontario County Landfill. Ontario County Landfill is a Subtitle D landfill located in Seneca, New York. In 2003, we entered into a 25-year operation, management and lease agreement for the Ontario County Landfill with the Ontario County Board of Supervisors. Ontario County Landfill currently consists of approximately 171 acres of permitted or permittable landfill area and is permitted to accept up to 0.9 million tons of municipal solid waste, C&D material and certain pre-approved special waste annually and is strategically situated to accept long haul volume from both the eastern and downstate New York markets. In January 2016, we received an expansion permit at the Ontario County Landfill, which is sufficient to permit the additional airspace required for the remaining term of the 25-year operation, management and lease agreement. The Ontario County Landfill site houses a Zero-Sort material recovery facility ("MRF"), which is operated by us, and a landfill gas-to-energy facility, which is owned and operated by a third-party, that has the capacity to generate 11.2 MW of energy.
Hakes Landfill. Hakes Landfill is a C&D landfill located in Campbell, New York that we purchased in 1998. Hakes Landfill currently consists of approximately 78 acres of permitted landfill area and is permitted to accept up to 0.5 million tons of C&D material annually.
Chemung County Landfill. Chemung County Landfill is a Subtitle D landfill located in Chemung, New York. In 2005, we entered into a 25-year operation, management and lease agreement for Chemung County Landfill and certain other facilities with Chemung County. Chemung County Landfill currently consists of approximately 113 acres of permitted or permittable landfill area strategically situated to accept long haul volume from both eastern and downstate New York markets and is permitted to accept up to 0.4 million tons of municipal solid waste and certain pre-approved special waste annually and 20.5 thousand tons of C&D material annually. In the fiscal year ended December 31, 2016, we received an expansion permit at Chemung County Landfill, which is sufficient to permit the additional airspace required for the remaining term of the 25-year operation, management and lease agreement. In fiscal year 2019, we exercised an option to extend the remaining term of the operation, management and lease agreement for up to five years through 2035.
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McKean Landfill. McKean Landfill is a Subtitle D landfill located in Mount Jewett, Pennsylvania that we purchased in 2011. McKean Landfill currently consists of approximately 256 acres of permitted or permittable landfill area and is permitted to accept up to approximately 0.3 million tons of municipal solid waste, C&D material and certain pre-approved special waste annually. The facility permit authorizes the construction of the rail siding at the landfill which if completed, would expand the market reach for the landfill to other rail capable transfer facilities. We have not yet committed to the construction of the rail siding pending a determination of the economic viability. We believe that McKean Landfill is well situated to provide services to the oil and gas industry that explores natural gas resources in the Marcellus Shale region of Pennsylvania in the form of disposal capacity for residual materials.
Our closed landfills consist of the following landfills:
In fiscal year 2017, we initiated a plan to cease operations of the Town of Southbridge, Massachusetts landfill (“Southbridge Landfill”) and decided to not proceed with expansion efforts and to close Southbridge Landfill once the remaining capacity had been exhausted, which occurred in fiscal year 2018. Closure operations, which began in November 2018 when Southbridge Landfill reached its final capacity, are ongoing.
In addition to Southbridge Landfill, we own and/or manage five unlined landfills and three lined landfills that are not currently in operation. We are closing, in the case of Southbridge Landfill, or have closed and capped all of these landfills according to applicable environmental regulatory standards.
Resource Solutions
Resource solutions services consist of tailored offerings to commercial and industrial customers with more diverse needs, and revenues associated with our resource-renewal operations are derived from organics services, large scale commercial and industrial services, as well as recycling services.
Organics. Our organics line-of-business has been working to develop and/or partner with firms that have developed innovative approaches to deriving incremental value from the organic portion of the waste stream. Organics services primarily consist of the collection and/or receipt of organic materials at one of our processing or disposal facilities; the processing of the organic materials; and the disposal or sale of the organic materials. Through our earthlife® soils products, we offer a wide array of organic fertilizers, composts, and mulches that help our customers recycle organic waste streams. We also have ownership interests in AGreen Energy, LLC and BGreen Energy, LLC, which we account for as cost method investments, that partner with other capital investors to build farm-based anaerobic digesters in the northeastern United States to generate electricity from farm and food waste streams.
Customer Solutions. Our customer solutions line-of-business works with larger scale commercial or industrial organizations (including multi-location customers, colleges and universities, municipalities, and industrial customers) to develop customized solid waste and recycling solutions. The focus of this business is to help these large-scale organizations achieve their economic and environmental objectives related to waste and residual management. We differentiate our services from our competitors by providing customized and comprehensive resource solutions, which enables us to win new business, including traditional solid waste collection and disposal customers. Commercial services consist of traditional collection, disposal and recycling services provided to large account multi-site customers. Industrial services consist of overall resource management services provided to large and complex organizations, such as universities, hospitals, manufacturers and municipalities, delivering a wide range of environmental services and zero waste solutions.
Recycling. Our recycling line-of-business is one of the largest processors and marketers of recycled materials in the northeastern United States. Our recycling line-of-businesses facilities are located in Vermont, New York, Maine, and Massachusetts, including our six large-scale, high volume MRFs, one of which is located in New York, two of which are located in Vermont, two of which are located in Massachusetts, and one of which is located in Maine. Two of the six MRFs are leased, three are owned, and one is operated by us under a contract with municipal third-party. Our MRFs receive, sort, bale and sell recyclable materials originating from the municipal solid waste stream, including newsprint, cardboard, office paper, glass, plastic, steel or aluminum containers and bottles. We also operate smaller MRFs, which generally process recyclables collected from our various residential and commercial collection operations. Recycling services primarily consist of the collection and/or receipt of recycled materials at one of our MRFs; the processing or sorting of the recycled materials; and the disposal or sale of the recycled materials. In fiscal year 2020, our recycling line-of-business processed and/or marketed over 0.6 million tons of recyclable materials including tons marketed through our commodity brokerage division and our baling facilities located throughout our footprint, including just under 0.5 million tons per year of recycled materials delivered to them by municipalities and commercial customers under long-term contracts.
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Revenues from recycling services consist of revenues derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales. A substantial portion of the material provided to our recycling line-of-business is delivered pursuant to multiple significant anchor contracts. The terms of the recycling contracts vary, but all of the contracts provide that the municipality or a third-party delivers the recycled materials to our facility. These contracts may include a minimum volume guarantee by the municipality. We also have service agreements with individual towns and cities and commercial customers, including small solid waste companies and major competitors, which do not have processing capacity within a specific geographic region. Under the recycling contracts, we charge the municipality a fee for each ton of material delivered to us. Some contracts contain revenue sharing arrangements under which the municipality receives a specified percentage of our revenues from the sale of the recovered materials if certain economic thresholds are met. In brokerage arrangements, we act as an agent that facilitates the sale of recyclable materials between an inbound customer and an outbound customer. Revenues from the brokerage of recycled materials are recognized on a net basis at the time of shipment. In general, these fees are variable in nature.
Our recycling line-of-business has historically derived a significant portion of its revenues from the sale of recyclable materials, particularly newspaper, corrugated containers, plastics, ferrous and aluminum. The pricing for these materials can fluctuate based upon market conditions. However, we have actively worked to reduce our risk exposure to commodity pricing volatility over the last five years through our efforts to shift customers to a processing fee model and other risk management programs. In fiscal year 2020, we generated 44.0% of recycling line-of-business revenues from commodity sales as compared to 86.5% in the fiscal year ended December 31, 2016.
We effectively manage commodity pricing volatility through our long-term revenue sharing (or processing fee) contracts with customers. Under such contracts, we obtain a guaranteed minimum price for recyclable materials through the receipt of a tipping or processing fee when commodity prices fall below agreed upon thresholds. Conversely, when prices for recyclable materials rise above agreed upon thresholds, we provide the counterparty with a portion of the related revenues above such threshold. Also, we mitigate the impact from commodity price fluctuations through the use of a floating SRA fee charged to collection customers to offtake recycling commodity risk. Further, we work to manage commodity pricing risk through commodity sales contracts with large domestic companies that use the recyclable materials in their manufacturing process, such as paper, packaging and consumer goods companies.
At times, we also hedge against fluctuations in the commodity prices of recycled paper and corrugated containers in order to mitigate the variability in cash flows and earnings generated from the sales of recycled materials at floating prices. As of December 31, 2020, no such commodity hedges were in place. The global recycling market has experienced negative commodity pricing pressure resulting from China's National Sword program in 2017. Markets continued to decline through 2019 and early 2020, leveling off at historical lows compared to prior years. Throughout the remainder of 2020 markets moderately rebounded; however, we expect markets to remain depressed as compared to levels before China's National Sword program into the foreseeable future.
See Note 20, Segment Reporting to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a summary of revenues, certain expenses, profitability, capital expenditures, goodwill, and total assets of our operating segments.
Competition
The solid waste services industry is highly competitive. We compete for collection and disposal volume primarily on the basis of the quality, breadth and price of our services. From time to time, competitors may reduce the price of their services in an effort to expand market share or to win a competitively bid municipal contract. These practices may also lead to reduced pricing for our services or the loss of business. In addition, competition exists within the industry for potential acquisition candidates.
Our business strategy generally focuses on operating in secondary or tertiary markets where we have a leading market share. However, in the larger urban markets where we operate, we typically compete against one or more of the large national solid waste companies, including Waste Management, Inc., Republic Services, Inc. and Waste Connections, Inc., any of which may be able to achieve greater economies of scale than we can. We also compete with a number of regional and local companies that offer competitive prices and quality service. In addition, we compete with operators of alternative disposal facilities, including incinerators; with certain municipalities, counties and districts that operate their own solid waste collection and disposal facilities; and with rail-serviced transfer stations that use rail transport to move waste to disposal sites outside of northeastern markets. Public sector facilities may have certain advantages over us due to the availability of user fees, charges or tax revenues.
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Marketing and Sales
We have fully integrated sales and marketing strategies with a primary focus on acquiring and retaining commercial, industrial, municipal and residential customers. Our business strategy focuses on creating a highly differentiated sustainable resource management model that meets customers’ unique needs and provides value “beyond the curb”.
Maintenance of a local presence and identity is an important aspect of our sales and marketing strategy, and many of our divisional managers are involved in local governmental, civic and business organizations. Our name and logo, or, where appropriate, that of our divisional operations, are displayed on all of our containers and trucks. We attend and make presentations at municipal and state meetings, and we advertise in a variety of media throughout our service footprint.
The customer solutions line-of-business serves customers with multiple locations and is focused on growing our share of business with municipal, institutional, commercial and industrial customers. This group leverages the broader service offerings of the Resource Solutions operating segment to provide customers with a full set of solutions to augment our regional and divisional service capabilities.
Marketing activities are focused on retaining existing customers and attracting new commercial and residential customers directly on-route in order to enhance profitability. Marketing campaigns are integrated with divisional management teams, sales personnel and the centralized customer care center.
Human Capital
Our mission is to create value by renewing and sustaining our resources and environment. We believe that one of the most important factors in achieving our mission is to hire and develop employees who make good decisions for our business, customers and communities by adhering to our core values of service, trust, responsibility, integrity, continuous improvement and teamwork. Our team consists of drivers, vehicle technicians, equipment operators, recycling facility sorters, engineers, accountants, customer care specialists, and many other key roles.
As of January 31, 2021, we employed approximately 2,500 employees, including approximately 500 managerial, sales, clerical, information systems or other administrative employees and approximately 2,000 employees involved in collection, transfer, disposal, recycling, organics or other operations. Approximately 160 of our employees are covered by collective bargaining agreements.
Health, Safety and Wellness
A top priority in all of our operations is to protect the health and safety of our team and the communities that we serve. At the heart of our safety program are our safety and operations teams, who are dedicated to ensuring that every employee has a safe operating environment and the necessary training and personal protective equipment (“PPE”), to safely conduct their role. The success of our safety programs and the performance of our health and safety and operating teams is measured by our total recordable incident rate, a measure of accidents and injuries compared to hours worked. Our extensive focus on new hire and ongoing training programs helps us to manage and reduce operational risks for our front-line employees. This is more important than ever with the ongoing COVID-19 pandemic.
Waste management has been classified as Critical Infrastructure Industry by the Department of Homeland Security and as an Essential Service Provider by state governments. To achieve our goal of keeping our employees safe during the COVID-19 pandemic, we have maintained careful adherence to Center for Disease Control and Prevention and state level guidance, including appropriate social distancing, increased cleaning of facilities, and updated PPE and safe practices. In early September 2020, we paid a special bonus to all our hourly employees (both frontline and administrative) to recognize their hard work and commitment to safety, environmental compliance and high customer service standards as essential service providers during the COVID-19 pandemic.
Compensation and Benefit Programs
We strive to provide the necessary resources to support the physical and mental health of our employees and the overall well-being of their families and the communities that we serve. We achieve this through our benefit programs, caring attitude towards our employees, deep engagement in our communities, and adherence to our core values. We are committed to offering high quality benefits at affordable rates, competitive compensation based on role, experience and performance, and a career paths program to encourage our people to advance throughout their employment with us. We conduct market-based surveys to ensure that our employees continue to be paid competitively, and we perform annual reviews to provide feedback and support the growth and development of our team.
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Our partnerships with great companies allow us to provide our employees with enhanced benefits such as a concierge surgery service, telemedicine options, access to a pharmacist to support employees in managing their medications and healthcare budget, and online psychology appointments. We understand the importance of work-life balance for our team, and offer eight weeks maternity leave as well as maintain a robust employee assistance program. We strive to attract and retain exceptional talent. Through comprehensive compensation and benefits, ongoing employee development, tuition reimbursement and a focus on health, safety and employee well-being, we wish to help our employees in all aspects of their lives so they can realize their value and do their best work.
Diversity and Inclusion
Our commitment to workplace diversity and to fostering a culture of inclusion is rooted in our core values of service, trust, responsibility, integrity, continuous improvement and teamwork. Our vision is to draw on our core values to achieve diversity throughout our workforce, including our leadership, through the following initiatives:
•directing recruiting efforts to new talent pools, promoting diversity in our training and development programs, and encouraging diversity within our process for advancing our next cohort of leaders;
•launching a cultural awareness and competency training program for managers that emphasizes diversity and inclusion;
•incorporating diversity and inclusion practices as part of our ongoing efforts to upgrade our procurement system and practices; and
•establishing an internal diversity and inclusion team that will include broad representation from our workforce and will be led by a member of our executive management team.
Employee Engagement & Training and Development
We are committed to building people and cultivating engagement by investing in our career path program in order to provide a clear and measurable development pathway for career growth.
•Apprenticeships: We have developed an apprenticeship program for drivers and technicians, where we recruit new employees from diverse backgrounds and help them build the skills they need to thrive in our organization.
•CDL Training: We have developed a commercial driver's license ("CDL") training school and have partnered with several additional training schools across our operating footprint to help develop skilled drivers for our team. In fiscal year 2019, we supported 45 drivers in securing their CDL, which unlocked new opportunities for them within our company.
