CASELLA WASTE SYSTEMS, INC. The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto, and other financial information, included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements. Discussion and analysis of the fiscal year endedDecember 31, 2018 compared to the fiscal year endedDecember 31, 2017 is included under the heading "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 as filed with theSecurities and Exchange Commission onFebruary 22, 2019 . Company Overview Founded in 1975 with a single truck,Casella Waste Systems, Inc. , aDelaware corporation, and its wholly-owned subsidiaries (collectively, "we", "us" or "our"), is a regional, vertically-integrated solid waste services company. We provide resource management expertise and services to residential, commercial, municipal and industrial customers, primarily in the areas of solid waste collection and disposal, transfer, recycling and organics services. We provide integrated solid waste services in six states: Vermont,New Hampshire ,New York ,Massachusetts ,Maine andPennsylvania , with our headquarters located inRutland, Vermont . We have managed operations through four operating segments, including (i) two regional operating segments, which we designate as our Eastern and Western regions, (ii) Recycling, which comprises our larger-scale recycling operations and our commodity brokerage operations and (iii) "Other", which comprises organic services, ancillary operations, along with major accounts and industrial services. EffectiveJanuary 1, 2020 , we reorganized our operating segments as follows: we aligned our organics services and our major account and industrial services with our Recycling segment to form theResource Solutions segment, thus creating a single resource renewal-focused segment. We also moved our ancillary transportation services, which were previously included in our Other segment, into our Western region. Accordingly, as ofJanuary 1, 2020 , our operating segments consist of the Eastern and Western regions andResource Solutions . As ofJanuary 31, 2020 , we owned and/or operated 43 solid waste collection operations, 58 transfer stations, 20 recycling facilities, eight Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition ("C&D") materials. 33
--------------------------------------------------------------------------------
Table of Contents
Recent Developments OnJanuary 9, 2019 ,North Country Environmental Services, Inc. ("NCES") filed an application for a 1.2 million (cy) expansion of the capacity of its landfill inBethlehem, New Hampshire ("NCES Landfill ") with theNew Hampshire Department of Environmental Services ("NHDES") ("Stage VI Expansion"). The Stage VI Expansion would provide NCES with over five (5) years of additional capacity beyond the capacity of Stage V. InJanuary 2020 , NHDES informed NCES and us that NHDES had concerns regarding the short-term public benefit need for the Stage VI expansion, and also in respect of certain technical concerns regarding the Stage VI expansion. Given the fact the NHDES decided to review our permit application for the Stage VI Expansion with respect to public benefit determination using a different regulatory framework than used in any of our previous permitting activities at NCES, we informed the NHDES onFebruary 11, 2020 , that while we vigorously disagreed with NHDES' review of our application and the context for the NHDES' concerns, we would withdraw our application with the expectation of refiling the application with the NHDES as soon as possible. While the refiling of the application for the Stage VI Expansion could be rejected by the NHDES, and while delay of the Stage VI Expansion will surely occur, we remain confident that we will receive a permit for the Stage VI Expansion. We believe that a loss of$1.2 million is reasonably possible, but not probable. Acquisitions and Divestitures Acquisitions We have a business development team that identifies acquisition candidates, categorizes the opportunity by strategic fit and perceived level of financial accretion, establishes contact with the appropriate representative of the acquisition candidate and gathers further information on the acquisition candidate. We have made in the past, and we may make in the future, acquisitions 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 competition for acquisition targets, particularly the larger and more meaningful targets, but we believe that our strong