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CWST > SEC Filings for CWST > Form 10-K on 27-Jun-2013All Recent SEC Filings

Show all filings for CASELLA WASTE SYSTEMS INC

Form 10-K for CASELLA WASTE SYSTEMS INC


27-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto, and other financial information, included elsewhere in this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements.

Company Overview

Founded in 1975 with a single truck, Casella Waste Systems, Inc. is a regional, vertically-integrated solid waste, recycling and resource management services 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, recycling and organics services. We operate in six states - Vermont, New Hampshire, New York, Massachusetts, Maine and Pennsylvania, with our headquarters located in Rutland, Vermont. We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which includes a full range of solid waste services, and our larger-scale recycling operations and commodity brokerage operations through our Recycling segment. Ancillary operations, major customer accounts, discontinued operations and earnings from equity method investees are included in our Other segment.

As of May 31, 2013, we owned and/or operated 35 solid waste collection operations, 38 transfer stations, 16 recycling facilities, nine Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition, or C&D, materials.

Acquisitions and Divestitures

Acquisitions

Beginning in fiscal year 2013, we put in place a dedicated business development team that identifies acquisition candidates, categorizes the opportunity by strategic fit and perceived level of financial accretion, establishes contact with the appropriate representative of the acquisition candidate and gathers further information on the acquisition candidate.

We have made in the past, and we may make in the future, acquisitions in order to acquire or develop additional disposal capacity. These acquisitions may include "tuck-in" acquisitions within our existing markets, assets that are adjacent to or outside of our existing markets, or larger, more strategic acquisitions. In addition, from time to time, we may acquire businesses that are complementary to our core business strategy. We face considerable competition for acquisition targets, particularly the larger and more meaningful targets, due to among other things our limited access to and weighted average cost of capital, but our strong relationships and reputation in the New England and upstate New York areas help to offset these factors.

During the fiscal year ended April 30, 2013, we acquired six solid waste hauling operations in the Western region for total consideration of $5.7 million, including $5.1 million in cash and $0.6 million in holdbacks to the sellers. We also acquired all of the outstanding capital stock of BBI in the Eastern region for total consideration, after recording a working capital adjustment defined in the agreement, of $22.4 million, including $19.7 million in cash and approximately 0.6 million shares of our Class A common stock, valued at an aggregate of $2.7 million. We recorded an additional $5.1 million to goodwill for the increased deferred tax liability related to the BBI acquisition based on the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amount recognized for income tax purposes. See Note 15 to the consolidated financial statements included in Item 8 of this Form 10-K for further discussion. The acquisition of BBI, a provider of solid waste collection, transfer and liquid waste services in New Hampshire and Maine, on December 6, 2012, provides us the opportunity to internalize additional waste and recyclables and to consolidate operations, routes and transportation within the Eastern region. Revenue generated from BBI amounted to approximately $7.3 million from December 6, 2012 through April 30, 2013.

In fiscal year 2012, we acquired five solid waste hauling operations. We also completed the acquisition of the McKean County landfill business in Pennsylvania by acquiring additional equipment not included in the original transaction. These entities and assets were acquired for total consideration of $2.2 million, including $2.1 million in cash and $0.1 million in holdbacks to sellers.

In fiscal year 2011, we acquired two solid waste hauling operations for $1.1 million in cash and $0.3 million in notes payable and the McKean County landfill business in Pennsylvania in exchange for $0.7 million in cash and the assumption of $1.4 million in liabilities. We acquired the McKean County landfill business out of bankruptcy proceedings and recognized a bargain purchase gain of $3.0 million based on the amount by which the fair value of assets acquired exceeded the purchase price consideration.


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Divestitures

From time to time in the future, we may sell or divest certain other components of our business. These divestitures may be undertaken for a number of reasons, including to generate proceeds to pay down debt, or as a result of a determination that the specified asset will provide inadequate returns to us, or that the asset no longer serves a strategic purpose in connection with our business or if we determine the asset may be more valuable to a third party. We will continue to look to divest certain activities that do not fit into our long term strategy that no longer enhance or complement our core business if the right opportunity presents itself.