•Operations Training: Our operations training program develops individuals into frontline management roles. Through on-the-job training, participants learn the technical and leadership skills required to lead our hauling operations. This program has become a strong pipeline for our operating managers across our company.
Risk Management, Insurance and Performance or Surety Bonds
We actively maintain environmental and other risk management programs that we believe are appropriate for our business. Our environmental risk management program includes evaluating existing facilities, as well as potential acquisitions, for compliance with environmental law requirements. Operating practices at all of our operations are intended to reduce the possibility of environmental contamination, enforcement actions and litigation. We also maintain a worker safety program, which focuses on safe practices in the workplace.
We carry a range of insurance intended to protect our assets and operations, including a commercial general liability policy and a property damage policy. A partially or completely uninsured claim against us (including liabilities associated with cleanup or remediation at our facilities), if successful and of sufficient magnitude, could have a material adverse effect on our business, financial condition and results of operations. Due primarily to market factors beyond our control, the insurance market is increasingly restrictive, potentially limiting our ability to obtain adequate coverage at reasonable prices, if at all. Any future difficulty in obtaining insurance could also impair our ability to secure future contracts, which may be conditioned upon the availability of adequate insurance coverage. See the risk factor titled “Our insurance coverage and self-insurance reserves may be inadequate to cover all significant risk exposures” in Item 1A, “Risk Factors” of this Annual Report on Form 10-K. See also Item 3, “Legal Proceedings” and Note 13, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
We self-insure for automobile and workers’ compensation coverage with reinsurance coverage limiting our maximum exposure. Our maximum exposure in fiscal year 2020 under the workers’ compensation plan was $1.25 million per individual event. Our maximum exposure in fiscal year 2020 under the automobile plan was $3.65 million per individual event.
Municipal solid waste collection contracts and landfill closure and post-closure obligations may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. While we have not experienced difficulty in obtaining these financial instruments, if we are unable to obtain these financial instruments in sufficient amounts or at acceptable rates, we could be precluded from entering into additional municipal contracts or obtaining or retaining landfill operating permits.
We hold a 19.9% ownership interest in Evergreen National Indemnity Company (“Evergreen”), a surety company which provides surety bonds to secure our contractual obligations for certain municipal solid waste collection contracts and landfill closure and post-closure obligations. Our ownership interest in Evergreen is pledged to Evergreen as security for our obligations under the bonds they provide on our behalf.
Customers
We provide our collection services to commercial, institutional, industrial and residential customers. A majority of our commercial and industrial collection services are performed under one-to-five year service agreements, and fees are determined by such factors as: professional or management services required; collection frequency; type of equipment and containers furnished; the type, volume and weight of the solid waste, recyclables or organics collected; the distance to the disposal or processing facility; and the cost of disposal or processing. Our residential collection and disposal services are performed either on a subscription basis (with no underlying contract) with individuals, or through contracts with municipalities, homeowners' associations, apartment owners or mobile home park operators.
Our recycling line-of-business provides recycling services to municipalities, commercial haulers and commercial waste generators within the geographic proximity of the processing facilities.
Seasonality and Severe Weather
Our transfer and disposal revenues historically have been higher in the late spring, summer and early fall months. This seasonality reflects lower volumes of waste in the late fall, winter and early spring months because:
•the volume of waste relating to C&D activities decreases substantially during the winter months in the northeastern United States; and
•decreased tourism in Vermont, New Hampshire, Maine and eastern New York during the winter months tends to lower the volume of waste generated by commercial and restaurant customers, which is partially offset by increased volume from the ski industry.
Because certain of our operating and fixed costs remain constant throughout the fiscal year, operating income is therefore impacted by a similar seasonality. Our operations can be adversely affected by periods of inclement or severe weather, which could increase our operating costs associated with the collection and disposal of waste, delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, increase the volume of waste collected under our existing contracts (without corresponding compensation), decrease the throughput and operating efficiency of our materials recycling facilities, or delay construction or expansion of our landfill sites and other facilities. Our operations can also be favorably affected by severe weather, which could increase the volume of waste in situations where we are able to charge for our additional services provided.
Our recycling line-of-business experiences increased volumes of fiber in November and December due to increased retail activity during the holiday season.
Regulation
Introduction
We are subject to extensive federal, state and local laws and regulations. The laws and regulations affecting us are administered by the United States Environmental Protection Agency (“EPA”) and other federal, state and local environmental, zoning, financial, health and safety agencies. Failure to comply with such requirements could result in substantial costs, including civil and criminal fines and penalties. Except as described in this Annual Report on Form 10-K, we believe that we are currently in substantial compliance with applicable federal, state and local environmental laws, permits, orders and regulations. Other than as disclosed herein, we do not currently anticipate any material costs to bring our existing operations into environmental compliance, although there can be no assurance in this regard for the future. We expect that our operations in the solid waste services industry will be subject to continued and increased regulation, legislation and enforcement oversight. We attempt to anticipate future legal and regulatory requirements and to keep our operations in compliance with those requirements.
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In order to transport, process, or dispose of solid waste, it is necessary for us to possess and comply with one or more permits from federal, state and/or local agencies. We must renew these permits periodically, and the permits may be modified or revoked by the issuing agency under certain circumstances.
The principal federal statutes and regulations applicable to our operations are as follows:
The Resource Conservation and Recovery Act of 1976, as amended (“RCRA”)
The RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. The RCRA divides waste into two categories, hazardous and non-hazardous. Wastes are generally classified as hazardous if they either (a) are specifically included on a list of hazardous wastes, or (b) exhibit certain characteristics defined as hazardous and are not specifically designated as non-hazardous. Wastes classified as hazardous waste are subject to more extensive regulation than wastes classified as non-hazardous, and businesses that deal with hazardous waste are subject to regulatory obligations in addition to those imposed on businesses that deal with non-hazardous waste.
Among the wastes that are specifically designated as non-hazardous are household waste and “special” waste, including items such as petroleum contaminated soils, asbestos, foundry sand, shredder fluff and most non-hazardous industrial waste products.
The EPA regulations issued under Subtitle C of the RCRA impose a comprehensive “cradle to grave” system for tracking the generation, transportation, treatment, storage and disposal of hazardous wastes. Subtitle C regulations impose obligations on generators, transporters and disposers of hazardous wastes, and require permits that are costly to obtain and maintain for sites where those businesses treat, store or dispose of such material. Subtitle C requirements include detailed operating, inspection, training and emergency preparedness and response standards, as well as requirements for manifesting, record keeping and reporting, corrective action, facility closure, post-closure and financial responsibility. Most states have promulgated regulations modeled on some or all of the Subtitle C provisions issued by the EPA, and in many instances the EPA has delegated to those states the principal role in regulating businesses which are subject to those requirements. Some state regulations impose obligations different from and in addition to those the EPA imposes under Subtitle C.
Leachate generated at our landfills and transfer stations is tested on a regular basis, and generally is not regulated as a hazardous waste under federal law. However, there is no guarantee that leachate generated from our facilities in the future will not be classified as hazardous waste.
In October 1991, the EPA adopted the Subtitle D regulations under RCRA governing solid waste landfills. The Subtitle D regulations, which generally became effective in October 1993, include siting restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater remediation standards and corrective action requirements. In addition, the Subtitle D regulations require that new landfill sites meet more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) intended to keep leachate out of groundwater and have extensive collection systems to carry away leachate for treatment prior to disposal. Regulations generally require us to install groundwater monitoring wells at virtually all landfills we operate, to monitor groundwater quality and, indirectly, the effectiveness of the leachate collection systems. The Subtitle D regulations also require facility owners or operators to control emissions of landfill gas (including methane) generated at landfills exceeding certain regulatory thresholds. State landfill regulations must meet those requirements or the EPA will impose such requirements upon landfill owners and operators in that state.
The Federal Water Pollution Control Act of 1972, as amended (“Clean Water Act”)
The Clean Water Act regulates the discharge of pollutants into “navigable waters” or “waters of the United States” from a variety of sources, including solid waste disposal sites and transfer stations, processing facilities and waste-to-energy facilities (collectively, “solid waste management facilities”). If pollutants from our solid waste management facilities are discharged into streams, rivers or other surface waters, or if there is a functional equivalent of a direct discharge into navigable waters, the Clean Water Act would require us to apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in such discharge. A permit also may be required if run-off or leachate from our solid waste management facilities is discharged to an offsite treatment facility. Almost all solid waste management facilities must comply with the EPA’s storm water regulations, which govern the discharge of regulated storm water to surface waters.
Under federal regulation, facilities that have above ground and/or below ground petroleum storage capacities over certain thresholds may be subject to regulations and/or permitting under the Clean Water Act. Many of our facilities have petroleum storage and are required to have a spill, prevention, control and countermeasures plan to prevent petroleum release to waters of the United States due to a spill, rupture or leak.
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Several states in which we operate have been delegated the authority to implement the Clean Water Act requirements and in some cases the regulations are more stringent than the federal regulations. We believe we are in compliance with the Clean Water Act regulations; however future changes to the law or regulations could have a material impact on our business.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”)
CERCLA established a regulatory and remedial program intended to provide for the investigation and remediation of facilities where, or from which, a release of any hazardous substance into the environment has occurred or is threatened. CERCLA has been interpreted to impose retroactive, strict, and under certain circumstances, joint and severable, liability for the costs to investigate and clean up facilities on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, as well as the generators and certain transporters of the hazardous substances. CERCLA imposes liability for the costs of evaluating and addressing damage to natural resources. The costs of CERCLA investigation and cleanup can be substantial. Liability under CERCLA does not depend upon the existence or disposal of “hazardous waste” as defined by RCRA, but can be based on the presence of any of approximately 800 “hazardous substances” listed by the EPA, many of which can be found in household waste. The definition of “hazardous substances” in CERCLA incorporates substances designated as hazardous or toxic under the Federal Clean Water Act, Clean Air Act and Toxic Substances Control Act ("TSCA"). If we were found to be a responsible party for a CERCLA cleanup, under certain circumstances, the enforcing agency could pursue us or any other responsible party, for all investigative and remedial costs, even if others also were liable. CERCLA also authorizes the EPA to impose a lien in favor of the United States upon all real property subject to, or affected by, a remedial action for all costs for which the property owner is liable. CERCLA provides a responsible party with the right to bring a contribution action against other responsible parties for their allocable share of investigative and remedial costs. Our ability to obtain reimbursement for amounts we pay in excess of our allocable share of such costs would be limited by our ability to identify and locate other responsible parties and to prove the extent of their responsibility and by the financial resources of such other parties.
The Clean Air Act of 1970, as amended (“Clean Air Act”)
The Clean Air Act, generally through state implementation of federal requirements, regulates emissions of air pollutants from certain landfills based upon the date the landfill was constructed, the total capacity of the landfill and the annual volume of emissions. The EPA has promulgated new source performance standards regulating air emissions of certain regulated pollutants (non-methane organic compounds) from municipal solid waste landfills. Landfills located in areas where ambient levels of regulated pollutants exceed certain thresholds may be subject to more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal of asbestos-containing materials under the Clean Air Act.
The EPA is also focusing on the emissions of greenhouse gases ("GHG"), including carbon dioxide and methane. In December 2009, the EPA issued its “endangerment finding” that carbon dioxide poses a threat to human health and welfare, providing the basis for the EPA to regulate GHG emissions. In December 2009 the EPA’s “Mandatory Reporting of Greenhouse Gases” rule went into effect, requiring facilities that emit twenty-five thousand metric tons or more per year of GHG emissions to submit annual reports to the EPA.
In May 2010, the EPA issued the so-called “GHG Tailoring Rule”, which described how certain sources that emit GHG would be subject to heightened Clean Air Act Prevention of Significant Deterioration ("PSD") / Title V regulation. In June 2014, the U.S. Supreme Court issued a decision partially invalidating the GHG Tailoring Rule and in 2015, the D.C. Circuit directed the EPA to consider further revisions to its regulations. In August 2016, the EPA proposed revisions to PSD and Title V regulations to clarify when sources would require permits based on GHG thresholds. We do not know whether or when the EPA will finalize regulations, or what obligations such regulations will impose on our operations.
The adoption of other laws and regulations, which may include the imposition of fees or taxes, could adversely affect our collection and disposal operations. Additionally, certain of the states in which we operate are implementing air pollution control regulations, including regional cap and trade systems, relating to GHG that may be more stringent than regulations the EPA may promulgate. Several states have passed Climate Protection or Global Warming Acts intended to achieve statewide goals in reduction of GHG emissions. Changing environmental regulations could require us to take any number of actions, including purchasing emission allowances, developing mitigation strategies, or installing additional pollution control technology, and could make some operations less profitable, which could adversely affect our results of operations.
Congress has considered various options, including a cap and trade system, which could impose a limit on and establish a pricing mechanism for GHG emissions and emission allowances. There also is pressure for the United States to join international efforts to control GHG emissions.
The Clean Air Act regulates emissions of air pollutants from our processing facilities. The EPA has enacted standards that apply to those emissions. It is possible that the EPA, or a state where we operate, will enact additional or different emission standards in the future.
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All of the federal statutes described above authorize lawsuits by private citizens to enforce certain provisions of the statutes. In addition to a penalty award to the United States, some of those statutes authorize an award of attorney’s fees to private parties successfully advancing such an action.
The Occupational Safety and Health Act of 1970, as amended (“OSHA”)
OSHA establishes employer responsibilities and authorizes the Occupational Safety and Health Administration to promulgate and enforce occupational health and safety standards, including the obligation to maintain a workplace free of recognized hazards likely to cause death or serious injury, to comply with adopted worker protection standards, to maintain certain records, to provide workers with required disclosures and to implement certain health and safety training programs. A variety of those promulgated standards may apply to our operations, including those standards concerning notices of hazards, safety in excavation and demolition work, the handling of asbestos and asbestos-containing materials, and worker training and emergency response programs.
The Public Utility Regulatory Policies Act of 1978, As Amended (“PURPA”)
PURPA exempts qualifying facilities from most federal and state laws governing the financial organization and rate regulation of electric utilities, and generally requires electric utilities to purchase electricity generated by qualifying facilities at a price equal to the utility’s full “avoided cost”. Our landfill gas-to-energy facilities are self-certified as “qualifying facilities”.
State and Local Regulations
Each state in which we now operate or may operate in the future has laws and regulations governing (1) water and air pollution, and the generation, storage, treatment, handling, processing, transportation, incineration and disposal of solid waste and hazardous waste; (2) in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of solid waste management facilities; and (3) in some cases, vehicle emissions limits or fuel types, which impact our collection operations. Such standards typically are as stringent as, and may be more stringent and broader in scope than, federal regulations. Most of the federal statutes noted above authorize states to enact and enforce laws with standards that are more protective of the environment than the federal analog. In addition, many states have adopted statutes comparable to, and in some cases more stringent than, CERCLA. Those statutes impose requirements for investigation and remediation of contaminated sites and liability for costs and damages associated with such sites, and some authorize the state to impose liens to secure costs expended addressing contamination on property owned by responsible parties. Some of those liens may take priority over previously filed instruments. Some states have enacted statutes that impose liability for substances in addition to the “hazardous substances” listed by EPA under CERCLA.