relationships and reputation inNew England andNew York help to offset this factor. In the fiscal year endedDecember 31, 2019 ("fiscal year 2019"), we acquired nine businesses: three tuck-in solid waste collection businesses in our Eastern region and four tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations, and a business comprised of solid waste hauling and transfer assets in our Western region for total consideration of$82.2 million , including$72.1 million in cash,$5.5 million in non-cash consideration,$2.7 million notes payable and$1.9 million in holdbacks to the sellers. In the fiscal year endedDecember 31 2018 ("fiscal year 2018"), we acquired nine businesses: six solid waste collection businesses and one transfer business in our Western region and two businesses comprised of solid waste collection and transfer operations in our Eastern region for total consideration of$99.5 million , including$86.7 million in cash,$4.3 million in Class A common stock, and$8.5 million in contingent consideration and holdbacks to the sellers. Divestitures From time to time, we may sell or divest certain investments or other components of our business. These divestitures may be undertaken for a number of reasons, including: to generate proceeds to pay down debt; as a result of a determination that the specified asset will provide inadequate returns to us or that the asset no longer serves a strategic purpose in connection with our business; or as a result of a determination that the asset may be more valuable to a third-party. We will continue to look to divest certain activities and investments that no longer enhance or complement our core business if the right opportunity presents itself. Results of Operations 34
--------------------------------------------------------------------------------
Table of Contents
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 our Eastern and Western regions. Revenues in our Eastern and
Western regions consist primarily of fees charged to customers for solid waste
collection and disposal, landfill, landfill gas-to-energy, transfer and
recycling services. We derive a substantial portion of our collection revenues
from commercial, industrial and municipal services that are generally performed
under service agreements or pursuant to contracts with municipalities. The
majority of our residential collection services are performed on a subscription
basis with individual households. Landfill and transfer customers are charged a
tipping fee on a per ton basis for disposing of their solid waste at our
disposal facilities and transfer stations. We also generate and sell electricity
at certain of our landfill facilities. Revenues from our Recycling segment
consist of revenues derived from municipalities and customers in the form of
processing fees, tipping fees and commodity sales. Revenues from organics
services, ancillary operations, and major account and industrial services are
included in our Other segment. Our revenues are shown net of inter-company
eliminations.
The table below shows revenue attributable to services provided (in millions)
for the following periods:
Fiscal Year Ended December 31, $
2019 2018 Change
Collection $ 372.0 $ 303.4 $ 68.6
Disposal 181.9 181.1 0.8
Power 3.6 5.1 (1.5)
Processing 7.2 7.2 -
Solid waste 564.7 496.8 67.9
Organics 56.3 54.2 2.1
Customer solutions 79.5 67.5 12.0
Recycling 42.8 42.2 0.6
Total revenues $ 743.3 $ 660.7 $ 82.6
Solid waste revenues
A summary of the period-to-period change in solid waste revenues (dollars in
millions and as percentage growth of solid waste revenues) follows:
Period-to-Period Change for Fiscal Year 2019 vs
Fiscal Year 2018
Amount % Growth
Price $ 25.3 5.1 %
Volume (5.1) (1.0) %
Surcharges and other fees 5.0 1.0 %
Commodity price and volume (3.7) (0.7) %
Acquisitions 57.9 11.6 %
Closed operations (10.5) (2.1) %
Solid waste revenues $ 68.9 13.9 %
(1)Adjusted for $1.0 million of inter-company movements between solid waste
collection volume and Customer Solutions associated with the acquisition of a
business.
Price.
The price change component in fiscal year 2019 solid waste revenues growth from
the prior year is a result of the following:
•$16.2 million from favorable collection pricing; and
•$9.1 million from favorable disposal pricing associated primarily with our
landfills and transfer stations.
35--------------------------------------------------------------------------------
Table of Contents
Volume.
