UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number 000-23211

 

CASELLA WASTE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

03-0338873

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

25 Greens Hill Lane, Rutland, Vermont

 

05701

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (802) 775-0325

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of November 30, 2010:

 

 

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

 

25,247,454

 

 

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

 

988,200

 

 

 

 



 

PART I.      FINANCIAL INFORMATION

 

ITEM 1.      FINANCIAL STATEMENTS

 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands)

 

 

 

October 31,

 

April 30,

 

 

 

2010

 

2010

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

4,044

 

$

2,035

 

Restricted cash

 

76

 

76

 

Accounts receivable - trade, net of allowance for doubtful accounts of $1,551 and $1,641

 

65,032

 

61,722

 

Notes receivable - officer/employees

 

140

 

139

 

Refundable income taxes

 

1,556

 

1,316

 

Prepaid expenses

 

6,180

 

5,710

 

Inventory

 

4,038

 

3,604

 

Deferred income taxes

 

5,096

 

5,461

 

Other current assets

 

1,491

 

2,001

 

 

 

 

 

 

 

Total current assets

 

87,653

 

82,064

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation and amortization of $625,640 and $595,023

 

478,715

 

480,053

 

Goodwill

 

125,792

 

125,792

 

Intangible assets, net

 

2,603

 

3,085

 

Restricted assets

 

311

 

228

 

Notes receivable - officer/employees

 

1,145

 

1,149

 

Deferred income taxes

 

553

 

553

 

Investments in unconsolidated entities

 

38,825

 

40,965

 

Other non-current assets

 

16,628

 

17,217

 

Non-current assets held for sale

 

 

3,708

 

 

 

 

 

 

 

 

 

664,572

 

672,750

 

 

 

 

 

 

 

 

 

$

752,225

 

$

754,814

 

 

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

 

2



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(Unaudited)

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

 

 

 

October 31,

 

April 30,

 

 

 

2010

 

2010

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current maturities of long-term debt and capital leases

 

$

2,425

 

$

2,000

 

Current maturities of financing lease obligations

 

1,471

 

1,449

 

Accounts payable

 

43,419

 

40,139

 

Accrued payroll and related expenses

 

4,831

 

4,596

 

Accrued interest

 

11,742

 

11,769

 

Current accrued capping, closure and post-closure costs

 

3,668

 

7,765

 

Other accrued liabilities

 

25,536

 

22,362

 

 

 

 

 

 

 

Total current liabilities

 

93,092

 

90,080

 

 

 

 

 

 

 

Long-term debt and capital leases, less current maturities

 

551,833

 

556,130

 

Financing lease obligations, less current maturities

 

10,066

 

10,832

 

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

 

33,620

 

32,237

 

Deferred income taxes

 

6,494

 

6,277

 

Other long-term liabilities

 

8,691

 

8,962

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Class A common stock -

 

 

 

 

 

Authorized - 100,000,000 shares, $0.01 par value per share, issued and outstanding - 25,185,000 and 24,944,000 shares as of October 31, 2010 and April 30, 2010, respectively

 

252

 

249

 

Class B common stock -

 

 

 

 

 

Authorized - 1,000,000 shares, $0.01 par value per share, 10 votes per share, issued and outstanding - 988,000 shares

 

10

 

10

 

Accumulated other comprehensive loss

 

(344

)

(785

)

Additional paid-in capital

 

283,644

 

281,899

 

Accumulated deficit

 

(235,133

)

(231,077

)

Total stockholders’ equity

 

48,429

 

50,296

 

 

 

 

 

 

 

 

 

$

752,225

 

$

754,814

 

 

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

 

3



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands)

 

 

 

Three Months Ended
October 31,

 

Six Months Ended
October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

141,009

 

$

133,094

 

$

280,850

 

$

265,551

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of operations

 

92,978

 

86,379

 

187,824

 

174,007

 

General and administration

 

17,406

 

14,755

 

34,630

 

30,980

 

Depreciation and amortization

 

16,791

 

18,309

 

33,518

 

37,801

 

Gain on divestiture

 

 

 

(3,502

)

 

 

 

127,175

 

119,443

 

252,470

 

242,788

 

Operating income

 

13,834

 

13,651

 

28,380

 

22,763

 

Other expense/(income), net:

 

 

 

 

 

 

 

 

 

Interest income

 

(11

)

(28

)

(26

)

(61

)

Interest expense

 

14,529

 

15,006

 

29,176

 

24,851

 

Loss from equity method investment

 

506

 

159

 

2,638

 

1,378

 

Loss on debt modification

 

 

 

 

511

 

Other income

 

(317

)

(247

)

(412

)

(291

)

Other expense, net

 

14,707

 

14,890

 

31,376

 

26,388

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes and discontinued operations

 

(873

)

(1,239

)

(2,996

)

(3,625

)

Provision for income taxes

 

281

 

457

 

1,060

 

1,019

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before discontinued operations

 

(1,154

)

(1,696

)

(4,056

)

(4,644

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations (net of income tax provision of $65 and $152)

 

 

97

 

 

226

 

Income on disposal of discontinued operations (net of income tax provision of $32 and $60)

 

 

48

 

 

89

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(1,154

)

$

(1,551

)

$

(4,056

)

$

(4,329

)

 

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

 

4



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Unaudited)

(in thousands, except for per share data)

 

 

 

Three Months Ended
October 31,

 

Six Months Ended
October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

Loss from continuing operations before discontinued operations applicable to common stockholders

 

$

(0.04

)

$

(0.06

)

$

(0.16

)

$

(0.18

)

Income from discontinued operations, net

 

 

 

 

0.01

 

Income on disposal of discontinued operations, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share applicable to common stockholders

 

$

(0.04

)

$

(0.06

)

$

(0.16

)

$

(0.17

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

26,058

 

25,733

 

25,981

 

25,711

 

 

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

 

5



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Six Months Ended
October 31,

 

 

 

2010

 

2009

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(4,056

)

$

(4,329

)

Income from discontinued operations, net

 

 

(226

)

Income on disposal of discontinued operations, net

 

 

(89

)

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

 

 

 

 

 

Gain on divestiture

 

(3,502

)

 

Gain on sale of equipment

 

(310

)

(916

)

Depreciation and amortization

 

33,518

 

37,801

 

Depletion of landfill operating lease obligations

 

4,299

 

3,165

 

Interest accretion on landfill and environmental remediation liabilities

 

1,656

 

1,738

 

Amortization of premium on senior subordinated notes

 

(386

)

(356

)

Amortization of discount on term loan and second lien notes

 

1,088

 

626

 

Loss from equity method investment

 

2,638

 

1,378

 

Loss on debt modification

 

 

511

 

Stock-based compensation

 

1,480

 

1,040

 

Excess tax benefit on the vesting of restricted stock

 

(117

)

 

Deferred income taxes

 

1,185

 

875

 

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

 

 

 

 

 

Accounts receivable

 

(3,310

)

(4,883

)

Accounts payable

 

3,280

 

(353

)

Prepaid expenses, inventories and other assets

 

273

 

1,032

 

Accrued expenses and other liabilities

 

(2,224

)

2,664

 

 

 

39,568

 

44,322

 

Net Cash Provided by Operating Activities

 

35,512

 

39,678

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Additions to property, plant and equipment - growth

 

(1,201

)

(2,643

)

                                                                      - maintenance

 

(31,180

)

(29,757

)

Payments on landfill operating lease contracts

 

(2,250

)

(4,538

)

Proceeds from divestiture

 

7,533

 

 

Proceeds from sale of equipment

 

555

 

2,497

 

Net Cash Used In Investing Activities

 

(26,543

)

(34,441

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from long-term borrowings

 

76,900

 

413,144

 

Principal payments on long-term debt

 

(84,236

)

(405,344

)

Payment of financing costs

 

(357

)

(13,980

)

Proceeds from exercise of stock options

 

160

 

85

 

Excess tax benefit on the vesting of restricted stock

 

117

 

 

Net Cash Used in Financing Activities

 

(7,416

)

(6,095

)

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

Net cash provided by operating activities

 

 

453

 

Net cash provided by investing activities

 

456

 

571

 

Cash Provided by Discontinued Operations

 

456

 

1,024

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

2,009

 

166

 

Cash and cash equivalents, beginning of period

 

2,035

 

1,838

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

4,044

 

$

2,004

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for -

 

 

 

 

 

Interest

 

$

26,225

 

$

17,212

 

Income taxes, net of refunds

 

$

117

 

$

550

 

 

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

 

6



 

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except for per share data)

 

1.             BASIS OF PRESENTATION

 

The accompanying unaudited financial statements include the accounts of Casella Waste Systems, Inc. (“the Parent”) and its subsidiaries (collectively, “we”, “us” or “our”).  We are a regional, integrated solid waste services company which provides a full range of solid waste services including collection, disposal, power generation and processing and recycling.  We also market recyclable paper, metals, aluminum, plastics and glass, which have been processed at our facilities or purchased from third parties.