Many municipalities in which we currently operate or may operate in the future also have ordinances, laws and regulations affecting our operations. These include zoning and health measures that limit solid waste management activities to specified sites or conduct, flow control provisions that direct the delivery of solid wastes to specific facilities or to facilities in specific areas, laws that grant the right to establish franchises for collection services and then put out for bid the right to provide collection services, and bans or other restrictions on the movement of solid wastes into a municipality.
Some states have enacted laws that allow agencies with jurisdiction over waste management facilities to deny or revoke permits based on the applicant’s or permit holder’s compliance status. Some states also consider the compliance history of the corporate parent, subsidiaries and affiliates of the applicant or permit holder.
Certain permits and approvals issued under state or local law may limit the types of waste that may be accepted at a solid waste management facility or the quantity of waste that may be accepted at a solid waste management facility during a specific time period. In addition, certain permits and approvals, as well as certain state and local regulations, may limit a solid waste management facility to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. Generally, restrictions on importing out-of-state waste have not withstood judicial challenge. However, from time to time federal legislation is proposed which would allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that could be imported for disposal and would require states, under certain circumstances, to reduce the amounts of waste exported to other states. Although such legislation has not been passed by Congress, if similar legislation is enacted, states in which we operate solid waste management facilities could limit or prohibit the importation of out-of-state waste. Such actions could materially and adversely affect the business, financial condition and results of operations of any of our landfills within those states that receive a significant portion of waste originating from out-of-state.
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Certain states and localities may restrict the export of waste from their jurisdiction, or require that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the U.S. Supreme Court rejected as unconstitutional and therefore invalid, a local ordinance that sought to limit waste going out of the locality by imposing a requirement that the waste be delivered to a particular privately-owned facility. However, in 2007, the U.S. Supreme Court upheld a U.S. District Court ruling that the flow control regulations in Oneida and Herkimer counties in New York requiring trash haulers to use publicly-owned transfer stations are constitutional, and therefore valid. Additionally, certain state and local jurisdictions continue to seek to enforce such restrictions. Some proposed federal legislation would allow states and localities to impose flow restrictions. Those restrictions could reduce the volume of waste going to solid waste management facilities in certain areas, which may materially adversely affect our ability to operate our facilities and/or affect the prices we can charge for certain services. Those restrictions also may result in higher disposal costs for our collection operations. Flow control restrictions could have a material adverse effect on our business, financial condition and results of operations.
There has been an increasing trend at the state and local levels to mandate or encourage both waste reduction at the source and waste recycling, and to prohibit or restrict the disposal in landfills of certain types of solid wastes, including yard wastes and leaves, certain construction or architectural wastes, food wastes, beverage containers, newspapers, household appliances and electronics such as computers, and batteries. Regulations reducing the volume and types of wastes available for transport to and disposal in landfills could affect our ability to operate our landfill facilities. Vermont, for example, enacted Act 148, containing among other things, a phased waste ban for recyclables, organics and leaf/yard waste. The law became effective July 1, 2012, with phased deadlines for compliance beginning 2014 through 2020. Vermont also passed a law requiring recycling of architectural waste from construction or demolition of a commercial project. The law became effective in January 2015.
Massachusetts revised its regulations governing solid waste management with a framework to encourage the re-use of organic waste material and prohibiting such material from disposal for large-scale commercial generators by October 2014. In September 2020, the Massachusetts Department of Environmental Protection proposed amendments to the state’s waste ban regulations to add mattresses and textiles as materials banned from disposal, and to lower the threshold of the existing commercial organics material waste ban.
New York State revised its regulations governing solid waste management, 6 NYCRR Part 360, effective in November 2017. The revised regulations, among other things, include requirements to conduct landfill liner integrity testing and install radiation detectors at certain facilities. New York has also enacted the Food Donation and Food Scraps Recycling Law, which will require certain generators to separate and donate or recycle food scraps starting in January 2022.
Although there is no federal law governing extended producer responsibility (“EPR”) regulations; many states have implemented or are contemplating EPR regulations for certain products. EPR regulations are intended to place responsibility for ultimate management or end-of-useful-life handling of the products they create. In addition to financial responsibility, an EPR program may include responsibility for local take-back or recycling programs. For example, several states in which we operate have EPR regulations for electronic waste. If broad EPR laws or regulations were adopted and managed under a manufacturer implemented program, it could have an impact on our business.
The EPA and environmental agencies within individual states in which we operate also consider and promulgate changes to water quality standards, action levels, remediation goals, and other federal or state regulatory standards for individual compounds or classes of compounds. These changes can also include the development of new or more stringent standards for “Emerging Contaminants”, including per- and polyfluoroalkyl substances, pharmaceutical compounds, and a variety of synthetic chemical compounds used in manufacturing and industrial processes. In December 2016, EPA also designated ten chemical substances for risk evaluations under TSCA, and in December 2019, EPA designated an additional 20 chemical substances for risk evaluation, based on the requirements of the June 2016 Frank R. Lautenberg Chemical Safety for the 21st Century Act. Changes in regulatory standards for existing or emerging contaminants can result in higher levels of cost and effort associated with the performance of environmental investigations and ongoing compliance at our facilities.
Information about our Executive Officers
Our executive officers and their respective ages are as follows:
| Name | Age | Position | ||||||||||||
| John W. Casella | 70 | Chairman of the Board of Directors, Chief Executive Officer and Secretary | ||||||||||||
| Edwin D. Johnson | 64 | President and Chief Operating Officer | ||||||||||||
| Edmond “Ned” R. Coletta | 45 | Senior Vice President and Chief Financial Officer | ||||||||||||
| Christopher B. Heald | 56 | Vice President and Chief Accounting Officer | ||||||||||||
| Shelley E. Sayward | 46 | Senior Vice President and General Counsel | ||||||||||||
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John W. Casella has served as Chairman of our Board of Directors since July 2001 and as our Chief Executive Officer since 1993. Mr. Casella also served as our President from 1993 to July 2001 and as Chairman of our Board from 1993 to December 1999. In addition, Mr. Casella has served as Chairman of the Board of Directors of Casella Waste Management, Inc., a wholly-owned subsidiary of ours, since 1977. Mr. Casella is also an executive officer and director of Casella Construction, Inc., a company owned by Mr. Casella and his brother Douglas R. Casella, also a member of our Board of Directors, which specializes in general contracting, soil excavation and heavy equipment work, and which performs landfill-construction and related services for us. Mr. Casella has been a member of numerous industry-related and community service-related state and local boards and commissions, including the Vermont State Chamber of Commerce, the Rutland Industrial Development Corporation and the Rutland Regional Medical Center. Mr. Casella has also served on various state task forces, serving in an advisory capacity to the Governors of Vermont and New Hampshire on solid waste issues. Mr. Casella holds an A.S. in Business Management from Bryant & Stratton College and a B.S. in Business Education from Castleton State College.
Edwin D. Johnson has served as our President and Chief Operating Officer since December 2012 and as our Senior Vice President and Chief Financial Officer from July 2010 until December 2012. From March 2007 to July 2010, Mr. Johnson served as Executive Vice President, Chief Financial Officer and Chief Accounting Officer at Waste Services, Inc, a solid waste services company. From November 2004 to March 2007, Mr. Johnson served as Chief Financial Officer of Expert Real Estate Services, Inc., a full service real estate brokerage company. Mr. Johnson is a Certified Public Accountant and holds an MBA from Florida International University and a Bachelor of Science in Accounting and Administration from Washington & Lee University.
Edmond “Ned” R. Coletta has served as our Senior Vice President, Chief Financial Officer and Treasurer since December 2012. Mr. Coletta joined us in December 2004 and has served in positions of increasing responsibility, including as our Vice President of Finance and Investor Relations from January 2011 to December 2012. Prior to that Mr. Coletta served as our Director of Finance and Investor Relations from August 2005 to January 2011. From 2002 until he joined us, Mr. Coletta served as the Chief Financial Officer and was a member of the Board of Directors of Avedro, Inc. (FKA ThermalVision, Inc.), an early stage medical device company that he co-founded. From 1997 to 2001, he served as a research and development engineer for Lockheed Martin Michoud Space Systems. Mr. Coletta holds an MBA from the Tuck School of Business at Dartmouth College and a Bachelor of Science in Materials Science Engineering from Brown University.
Christopher B. Heald has served as our Vice President of Finance and Chief Accounting Officer since January 2013. Mr. Heald joined us in September 2001 and has served in positions of increasing responsibility, including as our Director of Financial Reporting and Analysis from July 2010 to January 2013 and as our Accounting Manager from August 2002 to July 2010. Mr. Heald is a Certified Public Accountant and holds a Bachelor of Science in Business Administration from the University of Vermont.
Shelley E. Sayward has served as our Senior Vice President and General Counsel since January 2021. Ms. Sayward has served in various roles in the legal department since November 2006, most recently as our Vice President and Assistant General Counsel from September 2014 to January 2021 and as our Associate General Counsel from September 2008 to September 2014. Prior to joining us, Ms. Sayward held sales and marketing roles with GlaxoSmithKline and Abbott Laboratories, as well as a sales and managerial position with First American Financial Corporation. Ms. Sayward holds a Bachelor of Arts degree from Middlebury College, completed a four-year law clerkship program and is admitted to the Bar in the State of Vermont.
Availability of Reports and Other Information
Our website is www.casella.com. We make available, free of charge through our website, our Annual and Transition Reports on Form 10-K and 10-KT, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, and any amendments to those materials filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. We make these reports available through our website as soon as reasonably practicable after we electronically file such materials with or furnish them to the Securities and Exchange Commission (“SEC”). The information found on our website is not part of this or any other report we file with or furnish to the SEC.
ITEM 1A. RISK FACTORS
The following material factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions, especially in the northeastern United States, where our operations and customers are principally located, changes in laws or accounting rules or other disruptions of expected economic or business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are not material also may impair our business’s results of operations and financial condition.
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We have in place an Enterprise Risk Management process that involves systematic risk identification and mitigation covering the categories of strategic, financial, operational, and compliance risk. The goal of enterprise risk management is not to eliminate all risk, but rather to identify and assess risks; assign, mitigate and monitor risks; and report the status of our risks to the Board of Directors and its committees.
Risks Related to Our Business and Industry
The COVID-19 pandemic and related decline in economic activity has adversely affected, and will continue to adversely affect, our business, outlook, liquidity and results of operations, and we have experienced and expect to continue to experience reductions in demand for certain of our services.
The COVID-19 pandemic has caused, and will continue to cause, economic disruption across our geographic footprint. Although as an essential service provider we have continued our operations, the COVID-19 pandemic negatively impacted our revenues starting at the end of the first quarter of 2020 and through the fourth quarter of 2020 and into the first quarter of 2021, as some of our commercial collection customers requested service level decreases, construction activity decreased and volumes into our landfills declined on lower economic activity. The decline in our customers’ demand for our services and reduced volumes into our landfills has had, and is likely to continue to have, an adverse impact on our financial condition, results of operations and cash flows.
We are closely monitoring and evaluating the potential impacts that the COVID-19 pandemic may have on our business as well as our customers and employees. Due to the uncertain and evolving nature of economic conditions, we are unable to predict accurately the full extent of the impact and effects that the COVID-19 pandemic will have on our business going forward. We currently expect, however, that the COVID-19 pandemic will continue to negatively impact our financial performance going forward. The COVID-19 pandemic has negatively impacted and may continue to impact our business in other ways, including, but not limited to, higher costs associated with providing a safe working environment for our employees, potential employee layoffs or furloughs, employee impacts from illness, supporting a remote administration workforce, community response measures, the inability of customers to continue to pay for services, and temporary closures of our facilities or the facilities of our customers.
The extent of the effects of the COVID-19 pandemic on our business, results of operations and cash flows will ultimately depend on future developments. These include, but are not limited to, the availability and effectiveness of vaccines and therapeutics, the severity, extent and duration of the pandemic; actions taken by national, state and local governments to contain the pandemic or treat its impact; the speed and effectiveness of responses to combat the pandemic; the effect of the changes in hiring levels and remote working arrangements that we and our customers have implemented; and the impact on our contracts with customers and vendors. The COVID-19 pandemic may also materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider to present significant risks to our operations.
We face substantial competition in the solid waste services industry, and if we cannot successfully compete in the marketplace, our business, financial condition and results of operations may be materially adversely affected.
The solid waste services industry is highly competitive, has undergone a period of consolidation and requires substantial labor and capital resources. The markets in which we compete are served by, or are adjacent to markets served by, one or more of the large national or super regional solid waste companies, as well as numerous regional and local solid waste companies. Intense competition exists not only to provide services to customers, but also to acquire other businesses within each market. Some of our competitors have significantly greater financial and other resources than we do. From time to time, competitors may reduce the price of their services in an effort to expand market share or to win a competitively bid contract. These practices may require us to reduce the pricing of our services and may result in a loss of business.
As is generally the case in our industry, municipal contracts are typically subject to periodic competitive bidding. We may not be the successful bidder to obtain or retain these contracts. If we are unable to compete with larger and better capitalized companies or replace municipal contracts lost through the competitive bidding process with comparable contracts or other revenue sources within a reasonable time period, our revenues would decrease and our operating results could be materially adversely affected.
In our solid waste disposal markets, we also compete with operators of alternative disposal and recycling facilities and with counties, municipalities and solid waste districts that maintain their own solid waste collection, recycling and disposal operations. We are also increasingly competing with companies which seek to use parts of the waste stream as feedstock for renewable energy supplies. Public entities may have financial advantages because of their ability to charge user fees or similar charges, impose taxes and apply resulting revenues, access tax-exempt financing, transport waste to disposal sites outside of the northeastern markets, and, in some cases, utilize government subsidies.
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In addition, we may be impacted by the development and commercialization of disruptive technologies that may materially change how waste management services are provided. If we are unable to gain access to these technologies or to compete effectively against them, our financial results may suffer.
We also experience competition in our hiring of drivers and mechanics necessary to service our customers. This competition may come from other waste management companies, but it also comes from other employers who hire drivers and maintain fleets, such as companies that provide courier delivery services, including United Parcel Service, Inc. and FedEx Corporation, as well as from a tightening labor market. If we are unable to hire and retain sufficient numbers of drivers to service our collection and disposal routes and mechanics to maintain our trucks, our financial condition and operating results could be materially impacted.
Our growth strategy focuses on complementing or expanding our business through the acquisition of companies or assets, or the development of new operations. However, we may be unable to complete these transactions and, if executed, these transactions may not improve our business or may pose significant risks and could have a negative effect on our operations.
Our growth strategy includes engaging in acquisitions or developing operations or assets with the goal of complementing or expanding our business. These acquisitions may include “tuck-in” acquisitions within our existing markets, acquisitions of assets that are adjacent to or outside of our existing markets, or larger, more strategic acquisitions. In addition, from time to time we may acquire businesses that are complementary to our core business strategy. We may not be able to identify suitable acquisition candidates, and if we identify suitable acquisition candidates, we may be unable to successfully negotiate the acquisition at a price or on terms and conditions acceptable to us. Furthermore, we may be unable to obtain the necessary regulatory approvals to complete potential acquisitions.