In the fourth quarter of fiscal year 2013, we initiated a plan to dispose of KTI Bio Fuels, Inc. ("Bio Fuels"), a construction and demolition material processing facility located in Lewiston, Maine, and as a result, the assets associated with Bio Fuels were classified as held-for-sale and the results of operations were recorded as a loss from discontinued operations. Assets of the disposal group classified as held-for-sale include certain inventory and plant and equipment. We recognized a $3.3 million charge associated with the adjustment of the disposal group to fair value as a loss from discontinued operations. There are inherent judgments and estimates used in determining impairment charges and the actual sale of a business can result in the recognition of an additional gain or loss.

In the first quarter of fiscal year 2013, we executed a purchase and sale agreement with the City of Biddeford, Maine pursuant to which we agreed to sell the real property of Maine Energy, which is located in our Eastern region, to the City of Biddeford, subject to satisfaction of conditions precedent and closing. We agreed to sell Maine Energy for undiscounted purchase consideration of $6.7 million, which shall be paid to us in equal installments over the next 21 years, subject to the terms of the purchase and sale agreement. The transaction closed in November 2012, and we waived certain conditions precedent not satisfied at that time. In December 2012, we closed the facility and initiated the decommissioning process in accordance with the provisions of the agreement. Following the decommissioning of Maine Energy, it is our responsibility to demolish the facility, at our cost, within twelve months of the closing date and in accordance with the terms of the purchase and sale agreement. We initially recorded a charge to loss on divestiture of $0.4 million in the third quarter of fiscal year 2013 as a result of this transaction. In the fourth quarter of fiscal year 2013, as more information became available, we made revisions to the estimated costs associated with the divestiture, resulting in the reversal of the initial loss on divestiture of $0.4 million. We will continue to finalize estimates and get additional information regarding the estimated costs associated with the divestiture. Due to the inherent judgments and estimates regarding the remaining costs to fulfill our obligation under the purchase and sale agreement to demolish the facility and remediate the site, recognition of a loss on divestiture, which we do not expect, or a potential gain on divestiture is possible.

There were no divestitures in fiscal year 2012.

In fiscal year 2011, we completed the divestiture of our non-integrated recycling assets and select intellectual property assets for $134.2 million in gross proceeds and the sale of the assets of our Trilogy Glass business for cash proceeds of $1.8 million. These transactions resulted in gain (loss) on disposal of discontinued operations (net of tax) of $43.7 million and ($0.1) million, respectively.

The divestiture of our non-integrated recycling assets and select intellectual property assets included an estimated $3.8 million working capital and other purchase price adjustment, which was subject to further adjustment, as defined in the purchase and sale agreement. The final working capital adjustment, along with additional legal expenses related to the transaction, of $0.6 million, and an additional working capital adjustment of $0.1 million, which related to our subsequent collection of receivable balances that were released to us for collection by the purchaser, were recorded as gain on disposal of discontinued operations (net of tax) in fiscal year 2012. In fiscal year 2011, we also completed the sale of certain assets in Southeastern Massachusetts for a total consideration of $7.8 million, with cash proceeds of $7.5 million. We recorded a gain on sale of assets of $3.5 million.


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Results of Operations

The following table summarizes our revenues and cost and expenses from continuing operations for the fiscal years ended April 30, 2013, 2012 and 2011 (in millions and as a percentage of revenue):

                                                               Fiscal Year Ended April 30,
                                                      % of                        % of                        % of
                                        2013         Revenue        2012         Revenue        2011         Revenue
Revenues                              $  455.3        100.0%       $ 468.0        100.0%      $  454.7        100.0%