The volume change component in fiscal year 2019 solid waste revenues growth from the prior year is a result of the following: •$(2.6) million from lower collection volumes as we continue to focus on pricing and the quality of revenue; •$(2.1) million from lower disposal volumes (of which$(5.6) million relates to lower transportation volumes primarily associated with a large contaminated soils project that occurred in fiscal year 2018,$1.8 million relates to higher landfill volumes, and$1.7 million relates to higher transfer station volumes); and •$(0.4) million from lower processing volumes. Surcharges and other fees. The surcharges and other fees change component in fiscal year 2019 solid waste revenues growth from the prior year is associated primarily with the Energy component of the Energy and Environmental fee and theSustainability Recycling Adjustment fee. The Energy component of the fee floats on a monthly basis based on diesel fuel prices. The Sustainability Recycling Adjustment fee floats on a monthly basis based on recycled commodity prices. Commodity price and volume. The commodity price and volume change component in fiscal year 2019 solid waste revenues growth from the prior year is a result of the following: •$(1.2) million from unfavorable energy pricing and, to a lesser extent, unfavorable commodity pricing; and •$(2.5) million from lower commodity volumes due to lower commodity processing volumes and landfill gas-to-energy production. Acquisitions. The acquisitions change component in fiscal year 2019 solid waste revenues growth is a result of increased acquisition activity, including the following: •the acquisition of nine businesses in fiscal year 2019: seven tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations, and a business comprised of solid waste hauling and transfer assets; and •the acquisition of nine businesses in fiscal year 2018: six tuck-in solid waste collection businesses, one transfer business, and two businesses comprised of solid waste collection and transfer operations, combined to a lesser extent with roll over impact of acquisitions made in fiscal year 2017. Closed operations. The closed operations change component in fiscal year 2019 total solid waste revenues growth from prior year is a result of the closure of the landfill located inSouthbridge, Massachusetts ("Southbridge Landfill ") in our Eastern region in the quarter endedDecember 31, 2018 and the closure of a transfer station in our Western region in the quarter endedMarch 31, 2019 . Organics revenues Fiscal year 2019 organics revenues increased$2.1 million from the prior year as a result of higher volumes associated with two large transportation and disposal contracts. Customer Solutions revenues Fiscal year 2019 revenues increased$11.0 million from the prior year as a result of higher volumes mainly due to multi-site retail and industrial services organic growth. Recycling revenues Fiscal year 2019 recycling revenues increased$0.6 million from the prior year as a result of the following: •$8.0 million from higher recycling processing fees; and •$1.1 million from higher commodity volumes; partially offset by •$(8.5) million from unfavorable commodity pricing in the marketplace. 36
--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
A summary of our cost of operations, general and administration expenses and
depreciation and amortization expenses is as follows (dollars in millions and as
a percentage of total revenues):
Fiscal Years Ended December 31,
2019 2018
Cost of operations $ 508.7 68.4 % $ 453.3 68.6 %
General and administration $ 92.8 12.5 % $ 84.8 12.8 %
Depreciation and amortization $ 79.8 10.7 % $ 70.5 10.7 %
Cost of Operations
Cost of operations includes labor costs, tipping fees paid to third-party
disposal facilities, fuel costs, maintenance and repair costs of vehicles and
equipment, workers' compensation and vehicle insurance costs, the cost of
purchasing materials to be recycled, third-party transportation costs, district
and state taxes, host community fees and royalties. Cost of operations also
includes accretion expense related to final capping, closure and post-closure
obligations, leachate treatment and disposal costs and depletion of landfill
operating lease obligations.
An explanation of the period-to-period change in cost of operations is as
follows:
Third-party direct costs in fiscal year 2019 increased $25.8 million from the
prior year as a result of the following:
•higher disposal costs associated with: additional volumes related to
acquisition activity; additional volumes related to multi-site retail and
industrial services organic growth in our Customer Solutions line-of-business;
increased disposal pricing in the northeastern United States ; and an increased
reliance on third-party disposal sites in our Organics line-of-business during
the first half of the fiscal year; and
•higher hauling and third-party transportation costs associated with: higher
collection volumes related to acquisition activity; higher transportation rates;
and higher brokerage volumes in our Customer Solutions line-of-business with
high pass through direct costs; partially offset by lower hauling and
third-party transportation costs in the Western region associated with lower
transportation volumes related to a large contaminated soils project that
occurred in the prior year.
Labor and related benefit costs in fiscal year 2019 increased $15.9 million from
the prior year due to higher labor costs related primarily to acquisition
activity and wage increases associated with tight labor markets.
Maintenance and repair costs in fiscal year 2019 increased $13.3 million from
the prior year due primarily to higher fleet and facility maintenance costs
associated with acquisition activity and related business growth.
Fuel costs in fiscal year 2019 increased $2.8 million from the prior year due
primarily to higher volumes associated with acquisition activity.
Direct operational costs in fiscal year 2019 decreased $(2.4) million from the
prior year due to lower landfill operating lease amortization and lower host
royalty fees driven primarily by the closure of the Southbridge Landfill in the
Eastern region; lower rent expense associated with operating leases; and lower
landfill operating costs; partially offset by higher auto insurance costs
associated primarily with claims activity.
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.