Our ability to achieve the benefits from any potential future acquisitions, including cost savings and operating efficiencies, depends in part on our ability to successfully integrate the operations of such acquired businesses with our operations. The integration of acquired businesses and other assets may require significant management time and resources that would otherwise be available for the ongoing management of our existing operations. Any operations, properties or facilities that we acquire may be subject to unknown liabilities, such as undisclosed environmental contamination, or other environmental liability, including off-site disposal liability for which we would have no recourse, or only limited recourse, to the former owners of such operations or properties. As a result, if a liability were asserted against us based upon ownership of an acquired property, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow.
The waste management industry is undergoing fundamental change as traditional waste streams are increasingly viewed as renewable resources, which may adversely affect volumes and tipping fees at our landfills.
As we continue to develop our landfill capacity, the waste management industry is recognizing the value of the waste stream as a renewable resource, and accordingly, alternatives to landfilling are being developed that seek to maximize the renewable energy and other resource benefits of solid waste. These alternatives affect the demand for landfill airspace, and could affect our ability to operate our landfills at full capacity, as well as the tipping fees and prices that waste management companies generally, and that we, in particular, can charge for landfill airspace. Reduced tipping fees can affect our willingness to incur the expenditures necessary to increase the permitted capacity of the landfills. As a result, our revenues and operating margins could be materially adversely affected due to these disposal alternatives.
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The waste industry is subject to extensive government regulations, including environmental laws and regulations, and we incur substantial costs to comply with such laws and regulations. Failure to comply with environmental or other laws and regulations, as well as enforcement actions and litigation arising from an actual or perceived breach of such laws and regulations, could subject us to fines, penalties, and judgments, and impose limits on our ability to operate
and expand.
We are subject to potential liability and restrictions under environmental laws and regulations, including potential liability and restrictions arising from or relating to the transportation, handling, recycling, generation, treatment, storage and disposal of wastes, the presence, release, discharge or emission of pollutants, and the investigation, remediation and monitoring of impacts to soil, surface water, groundwater and other environmental media including natural resources, as a result of the actual or alleged presence, release, discharge or emission of hazardous substances, pollutants or contaminants on, at, under or migrating from our properties, or in connection with our operations. The waste management industry has been and will continue to be subject to regulation, including permitting and related financial assurance requirements, as well as attempts to further regulate the industry, including efforts to regulate and limit the emission of greenhouse gases. Our solid waste operations are subject to a wide range of federal, state and, in some cases, local environmental, odor and noise and land use restrictions. If we are not able to comply with the requirements that apply to a particular facility or if we operate in violation of the terms and conditions of, or without the necessary approvals or permits, we could be subject to administrative or civil, and possibly criminal, fines and penalties, and we may be required to spend substantial capital to bring an operation into compliance, to temporarily or permanently discontinue activities, and/or take corrective actions, possibly including removal of landfilled materials. Those costs or actions could be significant to us and affect our results of operations, cash flows, and available capital. Environmental and land use laws and regulations also affect our ability to expand and, in the case of our solid waste operations, may dictate those geographic areas from which we must, or, from which we may not, accept solid waste. Those laws and regulations may limit the overall size and daily solid waste volume that may be accepted by a solid waste operation. If we are not able to expand or otherwise operate one or more of our facilities because of limits imposed under such laws, we may be required to increase our utilization of disposal facilities owned by third-parties, which could reduce our revenues and/or operating margins.
In addition to complying with environmental laws and regulations, we are required to obtain government permits to operate our facilities, including all of our landfills. There is no guarantee that we will be able to obtain the requisite permits and, even if we could, that any permit (and any existing permits we currently hold) will be renewed or modified as needed to fit our business needs. Localities where we operate generally seek to regulate some or all landfill and transfer station operations, including siting and expansion of operations. The laws and regulations adopted by municipalities in which our landfills and transfer stations are located may limit or prohibit the expansion of a landfill or transfer station, as well as the amount of solid waste that we can accept at the landfill or transfer station on a daily, quarterly or annual basis, and any effort to acquire or expand landfills and transfer stations, which typically involves a significant amount of time and expense. In addition, state laws applicable to certain of our landfills require that the state determine whether acceptance of waste at the landfill not generated within the state provides a substantial public benefit. We may not be successful in obtaining new landfill or transfer station sites or expanding the permitted capacity of any of our current landfills and transfer stations. If we are unable to develop additional disposal and transfer station capacity, our ability to achieve economies from the internalization of our waste stream will be limited. If we fail to receive new landfill permits or renew existing permits, we may incur landfill asset impairment and other charges associated with accelerated closure. For information about a claim relating to the permitting of our new landfill in Dalton, New Hampshire and our NCES Landfill, see Note 13, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K
We have historically grown through acquisitions, may make additional acquisitions in the future, and we have tried and will continue to try to evaluate and limit environmental risks and liabilities presented by businesses to be acquired prior to the acquisition. It is possible that some liabilities may prove to be more difficult or costly to address than we anticipate. It is also possible that government officials responsible for enforcing environmental laws and regulations may believe an issue is more serious than we expect, or that we will fail to identify or fully appreciate an existing liability before we become responsible for addressing it. Some of the legal sanctions to which we could become subject could cause the suspension or revocation of a permit, prevent us from, or delay us in, obtaining or renewing permits to operate or expand our facilities, or harm our reputation. As of December 31, 2020, we have recorded a $0.9 million environmental remediation liability for the estimated cost of our share of work associated with a consent order issued by the State of New York to remediate a scrap yard and solid waste transfer station owned by one of our acquired subsidiaries, including the recognition of accretion expense, and a $4.3 million environmental remediation liability related to our obligation associated with installation of a municipal waterline associated with Southbridge Recycling & Disposal Park, Inc. discussed in Note 13, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, including the recognition of accretion expense in other accrued liabilities and other long-term liabilities. There can be no assurance that the cost of such cleanup or that our share of that cost will not exceed our estimates.
In addition to the costs of complying with environmental laws and regulations, we incur costs in connection with environmental proceedings and litigation brought against us by government agencies and private parties. We are, and may be in the future, a
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defendant in lawsuits brought by parties alleging environmental damage, including natural resource damage, personal injury, and/or property damage or impairment, or seeking to impose civil penalties, injunctive relief or overturn or prevent the issuance of an operating permit or authorization, all of which may result in us incurring significant liabilities. For information about the material outstanding claims against us and our subsidiaries, see Note 13, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
We may not have sufficient insurance coverage for our environmental liabilities, such coverage may not cover all of the potential liabilities we may be subject to and/or we may not be able to obtain insurance coverage in the future at reasonable expense, or at all.
The conduct of our businesses is also subject to various other laws and regulations administered by federal, state and local governmental agencies, including tax laws, employment laws and competition laws, among others. New laws, regulations or governmental policy and their related interpretations, or changes in any of the foregoing, including taxes or other limitations on our services, may alter the environment in which we do business and, therefore, may impact our results or increase our costs or liabilities.
In certain jurisdictions, we are subject to compliance with specific obligations under competition laws due to our competitive position in those jurisdictions. For example, in May 2002, we entered into an assurance of discontinuance with the Vermont Attorney General’s Office concerning, among other matters, the conduct of our business in Vermont relating to certain contract terms applicable to our small commercial container customers. In August 2011, a revised final judgment of consent and order was entered by the Vermont Superior Court Washington Unit, Civil Division, as a result of some of our small commercial container customers having been mistakenly issued contracts that did not strictly comply with the terms of the assurance of discontinuance. Pursuant to the order, we paid a civil penalty in an aggregate amount of $1.0 million. In July 2014, we entered into an assurance of discontinuance with the office of the New York Attorney General in connection with certain of our commercial practices in certain specified counties in New York, pursuant to which we paid the State of New York a sum of $0.1 million. The assurances of discontinuance and order provide for certain restrictions on our customer contract terms, certain conditions on our business acquisitions, sales and market share and require us to maintain an internal compliance program. Failure to comply with these requirements or other laws or regulations could subject us to enforcement actions or financial penalties which could have a material adverse effect on our business.
Our results of operations are affected by low commodity prices and diminished markets for recyclable materials.
Our results of operations have been and will continue to be affected by falling purchase or resale prices or market requirements for recyclable materials. Our recycling business involves the purchase and sale of recyclable materials, some of which are priced on a commodity basis. The commodity markets continue to see ongoing negative pressure on pricing associated with the decline of the fiber market due to less use of paper products such as newspaper and office paper as a result of increased online reading. As a result of these market changes, domestic demand for various recycled fibers from mill buyers has steadily declined over the past decade, and as such until 2017 we had exported more of these materials overseas to China. In 2017, China launched a campaign called National Sword which imposed significant restrictions on the importation into China of recyclable materials, including a complete ban on the import into China of mixed paper and new quality standards for contaminants in recyclable materials commencing January 1, 2018. Furthermore, China issued limited import licenses for its mills to import recyclable commodities, resulting in a decrease of over 50% of imports of recyclable commodities into China. These factors have had a significant impact on our business and have required us to seek alternative export markets for recyclable commodities.
In addition, some of the countries that took recyclable commodities following China’s imposition of restrictions, including Indonesia and India, have themselves imposed similar restrictions on U.S. exports, further impacting prices. Although we have restructured many of our recycling contracts to require the respective municipalities to absorb some of the impact of declining commodity prices, these restructured contracts have had the impact of significantly increasing the costs to municipalities for continuing to offer recycling services to their customers. In the event that the costs of such services become excessive, such municipalities could discontinue their recycling programs altogether, which could materially affect our financial results. We seek to limit our exposure to fluctuating commodity prices through: our revenue sharing contracts that share commodity prices above a threshold level or charge a tipping fee below the threshold; our net commodity rate formula that allows us to pass back higher costs to sell commodities, including higher labor costs or equipment costs to meet new quality standards; our floating sustainability recycling adjustment fee that passes back the cost of recycling to our collection customers; and as applicable, the use of hedging agreements, floor price contracts and long-term supply contracts with customers. Although we have introduced these risk mitigation programs to help offset volatility in commodity prices and to offset higher labor or capital costs to meet more stringent contamination standards, we cannot provide assurance that we can use these programs with our customers in all circumstances or that they will mitigate these risks in an evolving recycling environment.
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Our business requires a high level of capital expenditures.
Our business is capital intensive. Our capital expenditure requirements include fixed asset purchases and capital expenditures for landfill development and cell construction, as well as site and cell closure. We use a substantial portion of our cash flows from operating activities toward capital expenditures, which reduces our flexibility to use such cash flows for other purposes, such as reducing our indebtedness. Our capital expenditures could increase if we make acquisitions or further expand our operations, or as a result of factors beyond our control, such as changes in federal, state or local governmental requirements. The amount that we spend on capital expenditures may exceed current expectations, which may require us to obtain additional funding for our operations or impair our ability to grow our business.
We are upgrading our technology infrastructure and there can be no assurance that our efforts will be completed on the projected timetable or that our investment will result in the expected gains.
Upgrades to our technology infrastructure include a limited pilot of a new service management system, on-board computers, dynamic route optimization, procurement optimization, and other systems that we believe will improve our internal processes and the productivity of our employees. These upgrades are complex and there can be no assurance that they will result in expected productivity gains and operating cost reductions on our anticipated timeline, if at all. In addition, if we are not able to maintain the security of our data, confidential information about us or our customers or suppliers could be inadvertently disclosed, subjecting us to possible expenses and other liabilities as well as adversely impacting customer and other third-party relationships. If we are unable to benefit from new technologies, we may be at a competitive disadvantage to other companies in the waste management industry, in which case our operating results could suffer.
Cybersecurity incidents could negatively impact our business and our relationships with customers, adversely affecting our financial results and exposing us to litigation risk.
We use computer technology in substantially all aspects of our business operations. We also use mobile devices, social networking and other online activities to connect with our customers and our employees to be able to process transactions and provide information that we feel is necessary to manage our business. Such uses give rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ personal information, private information about employees, and financial and strategic information about us and our business partners. We also rely on a Payment Card Industry compliant third party to protect our customers’ credit card information. Further, as we pursue our strategy to grow through acquisitions and to pursue new initiatives that improve our operations and cost structure, we are also expanding and improving our information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess and identify cyber security risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks. Additionally, while we have implemented measures to prevent security breaches and cyber incidents, our preventive or detection measures and incident response efforts may not be entirely effective, especially as cyber security attacks continue to evolve and become more sophisticated, often are not recognized until launched against a target and may be difficult to detect for a long time. We are also exposed to cybersecurity risk with respect to data and other information that may be shared with third parties in connection with our business operations, if such third parties become subject to security breaches or other releases of information.
If company, personal or otherwise protected information is improperly accessed, tampered with or distributed, we may face significant financial exposure, including incurring significant costs to remediate possible injury to the affected parties. We may also be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under laws protecting confidential information. If our established network of security controls, policy enforcement mechanisms, educational awareness programs and monitoring systems that we use to address these threats to technology fail, the theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential litigation and liability and competitive disadvantage. While we have purchased insurance coverage for cybersecurity risks, there can be no assurance that any such coverage would be adequate to cover potential liability.
Our business is geographically concentrated and is therefore subject to regional economic downturns.
Our operations and customers are concentrated principally in New England and New York. Therefore, our business, financial condition and results of operations are susceptible to regional economic downturns and other regional factors, including state regulations and budget constraints and severe weather conditions. In addition, as we seek to expand in our existing markets, opportunities for growth within this region will become more limited and the geographic concentration of our business will increase.
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Our results of operations and financial condition may be negatively affected if we inadequately accrue for final capping, closure and post-closure costs or by the timing of these costs for our waste disposal facilities.
We have material financial obligations relating to final capping, closure and post-closure costs of our existing owned or operated landfills and will have material financial obligations with respect to any disposal facilities that we may own or operate in the future. Once the permitted capacity of a particular landfill is reached and additional capacity is not authorized, or a determination is made to cease operations at a landfill due to other considerations, the landfill must be closed and capped, and we must begin post-closure maintenance. We establish accruals for the estimated costs associated with such final capping, closure and post-closure obligations over the anticipated useful life of each landfill on a per ton basis. We have provided and expect that we will in the future provide accruals for financial obligations relating to final capping, closure and post-closure costs of our owned or operated landfills, generally for a term of 30 years after closure of a landfill. Our financial obligations for final capping, closure or post-closure costs could exceed the amounts accrued or amounts otherwise receivable pursuant to trust funds established for this purpose. Such a circumstance could result in significant unanticipated charges that would have an adverse effect on our business.
In addition, the timing of any such final capping, closure or post-closure costs, which exceed established accruals, may further negatively affect our business. Since we will be unable to control the timing and amounts of such costs, we may be forced to delay investments or planned improvements in other parts of our business or we may be unable to meet applicable financial assurance requirements. Any of the foregoing would negatively affect our business and results of operations.