 

The consolidated balance sheet as of October 31, 2010, the consolidated statements of operations for the three and six months ended October 31, 2010 and 2009 and the consolidated statements of cash flows for the six months ended October 31, 2010 and 2009 are unaudited.  In the opinion of management, such financial statements, together with the consolidated balance sheet as of April 30, 2010, include all adjustments (which include normal recurring and nonrecurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented.

 

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Our significant accounting policies are more fully discussed in Item 7 of our Annual Report on Form 10-K for the year ended April 30, 2010 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on June 11, 2010.  The consolidated financial statements presented herein should be read in conjunction with our audited consolidated financial statements as of and for the twelve months ended April 30, 2010 included in the Annual Report.  The results for the three and six month periods ended October 31, 2010 may not be indicative of the results that may be expected for any other interim period or the fiscal year ending April 30, 2011.

 

We consider events or transactions that have occurred after the balance sheet date of October 31, 2010, but prior to the filing of the financial statements with the SEC on this Form 10-Q to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of this filing.

 

Adoption of New Accounting Pronouncements

 

Variable Interest Entities

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under this guidance, an enterprise has a controlling financial interest when it has (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This guidance requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. This guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying

 

7



 

special-purpose entities.  We adopted this guidance effective May 1, 2010 with no effect on our consolidated financial position or results of operations.

 

Fair Value Measurements and Disclosures

 

In January 2010, FASB issued additional guidance on fair value disclosures. The guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance was effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which was required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years.  We adopted this guidance with no effect on our consolidated financial position or results of operations.

 

2.                                     RECLASSIFICATION

 

We have made reclassifications in our Consolidated Statements of Operations to conform information for the three and six months ended October 31, 2009 to our current period presentation. The supplementary financial information included in this section has also been updated to reflect these changes.

 

3.             GOODWILL AND INTANGIBLE ASSETS

 

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

 

Eastern
Region

 

Central
Region

 

Western
Region

 

FCR
Recycling

 

Total

 

 

 

 

 

 

 

 

 

 

 

$

38

 

$

32,996

 

$

55,302

 

$

37,456

 

$

125,792

 

 

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

 

 

 

Covenants
Not to
Compete

 

Client Lists

 

Licensing
Agreements

 

Contract
Acquisition
Costs

 

Patents

 

Total

 

Balance, October 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

$

14,478

 

$

2,177

 

$

920

 

$

424

 

$

250

 

$

18,249

 

Less accumulated amortization

 

(13,814

)

(1,025

)

(460

)

(128

)

(219

)

(15,646

)

 

 

$

664

 

$

1,152

 

$

460

 

$

296

 

$

31

 

$

2,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

$

14,488

 

$

2,177

 

$

920

 

$

424

 

$

250

 

$

18,259

 

Less accumulated amortization

 

(13,666

)

(922

)

(302

)

(111

)

(173

)

(15,174

)

 

 

$

822

 

$

1,255

 

$

618

 

$

313

 

$

77

 

$

3,085

 

 

Intangible amortization expense for the three and six months ended October 31, 2010 and 2009 was $243, $133, $494 and $285, respectively.  The intangible amortization expense estimated for the five fiscal years following fiscal year 2010 and thereafter is as follows:

 

8



 

2011

 

2012

 

2013

 

2014

 

2015

 

Thereafter

 

$

899

 

$

511

 

$

449

 

$

401

 

$

350

 

$

475

 

 

4.             ACCRUED CAPPING, CLOSURE AND POST CLOSURE

 

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

 

 

 

October 31,

 

April 30,

 

 

 

2010

 

2010

 

Beginning Balance

 

$

40,002

 

$

41,890

 

Obligations incurred

 

1,580

 

4,016

 

Revisions in estimates

 

(338

)

(2,438

)

Accretion expense

 

1,587

 

3,281

 

Payments

 

(5,543

)

(6,747

)

Ending Balance

 

$

37,288

 

$

40,002

 

 

5.             LONG-TERM DEBT

 

On July 9, 2009, we completed the refinancing of our then existing senior credit facility with a senior secured first lien credit facility (the “Senior Secured Credit Facility”), consisting of a $177,500 revolving credit facility (the “New Revolver”) and a $130,000 aggregate principal term loan (the “New Term Loan”). In connection with the Senior Secured Credit Facility, we simultaneously completed the offering of $180,000 aggregate principal amount of 11% senior second lien notes due 2014 (the “Second Lien Notes”).  The net proceeds from the Senior Secured Credit Facility and from the Second Lien Notes offering were used to refinance the borrowings under our previous $525,000 senior credit facility.

 

For the first two fiscal quarters after July 9, 2009, the interest rate for borrowings under the New Revolver was LIBOR plus a margin of 4.50% per annum, and thereafter the applicable margin will be determined in accordance with the pricing grid as set forth in the Senior Secured Credit Facility Agreement dated July 9, 2009. The interest rate for the New Term Loan is LIBOR plus a margin of 5.00% per annum, provided that LIBOR shall not be less than 2.00% per annum. The New Term Loan was issued at an original issue price of 94.5% of the principal amount of the loan.

 

The Senior Secured Credit Facility is subject to customary affirmative, negative, and financial covenants, generally consistent with our prior credit agreement. The New Revolver is due December 31, 2012 and the New Term Loan is due April 9, 2014. If we fail to refinance our 9.75% senior subordinated notes due February 2013 (the “Senior Subordinated Notes”) on or before October 31, 2012, the due date for the New Term Loan shall be December 31, 2012. We have the right to request an increase in the amount of the Senior Secured Credit Facility by an aggregate amount of $42,500, in our discretion, subject to certain conditions of the Senior Secured Credit Facility Agreement.

 

Further advances were available under the New Revolver in the amount of $97,655 as of October 31, 2010.  The available amount is net of outstanding irrevocable letters of credit totaling $49,845 as of October 31, 2010, at which date no amount had been drawn.

 

9



 

The Second Lien Notes were issued at an original issue price of 97.2% of the principal amount.  The Second Lien Notes pay interest on a semi-annual basis and are due on July 15, 2014.  The Second Lien Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States under Regulation S under the Securities Act.

 

We recorded a charge of $511 as a loss on debt modification in the quarter ended July 31, 2009 relating to the unamortized deferred financing costs associated with the refinancing of our previous senior credit facility.

 

On May 27, 2010, we entered into an amendment to the Senior Secured Credit Facility to create additional capital structure flexibility.  As amended, the Senior Secured Credit Facility permits us to use net proceeds of up to $150,000 from equity offerings to repurchase our Senior Subordinated Notes or our outstanding Second Lien Notes.  We are also permitted to use up to $50,000 of borrowings under the Senior Secured Credit Facility to repurchase the Senior Subordinated Notes.

 

6.                                  COMMITMENTS AND CONTINGENCIES

 

(a)                                  Legal Proceedings

 

North Country Landfill Expansion

 

Our subsidiary, North Country Environmental Services, Inc. (“NCES”) is located in Bethlehem, New Hampshire, and is currently permitted to accept municipal solid waste and C&D material from a wide geographic region.  NCES projects that its permitted and uncontested capacity will last into fiscal year 2012.

 

NCES and the Town of Bethlehem (the “Town”) have been in prolonged zoning litigation over NCES’s expansion of the landfill.  Currently, there are two court actions between NCES and the Town: a declaratory judgment action initiated by NCES on September 12, 2001, and a zoning enforcement action initiated by the Town on February 2, 2009.  In the declaratory judgment action, the New Hampshire Supreme Court ruled that NCES has all necessary local approvals to expand its landfill within a 51-acre area, but remanded to the New Hampshire Superior Court issues related to the validity of the Town’s zoning ordinance as it relates to a proposed landfill expansion outside that 51-acre area.  In the enforcement action, the Town has requested an injunction requiring NCES to remove a leachate force main, a landfill gas line, storm water drainage lines, catch basins and outfalls, a landfill liner anchor trench, and storm water detention ponds that are located outside the 51-acre area.  NCES and the Town filed cross-motions for summary judgment on the validity of the ordinance the Town is attempting to enforce, and the court denied both motions in October 2009.  On February 5, 2010, the court granted NCES’s motion to consolidate the remanded action with the enforcement action and continued the March 2010 trial date that had been set in the enforcement action.  The trial of the consolidated actions has been set for January 2011.  NCES filed a motion to continue the trial in early September 2010.

 

On December 12, 2008, the New Hampshire Department of Environmental Services (“NHDES”) denied a request by NCES to modify its standard permit to develop approximately eight years of capacity within the bounds of the 51-acre area.  NCES revised and resubmitted its request, and the NHDES denied the revised request on March 25, 2009.  NCES appealed each of these denials to the New Hampshire Waste Management Council.  NCES obtained a stay of both appeals pending the outcome of the action for declaratory and injunctive relief described below.