Operating expenses:
Cost of operations                       323.0         70.9%         318.1         68.0%         306.0         67.3%
General and administration                58.2         12.8%          60.3         12.9%          63.4         13.9%
Depreciation and amortization             56.6         12.4%          58.4         12.5%          58.2         12.8%
Severance and reorganization costs         3.7          0.9%            -           0.0%            -           0.0%
Expense from divestiture,
acquisition and financing costs            1.4          0.3%            -           0.0%            -           0.0%
Asset impairment charge                     -           0.0%          40.7          8.7%           3.7          0.8%
Legal settlement                            -           0.0%           1.4          0.3%            -           0.0%
Development project charge                  -           0.0%           0.1          0.0%            -           0.0%
Environmental remediation charge            -           0.0%            -           0.0%           0.5          0.1%
Bargain purchase gain                       -           0.0%            -           0.0%          (3.0)        -0.6%
Gain on sale of assets                      -           0.0%            -           0.0%          (3.5)        -0.8%

                                         442.9         97.3%         479.0        102.4%         425.3         93.5%


Operating income (loss)                   12.4          2.7%         (11.0)        -2.4%          29.4          6.5%


Other expense (income), net:
Interest expense, net                     41.4          9.1%          45.0          9.6%          45.5         10.0%
Loss from equity method
investments                                4.4          1.0%          10.0          2.1%           4.1          0.9%
Impairment of equity method
investment                                  -           0.0%          10.7          2.3%            -           0.0%
Loss on derivative instruments             4.5          1.0%            -           0.0%            -           0.0%
Loss on debt extinguishment               15.6          3.4%           0.3          0.1%           7.4          1.6%
Other income                              (1.0)        -0.2%          (0.9)        -0.2%          (0.9)        -0.2%
(Benefit) provision for income
taxes                                     (2.5)        -0.6%           1.6          0.3%         (23.7)        -5.2%

Loss from continuing operations       $  (50.0)       -11.0%       $ (77.7)       -16.6%      $   (3.0)        -0.6%

Revenues

We manage our solid waste operations, which include a full range of solid waste services, on a geographic basis through two regional operating segments, which we designate as the Eastern and Western regions. Revenues in our Eastern and Western regions consist primarily of fees charged to customers for solid waste disposal and collection, landfill, landfill gas-to-energy, transfer, organics and recycling services. We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual households. Landfill and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations. We also generate and sell electricity at certain of our landfill facilities. In addition, revenues from our Recycling segment consist of revenues from the sale of recyclable commodities and operations and maintenance contracts of recycling facilities for municipal customers. Revenues from our Other segment are made up of ancillary revenues including major customer accounts.

Our revenues are shown net of inter-company eliminations. The table below shows, for the periods indicated, the percentages and dollars (in millions) of revenue attributable to services provided.


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                                                            Fiscal Year Ended April 30,
                                         2013                           2012                          2011
Collection                     $    209.0         45.9%       $    205.4         43.9%      $    199.9         44.0%
Disposal                            115.0         25.3%            123.6         26.4%           118.8         26.1%
Power generation                     11.3          2.4%             11.9          2.6%            12.8          2.8%
Organics and processing              45.4         10.0%             40.9          8.7%            39.2          8.6%

Solid waste operations              380.7         83.6%            381.8         81.6%           370.7         81.5%
Customer resource solutions          35.5          7.8%             38.3          8.2%            40.4          8.9%
Recycling                            39.1          8.6%             47.9         10.2%            43.6          9.6%

Total revenues                  $   455.3        100.0%        $   468.0        100.0%       $   454.7        100.0%

Our revenues decreased $12.7 million, or 2.7%, and increased $13.3 million, or 2.9%, respectively, when comparing the fiscal years ended April 30, 2013 and 2012 to the prior fiscal year. The following table provides details associated with the period-to-period change in revenues (dollars in millions) attributable to services provided:

                                             Period-to-Period                            Period-to-Period
                                    Change for the Fiscal Years Ended           Change for the Fiscal Years Ended
                                              2013 vs. 2012                               2012 vs. 2011
                                                                                                           % of
                                       Amount              % of Growth             Amount                 Growth
Solid Waste Operations:
Price                              $           1.5                 0.3%        $           5.0                 1.1%
Volume                                        (9.3)               -2.0%                    3.1                 0.7%
Commodity price & volume                       0.9                 0.2%                   (0.3)               -0.1%
Acquisitions & divestitures                   10.0                 2.2%                    3.2                 0.7%
Closed landfills                              (4.1)               -0.9%                     -                  0.0%