Fluctuations in fuel costs could affect our operating expenses and results.
The price and supply of fuel is unpredictable and fluctuates based on events beyond our control, including among others, geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries and other oil and gas producers, war and unrest in oil producing countries and regional production patterns. Because fuel is needed to run our fleet of trucks, price escalations for fuel increase our operating expenses. In fiscal year 2020, we used approximately 6.7 million gallons of diesel fuel in our solid waste operations. Although we have an Energy and Environmental fee program, which includes an Energy component that floats on a monthly basis based on diesel fuel prices, contractual restrictions and competitive conditions may impact our opportunity to pass this fee on to our customers in all circumstances.
Our insurance coverage and self-insurance reserves may be inadequate to cover all significant risk exposures.
We carry a range of insurance policies intended to protect our assets and operations, including general liability insurance, property damage and environmental risk insurance. While we endeavor to purchase insurance coverage appropriate to our risk assessment, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages, and as a result our insurance program may not fully cover us for losses we may incur. In addition, as a result of a number of catastrophic weather and other events in the United States, insurance companies have incurred substantial losses and accordingly in many cases they have substantially reduced the nature and amount of insurance coverage available to the market, have broadened exclusions, and/or have substantially increased the cost of such coverage. It is likely that the tight insurance markets will continue into the foreseeable future. A partially or completely uninsured claim against us (including liabilities associated with cleanup or remediation at our facilities), if successful and of sufficient magnitude, could have a material adverse effect on our business, financial condition and results of operations. Any future difficulty in obtaining insurance could also impair our ability to secure future contracts, which may be conditioned upon the availability of adequate insurance coverage. In addition, claims associated with risks we have retained under our self-insurance programs may exceed our recorded reserves which could negatively impact future earnings.
We could be precluded from entering into contracts or obtaining or maintaining permits or certain contracts if we are unable to obtain third-party financial assurance to secure our contractual obligations.
Public solid waste collection, recycling and disposal contracts, and obligations associated with landfill closure and post-closure typically require performance or surety bonds, letters of credit or other means of financial assurance to secure our contractual performance. We currently obtain performance and surety bonds from Evergreen National Indemnity Company, in which we hold a 19.9% equity interest. If we are unable to obtain the necessary financial assurance in sufficient amounts or at acceptable rates, we could be precluded from entering into additional municipal contracts or from obtaining or retaining landfill management contracts or operating permits.
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We may be required to write-off or impair capitalized costs or intangible assets in the future or we may incur restructuring costs or other charges, each of which could harm our earnings.
In accordance with generally accepted accounting principles in the United States, we capitalize certain expenditures and advances relating to our acquisitions, pending acquisitions, landfills, cost method investments and development projects. In addition, we have considerable unamortized assets. From time to time in future periods, we may be required to incur a charge against earnings in an amount equal to any unamortized capitalized expenditures and advances, net of any portion thereof that we estimate will be recoverable, through sale or otherwise, relating to: (1) any operation or other asset that is being sold, permanently shut down or impaired or has not generated or is not expected to generate sufficient cash flow; (2) any pending acquisition that is not consummated; (3) any landfill or development project that is not expected to be successfully completed; and (4) any goodwill or other intangible assets that are determined to be impaired.
In response to such charges and costs and other market factors, we may be required to implement restructuring plans in an effort to reduce the size and cost of our operations and to better match our resources with our market opportunities. As a result of such actions, we would expect to incur restructuring expenses and accounting charges which may be material. Several factors could cause a restructuring to adversely affect our business, financial condition and results of operations. These include potential disruption of our operations, the development of our landfill capacity and recycling technologies and other aspects of our business. Employee morale and productivity could also suffer and result in unintended employee attrition. Any restructuring would require substantial management time and attention and may divert management from other important work. Moreover, we could encounter delays in executing any restructuring plans, which could cause further disruption and additional unanticipated expense.
Our revenues and our operating income experience seasonal fluctuations.
Our transfer and disposal revenues historically have been higher in the late spring, summer and early fall months. This seasonality reflects the lower volume of solid waste during the late fall, winter and early spring months primarily because:
•the volume of waste relating to C&D activities decreases substantially during the winter months in the northeastern United States; and
•decreased tourism in Vermont, Maine and eastern New York during the winter months tends to lower the volume of solid waste generated by commercial and restaurant customers, which is partially offset by increased volume from the ski industry.
Since certain of our operating and fixed costs remain constant throughout the fiscal year, operating income is impacted by a similar seasonality. In addition, particularly harsh weather conditions typically result in increased operating costs.
Adverse weather conditions may limit our operations and increase the costs of collection and disposal.
Our collection and landfill operations could be adversely impacted by extended periods of inclement weather, or by increased severity of weather. Adverse weather could increase our operating costs associated with the collection and disposal of waste, delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, increase the volume of waste collected under our existing contracts (without corresponding compensation), decrease the throughput and operating efficiency of our materials recycling facilities, or delay construction or expansion of our landfill sites and other facilities.
Efforts by labor unions to organize our employees could divert management attention and increase our operating expenses.
Certain groups of our employees have chosen to be represented by unions, and we have negotiated collective bargaining agreements with these groups. The negotiation of collective bargaining agreements could divert management attention and result in increased operating expenses and lower net income (or increased net loss). If we are unable to negotiate acceptable collective bargaining agreements, we may be subject to union-initiated work stoppages, including strikes. Depending on the type and duration of any labor disruptions, our revenues could decrease and our operating expenses could increase, which could adversely affect our financial condition, results of operations and cash flows. As of January 31, 2021, approximately 6% of our employees were represented by unions.
Our enterprise risk management process may not be effective in mitigating the risks to which we are subject, or in reducing the potential for losses in connection with such risks.
Our enterprise risk management framework is designed to minimize or mitigate the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diversified set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited in their ability to anticipate the existence or development of risks that are currently unknown and unanticipated. The ineffectiveness of our enterprise risk management framework in mitigating the impact of known risks or the emergence of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations.
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Risks Related to Our Indebtedness
We have substantial debt and have the ability to incur additional debt. The principal and interest payment obligations of such debt may restrict our future operations.
As of December 31, 2020, we had approximately $548.4 million of outstanding principal indebtedness (excluding approximately $26.4 million of outstanding letters of credit issued under our term loan A facility ("Term Loan Facility") and revolving line of credit facility (“Revolving Credit Facility” and, together with the Term Loan Facility, the "Credit Facility"). The Credit Facility consists of the Term Loan Facility with term loans in the outstanding principal amount of $350.0 million and the Revolving Credit Facility with loans thereunder being available up to an aggregate principal amount of $200.0 million, of which $173.6 million of unused commitments remain under the Revolving Credit Facility, subject to customary borrowing conditions. As of December 31, 2020, we also had approximately $154.3 million in cash and cash equivalents available for any future payment obligations. In addition, the terms of our existing indebtedness permit us to incur additional debt. Our debt, among other things:
•requires us to dedicate a portion of any available cash and cash equivalents or cash flow from operations to the payment of interest and principal due under our debt, which reduces funds available for other business purposes, including capital expenditures and acquisitions;
•may place us at a competitive disadvantage compared with some of our competitors that may have less debt and better access to capital resources; and
•limits our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes, but does allow us to increase the amount of our debt substantially subject to the conditions in the Credit Facility.
Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow, and future financings may not be available to provide sufficient net proceeds, to meet these obligations or to successfully execute our business strategy.
A portion of our indebtedness bears interest at variable rates. To the extent interest rates rise from current levels, we may incur higher levels of interest expense on our variable rate debt. We have sought to mitigate against adverse movements in interest rates by entering into: fixed interest rate debt instruments; and interest rate derivative agreements to hedge the variable rate portion of our long-term debt.
As of December 31, 2020, our interest rate derivative agreements have a total notional amount of $190.0 million. According to the terms of the agreements, we receive interest based on the 1-month LIBOR index and pay interest at a weighted average rate of approximately 2.5%. The agreements mature between February 2021 and May 2023. Additionally, we have forward starting interest rate derivative agreements with a total notional amount of $125.0 million that mature between February 2026 and May 2028. We receive interest based on the 1-month LIBOR index, restricted by a 0.0% floor, and will pay interest at a weighted average rate of approximately 1.6%. While our interest rate derivative counterparties are large financial institutions that we believe are well capitalized, if one or more of our interest rate derivative counterparties fails to perform under the terms of their agreements with us, we may not receive payments due under the applicable agreement(s) and the derivatives may prove to be ineffective in hedging our interest rate risk.
The Credit Facility requires us to meet a number of financial ratios and covenants.
The Credit Facility contains certain affirmative and negative covenants which, among other things and subject, in certain cases, to certain basket amounts and other exceptions, limit the existence of additional indebtedness, the existence of liens or pledges, certain investments, acquisitions and sales or other transfers of assets, the payment of dividends and distributions and repurchases of equity, prepayments of certain junior indebtedness, and certain other transactions. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities. Additionally, the Credit Facility requires, solely for the benefit of the lenders under the Revolving Credit Facility, that we meet financial tests, including, without limitation:
•minimum consolidated EBITDA to consolidated cash interest charges ratio; and
•maximum consolidated funded debt (net of up to an agreed amount of cash and cash equivalents) to consolidated EBITDA ratio.
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An event of default under any of our debt agreements could permit some of our lenders, including the lenders under the Credit Facility, to declare all amounts borrowed from them to be immediately due and payable, together with accrued and unpaid interest, or, in the case of the Credit Facility, terminate the commitment to make further credit extensions thereunder, which could, in turn, trigger cross-defaults under other debt obligations. If we were unable to repay debt to our lenders, or were otherwise in default under any provision governing our outstanding debt obligations, our secured lenders could proceed against us and against the collateral securing that debt.
Risks Related to Our Common Stock
Holders of our Class A common stock are entitled to one vote per share, and holders of our Class B common stock are entitled to ten votes per share. The lower voting power of the Class A common stock may negatively affect the attractiveness of our Class A common stock to investors and, as a result, its market value.
We have two classes of common stock: Class A common stock, which is entitled to one vote per share, and Class B common stock, all of which are beneficially owned by John W. Casella, our Chairman and Chief Executive Officer, and his brother, Douglas R. Casella, a member of our Board of Directors, and which is entitled to ten votes per share. Except for the election of one of our directors and in certain limited circumstances required by applicable law, holders of Class A common stock and Class B common stock vote together as a single class on all matters to be voted on by our stockholders. As of January 31, 2021, an aggregate of 988,200 shares of our Class B common stock, representing 9,882,000 votes, were outstanding. Based on the number of shares of common stock outstanding as of January 31, 2021, the shares of our Class A common stock and Class B common stock beneficially owned by John W. Casella and Douglas R. Casella represented approximately 17.2% of the aggregate voting power of our stockholders. Consequently, John W. Casella and Douglas R. Casella are able to substantially influence all matters for stockholder consideration and constitute, and are expected to continue to constitute, a significant portion of the shares entitled to vote on all matters requiring approval by our stockholders. The difference in the voting power of our Class A common stock and Class B common stock could diminish the market value of our Class A common stock if investors attribute value to the superior voting rights of our Class B common stock and the power those rights confer.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters is located at 25 Greens Hill Lane, Rutland, Vermont 05701, where we currently lease approximately 12,000 square feet of office space.
Our principal property and equipment consists of land, landfills, buildings, machinery and equipment, rolling stock and containers. At January 31, 2021, we operated eight subtitle D landfills, four of which we own and four of which we lease; one landfill permitted to accept C&D materials that we own; 58 transfer stations, 32 of which we own, eight of which we lease and 18 of which we operate under a contract; 46 solid waste collection facilities, 28 of which we own, 17 of which we lease and one of which we operate under a contract; 20 recycling processing facilities, ten of which we own, seven of which we lease and three of which we operate under a contract; four landfill gas-to-energy facilities that we own; and 24 corporate office and other administrative facilities, five of which we own and 19 of which we lease (See Item 1, “Business” of this Annual Report on Form 10-K for property information by operating segment and location). We believe that our property and equipment are adequately maintained and sufficient for our current operations.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is provided in Note 13, Commitments and Contingencies to our consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A common stock trades on the Nasdaq Global Select Market (“Nasdaq Stock Market”) under the symbol CWST. There is no established trading market for our Class B common stock. As of January 31, 2021, there were approximately 500 holders of record of our Class A common stock and two holders of record of our Class B common stock.
For purposes of calculating the aggregate market value of the shares of common stock held by non-affiliates, as shown on the cover page of this Annual Report on Form 10-K, we have assumed that all the outstanding shares of Class A common stock were held by non-affiliates except for the shares beneficially held by directors and executive officers and funds represented by them.
Dividends
No dividends have ever been declared or paid on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
The information required by Item 201(d) of Regulation S-K is included in Part III of this Annual Report on Form 10-K.
Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The stock performance graph below compares the percentage change in cumulative stockholder return on our Class A common stock for the period from December 31, 2015 through December 31, 2020, with the cumulative total return on the Russell 2000 Index and our Industry Peer Group ("Peer Group"). The stock performance graph assumes the investment on December 31, 2015 of $100.00 in our Class A common stock at the closing price on such date, in the Russell 2000 Index and the Peer Group, and that dividends are reinvested. No dividends have been declared or paid on our Class A common stock.