The period-to-period change in general and administration expense can be
primarily attributed to higher labor and related benefit costs associated with
acquisition activity and higher accrued incentive compensation, partially offset
by lower equity compensation costs and lower professional service fees related
to reduced legal costs and consulting fees.
37--------------------------------------------------------------------------------
Table of Contents
Depreciation and Amortization
Depreciation and amortization expense includes: (i) depreciation of property and
equipment (including assets recorded for finance leases) on a straight-line
basis over the estimated useful lives of the assets; (ii) amortization of
landfill costs (including those costs incurred and all estimated future costs
for landfill development and construction, along with asset retirement costs
arising from closure and post-closure obligations) on a units-of-consumption
method as landfill airspace is consumed over the total estimated remaining
capacity of a site, which includes both permitted capacity and unpermitted
expansion capacity that meets certain criteria for amortization purposes, and
amortization of landfill asset retirement costs arising from final capping
obligations on a units-of-consumption method as airspace is consumed over the
estimated capacity associated with each final capping event; and (iii)
amortization of intangible assets with a definite life, using either an economic
benefit provided approach or on a straight-line basis over the definitive terms
of the related agreements.
A summary of the components of depreciation and amortization expense (dollars in
millions and as a percentage of total revenues) follows:
Fiscal Year Ended December 31,
2019 2018
Depreciation expense $ 45.1 6.1 % $ 35.4 5.4 %
Landfill amortization expense 27.5 3.7 % 31.8 4.8 %
Other amortization expense 7.2 0.9 % 3.3 0.5 %
$ 79.8 10.7 % $ 70.5 10.7 %
The period-to-period change in depreciation and amortization expense can be
primarily attributed to acquisition activity, partially offset by lower landfill
amortization expense associated with lower landfill volumes in our Eastern
Region due to the closure of the Southbridge Landfill .
Multiemployer Pension Plan
We make contributions to a multiemployer defined benefit pension plan, the New
England Teamsters and Trucking Industry Pension Fund (the "Pension Plan"), under
the terms of a collective bargaining agreement ("CBA") that covers certain of
our union represented employees. The Pension Plan provides retirement benefits
to participants based on their service to contributing employers. We do not
administer the Pension Plan. The risks of participating in a multiemployer
pension plan are different from a single-employer pension plan in that: (i)
assets contributed to the multiemployer pension plan by one employer may be used
to provide benefits to employees or former employees of other participating
employers; (ii) if a participating employer stops contributing to the plan, the
unfunded obligations of the plan may be required to be assumed by the remaining
participating employers; and (iii) if we choose to stop participating in our
multiemployer Pension Plan, we may be required to pay the plan a withdrawal
amount based on the underfunded status of the plan.
In October 2019 , we reached an agreement to withdraw from the Pension Plan by
entering into Withdrawal and Re-entry Agreements with the Pension Plan. In
accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") 450 - Contingencies, because of our withdrawal
from the Pension Plan, we recorded an obligation of $3.2 million as of September
30, 2019 and a charge of $3.6 million as pension withdrawal expense, offset by a
$0.4 million retroactive contribution credit recorded as cost of operations, in
fiscal year 2019. While the withdrawal generates a fixed yearly contingent
liability for us for a period of approximately seventeen (17) years, it caps our
gross payments at $4.2 million , significantly reducing our cash exposure from
the potential $18.5 million withdrawal liability as determined based on a
complete withdrawal. As per the Re-entry Agreements and upon withdrawal, we
re-entered the Pension Plan with certainty from a liability perspective. We have
not, however, changed the terms of our CBA with Local 170, which remains in
effect until June 30, 2020 . As of December 31, 2019 , we had a remaining
obligation of $1.8 million associated with our withdrawal.