 

NCES filed a petition for declaratory and injunctive relief with the New Hampshire Superior Court on

 

10



 

February 10, 2009 related to the NHDES’s December 12, 2008 denial.  NCES amended this petition following NHDES’s March 25, 2009 denial.  In its amended petition, NCES sought declarations that NHDES’s denials were unlawful on several grounds.  NCES also sought preliminary injunctive relief that would have required NHDES to immediately resume its consideration of NCES’s request to modify its standard permit.  In addition, NCES sought permanent injunctive relief that would require NHDES to review the permit modification application in conformity with the Superior Court’s declarations.  In October 2009, NCES moved successfully — with NHDES’s concurrence — to stay the litigation so that NHDES could consider the results of certain remedial work NCES undertook during the 2009 construction season.  NCES sought the stay because the outcome of this review by NHDES could affect the scope of the litigation.

 

On April 29, 2010, NCES filed another application with NHDES to modify its standard permit to develop the capacity that was the subject of the denials in December 2008 and March 2009.  On August 27, 2010, NHDES granted the modified permit, thereby authorizing NCES to develop approximately one million cubic yards of disposal capacity.  The Town did not appeal this decision, but there were two appeals filed with the New Hampshire Waste Management council.  One appeal was filed by a group of local citizens and seeks to invalidate the approval.  The other appeal was filed by a company with which NCES has certain agreements relating to the operation of the gas management system at the landfill and the use of the landfill gas and seeks modification of the approval with respect to the criteria governing the operation of the gas management system.  The filing of an appeal of a NHDES approval does not suspend or otherwise affect the approval.  No hearing has been set on these appeals.

 

Southbridge Landfill Site Assignment Appeal

 

On June 9, 2008, the Southbridge Board of Health (“Southbridge BOH”) issued a Decision and Statement of Findings pursuant to Massachusetts General Laws ch.111, §§150A and 150 A1/2 and 310 CMR 16.00 (“2008 Site Assignment”) granting our subsidiary, Southbridge Recycling and Disposal Park, a minor modification to the existing site assignment for the Southbridge Sanitary Landfill (the “Landfill”).  The 2008 Site Assignment allows Southbridge Recycling and Disposal Park, subject to numerous conditions, to accept into the Landfill up to 405,000 tons of waste per year without regard to geographic origin.

 

On or about July 14, 2008, the Sturbridge Board of Health (“Sturbridge BOH”), an abutting municipality to Southbridge, together with several 10-citizen groups, filed a complaint in Worcester County Superior Court contesting the 2008 Site Assignment (the “Appeal”). The Appeal named as defendants the Southbridge BOH, its individual members and Southbridge Recycling and Disposal Park. On August 21, 2008, Southbridge Recycling and Disposal Park reached a settlement with the Sturbridge BOH, pursuant to which Southbridge Recycling and Disposal Park agreed to fund an escrow account to be controlled by the Sturbridge BOH, in the amount of $50. The Sturbridge BOH withdrew as a party to the Appeal on August 22, 2008.

 

On December 11, 2009, the Worcester County Superior Court dismissed the plaintiffs’ complaint following briefing and a court hearing. Plaintiffs appealed that decision, and we have filed a joint motion with the Southbridge BOH to dismiss, contending that the appeal was filed late and is subject to dismissal as a matter of law. On November 19, 2010, all parties received Notice from the Appeals Court Clerk’s Office that this appeal will be heard by the Massachusetts Supreme Judicial Court, upon its own motion. While it is too early to assess the outcome of the appellate action, Southbridge Recycling and Disposal Park will continue to aggressively defend the appellate action.

 

In July 2008, Southbridge Recycling and Disposal Park filed an application with the Massachusetts Department of Environmental Protection (“MADEP”) for a minor modification to the existing landfill operating permit, to allow Southbridge Recycling and Disposal Park to operate in a manner consistent

 

11



 

with the Site Assignment (conversion from 180,960 tons per year of construction and demolition debris to 180,960 tons per year of any combination of construction and demolition debris and municipal solid waste, with no geographic limitations).  The MADEP issued a “provisional” final permit granting this minor modification on April 23, 2010, and invited public comment through May 19, 2010.  On May 28, 2010, the MADEP issued a final permit granting the minor modification to Southbridge Recycling and Disposal Park’s existing operating permit (the “Conversion Permit”).  On July 1, 2010, the Board of Health of the Town of Sturbridge filed a pro se complaint challenging MADEP’s issuance of the Conversion Permit, despite its prior settlement.  However, due to procedural irregularities in the Board of Health’s filing, the court has not accepted the filing as complete and the lawsuit has therefore not officially been initiated.  However, on or about August 1, 2010, the Board of Health of the Town of Sturbridge filed a second complaint challenging MADEP’s issuance of the Conversion Permit on different but similar grounds.  MADEP as the issuing agency and defendant will be required to defend the Final Permit.  We will assist to the extent required or requested.

 

CRMC Bethlehem, LLC Litigation

 

CRMC Bethlehem, LLC and Commonwealth Bethlehem Energy, LLC (collectively, “CRMC”), have filed claims in the US District Court for the District of New Hampshire against NCES.  CRMC seeks declaratory and injunctive relief and damages.  CRMC alleges that NCES has breached the terms of a Gas Lease and Easement Agreement by and between CRMC and NCES, entered into on September 10, 1998, as amended on March 1, 2000 (the “Gas Lease”).  CRMC alleges that NCES has inappropriately interfered with CRMC rights pursuant to the Gas Lease to develop a landfill gas-to-energy project to be sited on the Landfill.  CRMC also alleges that NCES has violated the terms of an Operations and Maintenance Agreement in operating the landfill gas management system.  NCES denies these allegations, and intends to vigorously defend against these claims.  We do not believe that this matter will have a material adverse effect on our business, financial condition or results of operations or cash flows.

 

Vermont Attorney General Matter

 

We have been a party to an Assurance of Discontinuance (“AOD”) entered into on May 17, 2002 with the Vermont Attorney General’s Office, which relates to our business activities in Vermont regarding certain contract terms, and certain acquisition guidelines.  On March 23, 2010, we were the recipient of a Civil Investigative Subpoena requesting information and documents regarding our compliance with the AOD.  We have been, and will continue to be, responsive to the inquiries proffered by the Vermont Attorney General’s office.  We do not believe that this matter will have a material adverse effect on our business, financial condition or results of operations or cash flows.

 

Other

 

We are a defendant in certain other lawsuits alleging various claims incurred in the ordinary course of business, none of which, either individually or in the aggregate, we believe are material to our business, financial condition, results of operations or cash flows.

 

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

 

(b)                                 Environmental Liability

 

We are subject to liability for environmental damage, including personal injury and property damage, that our solid waste, recycling and power generation facilities may cause to neighboring property owners,

 

12



 

particularly as a result of the contamination of drinking water sources or soil, possibly including damage resulting from conditions existing before we acquired the facilities. We may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants or hazardous substances if we or our predecessors arrange or arranged to transport, treat or dispose of those materials.

 

On December 20, 2000, the State of New York Department of Environmental Conservation (“DEC”) issued an Order on Consent (“Order”) which named Waste-Stream, Inc. (“WSI”), a Casella subsidiary, General Motors Corporation (“GM”) and Niagara Mohawk Power Corporation (“NiMo”) as Respondents.  The Order required that the Respondents undertake certain work on a 25-acre scrap yard and solid waste transfer station owned by WSI, including the drafting of a Remedial Investigation and Feasibility Study (the “Study”).  A draft of the Study was submitted to DEC in January 2009 (followed by a final report in May 2009).  The Study estimates that the undiscounted costs associated with implementing the preferred remedies will be approximately $10,219 and it is unlikely that any costs relating to onsite remediation will be incurred until fiscal year 2012.  WSI is jointly and severally liable for the total cost to remediate and we initially expected to be responsible for approximately 30% upon implementation of a cost-sharing agreement with NiMo and GM. Based on these estimates, we recorded an environmental remediation charge of $2,823 in third quarter of fiscal year 2009.  In the fourth quarter of fiscal year 2009, we recognized an additional charge of $1,532, representing an additional 15% of the estimated costs, in recognition of the deteriorating financial condition and eventual bankruptcy filing of GM.  In the fourth quarter of fiscal year 2010, we recognized an additional charge of $335 based on changes in the expected timing of cash outflows.  Such charges could be significantly higher if costs exceed estimates, or one or more of the other responsible parties fail to meet their obligation.  We inflate these estimated costs in current dollars until the expected time of payment and discount the cost to present value using an appropriate discount rate (3.12%).  At October 31, 2010 and April 30, 2010, we have recorded $4,596 and $4,551, respectively, related to this liability including the recognition of $34, $56, $69 and $111 of accretion expense in the three and six months ended October 31, 2010 and 2009.