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| December 31, 2015 | December 31, 2016 | December 31, 2017 | December 31, 2018 | December 31, 2019 | December 31, 2020 | ||||||||||||||||||||||||||||||
| Casella Waste Systems, Inc. | $ | 100.00 | $ | 207.53 | $ | 384.95 | $ | 476.42 | $ | 769.73 | $ | 1,035.95 | |||||||||||||||||||||||
| Russell 2000 | $ | 100.00 | $ | 121.31 | $ | 139.08 | $ | 123.76 | $ | 155.35 | $ | 186.36 | |||||||||||||||||||||||
Peer Group (1) | $ | 100.00 | $ | 135.30 | $ | 170.01 | $ | 179.83 | $ | 229.04 | $ | 248.12 | |||||||||||||||||||||||
(1)The Peer Group is comprised of Waste Connections Inc., Covanta Holding Corp., Waste Management, Inc. and Republic Services, Inc.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and operating data set forth below was derived from the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K and from the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of previous Annual Reports on Form 10-K that we filed with the Securities and Exchange Commission. This information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
| Fiscal Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
Statement of Operations Data: | (in thousands, except per share data) | ||||||||||||||||||||||||||||
| Revenues | $ | 774,584 | $ | 743,290 | $ | 660,660 | $ | 599,309 | $ | 565,030 | |||||||||||||||||||
| Cost of operations | 515,646 | 508,656 | 453,291 | 405,188 | 381,973 | ||||||||||||||||||||||||
| General and administration | 102,410 | 92,782 | 84,791 | 79,243 | 75,356 | ||||||||||||||||||||||||
| Depreciation and amortization | 90,782 | 79,790 | 70,508 | 62,102 | 61,856 | ||||||||||||||||||||||||
| Southbridge Landfill closure charge, net | 4,587 | 2,709 | 8,054 | 65,183 | — | ||||||||||||||||||||||||
| Expense from acquisition activities and other items | 1,862 | 2,687 | 1,872 | 176 | — | ||||||||||||||||||||||||
| Withdrawal costs - multiemployer pension plan | — | 3,591 | — | — | — | ||||||||||||||||||||||||
| Contract settlement charge | — | — | 2,100 | — | — | ||||||||||||||||||||||||
| Development project charge | — | — | 311 | — | — | ||||||||||||||||||||||||
| Environmental remediation charge | — | — | — | — | 900 | ||||||||||||||||||||||||
| Operating income (loss) | 59,297 | 53,075 | 39,733 | (12,583) | 44,945 | ||||||||||||||||||||||||
| Interest expense, net | 22,068 | 24,735 | 26,021 | 24,887 | 38,652 | ||||||||||||||||||||||||
| Other (income) expense, net | (1,073) | (1,439) | 7,676 | (418) | 12,657 | ||||||||||||||||||||||||
| Income (loss) before income taxes | 38,302 | 29,779 | 6,036 | (37,052) | (6,364) | ||||||||||||||||||||||||
| (Benefit) provision for income taxes | (52,804) | (1,874) | (384) | (15,253) | 494 | ||||||||||||||||||||||||
| Net income (loss) | 91,106 | 31,653 | 6,420 | (21,799) | (6,858) | ||||||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests | — | — | — | — | (9) | ||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 91,106 | $ | 31,653 | $ | 6,420 | $ | (21,799) | $ | (6,849) | |||||||||||||||||||
| Basic earnings (loss) per share attributable to common stockholders: | |||||||||||||||||||||||||||||
| Weighted average common shares outstanding | 48,793 | 47,226 | 42,688 | 41,846 | 41,233 | ||||||||||||||||||||||||
Basic earnings (loss) per common share (1) | $ | 1.87 | $ | 0.67 | $ | 0.15 | $ | (0.52) | $ | (0.17) | |||||||||||||||||||
| Diluted earnings (loss) per share attributable to common stockholders: | |||||||||||||||||||||||||||||
| Weighted average common shares outstanding | 49,045 | 47,966 | 44,168 | 41,846 | 41,233 | ||||||||||||||||||||||||
Diluted earnings (loss) per common share (1) | $ | 1.86 | $ | 0.66 | $ | 0.15 | $ | (0.52) | $ | (0.17) | |||||||||||||||||||
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| Fiscal Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| Other Data: | |||||||||||||||||||||||||||||
| Capital expenditures | $ | 108,108 | $ | 103,165 | $ | 73,232 | $ | 64,862 | $ | 54,238 | |||||||||||||||||||
| Cash flows provided by operating activities | $ | 139,922 | $ | 116,829 | $ | 120,834 | $ | 107,538 | $ | 80,434 | |||||||||||||||||||
| Cash flows used in investing activities | $ | (140,032) | $ | (177,462) | $ | (164,197) | $ | (76,447) | $ | (62,964) | |||||||||||||||||||
| Cash flows provided by (used in) financing activities | $ | 150,981 | $ | 60,097 | $ | 45,375 | $ | (31,640) | $ | (18,585) | |||||||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 154,342 | $ | 3,471 | $ | 4,007 | $ | 1,995 | $ | 2,544 | |||||||||||||||||||
| Working capital, net (2) | $ | (38,296) | $ | (31,247) | $ | (18,411) | $ | (6,184) | $ | (6,382) | |||||||||||||||||||
| Property, plant and equipment, net | $ | 510,512 | $ | 443,825 | $ | 404,577 | $ | 361,547 | $ | 398,466 | |||||||||||||||||||
| Goodwill | $ | 194,901 | $ | 185,819 | $ | 162,734 | $ | 122,605 | $ | 119,899 | |||||||||||||||||||
| Total assets | $ | 1,193,898 | $ | 932,182 | $ | 732,410 | $ | 614,949 | $ | 631,512 | |||||||||||||||||||
| Debt, less current portion | $ | 530,411 | $ | 509,021 | $ | 542,001 | $ | 477,576 | $ | 503,961 | |||||||||||||||||||
| Total stockholders’ equity (deficit) | $ | 362,142 | $ | 122,753 | $ | (15,832) | $ | (37,862) | $ | (24,550) | |||||||||||||||||||
(1)Computed as described in Note 3, Summary of Significant Accounting Policies to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
(2)Working capital, net is defined as current assets, excluding cash and cash equivalents, minus current liabilities.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto, and other financial information, included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements.
Discussion and analysis of the fiscal year ended December 31, 2019 ("fiscal year 2019") compared to the fiscal year ended December 31, 2018 is included under the heading Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on February 21, 2020.
Company Overview
Founded in 1975 with a single truck, Casella Waste Systems, Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively, “we”, “us” or “our”), is a regional, vertically integrated solid waste services company. We provide resource management expertise and services to residential, commercial, municipal and industrial customers, primarily in the areas of solid waste collection and disposal, transfer, recycling and organics services. We provide integrated solid waste services in six states: Vermont, New Hampshire, New York, Massachusetts, Maine and Pennsylvania, with our headquarters located in Rutland, Vermont. We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services. We manage our larger-scale recycling and commodity brokerage operations along with our organics services and large scale commercial and industrial services through our single resource-renewal focused Resource Solutions operating segment. We restructured and formed the Resource Solutions operating segment as of January 1, 2020 to be able to leverage our core competencies in materials processing, industrial recycling, clean energy, and organics service offerings in order to generate additional value from the waste stream for larger commercial and industrial customers with more diverse needs.
As of January 31, 2021, we owned and/or operated 46 solid waste collection operations, 58 transfer stations, 20 recycling facilities, eight Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition (“C&D”) materials.
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Recent Developments
With the global outbreak of the novel coronavirus ("COVID-19") and the declaration of a pandemic by the World Health Organization in March 2020, the U.S. Government and all of the states in which we operate have declared the waste services industry as an essential services provider and as a result we are committed to continue to operate and provide our full breadth of services. We have prioritized the safety and well-being of our employees by strictly adhering to recommendations of the Centers for Disease Control and Prevention as well as executive orders of the states in which we operate.
The COVID-19 pandemic has caused, and will to continue to cause, economic disruption across our geographic footprint and has adversely affected, and is expected to continue to adversely affect, our business. The COVID-19 pandemic negatively impacted our revenues starting at the end of the first quarter of fiscal year 2020, as many small business and construction collection customers required service level changes and volumes into our landfills declined due to lower economic activity. Even with the continued negative impact of the COVID-19 pandemic, we did experience improved demand for services as local economies started to reopen as allowed by State Governments. This positive trend continued through December 31, 2020, as additional small business collection customers increased service levels, construction activity continued to rebound, and overall higher economic activity across the northeast led to higher landfill volumes. Despite these positive trends, our collection and disposal operations were negatively impacted by lower volumes attributable to the COVID-19 pandemic in the fiscal year ended December 31, 2020 ("fiscal year 2020"), extending into the first quarter of the fiscal year ended December 31, 2021.
The COVID-19 pandemic has negatively impacted and will continue to impact our business in other ways, as we have experienced and continue to experience increased costs in response to the COVID-19 pandemic, including, but not limited to, higher costs associated with providing a safe working environment for our employees (such as increased costs associated with the protection of our employees, including costs for additional safety equipment, hygiene products and enhanced facility cleaning), potential employee layoffs or furloughs, employee impacts from illness, supporting a remote administration workforce, community response measures, the inability of customers to continue to pay for services, and temporary closures of our facilities or the facilities of our customers. In early September 2020, we also paid a special bonus to all our hourly employees (both frontline and administrative) to recognize their hard work and commitment to safety, environmental compliance and high customer service standards as essential service providers during the COVID-19 pandemic. We have taken measures to reduce costs in other areas and preserve liquidity during this period of uncertainty. As of the date of this filing, we are unable to determine or predict the nature, duration or scope of the overall impact that the COVID-19 pandemic will have on our business, results of operations, liquidity and capital resources. For further information regarding the impact of the COVID-19 pandemic on us, see Item 1A, “Risk Factors” included in this Annual Report on Form 10-K.
Acquisitions and Divestitures
Acquisitions
We have a business development team that identifies acquisition candidates, categorizes the opportunity by strategic fit and perceived level of financial accretion, establishes contact with the appropriate representative of the acquisition candidate and gathers further information on the acquisition candidate.
We have made in the past, and we may make in the future, acquisitions to densify existing operations, expand service areas, and grow services for our customers. These acquisitions may include “tuck-in” acquisitions within our existing markets, assets that are adjacent to or outside of our existing markets, or larger, more strategic acquisitions. In addition, from time to time, we may acquire businesses that are complementary to our core business strategy. We face competition for acquisition targets, particularly the larger and more meaningful targets, but we believe that our strong relationships and reputation in New England and New York help to offset this factor.
In fiscal year 2020, we acquired ten businesses: seven tuck-in solid waste collection businesses and a solid waste collection business in our Western region, a transportation business in our Eastern region, and one recycling operation in our Resource Solutions operating segment for total consideration of $33.5 million, including $29.0 million in cash and $4.5 million in holdbacks to sellers.
In fiscal year 2019, we acquired nine businesses: three tuck-in solid waste collection businesses in our Eastern region and four tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations, and a business comprised of solid waste hauling and transfer assets in our Western region for total consideration of $82.2 million, including $72.1 million in cash, $5.5 million in non-cash consideration, $2.7 million notes payable and $1.9 million in holdbacks to sellers.
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Divestitures
From time to time, we may sell or divest certain investments or other components of our business. These divestitures may be undertaken for a number of reasons, including: to generate proceeds to pay down debt; as a result of a determination that the specified asset will provide inadequate returns to us or that the asset no longer serves a strategic purpose in connection with our business; or as a result of a determination that the asset may be more valuable to a third-party. We will continue to look to divest certain activities and investments that no longer enhance or complement our core business if the right opportunity presents itself.
Results of Operations
Revenues
We manage our solid waste operations, which include a full range of solid waste services, on a geographic basis through two regional operating segments, which we designate as the Eastern and Western regions. Revenues in our Eastern and Western regions consist primarily of fees charged to customers for solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services. We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual households. Landfill and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations. We also generate and sell electricity at certain of our landfill facilities. We classify our resource-renewal services by service in our Resource Solutions operating segment. Revenues associated with our resource-renewal operations are derived from organics services, large scale commercial and industrial services, as well as recycling services generated from both municipalities and customers in the form of processing fees, tipping fees and commodity sales.
The table below shows revenue attributable to services provided (in millions) for the following periods:
| Fiscal Year Ended December 31, | $ Change | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Collection | $ | 391.4 | $ | 372.0 | $ | 19.4 | |||||||||||
| Disposal | 175.5 | 181.9 | (6.4) | ||||||||||||||
| Power | 4.1 | 3.6 | 0.5 | ||||||||||||||
| Processing | 7.3 | 7.2 | 0.1 | ||||||||||||||
| Solid waste | 578.3 | 564.7 | 13.6 | ||||||||||||||
| Organics | 59.4 | 56.3 | 3.1 | ||||||||||||||
| Customer solutions | 86.7 | 79.5 | 7.2 | ||||||||||||||
| Recycling | 50.2 | 42.8 | 7.4 | ||||||||||||||
| Resource Solutions | 196.3 | 178.6 | 17.7 | ||||||||||||||
| Total revenues | $ | 774.6 | $ | 743.3 | $ | 31.3 | |||||||||||
Solid waste revenues
A summary of the period-to-period change in solid waste revenues (dollars in millions and as percentage growth of solid waste revenues) follows:
Period-to-Period Change For Fiscal Year 2020 vs Fiscal Year 2019 | |||||||||||
| Amount | % Growth | ||||||||||
| Price | $ | 25.1 | 4.5 | % | |||||||
Volume (1) | (40.5) | (7.2) | % | ||||||||
| Surcharges and other fees | (0.7) | (0.1) | % | ||||||||
| Commodity price and volume | 0.1 | — | % | ||||||||
| Acquisitions | 31.0 | 5.5 | % | ||||||||
| Solid waste revenues | $ | 15.0 | 2.7 | % | |||||||
(1)Adjusted for $1.4 million of inter-company movements between solid waste collection volume and the customer solutions line-of-business associated with an acquisition.
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Price.
The price change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following:
•$15.6 million from favorable collection pricing; and
•$9.5 million from favorable disposal pricing associated with our landfills and transfer stations.
Volume.
The volume change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following:
•$(21.8) million from lower collection volumes mainly due to the negative impacts of the COVID-19 pandemic;
•$(18.4) million from lower disposal volumes (of which $(14.0) million relates to lower landfill volumes mainly due to the negative impacts of the COVID-19 pandemic, $(1.2) million relates to lower transfer station volumes mainly due to the negative impacts of the COVID-19 pandemic and $(3.3) million relates to lower transportation volumes associated primarily with one of our larger customers); and
•$(0.3) million from lower processing volumes.
Surcharges and other fees.
The surcharges and other fees change component in fiscal year 2020 solid waste revenues growth from the prior year is associated with the energy component of the energy and environmental fee and the sustainability recycling adjustment fee, inclusive of the effect of acquisition activity. The energy component of the fee floats on a monthly basis based on diesel fuel prices. The sustainability recycling adjustment fee floats on a monthly basis based on recycled commodity prices.
Acquisitions.
The acquisitions change component in fiscal year 2020 solid waste revenues growth is a result of increased acquisition activity, including the following:
•the acquisition of ten businesses in fiscal year 2020: seven tuck-in solid waste collection businesses and a solid waste collection business in our Western region, a transportation business in our Eastern region, and one recycling operation in our Resource Solutions operating segment; and
•the acquisition of nine businesses in fiscal year 2019: seven tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations, and a business comprised of solid waste hauling and transfer assets.
Resource Solutions revenues
Organics revenues.
Fiscal year 2020 organics revenues increased $3.1 million from the prior year as a result of higher volumes mainly associated with two large transportation and disposal contracts.
Customer solutions revenues.
Fiscal year 2020 revenues increased $5.8 million from the prior year as a result of higher volumes mainly due to multi-site retail and industrial services organic growth. The increase was adjusted for $1.4 million of inter-company movements between solid waste collection volume and customer solutions associated with the acquisition of a business.
Recycling revenues.
Fiscal year 2020 recycling revenues increased $7.4 million from the prior year as a result of the following:
•$3.5 million from favorable commodity pricing in the marketplace with higher cardboard and paper pricing;
•$1.8 million from higher recycling processing fees;
•$1.1 million from the acquisition of a recycling operation; and
•$1.0 million from higher commodity volumes.