Total solid waste                             (1.0)               -0.2%                   11.0                 2.4%

Customer resource solutions                   (2.8)               -0.6%                   (2.1)               -0.5%

Recycling Operations:
Commodity price                              (10.6)               -2.3%                    4.4                 1.0%
Commodity volume                               1.7                 0.4%                      -                 0.0%

Total recycling                               (8.9)               -1.9%                    4.4                 1.0%

Total revenue (decline) growth     $         (12.7)               -2.7%        $          13.3                 2.9%

Solid waste revenues

The price change component in total solid waste revenues decline for the fiscal year ended April 30, 2013 is primarily the result of $2.1 million from favorable collection pricing, partially offset by $0.6 million from unfavorable disposal pricing, of which $0.4 million relates to landfills. The price change component in total solid waste revenues growth for the fiscal year ended April 30, 2012 is primarily the result of $5.1 million from favorable collection pricing, partially offset by $0.1 million from unfavorable disposal pricing, of which $0.3 million relates to landfills.

The volume change component in total solid waste revenues decline for the fiscal year ended April 30, 2013 is primarily the result of $7.5 million from collection volume decreases, $4.0 million from disposal volume declines, of which $4.7 million relates to landfills, partially offset by $2.3 million from organics and processing volume increases. The volume change component in total solid waste revenues growth for the fiscal year ended April 30, 2012 is primarily the result of $3.2 million from disposal volume increases and $1.0 million from organics and processing volume increases, partially offset by $1.2 million from collection volume decreases.


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The commodity price and volume change component in total solid waste revenues decline for the fiscal year ended April 30, 2013 is primarily the result of $3.3 million from organics and processing volume increases and $1.1 million from favorable commodity pricing within power generation, partially offset by $2.3 million from unfavorable commodity pricing within processing and organics and $1.2 million from power generation volume declines. The commodity price and volume change component in total solid waste revenues growth for the fiscal year ended April 30, 2012 is primarily the result of $1.1 million from unfavorable commodity pricing within power generation and $0.2 million from organics and processing commodity volume decreases, partially offset by $0.9 million from favorable commodity pricing within organics and processing and $0.1 million from power generation volume increases.

The acquisitions and divestitures change component in total solid waste revenues decline for the fiscal year ended April 30, 2013 is primarily the result of $11.5 million in increased revenues from acquisitions, primarily associated with the BBI acquisition within the Eastern region, partially offset by $1.5 million in decreased revenues associated with the Maine Energy divestiture. The acquisitions and divestitures change component in total solid waste revenues growth for the fiscal year ended April 30, 2012 is the result of $4.5 million in increased revenues from acquisitions, partially offset by $1.3 million in decreased revenues associated with the divestiture of certain assets in Southeastern Massachusetts in fiscal year 2011.

Customer resource solutions and recycling revenues

The decrease in CRS revenues for the fiscal years ended April 30, 2013 and April 30, 2012 from the previous periods is primarily the result of $2.9 million and $2.1 million from volume declines.

The decrease in recycling revenues for the fiscal year ended April 30, 2013 from the previous period is the result of $10.6 million from unfavorable commodity prices in the marketplace, partially offset by $1.7 million in commodity volume increases. The increase in recycling revenues for the fiscal year ended April 30, 2012 from the previous period is primarily the result of favorable commodity prices in the marketplace.

Operating Expenses

Cost of Operations

Cost of operations includes labor, tipping fees paid to third-party disposal facilities, fuel, maintenance and repair of vehicles and equipment, workers' 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.

Our cost of operations expense increased $4.9 million, or 1.5%, and $12.1 million, or 3.9%, respectively, when comparing the fiscal years ended April 30, 2013 and 2012 to the prior fiscal year. As a percentage of revenues, cost of operations was 70.9%, 68.0% and 67.3% for fiscal years ended April 2013, 2012 and 2011, respectively.