 

7.             STOCK-BASED COMPENSATION

 

In June, 2010, we granted a combination of restricted stock units and performance stock units under the 2006 Stock Incentive Plan (the “2006 Plan”) to certain employees.  The vesting of half of the stock units is based on the attainment of a targeted annual return on net assets in fiscal year 2013 (performance stock units) and the vesting of the other half is based on continued employment over a three year period starting on the first anniversary of the grant (restricted stock units).  As of October 31, 2010, the performance stock units included in the June, 2010 grant could result in the issuance of up to 582 shares of Class A Common Stock based on the attainment of a targeted annual return on net assets in fiscal year 2013 and the restricted stock units could result in the issuance of up to 465 shares of Class A Common Stock based on vesting over a three year period starting on the first anniversary of the grant.  The performance and restricted stock units were granted at a grant date fair value of $3.83 per share.

 

As of October 31, 2010 there were 396 Class A Common Stock equivalents available for future grant under the 2006 Plan inclusive of additional Class A Common Stock equivalents which were previously issued under our terminated plans but which have become available for grant because such awards expired or otherwise resulted in shares not being issued.

 

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

 

A summary of stock option activity for the six months ended October 31, 2010 is as follows:

 

13



 

 

 

Stock Options

 

Weighted
Average
Exercise
Price

 

Outstanding, April 30, 2010

 

2,639

 

$

11.28

 

Granted

 

280

 

$

3.86

 

Exercised

 

 

$

 

Class A Common Stock Issued

 

 

$

 

Forfeited

 

(603

)

$

9.70

 

Outstanding,October 31, 2010

 

2,316

 

$

10.80

 

Exercisable, October 31, 2010

 

2,031

 

$

11.76

 

 

A summary of restricted stock, restricted stock unit and performance stock unit activity for the six months ended October 31, 2010 is as follows:

 

 

 

Restricted Stock /
Restricted Stock
Units

 

Performance
Stock Units (1)

 

Outstanding, April 30, 2010

 

695

 

775

 

Granted

 

545

 

469

 

Class A Common Stock Issued

 

(194

)

 

Forfeited

 

(27

)

(29

)

Outstanding, October 31, 2010

 

1,019

 

1,215

 

 


(1) Performance stock units are included at the 100% attainment level.  Attainment of performance metrics at maximum levels could result in the issuance of an additional 764 shares of Class A Common Stock.

 

We recorded $825, $446, $1,433 and $953 of stock-based compensation expense related to stock options, performance stock units, restricted stock units and restricted stock during the three and six months ended October 31, 2010 and 2009.  We also recorded $25, $64, $47 and $87 of stock-based compensation expense for our Employee Stock Purchase Plan during the three and six months ended October 31, 2010 and 2009.

 

Stock-based compensation expense is included in general and administration expenses in the consolidated statement of operations.  The unrecognized stock-based compensation expense at October 31, 2010 related to unvested stock options and restricted stock units was $3,005, to be recognized over a weighted average period of 2.2 years.  We expect to recognize $2,398 of expense related to outstanding performance stock units over the weighted average period based on expected metrics at October 31, 2010.  Maximum unrecognized stock-based compensation expense at October 31, 2010 related to outstanding performance stock units was $5,677, to be recognized over a weighted average period of 1.6 years subject to the attainment of performance metrics.

 

Our calculations of stock-based compensation expense associated with stock options and our Employee Stock Purchase Plan for the three and six months ended October 31, 2010 were made using the Black-Scholes valuation model. The fair value of our stock option grants was estimated assuming no expected dividend yield and the following weighted average assumptions were used for the three and six months ended October 31, 2010 and 2009:

 

14



 

 

 

Three Months Ended
October 31,

 

Six Months Ended
October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Stock Options:

 

 

 

 

 

 

 

 

 

Expected life

 

4.73 years

 

 

6.53 years

 

 

Risk-free interest rate

 

1.38

%

 

1.80

%

 

Expected volatility

 

85.59

%

 

85.59

%

 

Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

Expected life

 

0.5 years

 

0.5 years

 

0.5 years

 

0.5 years

 

Risk-free interest rate

 

0.33

%

0.35

%

0.33

%

0.35

%

Expected volatility

 

47.45

%

243.78

%

47.45

%

243.78

%

 

Expected life is calculated based on the weighted average historical life of the vested stock options, giving consideration to vesting schedules and historical exercise patterns. Risk-free interest rate is based on the U.S. treasury yield curve for the period of the expected life of the stock option. For shares issued under our Employee Stock Purchase Plan and stock options granted during the six months ended October 31, 2010, expected volatility is calculated using the average of weekly historical volatility of our Class A Common Stock over the expected life.

 

The Black-Scholes valuation model requires extensive use of accounting judgment and financial estimation, including estimates of the expected term option holders will retain their vested stock options before exercising them, the estimated volatility of our Class A Common Stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the consolidated statements of operations.

 

8.             EARNINGS PER SHARE

 

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

 

 

 

Three Months
Ended October 31,

 

Six Months
Ended October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(1,154

)

$

(1,551

)

$

(4,056

)

$

(4,329

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Number of shares outstanding, end of period:

 

 

 

 

 

 

 

 

 

Class A common stock

 

25,185

 

24,745

 

25,185

 

24,745

 

Class B common stock

 

988

 

988

 

988

 

988

 

Unvested restricted stock

 

(78

)

 

(78

)

 

Effect of weighted average shares outstanding during period

 

(37

)

 

(114

)

(22

)

Weighted average number of common shares used in basic EPS

 

26,058

 

25,733

 

25,981

 

25,711

 

Impact of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Dilutive effect of options and restricted / performance stock units

 

 

 

 

 

Weighted average number of common shares used in diluted EPS

 

26,058

 

25,733

 

25,981

 

25,711

 

 

For the three and six months ended October 31, 2010, 4,366 shares of Class A common stock related to options and restricted / performance stock units were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.

 

15



 

For the three and six months ended October 31, 2009, 4,267 shares of Class A common Stock related to options and restricted / performance stock units were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive.

 

9.             COMPREHENSIVE LOSS

 

Comprehensive loss is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Accumulated other comprehensive loss included in the accompanying balance sheets consists of changes in the fair value of our commodity hedge agreements.  Also included in accumulated other comprehensive loss is the change in fair value of certain securities classified as available for sale as well as our portion of the change in the fair value of commodity hedge agreements of our equity method investment, US GreenFiber, LLC (“GreenFiber”).

 

Comprehensive loss for the three and six months ended October 31, 2010 and 2009 is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net loss applicable to common stockholders

 

$

(1,154

)

$

(1,551

)

$

(4,056

)

$

(4,329

)

Other comprehensive income (loss)

 

78

 

(1,016

)

441

 

(2,729

)

Comprehensive loss

 

$

(1,076

)

$

(2,567

)

$

(3,615

)

$

(7,058

)

 

The components of other comprehensive income (loss) for the three and six months ended October 31, 2010 and 2009 are shown as follows:

 

 

 

Three Months Ended October 31,

 

 

 

2010

 

2009

 

 

 

Gross

 

Tax
effect

 

Net of Tax

 

Gross

 

Tax effect

 

Net of Tax

 

Change in fair value of marketable securities during the period

 

$

(14

)

$

 

$

(14

)

$

13

 

$

 

$

13

 

Change in fair value of commodity hedges during the period

 

(56

)

(148

)

92

 

(592

)

 

(592

)

Reclassification to earnings for commodity hedge contracts

 

(65

)

(65

)

 

(732

)

(295

)

(437

)

 

 

$

(135

)

$

(213

)

$

78

 

$

(1,311

)

$

(295

)

$

(1,016

)

 

 

 

Six Months Ended October 31,

 

 

 

2010

 

2009

 

 

 

Gross

 

Tax
effect

 

Net of Tax

 

Gross

 

Tax effect

 

Net of Tax

 

Change in fair value of marketable securities during the period

 

$

(20

)

$

 

$

(20

)

$

18

 

$

 

$

18

 

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

 

126

 

(580

)

706

 

(1,589

)

 

(1,589

)

Reclassification to earnings for interest rate derivatives and commodity hedge contracts

 

(150

)

95

 

(245

)

(1,939

)

(781

)

(1,158

)

 

 

$

(44

)

$

(485

)

$

441

 

$

(3,510

)

$

(781

)

$

(2,729

)

 

16



 

Our strategy to hedge against fluctuations in the commodity prices of recycled paper is to enter into hedges to mitigate the variability in cash flows generated from the sales of recycled paper at floating prices, resulting in a fixed price being received from these sales.  We have evaluated these hedges and believe that these instruments qualify for hedge accounting pursuant to derivative and hedging guidance.  Designated as effective cash flow hedges, the changes in the fair value of these derivatives are recognized in other comprehensive loss until the hedged item is settled and recognized as part of commodity revenue.  We recognize all derivatives on the balance sheet at fair value.

