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CWST > SEC Filings for CWST > Form 10-Q on 29-Aug-2013All Recent SEC Filings

Show all filings for CASELLA WASTE SYSTEMS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CASELLA WASTE SYSTEMS INC


29-Aug-2013

Quarterly Report


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

The following discussion should be read in conjunction with our 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, 2013 filed with the Securities and Exchange Commission ("SEC") on June 27, 2013.

This Quarterly Report on Form 10-Q and, in particular, this Management's Discussion and Analysis of Financial Condition and Results of Operations 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 ("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 Quarterly Report on Form 10-Q 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 unaudited consolidated financial statements and unaudited notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. 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, 2013. We expressly disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by law.


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. Organics services, ancillary operations, major customer accounts, discontinued operations, and earnings from equity method investees are included in our "Other" reportable segment.

As of August 22, 2013, we owned and/or operated 36 solid waste collection operations, 38 transfer stations, 15 recycling facilities, nine Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition materials.

Acquisitions and Divestitures

From time to time in the future, we may sell or divest certain investments or other components of our business. These divestitures may be undertaken for a number of reasons, including to generate proceeds to pay down debt; 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 and investments 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, and now as discontinued operations, include certain inventory along with plant and equipment. In the three months ended July 31, 2013, we executed a purchase and sale agreement with ReEnergy Lewiston LLC ("ReEnergy"), pursuant to which we agreed to sell certain assets of Bio Fuels, which is located in our Eastern region, to ReEnergy. We agreed to sell the Bio Fuels assets for undiscounted purchase consideration of $2.0 million, which will be paid to us in equal quarterly installments commencing November 1, 2013 and continuing over five years, subject to the terms of the purchase and sale agreement.

On August 1, 2012, 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 Recovery Company LP ("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 will 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 Maine Energy facility and initiated the decommissioning process in accordance with the provisions of the agreement. Following the decommissioning of the Maine Energy facility, 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 will continue to finalize estimates and obtain 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.

As a part of the closure and decommissioning of the Maine Energy facility, we are withdrawing from a multiemployer pension plan to which we have made contributions for the benefit of Maine Energy employees covered under a collective bargaining agreement. We have a potential liability associated with our withdrawal from the multiemployer pension plan based on the value of the plan's unfunded vested benefits. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 715-80, in a situation with unfunded vested benefits, a liability is not recorded by a participating employer as no single employer has an identifiable share of the actuarial obligation of the multiemployer pension plan.


In accordance with FASB ASC 450-20, we accrue for an obligation when an obligation becomes probable and reasonably estimable. We currently believe that an obligation associated with withdrawal from the multiemployer pension plan is probable, but we cannot reasonably estimate the amount of loss or possible range of loss due to a lack of information being made available by the fund administrator in regards to the unfunded vested benefits. The fund administrator will quantify our withdrawal liability based on the unfunded vested benefits as of the plan year preceding actual withdrawal. As we withdrew from the plan in the three months ended July 31, 2013, we expect the plan administrator to base our obligation on the plan year ended January 31, 2013. We expect to record an obligation associated with our portion of unfunded vested benefits in fiscal year 2014. As of July 31, 2013, no accrual is established related to withdrawal from the multiemployer pension plan.

Results of Operations

The following table summarizes our revenues and expenses from continuing
operations for the three months ended July 31, 2013 and 2012 (in millions and as
a percentage of revenue):



                                                                Three Months Ended
                                                                     July 31,
                                                                % of                         % of
                                                 2013         Revenue         2012         Revenue
Revenues                                        $ 128.6          100.0 %     $ 117.6          100.0 %
Operating expenses:
Cost of operations                                 88.5           68.9 %        81.3           69.2 %
General and administration                         15.1           11.7 %        15.2           12.9 %
Depreciation and amortization                      15.2           11.8 %        14.7           12.5 %
Expense from divestiture, acquisition and
financing costs                                      -             0.0 %         0.6            0.5 %
Severance and reorganization costs                  0.1            0.1 %          -             0.0 %

                                                  118.9           92.5 %       111.8           95.1 %

Operating income                                    9.7            7.5 %         5.8            4.9 %

Other expense (income), net:
Interest expense, net                               9.3            7.3 %        11.6            9.9 %
Loss from equity method investments                 1.0            0.7 %         1.8            1.5 %
Gain on derivative instruments                     (0.7 )         -0.5 %          -             0.0 %
Other income                                       (0.1 )         -0.1 %        (0.1 )         -0.1 %
Provision for income taxes                          0.3            0.2 %         0.7            0.6 %

Loss from continuing operations                 $  (0.1 )         -0.1 %     $  (8.2 )         -7.0 %

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 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 derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales. Organics services, ancillary operations, major customer accounts, discontinued operations, and earnings from equity method investees are included in our "Other" reportable segment.