The change in our cost of operations during the fiscal year ended April 30, 2013 can largely be attributed to the following:

Third-party disposal cost increased $3.4 million due primarily to increased landfill disposal costs associated with additional volumes from the acquisition of BBI and increased waste-to-energy disposal costs associated with a diversion of tons to a third-party incinerator from one of our landfills.

Labor and related benefit costs increased $2.3 million associated with the acquisition of BBI and an increase in health care costs.

Direct operational costs increased $1.7 million due primarily to higher equipment rental and lease costs associated with an increase in fleet and landfill equipment rentals, depletion of landfill operating lease obligations and a decrease in the gain related to the sale of fixed assets.

Hauling costs increased $0.8 million due primarily to increased transportation costs associated with additional volumes from the acquisition of BBI and a higher volume of organic materials being processed within organics and processing. The increase in transportation costs associated with BBI and organics and processing was partially offset by reductions in transportation costs associated with lower solid waste collection volumes and the divestiture of Maine Energy.


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Vehicle maintenance costs increased $0.3 million due to increased fleet maintenance costs and the timing of various maintenance projects within our Western region.

Direct costs related to purchased materials decreased $5.2 million associated primarily with lower commodity prices within the marketplace.

The change in our cost of operations during the fiscal year ended April 30, 2012 can largely be attributed to the following:

Hauling costs increased $4.8 million due to increased transportation costs associated with higher organics and processing volumes and higher disposal volumes related to landfill brokerage services, transfer station activity and transportation services to third-party customers.

Fuel costs increased $3.5 million due primarily to higher average fuel prices for the fiscal year ended April 30, 2012.

Direct operational costs increased $2.5 million due to higher leachate disposal costs associated with elevated rainfall amounts at our landfills in fiscal year 2012, increased other operating costs associated primarily with a commodities marketing agreement, increased depletion of landfill operating lease obligations and increased landfill operating costs related primarily to engineering and grounds maintenance, offset by decreased host and royalty fees.

Direct costs related to purchased materials increased $1.5 million due to higher recycling commodity prices for much of fiscal year 2012 and increased costs of purchased scrap metals.

General and Administration

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

Our general and administration expense decreased $2.1 million, or 3.5%, and $3.1 million, or 4.9%, respectively, when comparing the fiscal years ended April 30, 2013 and 2012 to the prior fiscal year. As a percentage of revenues, general and administration expense was 12.8%, 12.9% and 13.9% for fiscal years ended April 2013, 2012 and 2011, respectively.

The change in our general and administration expense during the fiscal year ended April 30, 2013 can largely be attributed to the following:

Legal and consulting fees decreased $0.7 million for the fiscal year ended April 30, 2013 due primarily to fewer ongoing legal proceedings, despite $0.8 million of legal costs associated with the New York State Tax Litigation matter. See Notes 11 and 15 to the consolidated financial statements included in Item 8 of this Form 10-K for further discussion.

Labor, bonus and related benefit costs decreased $0.5 million for the fiscal year ended April 30, 2013 due to a reduction of salaries and wages associated with the realignment and streamlining of functions to improve our cost structure in the second quarter of fiscal year 2013. Cost savings were partially offset by increased equity compensation costs, an increase in health care costs and additional personnel costs associated with the BBI acquisition.

Other general and administration costs, including travel and entertainment, telephone and advertising, decreased by $1.5 million for the fiscal year ended April 30, 2013 due primarily to additional cost savings associated with the realignment and streamlining of functions to improve our cost structure in the second quarter of fiscal year 2013.

The change in our general and administration expense during the fiscal year ended April 30, 2012 can largely be attributed to the following:

Labor and related benefit costs decreased $3.0 million for the fiscal year ended April 30, 2012 due primarily to a $3.5 million one-time discretionary bonus that was granted in the fourth quarter of fiscal year 2011.


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