 

At October 31, 2010, we were party to four commodity hedge contracts for old corrugated cardboard (“OCC”) and eight commodity hedge contracts for old newsprint (“ONP”) as follows:

 

Inception Date Range

 

Commodity
Type

 

Contract Date Range

 

Monthly Notional
Ton Range

 

Fixed Price
Per Ton
Received
Range

 

February 2008 - March 2010

 

OCC

 

April 2008 - June 2011

 

75 - 500

 

$102 - $120

 

June 2007 - March 2010

 

ONP

 

June 2007 - December 2011

 

350 - 1500

 

$86 - $127

 

 

If the price per short ton of the underlying commodity as reported on the Official Board Market is less than the contract price per short ton, we receive the difference between the average price and the contract price (multiplied by the notional tons) from the respective counter-party.  If the price of the commodity exceeds the contract price per short ton, we pay the calculated difference to the counter-party.

 

The fair values of the commodity hedges are obtained or derived from third-party counter-parties and are determined using valuation models with assumptions about market prices for commodities being based on those in underlying active markets.  The gross carrying value of our commodity hedges was $395 at October 31, 2010 with $331 recorded in other current assets and $64 recorded in other non-current assets in our Consolidated Balance Sheets.  In accordance with derivative and hedging guidance, the offset to this, net of taxes of $922, is recorded to accumulated other comprehensive loss.

 

10.          FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

Our financial assets and liabilities recorded at fair value on a recurring basis include restricted assets and derivative instruments.  Our derivative instruments include commodity hedges.  As of October 31, 2010, we had no interest rate derivatives.  We use commodity hedges to hedge against fluctuations in commodity pricing.  The fair value of these hedges is based on futures pricing in the underlying commodities.

 

We use valuation techniques that maximize the use of market prices and observable inputs and minimize the use of unobservable inputs. In measuring the fair value of our financial assets and liabilities, we rely on market data or assumptions which we believe market participants would use in pricing an asset or liability.  As of October 31, 2010, our assets that are measured at fair value on a recurring basis included the following:

 

17



 

 

 

Fair Value Measurement at October 31, 2010 Using:

 

 

 

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

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

Restricted assets

 

$

311

 

$

 

$

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

290

 

$

 

 

During the three and six months ended October 31, 2010 and 2009 there were no nonrecurring fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis subsequent to initial measurement.

 

Our financial instruments include cash and cash equivalents, trade receivables, investments in closure trust funds and trade payables.  The carrying values of these financial instruments approximate their respective fair values.  At October 31, 2010, the fair market value of our fixed rate debt including the Second Lien Notes and the 9.75% Senior Subordinated Notes due February 2013 was approximately $394,875 and the carrying value was $372,954.  At October 31, 2010, the fair market value of our Senior Secured Credit Facility which includes the New Revolver and New Term Loan was approximately $159,504 and the carrying value was $152,937.

 

11.          ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

 

Assets held for sale:

 

In the quarter ended July 31, 2010, we completed the divestiture of the assets of our Cape Cod, Massachusetts operations along with the assets of our Rochester, Massachusetts transfer station.  Total consideration amounted to $7,750 with cash proceeds of $7,533.  We recorded a gain on divestiture of $3,502.  Assets of these operations were deemed as held for sale in the quarter ended April 30, 2010.  Non-current assets held for sale at April 30, 2010 were related to property, plant and equipment and amounted to $3,708.

 

Discontinued operations:

 

We completed the divestiture of our Great Northern Recycling Canadian operation in the third quarter of fiscal year 2010 for $400 in cash.  In the fourth quarter of fiscal year 2010, we also completed the divestiture of our domestic brokerage operations for $1,350.  We had previously accounted for these transactions as assets under contractual obligation.  This resulted in a gain on disposal of discontinued operations (net of tax) amounting to $48 and $89 in the three and six months ended October 31, 2009, respectively.

 

Our contract for the FCR Recycling Cape May operation expired in the third quarter of fiscal year 2010.  Accordingly, this operation has been treated as a discontinued operation.

 

The operating results of these operations for the six months ended October 31, 2009 have been reclassified from continuing to discontinued operations in the accompanying consolidated financial statements.  Revenues attributable to discontinued operations for the three and six months ended October 31, 2009 amounted to $639 and $1,283, respectively.  Income before income taxes attributable to

 

18



 

discontinued operations for the three and six months ended October 31, 2009 amounted to $162 and $378, respectively.

 

We have recorded liabilities associated with previous divestitures amounting to approximately $349 at October 31, 2010.

 

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

 

12.          SEGMENT REPORTING

 

We manage and evaluate our solid waste operations on a geographic basis through three regions, designated as the Eastern, Central and Western regions, which include a full range of solid waste services including collection, disposal, power generation and processing and recycling.  Our revenues in the FCR recycling segment are derived primarily from the processing and recycling and sale of paper, metals, aluminum, plastics and glass.  Ancillary operations, major customer accounts and earnings from equity method investment are included in Other.

 

19


 


 

Three Months Ended October 31, 2010

 

Segment

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

43,681

 

$

9,997

 

$

6,184

 

$

377

 

$

226,425

 

Central

 

30,035

 

11,554

 

4,095

 

4,729

 

160,991

 

Western

 

30,353

 

6,252

 

3,859

 

7,671

 

182,644

 

FCR recycling

 

26,801

 

181

 

2,012

 

1,740

 

107,674

 

Other

 

10,139

 

 

641

 

(683

)

74,491

 

Eliminations

 

 

(27,984

)

 

 

 

Total

 

$

141,009

 

$

 

$

16,791

 

$

13,834

 

$

752,225

 

 

Three Months Ended October 31, 2009

 

Segment

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

47,252

 

$

10,869

 

$

8,677

 

$

1,788

 

$

232,606

 

Central

 

28,775

 

10,993

 

3,530

 

5,028

 

158,868

 

Western

 

25,116

 

6,025

 

3,764

 

4,783

 

177,648

 

FCR recycling

 

22,257

 

113

 

1,930

 

2,571

 

106,209

 

Other

 

9,694

 

 

408

 

(519

)

83,087

 

Eliminations

 

 

(28,000

)

 

 

 

Total

 

$

133,094

 

$

 

$

18,309

 

$

13,651

 

$

758,418

 

 

Six Months Ended October 31, 2010

 

Segment

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

88,801

 

$

20,677

 

$

12,376

 

$

3,207

 

$

226,425

 

Central

 

58,291

 

23,155

 

7,927

 

8,470

 

160,991

 

Western

 

59,545

 

12,673

 

7,936

 

14,433

 

182,644

 

FCR recycling

 

53,672

 

415

 

3,996

 

3,455

 

107,674

 

Other

 

20,541

 

 

1,283

 

(1,185

)

74,491

 

Eliminations

 

 

(56,920

)

 

 

 

Total

 

$

280,850

 

$

 

$

33,518

 

$

28,380

 

$

752,225

 

 

Six Months Ended October 31, 2009

 

Segment

 

Outside
revenues

 

Inter-company
revenue

 

Depreciation and
amortization

 

Operating
income (loss)

 

Total assets

 

Eastern

 

$

93,245

 

$

22,023

 

$

18,414

 

$

(164

)

$

232,606

 

Central

 

58,622

 

22,877

 

7,164

 

9,772

 

158,868

 

Western

 

50,273

 

12,147

 

7,523

 

9,774

 

177,648

 

FCR recycling

 

43,925

 

277

 

3,861

 

4,428

 

106,209

 

Other

 

19,486

 

 

839

 

(1,047

)

83,087

 

Eliminations

 

 

(57,324

)

 

 

 

Total

 

$

265,551

 

$

 

$

37,801

 

$

22,763

 

$

758,418

 

 

20



 

Sources of our total revenue are as follows:

 

 

 

Three Months Ended
October 31,

 

Six Months Ended
October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Collection

 

$

52,241

 

$

 53,352

 

$

104,916

 

$

 106,460

 

Disposal

 

30,893

 

28,633

 

60,273

 

58,375

 

Power generation

 

6,273

 

7,159

 

11,986

 

13,528

 

Processing and recycling

 

14,662

 

11,999

 

29,462

 

23,777

 

Solid waste operations

 

104,069

 

101,143

 

206,637

 

202,140

 

Major accounts

 

10,139

 

9,694

 

20,541

 

19,486

 

FCR recycling

 

26,801

 

22,257

 

53,672

 

43,925

 

Total revenues

 

$

 141,009

 

$

 133,094

 

$

 280,850

 

$

 265,551

 

 

We have revised our table of revenue by source to more closely align the types of revenue generated by our operating segments. Amounts for the three and six months ended October 31, 2009 have been revised to conform to this presentation.

 

13.          INVESTMENTS IN UNCONSOLIDATED ENTITIES

 

Effective August 1, 2000, we entered into a joint venture agreement with Louisiana-Pacific Corporation to combine our respective cellulose insulation businesses into a single operating entity, GreenFiber. Our investment in GreenFiber amounted to $23,699 and $25,840 at October 31, 2010 and April 30, 2010, respectively. We account for our 50% ownership in GreenFiber using the equity method of accounting.