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.

                                                  Three Months Ended
                                                       July 31,
                                            2013                     2012
            Collection               $  58.3        45.3 %    $  53.0        45.1 %
            Disposal                    35.1        27.3 %       31.0        26.4 %
            Power generation             2.0         1.5 %        2.7         2.2 %
            Processing                   2.9         2.3 %        1.4         1.2 %

            Solid waste operations      98.3        76.4 %       88.1        74.9 %
            Organics                     9.9         7.7 %        8.8         7.5 %
            Customer solutions           9.2         7.2 %        9.5         8.1 %
            Recycling                   11.2         8.7 %       11.2         9.5 %

            Total revenues           $ 128.6       100.0 %    $ 117.6       100.0 %

Our revenues increased $11.0 million, or 9.4%, when comparing the three months ended July 31, 2013 to the same period in the prior fiscal year. The following table provides details associated with the period-to-period changes in revenues (in millions) attributable to services provided:

                                                 Period-to-Period
                                        Change for the Three Months Ended
                                             July 31, 2013 vs . 2012
                                        Amount                   % of Growth
      Solid Waste Operations:
      Price                         $           0.4                        0.3 %
      Volume                                    7.0                        6.0 %
      Fuel and oil recovery fee                (0.2 )                     -0.2 %
      Commodity price & volume                  0.2                        0.2 %
      Acquisitions & divestitures               3.3                        2.8 %
      Closed landfills                         (0.5 )                     -0.4 %

      Total solid waste                        10.2                        8.7 %

      Organics                                  1.1                        0.9 %

      Customer solutions                       (0.3 )                     -0.2 %

      Recycling Operations:
      Commodity price                          (1.2 )                     -1.0 %
      Commodity volume                          1.2                        1.0 %

      Total recycling                            -                         0.0 %

      Total revenue growth          $          11.0                        9.4 %

Solid waste revenues

The price change component in quarterly total solid waste revenue growth period-to-period is the result of $0.6 million from favorable collection pricing, partially offset by $0.2 million from unfavorable disposal pricing.



The volume change component in quarterly total solid waste revenue growth period-to-period is the result of $5.7 million from disposal volume increases, of which $2.1 million relates to landfills, $2.3 million relates to transfer stations and $1.3 million relates to transportation, $0.8 million from processing volume increases and $0.5 million from collection volume increases.

The commodity price and volume change component in quarterly total solid waste revenue growth period-to-period is the result of $0.5 million from favorable pricing within power generation, partially offset by $0.3 million from unfavorable processing pricing.

The acquisitions and divestitures change component in quarterly total solid waste revenue growth period-to-period is the result of $6.1 million in increased revenues from acquisitions, primarily associated with our acquisition of Bestway Disposal Services and BBI Waste Industries ("BBI") in December 2012, partially offset by $2.8 million in decreased revenues associated with the Maine Energy divestiture.

The closed landfill change component in quarterly total solid waste revenue growth period-to-period is the result of a landfill in the Eastern region that stopped accepting waste in the second quarter of fiscal year 2013 based on the attainment of its permitted capacity. The impact of the closure was limited when we were granted a permit in May 2013 to accept an additional 0.2 million tons of waste at this landfill. We began placing additional waste at this landfill pursuant to the permit at the end of June.

Organics revenues

The change component in quarterly organics revenue growth period-to-period is primarily the result of $1.1 million from volume increases.

Customer solutions revenues

The change component in quarterly customer solutions revenue decline period-to-period is primarily the result of $0.3 million from volume declines.

Recycling revenues

Quarterly recycling revenue remained consistent period-to-period as $1.2 million in volume increases were offset by $1.2 million from unfavorable pricing due to declining 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 by $7.2 million, or 8.9%, when comparing the three months ended July 31, 2013 to the same period in the prior fiscal year. As a percentage of revenues, cost of operations was 68.9% and 69.2% for three months ended July 31, 2013 and 2012, respectively.

The period-to-period change in our cost of operations can be primarily attributed to the following:

Hauling costs increased $2.2 million due primarily to higher transportation costs associated with increased solid waste volumes within collection and disposal due to the acquisition of BBI and tuck in acquisitions in the Western region, increased volumes to be disposed of within organics and the operation of the newly constructed Westbrook transfer station in the Eastern region.



Direct operational costs increased $1.7 million due primarily to higher leachate treatment costs associated with increased rainfall at our landfills, higher equipment rental and lease costs associated with an increase in fleet and landfill equipment rentals, higher landfill operating costs associated with leachate and grounds maintenance and higher depletion of landfill operating lease obligations due to increased volumes at our landfills.

Labor and related benefit costs increased $1.5 million due to increased labor and healthcare costs along with the acquisition of BBI.