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Operating Expenses
A summary of our cost of operations, general and administration expenses and depreciation and amortization expenses is as follows (dollars in millions and as a percentage of total revenues):
| Fiscal Years Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Cost of operations | $ | 515.6 | 66.6 | % | $ | 508.7 | 68.4 | % | |||||||||||||||
| General and administration | $ | 102.4 | 13.2 | % | $ | 92.8 | 12.5 | % | |||||||||||||||
| Depreciation and amortization | $ | 90.8 | 11.7 | % | $ | 79.8 | 10.7 | % | |||||||||||||||
Cost of Operations
Cost of operations includes labor costs, tipping fees paid to third-party disposal facilities, fuel costs, maintenance and repair costs of vehicles and equipment, workers’ compensation and vehicle insurance costs, the cost of purchasing materials to be recycled, third-party transportation costs, district and state taxes, host community fees and royalties. Cost of operations also includes accretion expense related to final capping, closure and post-closure obligations, leachate treatment and disposal costs and depletion of landfill operating lease obligations.
An explanation of the period-to-period change in cost of operations is as follows:
Maintenance and repair costs in fiscal year 2020 increased $8.2 million from the prior year while increasing approximately 50 basis points as a percentage of revenues, due primarily to higher facility maintenance costs, and, to a lesser extent, higher container maintenance and repair costs; partially offset by lower overall fleet maintenance costs associated with less wear and tear based on activity levels and lower volumes as a result of the COVID-19 pandemic, which outweighed increased fleet maintenance costs associated with acquisition activity.
Labor and related benefit costs in fiscal year 2020 increased $3.3 million from the prior year but decreased approximately 10 basis points as a percentage of revenues, due primarily to acquisition activity in the Western region and a special $1.8 million discretionary bonus for our front-line employees associated with operational execution during the COVID-19 pandemic, partially offset by lower benefit costs, and lower labor costs due to decreased overtime.
Third-party direct costs in fiscal year 2020 decreased $(0.7) million from the prior year while decreasing approximately 120 basis points as a percentage of revenues due to the following:
•lower hauling and third-party transportation costs associated with lower volumes mainly due to the negative impacts of the COVID-19 pandemic; partially offset by higher hauling and third-party transportation costs associated with (i) higher collection volumes related to acquisition activity in the Western region; (ii) higher brokerage volumes in our customer solutions line-of-business with high pass through direct costs; (iii) higher recycling volumes related to organic growth and acquisition activity; and (iv) higher transportation rates; and
•lower disposal costs associated with lower commercial collection, construction and demolition, and landfill volumes, mainly due to the negative economic impacts of the COVID-19 pandemic, combined with lower organic collection and landfill volumes due to our focus on pricing; partially offset by higher third-party disposal costs associated with (i) increased disposal pricing in the northeastern United States; (ii) additional volumes related to acquisition activity in the Western region; and (iii) additional volumes within our Resource Solutions operating segment due to multi-site retail and industrial services organic growth in our customer solutions line-of-business and organic growth in our organics line-of-business.
Fuel costs in fiscal year 2020 decreased $(1.5) million from the prior year while decreasing approximately 30 basis points as a percentage of revenues, due primarily to lower fuel prices, less traffic due to the COVID-19 pandemic, and improved fleet efficiency, partially offset by higher volumes associated with acquisition activity.
Direct operational costs in fiscal year 2020 decreased $(2.4) million from the prior year while decreasing approximately 70 basis points as a percentage of revenues, due to lower landfill operating costs, lower equipment operating lease expense, lower short term equipment rental costs, and lower host community fees on lower landfill volumes in our Western region; partially offset by higher operating costs related to business growth.
General and Administration
General and administration expenses include management, clerical and administrative compensation and overhead, professional services and costs associated with marketing, sales force and community relations efforts.
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The period-to-period change in general and administration expense can be primarily attributed to: higher labor costs of $8.2 million associated with acquisition activity, higher accrued incentive compensation, a special discretionary bonus for our hourly back-office employees associated with their execution during the COVID-19 pandemic, and severance costs; and higher bad debt expense based on challenges faced by our customers as a result of the economic downturn associated with the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization expense includes: (i) depreciation of property and equipment (including assets recorded for finance leases) on a straight-line basis over the estimated useful lives of the assets; (ii) amortization of landfill costs (including those costs incurred and all estimated future costs for landfill development and construction, along with asset retirement costs arising from closure and post-closure obligations) on a units-of-consumption method as landfill airspace is consumed over the total estimated remaining capacity of a site, which includes both permitted capacity and unpermitted expansion capacity that meets certain criteria for amortization purposes, and amortization of landfill asset retirement costs arising from final capping obligations on a units-of-consumption method as airspace is consumed over the estimated capacity associated with each final capping event; and (iii) amortization of intangible assets with a definite life, using either an economic benefit provided approach or on a straight-line basis over the definitive terms of the related agreements.
A summary of the components of depreciation and amortization expense (dollars in millions and as a percentage of total revenues) follows:
| Fiscal Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Depreciation expense | $ | 54.4 | 7.0 | % | $ | 45.1 | 6.1 | % | |||||||||||||||
| Landfill amortization expense | 27.5 | 3.6 | % | 27.5 | 3.7 | % | |||||||||||||||||
| Other amortization expense | 8.9 | 1.1 | % | 7.2 | 0.9 | % | |||||||||||||||||
| $ | 90.8 | 11.7 | % | $ | 79.8 | 10.7 | % | ||||||||||||||||
The period-to-period change in depreciation and amortization expense can be primarily attributed to increased investment in our fleet, acquisition activity and higher landfill amortization expense associated with changes in cost estimates and other assumptions, partially offset by lower landfill volumes mainly associated with the negative impacts of the COVID-19 pandemic.
Multiemployer Pension Plan
We make contributions to a multiemployer defined benefit pension plan, the New England Teamsters and Trucking Industry Pension Fund (the “Pension Plan”), under the terms of a collective bargaining agreement (“CBA”) that covers certain of our union represented employees. The EIN or Pension Plan Number for the Pension Plan is 04-6372430. The Pension Plan provides retirement benefits to participants based on their service to contributing employers. We do not administer the Pension Plan. The risks of participating in a multiemployer pension plan are different from a single-employer pension plan in that: (i) assets contributed to the multiemployer pension plan by one employer may be used to provide benefits to employees or former employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be required to be assumed by the remaining participating employers; and (iii) if we choose to stop participating in our multiemployer Pension Plan, we may be required to pay the plan a withdrawal amount based on the underfunded status of the plan.
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In fiscal year 2019, we reached an agreement to withdraw from the Pension Plan by entering into Withdrawal and Re-entry Agreements with the Pension Plan ("Agreements"). In accordance with FASB ASC 450 - Contingencies, because of our withdrawal from the Pension Plan, we recorded an obligation of $3.2 million and a charge of $3.6 million as pension withdrawal expense, offset by a $0.4 million retroactive contribution credit recorded as cost of operations, in fiscal year 2019. While the withdrawal generates a fixed yearly contingent liability for us for a period of approximately seventeen (17) years, it caps our gross payments at $4.2 million significantly reducing our cash exposure from the potential $18.5 million withdrawal liability as determined based on a complete withdrawal prior to withdrawing from the Pension Plan. As per the Re-entry Agreements and upon withdrawal, we re-entered the Pension Plan as a new employer with certainty from a liability perspective. As of December 31, 2020, we had a remaining obligation of $1.8 million associated with our withdrawal. We did not, however, change the terms of our CBA with Local 170, which remained in effect until it expired on June 30, 2020, at which time a new agreement was entered into. As a new employer in the Pension Plan, our contributions are projected to fully fund the benefits accrued by our employee's in the Pension Plan. As of December 31, 2020, our employees were fully funded as a new employer in the Pension Plan, subject to the terms of the Agreements. Subsequent withdrawal from the Pension Plan, under certain circumstances, may result in a change in the payment schedule required to settle the remaining obligation associated with our withdrawal. During fiscal years 2020 and 2019, we made contributions to the Pension Plan of $0.4 million and $0.4 million, respectively.
Southbridge Landfill Closure Charge
In the fiscal year ended December 31, 2017 ("fiscal year 2017"), we initiated the plan to cease operations of the Town of Southbridge, Massachusetts landfill (“Southbridge Landfill”) and later closed it in November 2018 when Southbridge Landfill reached its final capacity. Accordingly, in fiscal years 2020 and 2019, respectively, we recorded charges associated with the closure of our Southbridge Landfill as follows:
| Fiscal Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Legal and transaction costs (1) | $ | 2.3 | $ | 2.7 | |||||||
| Legal settlement charge (2) | 2.0 | — | |||||||||
| Landfill closure project charge (3) | 0.5 | — | |||||||||
| Environmental remediation charge (4) | (0.2) | — | |||||||||
| Southbridge Landfill closure charge | $ | 4.6 | $ | 2.7 | |||||||
(1)We incurred legal costs as well as other transaction costs associated with various matters as part of the Southbridge Landfill closure.
(2)We established reserves associated with legal settlements associated with claims against us as part of the Southbridge Landfill closure.
(3)We recorded a landfill closure project charge associated with increased costs under the revised closure plan at our Southbridge Landfill.
(4)We recorded an environmental remediation reversal associated with the completion of environmental remediation at the site.
See Note 13, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure.
Expense from Acquisition Activities
In fiscal year 2020, we recorded a charge of $1.9 million comprised primarily of legal, consulting and other similar costs associated with the acquisition and integration of acquired businesses or select development projects. In fiscal year 2019, we recorded a charge of $2.7 million associated primarily with acquisition activities. See Note 5, Business Combinations to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for disclosure regarding acquisition activity.
Other expenses
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Interest Expense, net
Our interest expense, net decreased $(2.7) million in fiscal year 2020 due primarily to lower average interest rates associated with changes in LIBOR and the remarketing of our New York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014 (“New York Bonds 2014R-1”) and our Business Finance Authority of the State of New Hampshire Solid Waste Disposal Revenue Bonds Series 2013 (“New Hampshire Bonds”).
Benefit for Income Taxes
Our benefit for income taxes was $(52.8) million in fiscal year 2020 and $(1.9) million in fiscal year 2019. The benefit for income taxes for fiscal years 2020 and 2019 includes a deferred tax benefit of $(52.3) million and $(1.2) million, respectively.
On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In the fourth quarter of fiscal year 2020, we assessed the valuation allowance and considered positive evidence, including significant cumulative consolidated income over the three years ended December 31, 2020, revenue growth and expectations of future profitability, and negative evidence, including the impact of a negative change in the economic climate, significant risks and uncertainties in the business and restrictions on tax loss utilization in certain state jurisdictions. After assessing both the positive evidence and the negative evidence, we determined it was more likely than not that the majority of our deferred tax assets would be realized in the future and released the valuation allowance on the majority of our net operating loss carryforwards and other deferred tax assets as of December 31, 2020, resulting in a benefit from income taxes of $61.3 million. As of December 31, 2020, we maintained a valuation allowance of $6.5 million, primarily related to deferred tax assets that would generate capital losses when realized and deferred tax assets related to certain state jurisdictions.
During fiscal year 2019, we recognized a ($0.3) million deferred tax benefit due to a reduction of the deferred tax liability related to indefinite lived assets. The financial statement value of indefinite lived goodwill was reduced as a result of a settlement of an acquisition contingency that pre-dated the effective date of Accounting Standards Codification 805, which resulted in a reduction of the related deferred tax liability. In addition, during fiscal year 2019, we recognized a $(2.4) million deferred tax benefit due to a reduction of the valuation allowance based on the recognition of additional reversing temporary differences related to the $2.4 million deferred tax liability recorded through goodwill for the acquisition of a company in May 2019. The deferred tax liability related to the acquisition was based on the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the related tax bases. A deferred tax benefit of $(2.1) million was recognized in quarter ending June 30, 2019 based on initial estimates of the acquired temporary differences, and adjusted by $(0.3) million in quarter ending December 31, 2019 based on the availability of better estimates of temporary differences upon the filing of prior year returns by the sellers.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted which, among other things, allows the carryback of remaining minimum tax credit carryforwards to tax year 2018. Prior to the CARES Act, the minimum tax credit carryforwards were fully refundable through tax year 2021, if not otherwise used to offset tax liabilities. A current federal income tax benefit of $(1.0) million, offset by a $1.0 million deferred tax provision, was recognized in the quarter ended March 31, 2020 for the remaining minimum tax credit being carried back to tax year 2018 by us. In fiscal year 2019, we recognized a $(1.0) million current income tax benefit, offset by a $1.0 million deferred tax provision, for the portion of the minimum tax credit carryforward refundable for 2019 based on law then enacted.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted. The TCJ Act significantly changed U.S. corporate income tax laws by, among other things, changing carryforward rules for net operating losses. Our $92.5 million in federal net operating loss carryforwards generated as of the end of 2017 continue to be carried forward for 20 years and are expected to be available to fully offset taxable income earned in 2021 and future tax years. Federal net operating losses generated after 2017, totaling $46.5 million carried forward to 2021, will be carried forward indefinitely, but generally may only offset up to 80% of taxable income earned in a tax year. Although the CARES Act further modifies the net operating loss rules to permit net operating losses incurred in tax years 2018 through 2020 to be carried back 5 years and to temporarily permit such losses to offset 100% of taxable income in tax year 2020, these modifications have not impacted us.
Other income tax changes under the CARES Act have not had a material impact.
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Segment Reporting
We report selected information about our reportable 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, our Western and Eastern regions. Revenues associated with our solid waste operations are derived mainly from solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services in the northeastern United States. We classify our resource-renewal services by service in our Resource Solutions operating segment. Revenues associated with our resource-renewal operations are derived from organics services, large scale commercial and industrial services, as well as recycling services generated from both municipalities and customers in the form of processing fees, tipping fees and commodity sales. Legal, tax, information technology, human resources, marketing, certain finance and accounting and other administrative functions are included in our Corporate Entities operating segment.
A summary of revenues by operating segment (in millions) follows:
| Fiscal Year Ended December 31, | $ Change | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Eastern | $ | 220.3 | $ | 219.5 | $ | 0.8 | |||||||||||
| Western | 358.0 | 345.2 | 12.8 | ||||||||||||||
| Resource Solutions | 196.3 | 178.6 | 17.7 | ||||||||||||||
| Total | $ | 774.6 | $ | 743.3 | $ | 31.3 | |||||||||||
Eastern Region
The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
| Period-to-Period Change for Fiscal Year 2020 vs Fiscal Year 2019 | |||||||||||
| Amount | % Growth | ||||||||||
| Price | $ | 8.5 | 3.9 | % | |||||||
| Volume | (8.9) | (4.1) | % | ||||||||
| Surcharges and other fees | (0.8) | (0.4) | % | ||||||||
| Commodity price and volume | 0.1 | 0.1 | % | ||||||||
| Acquisitions | 1.9 | 0.9 | % | ||||||||
| Solid waste revenues | $ | 0.8 | 0.4 | % | |||||||
Price.
The price change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following:
•$6.3 million from favorable collection pricing; and
•$2.2 million from favorable disposal pricing related to transfer stations and landfills.
Volume.
The volume change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following:
•$(8.2) million from lower collection volumes mainly due to the negative impacts of the COVID-19 pandemic;
•$(0.5) million from lower disposal volumes (of which $(1.2) million relates to lower transfer station volumes mainly due to the negative impacts of the COVID-19 pandemic, partially offset by $0.7 million from higher landfill volumes in the Eastern region); and
•$(0.2) million from lower processing volumes.