 

Summarized financial information for GreenFiber is as follows:

 

 

 

October 31,
2010

 

April 30,
2010

 

 

 

 

 

Current assets

 

$

17,261

 

$

 16,969

 

 

 

 

 

Noncurrent assets

 

$

54,140

 

$

56,770

 

 

 

 

 

Current liabilities

 

$

11,732

 

$

11,553

 

 

 

 

 

Noncurrent liabilities

 

$

11,930

 

$

9,625

 

 

 

 

 

 

 

 

Three Months Ended
October 31,

 

Six Months Ended
October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

$

20,581

 

$

28,897

 

$

38,018

 

$

50,016

 

Gross profit

 

$

3,793

 

$

6,931

 

$

5,578

 

$

11,691

 

Net loss

 

$

(1,012

)

$

(318

)

$

(5,276

)

$

(2,756

)

 

We also have a 10.6% interest in RecycleRewards, Inc., a company that markets an incentive based recycling service, and a 19.9% interest in Evergreen National Indemnity Company, a surety company which provides surety bonds to secure contractual performance for municipal solid waste collection contracts and landfill closure and post-closure obligations. Our investment in these interests amounted to $15,123 at October 31, 2010 and April 30, 2010. We account for these investments under the cost method of accounting.

 

21



 

14.          SUBSIDIARY GUARANTORS

 

Our Senior Subordinated Notes and Second Lien Notes are guaranteed jointly and severally, fully and unconditionally, by our significant wholly-owned subsidiaries. The Parent is the issuer and a non-guarantor of the Senior Subordinated Notes and Second Lien Notes and the Parent has no independent assets or operations. Non-guarantor subsidiaries of the parent are considered minor as each represents less than 3% of total assets, stockholders’ equity, revenues, loss from continuing operations before income taxes and discontinued operations and cash flow from operating activities. There are no significant restrictions on the ability of the Parent and the guarantor subsidiaries to obtain funds from subsidiaries by dividend or loan.

 

22



 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto included under Item 1. In addition, reference should be made to our audited Consolidated Financial Statements and Notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended April 30, 2010.

 

This Quarterly Report on Form 10-Q and, in particular, this Management’s Discussion and Analysis may contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”), including:

 

·                  expected 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 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;

·                  the projected development of additional disposal capacity or expectations regarding permits of existing capacity;

·                  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;

·                  the outcome of any legal or regulatory matter;

·                  potential business combinations or divestitures; and

·                  projected improvements to our infrastructure and 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 to consolidated financial statements included in this report. 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 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” in our Annual Report on Form 10-K for the year ended April 30, 2010. We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by law.

 

23



 

Company Overview

 

Founded in 1975 with a single truck, Casella Waste Systems, Inc. is a vertically-integrated company. We provide resource management expertise and services to residential, commercial, municipal, and industrial customers, primarily in the areas of solid waste collection, transfer, disposal and recycling services. We operate in 14 states— including vertically integrated solid waste operations in Vermont, New Hampshire, New York, Massachusetts and Maine; and stand alone materials processing facilities in Connecticut, Pennsylvania, New Jersey, North Carolina, Tennessee, Georgia, Florida, Michigan and Wisconsin.

 

As of November 30, 2010, we owned and/or operated 31 solid waste collection operations, 30 transfer stations, 34 recycling facilities, eight Subtitle D landfills, one landfill permitted to accept construction and demolition materials, and one waste-to-energy facility. In addition, we hold a 50% interest in US Green Fiber, LLC (“GreenFiber”), a joint venture that manufactures, markets and sells cellulose insulation made from recycled fiber. We also hold a 10.6% interest in RecycleRewards, Inc. (“RecycleRewards”), a company that markets an incentive based recycling service, and a 19.9% interest in Evergreen National Indemnity Company (“Evergreen”), a surety company which provides surety bonds to secure contractual performance for municipal solid waste collection contracts and landfill closure and post-closure obligations.

 

Operating Results

 

Revenues and operating income (loss) based on our segments for the three and six months ended October 31, 2010 and 2009 are as follows (in millions):

 

 

 

Revenues

 

Operating Income (Loss)

 

 

 

Three Months Ended October 31,

 

Segment

 

2010

 

2009

 

2010

 

2009

 

Eastern

 

$

 43.7

 

$

 47.2

 

$

 0.4

 

$

 1.8

 

Central

 

30.0

 

28.8

 

4.7

 

5.0

 

Western

 

30.4

 

25.1

 

7.7

 

4.8

 

Total solid waste operations

 

104.1

 

101.1

 

12.8

 

11.6

 

FCR recycling

 

26.8

 

22.3

 

1.7

 

2.6

 

Other

 

10.1

 

9.7

 

(0.7

)

(0.5

)

Total

 

$

 141.0

 

$

 133.1

 

$

 13.8

 

$

 13.7

 

 

 

 

Revenues

 

Operating Income (Loss)

 

 

 

Six Months Ended October 31,

 

Segment

 

2010

 

2009

 

2010

 

2009

 

Eastern

 

$

 88.8

 

$

 93.3

 

$

 3.2

 

$

 (0.2

)

Central

 

58.3

 

58.6

 

8.5

 

9.8

 

Western

 

59.5

 

50.3

 

14.4

 

9.8

 

Total solid waste operations

 

206.6

 

202.2

 

26.1

 

19.4

 

FCR recycling

 

53.7

 

43.9

 

3.5

 

4.4

 

Other

 

20.6

 

19.5

 

(1.2

)

(1.0

)

Total

 

$

 280.9

 

$

 265.6

 

$

 28.4

 

$

 22.8

 

 

For the three months ended October 31, 2010, we reported revenues of $141.0 million, an increase of $7.9 million, or 5.9%, from $133.1 million for the three months ended October 31, 2009. As a percentage of solid waste revenues, solid waste revenues increased 2.9%, with higher disposal, power generation and

 

24



 

processing and recycling volumes accounting for 10.1% of the increase, 1.0% from higher commodity price and volumes, 0.1% increase from increased fuel surcharges along with a 0.5% increase from an acquisition in the Eastern region. These increases were partially offset by a 1.4% volume decline in collection, 1.3% price decline in power generation, 2.0% decline related to a divestiture in the Eastern region, and a 4.1% decline from the closure of a landfill.  As a percentage of major accounts revenues, major accounts revenues increased 4.6% with volume representing 4.2% of the increase and 0.4% resulting from higher price. As a percentage of total FCR recycling revenues, FCR revenues increased 20.4%, with 14.6% coming from higher commodity prices and 5.8% from higher volumes.

 

Operating income for the three months ended October 31, 2010 was $13.8 million compared to $13.7 million in the prior year comparable period and decreased between years as a percentage of revenue to 9.8% from 10.3%. Western region operating income increased $2.9 million compared to the prior year period primarily due to higher disposal revenues associated with higher volume. Eastern region operating income decreased $1.4 million compared to the prior year period primarily due to lower power revenue at Maine Energy associated with lower market rates for power. FCR recycling operating income decreased by $0.9 million compared to the prior year period due primarily to higher labor and maintenance costs.

 

Divestitures

 

In the quarter ended July 31, 2010, we completed the divestiture of the assets of our Cape Cod, Massachusetts operations along with the assets of our Rochester, Massachusetts transfer station. Total consideration amounted to $7.8 million with cash proceeds of $7.5 million. We recorded a gain on divestiture of $3.5 million.

 

We completed the divestiture of our Great Northern Recycling Canadian operation in the third quarter of fiscal year 2010 for $0.4 million in cash. In the fourth quarter of fiscal year 2010, we also completed the divestiture of our domestic brokerage operations for $1.4 million in cash. We had previously accounted for these transactions as assets under contractual obligation. This resulted in a gain on disposal of discontinued operations (net of tax) amounting to $0.05 million and $0.09 million in the three months and six months ended October 31, 2009.

 

Our contract for the FCR Recycling Cape May operation expired in the third quarter of fiscal year 2010. Accordingly, this operation has been treated as a discontinued operation in the six months ended October 31, 2009. The operating results of these operations for the six months ended October 31, 2009 have been reclassified from continuing to discontinued operations in the accompanying consolidated financial statements. Revenues attributable to discontinued operations for the three and six months ended October 31, 2009 amounted to $0.6 million and $1.3 million, respectively. Income before income taxes attributable to discontinued operations for the three and six months ended October 31, 2009 amounted to $0.2 million and $0.4 million, respectively.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and assumptions which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of its evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. Our significant accounting policies are more fully discussed in Item 7 of our Annual Report on Form 10-K for the year ended April 30, 2010.

 

25


 

 

 


 

Adoption of New Accounting Pronouncements

 

For a description of the new accounting standards adopted that may affect us, see Note 1 to our Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

General

 

Revenues

 

Our revenues in the Eastern, Central and Western regions are attributable primarily to fees charged to customers for solid waste collection, disposal, power generation and processing and recycling. 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, waste-to-energy facility and transfer customers are charged a tipping fee on a per ton basis for disposing their solid waste at our facilities. Recycling revenues, which are included in FCR recycling and the Central and Western regions, consist of revenues from the sale of recyclable commodities and operations and maintenance contracts of recycling facilities for municipal customers.  We also generate and sell electricity under contract at our waste-to-energy facility and at certain of our landfill facilities.