Third-party disposal costs increased $1.5 million due primarily to additional volumes from the acquisition of BBI and an increase in state, local and other disposal fees.

Vehicle maintenance costs increased $0.5 million due to increased fleet maintenance and costs associated with the integration of the BBI vehicle fleet.

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 $0.1 million, or less than one percent, when comparing the three months ended July 31, 2013 to the same period in the prior fiscal year. As a percentage of revenues, general and administration expense was 11.7% and 12.9% for the three months ended July 31, 2013 and 2012, respectively.

The period-to-period change in our general and administration expense can largely be attributed to the following:

Labor costs decreased $0.2 due primarily 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 additional personnel costs associated with the BBI acquisition, higher recruitment and relocation costs and higher incentive compensation costs.

Depreciation and Amortization

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 amortization of intangible assets (other than goodwill) based on the economic benefit provided or the straight-line method over their estimated useful lives, typically no more than 10 years. We amortize landfill retirement assets through a charge to cost of operations using a straight-line rate per ton as landfill airspace is utilized. The amount of landfill amortization expense related to airspace consumption can vary materially from landfill to landfill depending upon the purchase price and landfill site and cell development costs. We amortize or depreciate all fixed and intangible assets, other than goodwill, to a zero net book value, and do not apply a salvage value to any fixed assets.

We capitalize certain direct landfill development costs, such as engineering, permitting, legal, construction and other costs associated directly with the expansion of existing landfills. Additionally, we also capitalize certain third-party expenditures related to development projects and pending acquisitions, such as legal and engineering costs. We routinely evaluate all such capitalized costs, and expense those costs related to projects not likely to be successful. Internal and indirect landfill development and acquisition costs, such as executive and corporate overhead, public relations and other corporate services, are expensed as incurred.

We have material financial obligations relating to capping, closure and post-closure costs of our existing landfills and disposal facilities. We have provided accruals for these future financial obligations based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. There can be no assurance that our financial obligations for capping, closure or post-closure costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to trust funds.


Our depreciation and amortization expense increased $0.5 million, or 3.4%, when comparing the three months ended July 31 2013 to the same period in the prior fiscal year. As a percentage of revenues, depreciation and amortization expense was 11.8% and 12.5% for three months ended July 31, 2013 and 2012, respectively.

In the three months ended July 31, 2013, depreciation expense decreased by $0.5 million associated largely with the makeup of our asset group after the Maine Energy divestiture and the acquisition of BBI. This was offset by $0.7 million in increased landfill amortization expense due to increased landfill volumes and $0.3 million in increased amortization expense associated with an increase in our intangible assets due primarily to the BBI acquisition.

Expense from Divestiture, Acquisition and Financing Costs

The $0.6 million expense from divestiture, acquisition and financing costs in the three months ended July 31, 2012 is associated with the following: a $0.3 million write-off of costs associated with the proposed refinancing of our senior second lien notes ("Second Lien Notes") and $0.3 million of legal costs associated with the Maine Energy divestiture transaction.

Other Expenses

Interest Expense, net

Our interest expense, net decreased $2.3 million when comparing the three months ended July 31, 2013 to the same period in the prior fiscal year. As a percentage of revenues, interest expense, net was 7.3% and 9.9% for three months ended July 31, 2013 and 2012, respectively.

The decrease in interest expense, net during the three months ended July 31, 2013 can largely be attributed to lower interest rates associated with the redemption in October and November of 2012 of $180.0 million in aggregate principal balance of then outstanding 11.0% Second Lien Notes.

Loss from Equity Method Investments

Our loss from equity method investments decreased $0.8 million when comparing the three months ended July 31, 2013 to the same period in the prior fiscal year. Our equity method investments consist of the following investments:

GreenFiber. We account for our 50% membership interest in GreenFiber, a cellulose insulation and manufacturing business, using the equity method of accounting. GreenFiber reported losses for the three months ended July 31, 2013 and 2012, of which our 50% share was $1.0 million and $1.8 million, respectively. The operational performance of GreenFiber improved when comparing the three months ended July 31, 2013 to the same period in the prior fiscal year largely due to improved sales associated with a recovering housing market.

Effective June 28, 2013, we and LP each guaranteed up to $0.8 million in support of GreenFiber's new term loan associated with an amended loan and security agreement. The guaranty can be drawn on upon an event of default by GreenFiber and remains in place through the earlier of payment of the associated term loan under the security agreement and December 1, 2014, which is the extended term of GreenFiber's amended loan and security agreement.

Additionally, as of July 31, 2013, we and LP are each committed to fund any liquidity shortfalls, if any such shortfalls exist, of GreenFiber related to covenant compliance as defined in GreenFiber's amended loan and security . . .

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