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Surcharges and other fees.
The surcharges and other fees change component in in fiscal year 2020 solid waste revenues growth from the prior year is associated with the energy component of the energy and environmental fee and the sustainability recycling adjustment fee, inclusive of the effect of acquisition activity. The energy component of the fee floats on a monthly basis based on diesel fuel prices. The sustainability recycling adjustment fee floats on a monthly basis based on recycled commodity prices.
Acquisitions.
The acquisitions and divestitures change component in fiscal year 2020 solid waste revenues growth is the result of the acquisition of a transportation business in fiscal year 2020 and the acquisition of three tuck-in solid waste collection businesses in the prior year.
Western Region
The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
| Period-to-Period Change for Fiscal Year 2020 vs Fiscal Year 2019 | |||||||||||
| Amount | % Growth | ||||||||||
| Price | $ | 16.7 | 4.8 | % | |||||||
Volume (1) | (31.6) | (9.1) | % | ||||||||
| Surcharges and other fees | 0.1 | — | % | ||||||||
| Commodity price and volume | (0.1) | — | % | ||||||||
| Acquisitions | 29.1 | 8.4 | % | ||||||||
| Solid waste revenues | $ | 14.2 | 4.1 | % | |||||||
(1)Adjusted for $1.4 million of inter-company movements between solid waste collection volume and the customer solutions line-of-business associated with an acquisition.
Price.
The price change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following:
•$9.4 million from favorable collection pricing; and
•$7.3 million from favorable disposal pricing related to landfills and transfer stations.
Volume.
The volume change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following:
•$(18.0) million from lower disposal volumes related to landfills and transportation mainly due to the negative impacts of the COVID-19 pandemic; and
•$(13.6) million from lower collection volumes mainly due to the negative impacts of the COVID-19 pandemic.
Acquisitions and divestitures.
The acquisitions and divestitures change component in fiscal year 2020 solid waste revenues growth from the prior year is the result of the acquisition of seven tuck-in solid waste collection businesses and a solid waste collection business in fiscal year 2020 and the acquisition of four tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations and a business comprised of solid waste hauling and transfer assets in the prior year.
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Operating Income (Loss)
A summary of operating income (loss) by operating segments (in millions) follows:
| December 31, | $ Change | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Eastern | $ | 11.6 | $ | 9.5 | $ | 2.1 | |||||||||||
| Western | 42.7 | 42.0 | 0.7 | ||||||||||||||
| Resource Solutions | 7.4 | 5.8 | 1.6 | ||||||||||||||
| Corporate Entities | (2.4) | (4.2) | 1.8 | ||||||||||||||
| Total | $ | 59.3 | $ | 53.1 | $ | 6.2 | |||||||||||
Eastern Region
Eastern region operating income increased $2.1 million in fiscal year 2020 from the prior year. Excluding the impact of the Southbridge Landfill closure charge, the multiemployer pension plan withdrawal costs, and the expense from acquisition activities, our operating performance in fiscal year 2020 improved as a result of revenue growth and the cost impacts discussed below.
Cost of operations: Cost of operations decreased $(2.9) million in fiscal year 2020 from the prior year as a result of the following:
•lower disposal costs associated with lower volumes mainly due to the negative impacts of the COVID-19 pandemic and to a lesser extent our focus on pricing;
•lower hauling and third-party transportation costs associated with lower collection volumes mainly due to the negative impacts of the COVID-19 pandemic, which offset additional costs related to acquisition activity and higher transportation rates;
•lower labor and related benefit costs due to decreased overtime and lower benefit costs more than offsetting a special discretionary bonus for our front-line employees associated with operational execution during the COVID-19 pandemic;
•lower fuel costs due primarily to lower fuel prices, less traffic and improved fleet efficiency;
•lower direct operational costs, excluding the impact of gains associated with fixed asset sales, due to landfill operations and lower equipment costs; and
•lower fleet maintenance costs due to less wear and tear based on activity levels and lower volumes as a result of the COVID-19 pandemic; partially offset by
•higher facility maintenance costs associated with acquisition activity and related business growth.
General and administration: General and administration expense increased $0.7 million in fiscal year 2020 due to higher accrued incentive compensation, combined with higher bad debt expense based on challenges faced by our customers as a result of the economic downturn associated with the COVID-19 pandemic and a special discretionary bonus for our hourly back-office employees associated with their execution during the COVID-19 pandemic.
Depreciation and amortization: Depreciation and amortization expense increased $1.3 million in fiscal year 2020 due to higher depreciation and amortization expense associated with acquisition activity.
Western Region
Western region operating income increased $0.7 million in fiscal year 2020 from the prior year. Excluding the impact of expense from acquisition activities, our operating performance in fiscal year 2020 improved as a result of revenue growth and the cost impacts discussed below.
Cost of operations: Cost of operations increased $15.7 million in fiscal year 2020 from the prior year as a result of the following:
•higher labor and benefit costs associated with acquisition activity and a special discretionary bonus for our front-line employees associated with operational execution during the COVID-19 pandemic, partially offset by lower labor costs on decreased overtime;
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•higher maintenance and repair costs associated with higher facility maintenance costs, and to a lesser extent, higher fleet maintenance costs associated with acquisition activity and related business growth, which was partially offset by fleet maintenance cost savings associated with less wear and tear based on activity levels and lower volumes as a result of the COVID-19 pandemic; and
•higher disposal costs associated with increased disposal pricing in the northeastern United States and additional volumes related to acquisition activity, more than offsetting lower commercial collection, construction and demolition, and landfill volumes, mainly due to the negative impacts of the COVID-19 pandemic and our focus on pricing; partially offset by
•lower hauling and third-party transportation costs associated with lower collection volumes, partially offset by higher costs related to increased collection volumes associated with acquisition activity and higher transportation rates;
•lower direct operational costs associated with lower landfill operating costs, partially offset by higher operating costs related to business growth; and
•lower fuel costs associated with lower fuel prices and improved fleet efficiency, partially offset by higher fuel costs related to increased volumes associated with acquisition activity.
General and administration: General and administration expense increased $5.9 million in fiscal year 2020 due to higher labor costs associated with acquisition activity, higher bad debt expense based on challenges faced by our customers as a result of the economic downturn associated with the COVID-19 pandemic, higher accrued incentive compensation and a special discretionary bonus for our hourly back-office employees associated with execution during the COVID-19 pandemic.
Depreciation and amortization: Depreciation and amortization expense increased $8.8 million in fiscal year 2020 due primarily to acquisition activity and higher landfill amortization expense associated with changes in cost estimates and other assumptions, partially offset by lower landfill volumes mainly associated with the negative impacts of the COVID-19 pandemic.
Resource Solutions
Operating income increased $1.6 million in fiscal year 2020 from the prior year due to the following:
Recycling.
Our operating performance in fiscal year 2020 improved primarily due to revenue growth on higher recycling processing fees and higher commodity pricing in the marketplace with higher cardboard and paper pricing, and higher recycling volumes both organically and as a result of acquisition activity, partially offset by higher operating costs, including disposal costs and facility and operational support costs, driven primarily by volume growth.
Organics.
Our operating performance remained flat in fiscal year 2020 as higher volumes were offset by higher operating and disposal costs.
Customer solutions.
Our operating performance in fiscal year 2020 declined as revenue growth associated with increased volumes was outpaced by higher cost of operations including an increase in hauling, transportation and disposal costs, higher labor and personnel costs, and higher depreciation expense.
Liquidity and Capital Resources
Recent Events
We continue to monitor the impact that the COVID-19 pandemic has had and will continue to have on our actual and forecasted cash flows, our liquidity, and our capital requirements in order to properly manage our liquidity needs as we move forward. Because of the nature of the services we provide, we expect to continue to generate positive operating cash flows through stable revenue sources. To counter the impact of expected revenue declines, we have initiated steps to reduce discretionary spending and delay certain capital expenditures and can further scale down these expenditures to meet liquidity needs.
We have $173.6 million of undrawn capacity from our $200.0 million revolving line of credit facility ("Revolving Credit Facility") and $154.3 million of cash and cash equivalents as of December 31, 2020 to help meet our liquidity needs, and our next significant debt maturity, which is comprised of our Revolving Credit Facility and term loan A facility ("Term Loan Facility", and together with the Revolving Credit Facility, the "Credit Facility"), is in May 2023. We believe that we will remain in compliance with all necessary covenants of our Credit Facility over the remaining term of this facility.
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A summary of cash and cash equivalents, restricted assets and debt balances, excluding any debt issuance costs, (in millions) follows:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash and cash equivalents | $ | 154.3 | $ | 3.5 | |||||||
| Restricted assets: | |||||||||||
| Restricted investments securities - landfill closure | $ | 1.8 | $ | 1.6 | |||||||
| Debt: | |||||||||||
| Current portion | $ | 9.2 | $ | 4.3 | |||||||
| Non-current portion | 539.2 | 518.4 | |||||||||
| Total debt | $ | 548.4 | $ | 522.7 | |||||||
Summary of Cash Flow Activity
A summary of cash flows (in millions) follows:
| Fiscal Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net cash provided by operating activities | $ | 139.9 | $ | 116.8 | |||||||
| Net cash used in investing activities | $ | (140.0) | $ | (177.5) | |||||||
| Net cash provided by financing activities | $ | 151.0 | $ | 60.1 | |||||||
Cash flows from operating activities.
A summary of operating cash flows (in millions) follows:
| Fiscal Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net income | $ | 91.1 | $ | 31.7 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 90.8 | 79.8 | |||||||||
| Depletion of landfill operating lease obligations | 7.8 | 7.7 | |||||||||
| Interest accretion on landfill and environmental remediation liabilities | 7.1 | 7.0 | |||||||||
| Amortization of debt issuance costs and discount on long-term debt | 2.2 | 2.3 | |||||||||
| Stock-based compensation | 8.2 | 7.2 | |||||||||
| Operating lease right-of-use assets expense | 8.5 | 9.6 | |||||||||
| Loss (gain) on sale of property and equipment | 0.9 | (0.9) | |||||||||
| Southbridge Landfill non-cash closure charge | 0.3 | 0.1 | |||||||||
| Non-cash expense from acquisition activities and other items | 0.6 | 0.1 | |||||||||
| Withdrawal costs - multiemployer pension plan | — | 2.2 | |||||||||
| Deferred income taxes | (52.3) | (1.2) | |||||||||
| 165.2 | 145.6 | ||||||||||
| Changes in assets and liabilities, net | (25.3) | (28.8) | |||||||||
| Net cash provided by operating activities | $ | 139.9 | $ | 116.8 | |||||||
Net cash provided by operating activities increased $23.1 million in fiscal year 2020 as compared to fiscal year 2019. This was the result of improved operational performance combined with the favorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures. For discussion of our improved operational performance in fiscal year 2020 as compared to fiscal year 2019, see Results of Operations included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K. The favorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures, which are affected by both cost changes and the timing of payments, in fiscal year 2020 as compared to fiscal year 2019 was due primarily to the following:
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•a $13.8 million favorable impact to operating cash flows associated with the change in accrued expenses and other liabilities due primarily to the timing of environmental remediation payments and final capping, closure and post-closure payments, which increased in fiscal year 2019 and then decreased in fiscal year 2020; and
•a $11.3 million favorable impact to operating cash flows associated with the change in accounts receivable; and
•a $0.5 million favorable impact to operating cash flows associated with the change in prepaid expenses, inventories and other assets; partially offset by
•a $(22.0) million unfavorable impact to operating cash flows associated with the change in accounts payable based on differences in the timing of payments.
Cash flows from investing activities.
A summary of investing cash flows (in millions) follows:
| Fiscal Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Acquisitions, net of cash acquired | $ | (32.5) | $ | (75.4) | |||||||
| Additions to property, plant and equipment | (108.0) | (103.2) | |||||||||
| Proceeds from sale of property and equipment | 0.5 | 0.8 | |||||||||
| Proceeds from property insurance settlement | — | 0.3 | |||||||||
| Net cash used in investing activities | $ | (140.0) | $ | (177.5) | |||||||
A summary of the most significant items affecting the change in our investing cash flows follows:
Acquisitions, net of cash acquired. In fiscal year 2020, we acquired seven tuck-in solid waste collection businesses and a solid waste collection business, a transportation business, and one recycling operation for total consideration of $33.5 million, including $29.0 million in cash, and paid $3.5 million in holdback payments on businesses previously acquired, as compared to fiscal year 2019, during which we acquired seven tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations and a business comprised of solid waste hauling and transfer assets for total consideration of $82.2 million, including $72.1 million in cash and $3.3 million in holdback payments on businesses previously acquired.
Capital expenditures. Capital expenditures were $4.8 million higher in fiscal year 2020 as compared to fiscal year 2019 primarily due to timing differences and the following items:
•$5.7 million in additional capital expenditures from phase VI construction and development costs related to long-term infrastructure at the Subtitle D landfill in Coventry, Vermont ("Waste USA Landfill") to facilitate future landfill airspace construction which will significantly enhance the economic useful life of the Waste USA Landfill once construction is finished; partially offset by
•$(1.8) million from lower capital expenditures associated with the integration of newly acquired operations, which includes planned capital expenditures following an acquisition, as well as non-routine development investments that are expected to provide long-term returns.
Proceeds from property insurance settlement. Recovery of insurance proceeds was $(0.3) million lower in fiscal year 2020 as compared to fiscal year 2019 due to increased recoveries in prior year pertaining to property damage related to a fire at a transfer station in our Western region.
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Cash flows from financing activities.
A summary of financing cash flows (in millions) follows:
| Fiscal Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Proceeds from debt borrowings | $ | 157.0 | $ | 197.8 | |||||||
| Principal payments on debt | (149.4) | (243.4) | |||||||||
| Payments of debt issuance costs | (1.5) | (0.7) | |||||||||
| Proceeds from the exercise of share-based awards | 0.1 | 3.4 | |||||||||
| Proceeds from the public offering of Class A Common Stock | 144.8 | 100.4 | |||||||||
| Proceeds from unregistered sale of Class A Common Stock | — | 2.6 | |||||||||
| Net cash provided by financing activities | $ | 151.0 | $ | 60.1 | |||||||
A summary of the most significant items affecting the change in our financing cash flows follows:
Debt activity. Net cash provided by debt activity increased $53.2 million year-over-year. The increase in financing cash flows related to debt activity is primarily associated with the timing of the pay down of our Revolving Credit Facility and an increase in new finance lease obligations.
Payments of debt issuance costs. We made $1.5 million of debt issuance cost payments in fiscal year 2020 related to the issuance of $40.0 million aggregate principal amount of New York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2020 ("New York Bonds 2020") as compared to $0.7 million of debt issuance cost payments in fiscal year 2019 related to the remarketing of $11.0 million aggregate principal amount of New Hampshire Bonds and $25.0 million aggregate principal amount of New York Bonds 2014R-1.
Proceeds from the exercise of share-based awards.