 

GreenFiber’s business is conducted through a 50/50 joint venture with Louisiana-Pacific Corporation, and accordingly, we recognize half of the joint venture’s net income or loss on the equity method in our results of operations.  Our investments in RecycleRewards and Evergreen are accounted for under the cost method of accounting.  Also, in the “Other” segment, we have ancillary revenues, including major customer accounts.

 

Our revenues are shown net of inter-company eliminations.  We typically establish our inter-company transfer pricing based upon prevailing market rates.  The table below shows, for the periods indicated, the percentages and dollars (in millions) of revenue attributable to services provided.

 

 

 

Three Months Ended October 31,

 

Six Months Ended October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Collection

 

$

52.2

 

37.1

%

$

53.3

 

40.1

%

$

104.9

 

37.4

%

$

106.5

 

40.1

%

Disposal

 

30.9

 

21.9

%

28.6

 

21.5

%

60.2

 

21.4

%

58.4

 

22.0

%

Power generation

 

6.3

 

4.4

%

7.2

 

5.4

%

12.0

 

4.3

%

13.5

 

5.1

%

Processing and recycling

 

14.7

 

10.4

%

12.0

 

9.0

%

29.5

 

10.5

%

23.8

 

9.0

%

Total solid waste operations

 

104.1

 

73.8

%

101.1

 

76.0

%

206.6

 

73.6

%

202.2

 

76.2

%

Major accounts

 

10.1

 

7.2

%

9.7

 

7.3

%

20.6

 

7.3

%

19.5

 

7.3

%

FCR recycling

 

26.8

 

19.0

%

22.3

 

16.7

%

53.7

 

19.1

%

43.9

 

16.5

%

Total revenues

 

$

141.0

 

100.0

%

$

133.1

 

100.0

%

$

280.9

 

100.0

%

$

265.6

 

100.0

%

 

Solid waste operations revenues decreased as a percentage of total revenues in the three and six months ended October 31, 2010 compared to the same periods in the prior year mainly due to the decrease in collection and power generation revenues.  Volume decline and a divestiture in the Eastern region drove collection revenues to a lower percentage in these periods while power generation revenues were negatively impacted by price.  These declines were offset by increases in disposal and processing and recycling revenues.   Disposal volume showed improvement over the same periods in the prior year, but were offset by price decline and partially offset by a divestiture and the closure of a landfill.  Processing and recycling revenues were higher as a result of volume, commodity price and commodity volume.  The

 

26



 

dollar increase in major accounts revenues in the three and six months ended October 31, 2010 compared to the prior year was primarily due to higher volumes, slightly offset by price decreases in the six months ended October 31, 2010.  FCR recycling revenues were higher in the three and six months ended October 31, 2010 primarily due to commodity price increases and higher commodity volumes.

 

Operating Expenses

 

Cost of operations includes labor, tipping fees paid to third-party disposal facilities, fuel, maintenance and repair of vehicles and equipment, worker’s compensation and vehicle insurance, the cost of purchasing materials to be recycled, third party transportation expense, district and state taxes, host community fees and royalties. Cost of operations also includes accretion expense related to landfill capping, closure and post closure, leachate treatment and disposal costs and depletion of landfill operating lease obligations.

 

General and administration expenses include management, clerical and administrative compensation and overhead, professional services and costs associated with marketing, sales force and community relations efforts.

 

Depreciation and amortization expense includes depreciation of fixed assets over the estimated useful life of the assets using the straight-line method, amortization of landfill airspace assets under the units-of-consumption method, and the amortization of intangible assets (other than goodwill) using the straight-line method.

 

The following table sets forth for the periods indicated the percentage relationship that certain items from our consolidated financial statements bear to revenues.

 

 

 

Three Months Ended
October 31,

 

Six Months Ended
October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of operations

 

65.9

%

64.9

%

66.9

%

65.5

%

General and administration

 

12.3

%

11.1

%

12.3

%

11.7

%

Depreciation and amortization

 

11.9

%

13.8

%

11.9

%

14.2

%

Gain on divestiture

 

0.0

%

0.0

%

-1.2

%

0.0

%

Operating income

 

9.9

%

10.2

%

10.1

%

8.6

%

Interest expense, net

 

10.3

%

11.3

%

10.4

%

9.3

%

Loss from equity method investment

 

0.4

%

0.1

%

0.9

%

0.5

%

Other income, net

 

-0.2

%

-0.2

%

-0.1

%

0.1

%

Provision for income taxes

 

0.2

%

0.3

%

0.4

%

0.4

%

Loss before discontinued operations

 

-0.8

%

-1.3

%

-1.5

%

-1.7

%

 

Three months ended October 31, 2010 versus October 31, 2009

 

Revenues - Revenues increased $7.9 million, or 5.9%, to $141.0 million in the three months ended October 31, 2010 from $133.1 million in the three months ended October 31, 2009.  Solid waste revenues, increased $3.0 million, with $10.2 million coming from volume increases in our disposal, power generation and processing and recycling operations, $0.3 million from higher collection prices, $1.0 million from higher processing and recycling commodity prices and volumes, $0.3 million from higher power generation commodity volume and $0.5 million related to tuck-in acquisitions in the Eastern and Central regions.  These increases were partially offset by price decline in our disposal and energy prices of $0.4 million, collection volume declines of $1.4 million, $1.3 million from lower power generation commodity prices, $4.1 million related to the closure of a landfill in the Eastern region, and $2.1 million related to a divestiture in the Eastern region.  Major accounts revenues increased $0.4 million primarily

 

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due to increased volumes.  FCR recycling revenues increased $4.5 million mainly due to increases in commodity prices and higher volumes.

 

Cost of operations - Cost of operations increased $6.6 million, or 7.6%, to $93.0 million in the quarter ended October 31, 2010 from $86.4 million in the quarter ended October 31, 2009 and increased as a percentage of revenue between periods to 65.9% from 64.9%.  The dollar increase in cost of operations is primarily attributable to higher costs of purchased materials associated with increased revenues and higher direct labor costs in the FCR recycling segment along with higher solid waste operating costs including host and royalty fees and fuel costs.  The percentage of revenue increase in cost of operations is attributable to higher purchased materials costs in the FCR recycling segment.

 

General and administration - General and administration expenses increased $2.6 million, or 17.6%, to $17.4 million in the quarter ended October 31, 2010 from $14.8 million in the quarter ended October 31, 2009.  The dollar increase in general and administration expenses is primarily from higher expense associated with increased salary and incentive compensation costs along with higher legal, travel, consulting and advertising expenses.  General and administration expenses as a percentage of revenues increased to 12.3% in the quarter ended October 31, 2010 from 11.1% in the quarter ended October 31, 2009.

 

Depreciation and amortization - Depreciation and amortization expense decreased $1.5 million, or 8.2%, to $16.8 million in the quarter ended October 31, 2010 from $18.3 million in the quarter ended October 31, 2009.  Landfill amortization expense decreased by $1.1 million in the quarter ended October 31, 2010 associated with the closure of the Pine Tree Landfill which ceased operations in the quarter ended January 31, 2010 offset by higher amortization at other sites due to higher volumes. Depreciation expense decreased $0.4 million between periods.  Depreciation and amortization expense as a percentage of revenue decreased to 11.9% in the quarter ended October 31, 2010 from 13.8% in the quarter ended October 31, 2009.

 

Interest expense, net -  Net interest expense decreased $0.5 million, or 3.3%, to $14.5 million in the quarter ended October 31, 2010 from $15.0 million in the quarter ended October 31, 2009.  This decrease is primarily attributable to lower debt balances and slightly reduced variable interest rates.  Net interest expense, as a percentage of revenues, decreased to 10.3% in the quarter ended October 31, 2010 from 11.3% in the quarter ended October 31, 2009.

 

Loss from equity method investment - The loss from equity method investment in the quarter ended October 31, 2010 is attributable to our 50% joint venture interest in GreenFiber.  GreenFiber reported a loss for the quarter ended October 31, 2010, of which our share was $0.5 million, compared to a loss in the quarter ended October 31, 2009, of which our share was $0.2 million.  GreenFiber’s lower revenues and higher net loss for the quarter ended October 31, 2010 compared to the quarter ended October 31, 2009 are due to a continued depressed new housing market, which is GreenFiber’s primary market.  GreenFiber’s net loss for the quarter ended October 31, 2010 includes a benefit due to the reversal of a charge recorded in a previous period associated with a legal contingency, of which our share was $0.9 million.

 

Provision for income taxes - Provision for income taxes decreased $0.2 million to $0.3 million for the quarter ended October 31, 2010 from $0.5 million in the quarter ended October 31, 2009.  The effective tax rate changed to (32.2)% in the quarter ended October 31, 2010 from (36.9)% in the quarter ended October 31, 2009.  The provision for income taxes in the quarter ended October 31, 2010 includes $0.3 million in deferred tax provision, primarily related to an increase in the valuation allowance against deferred tax assets.  The deferred tax provision for the current period and the change in the effective tax rate between periods are primarily a result of an increase in the valuation allowance related to the book loss projected for the year and the provision of deferred tax liabilities related to indefinite lived intangible asset amortization for tax purposes.

 

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Six Months Ended October 31, 2010 versus October 31, 2009

 

Revenues - Revenues increased $15.3 million, or 5.8%, to $280.9 million in the six months ended October 31, 2010 from $265.6 million in the six months ended October 31, 2009.  Solid waste revenues increased $4.5 million, with $15.3 million coming from volume increases in our disposal, power generation and processing and recycling operations, $0.6 million from higher collection prices, $2.3 million from higher processing and recycling commodity prices and commodity volumes, $0.3 million from higher power generation commodity volume, $0.7 million from fuel surcharges, and $0.8 million related to tuck-in acquisitions in the Eastern and Central regions.  These increases were partially offset by lower disposal and energy prices of $0.6 million, volume declines of $2.8 million for collection, $1.7 million from lower power generation commodity price, $7.5 million related to the closure of a landfill in the Eastern region, and $2.8 million related to a divestiture in the Eastern region.  Major accounts revenues increased $1.0 million due to increased volumes, partially offset by price declines.  FCR recycling revenues increased $9.8 million mainly due to increases in commodity prices and higher commodity volumes.

 

Cost of operations - Cost of operations increased $13.8 million, or 7.9%, to $187.8 million in the six months ended October 31, 2010 from $174.0 million in the six months ended October 31, 2009 and increased as a percentage of revenue between periods to 66.9% from 65.5%.  The dollar increase in cost of operations is attributable to an increase in the cost of purchased materials associated with higher FCR recycling revenues as well as higher fuel costs, direct labor and higher host and royalty fees.  The percentage of revenue increase in cost of operations is attributable to higher purchased materials costs in the FCR recycling segment.

 

General and administration - General and administration expenses increased $3.6 million, or 11.6%, to $34.6 million in the six months ended October 31, 2010 from $31.0 million in the six months ended October 31, 2009.  The dollar increase in general and administration expenses is primarily due to higher expense associated with increased salary and incentive compensation costs along with higher, legal, travel and consulting expenses.  General and administration expenses as a percentage of revenue increased to 12.3% in the six months ended October 31, 2010 from 11.7% in the six months ended October 31, 2009.

 

Depreciation and amortization - Depreciation and amortization expense decreased $4.3 million, or 11.4%, to $33.5 million in the six months ended October 31, 2010 from $37.8 million in the six months ended October 31, 2009.  Landfill amortization expense decreased by $3.7 million in the six months ended October 31, 2010 associated with the closure of the Pine Tree Landfill which ceased operations in the quarter ended January 31, 2010 offset by higher amortization at other sites due to higher volumes.  Depreciation expense decreased between periods by $0.8 million, primarily due to lower capital spending in our solid waste regions.  Depreciation and amortization expense as a percentage of revenue decreased to 11.9% in the six months ended October 31, 2010 from 14.2% in the six months ended October 31, 2009 due to revenue increases.

 

Interest expense, net - Net interest expense increased $4.4 million, or 17.7%, to $29.2 million in the six months ended October 31, 2010 from $24.8 million in the six months ended October 31, 2009.  This increase is primarily attributable to higher average interest rates associated with our new capital structure which was put in place on July 9, 2009.  Net interest expense, as a percentage of revenues, increased to 10.4% in the six months ended October 31, 2010 from 9.3% in the six months ended October 31, 2009.

 

Loss from equity method investment - The loss from equity method investment in the six months ended October 31, 2010 is attributable to our 50% joint venture interest in GreenFiber.  GreenFiber reported a loss for the six months ended October 31, 2010, of which our share was $2.6 million, compared to a loss in the six months ended October 31, 2009, of which our share was $1.4 million.  GreenFiber’s net loss for the six months ended October 31, 2010 includes a benefit due to the reversal of a charge recorded in a previous period associated with a legal contingency, of which our share was $0.9 million.

 

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Loss on debt modification - The loss in the six months ended October 31, 2009 of $0.5 million is due to the write-off of unamortized financing costs associated with the former senior credit facility, which was amended in the quarter ended July 31, 2009.

 

Provision for income taxes - Provision for income taxes increased $0.1 million to $1.1 million in the six months ended October 31, 2010 from $1.0 million in the six months ended October 31, 2009.  The effective tax rate changed to (35.4)% in the six months ended October 31, 2010 from (28.1)% in the six months ended October 31, 2009.  The provision for income taxes in the six months ended October 31, 2010 includes $1.0 million in deferred tax provision, primarily related to an increase in the valuation allowance against deferred tax assets, and $0.1 million in current tax provision.  The deferred tax provision for the current period and the change in the effective tax rate between periods are primarily a result of an increase in the valuation allowance related to the book loss projected for the year and the provision of deferred tax liabilities related to indefinite lived intangible asset amortization for tax purposes.

 

Liquidity and Capital Resources

 

Our business is capital intensive.  Our capital requirements include acquisitions, fixed asset purchases and capital expenditures for landfill development and cell construction, as well as site and cell closure.  Our capital expenditures are broadly defined as pertaining to either growth or maintenance activities.  Growth capital expenditures are defined as costs related to development of new airspace, permit expansions and new recycling contracts along with incremental costs of equipment and infrastructure added to further such activities.  Growth capital expenditures include the cost of equipment added directly as a result of new business, as well as expenditures associated with increasing infrastructure to increase throughput at transfer stations and recycling facilities.  Growth capital expenditures also include those outlays associated with acquiring landfill operating leases, which do not meet the operating lease payment definition, but which were included as a commitment in the successful bid.  Maintenance capital expenditures are defined as landfill cell construction costs not related to expansion airspace, costs for normal permit renewals and replacement costs for equipment due to age or obsolescence.

 

We had net working capital deficit of $9.5 million at October 31, 2010 compared to a deficit of $10.1 million at April 30, 2010.  Net working capital comprises current assets, excluding cash and cash equivalents, minus current liabilities.  The increase in net working capital at October 31, 2010 was primarily due to higher trade receivables and lower current accrued capping, closure and post-closure liabilities.  These were offset by higher accounts payable and other accrued liabilities.

 

On July 9, 2009, we completed the refinancing of our then existing senior credit facility with a Senior Secured Credit Facility, consisting of a $177.5 million revolving credit facility (the “New Revolver”), a $130.0 million aggregate principal term loan (the “New Term Loan”) and the offering of $180.0 million aggregate principal amount of Second Lien Notes.  The net proceeds from the Senior Secured Credit Facility and Second Lien Notes offering were used to refinance the borrowings under our previous $525.0 million then existing senior credit facility.

 

For the first two quarters after the closing date, the interest rate for borrowings under the New Revolver was LIBOR plus a margin of 4.50% per annum, and thereafter the applicable margin will be determined in accordance with the pricing grid as set forth in the Senior Secured Credit Facility Agreement dated July 9, 2009. The interest rate for the New Term Loan will be LIBOR plus a margin of 5.00% per annum, provided that LIBOR shall not be less than 2.00% per annum. The New Term Loan was issued at an original issue price of 94.5% of the principal amount of the loan.

 

The Senior Secured Credit Facility is subject to customary affirmative, negative, and financial covenants, generally consistent with our prior credit agreement. The New Revolver is due December 31, 2012 and

 

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the New Term Loan is due April 9, 2014.  If we fail to refinance our 9.75% senior subordinated notes due 2013 (the “Senior Subordinated Notes”) on or before January 31, 2012 the due date for the New Term Loan shall be December 31, 2012. We have the right to request an increase in the amount of the Senior Secured Credit Facility by an aggregate amount of $42.5 million at our discretion, subject to certain conditions.

 

As of October 31, 2010, we were in compliance with all financial covenants as follows:

 

Senior Secured Credit Facility Covenant

 

Twelve months
ended October 31,
2010

 

Covenant
requirements -
October 31, 2010

 

Total funded debt / Bank-defined cash flow metric (1)

 

4.43

 

5.60 Max.

 

Senior funded debt / Bank-defined cash flow metric (1)

 

2.92

 

3.75 Max.

 

Interest coverage

 

2.40

 

1.80 Min.

 

 


(1)          Bank-defined cash flow metric is based on operating results for the twelve months preceding the measurement date, October 31, 2010.  A reconciliation of net cash provided by operating activities to bank-defined cash flow metric is as follows (in millions):

 

 

 

Twelve Months Ended
October 31, 2010

 

Net cash provided by operating activities

 

$

65.1

 

 

 

 

 

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

 

3.0

 

Gain on sale of equipment and assets

 

4.2

 

Stock based compensation, net of excess tax benefit on exercise of options

 

(2.6

)

Environmental remediation charge

 

(0.3

)