38--------------------------------------------------------------------------------
Table of Contents
Southbridge Landfill Closure Charge,Net In June 2017 , we initiated the plan to cease operations of ourSouthbridge Landfill and later closed it inNovember 2018 whenSouthbridge Landfill reached its final capacity. In fiscal years 2019 and 2018, we recorded charges associated with the closure of ourSouthbridge Landfill as follows: Fiscal Year Ended December 31, 2019 2018 Contract settlement charge (1) $ -$ 8.7 Landfill closure project charge (2) - 6.0 Charlton settlement charge (3) - 1.2 Legal and transaction costs (4) 2.7 2.2 Recovery on insurance settlement (5) - (10.0) Southbridge Landfill closure charge, net$ 2.7 $ 8.1 (1)We recorded a contract settlement charge associated with the closure ofSouthbridge Landfill and the remaining future obligations due to theTown of Southbridge under the landfill operating agreement with theTown of Southbridge . (2)We recorded a landfill closure project charge associated with increased costs under the revised closure plan at ourSouthbridge Landfill . (3)We established a reserve associated with settlement of the Town of Charlton's claim against us. (4)We incurred legal and other transaction costs associated with various matters as part of theSouthbridge Landfill closure. (5)We recorded a recovery on an environmental insurance settlement associated with theSouthbridge Landfill closure. Expense from Acquisition Activities and Other Items In fiscal year 2019, we recorded a charge of$2.7 million associated primarily with acquisition activities. In fiscal year 2018, we recorded a charge of$1.9 million associated with acquisition activities and the write-off of deferred costs related to the expiration of our shelf registration statement. See Note 5, Business Combinations to our consolidated financial statements included under Part II, Item 8 of this Annual Report on Form 10-K for disclosure regarding acquisition activity. Contract Settlement Charge In fiscal year 2018, we recorded contract settlement charges of$2.1 million associated with the termination and discounted buy-out of a commodities marketing and brokerage agreement. Development Project Charge In fiscal year 2018, we recorded development project charges of$0.3 million associated with previously deferred costs that were written off as a result of the negative vote in a public referendum relating to theNCES Landfill . Other expenses Interest Expense, net Our interest expense, net decreased$(1.3) million in fiscal year 2019 due primarily to lower average interest rates, lower average debt balances and the refinancing of our term loan B facility ("Term Loan B Facility") with our existing revolving line of credit facility ("Revolving Credit Facility") and our term loan A facility ("Term Loan Facility", together with the Revolving Credit Facility, the "Credit Facility"), and the remarketing of our Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013 ("Vermont Bonds") and ourNew York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014 ("New York Bonds 2014"). Loss on Debt Extinguishment In order to lower our borrowing costs and reduce our market risk we completed the following transactions that resulted in a loss on debt extinguishment in fiscal year 2018 of$7.4 million: •the write-off of debt issuance costs and unamortized discount, in the case of our Term Loan B Facility in fiscal year 2018, associated with the refinancing of our previously outstanding senior secured credit facility in fiscal year 2018: and •the write-off of debt issuance costs in connection with the remarketing of ourVermont Bonds in fiscal year 2018. 39
--------------------------------------------------------------------------------
Table of Contents
Impairment of Investments As ofDecember 31, 2018 , we owned 6.8% of the outstanding common stock ofRecycle Rewards, Inc. ("Recycle Rewards"), a company that marketed an incentive based recycling service. In fiscal year 2018, it was determined based on the operating performance of Recycle Rewards that our cost method investment in Recycle Rewards was potentially impaired. As a result, we performed a valuation analysis in fiscal year 2018, which used an income approach based on discounted cash flows to determine an equity value for Recycle Rewards in order to properly value our cost method investment in Recycle Rewards. Based on this analysis, it was determined that the fair value of our cost method investment in Recycle Rewards was less than the carrying amount and, therefore, we recorded an other-than-temporary investment impairment charge for the full cost method investment amount of$1.1 million in fiscal year 2018. InOctober 2019 , Recycle Rewards sold all or substantially all of its assets comprising the business toRTS RecycleBank, LLC , a subsidiary of Recycle Track Systems, pursuant to an asset purchase agreement. Based on our junior ownership position, we did not receive any proceeds from this disposition. Benefit for Income Taxes Our benefit for income taxes was$(1.9) million in fiscal year 2019 and$(0.4) million in fiscal year 2018. The benefit for income taxes for fiscal years 2019 and 2018 include a deferred tax (benefit) provision of$(1.2) million and$1.3 million , respectively. During fiscal years 2019 and 2018, we recognized$(2.4) million and$(0.9) million of deferred tax benefits, respectively, due to a reduction of the valuation allowance. The valuation allowance decreased in the periods based upon the recognition of additional reversing temporary differences related to the$2.4 million deferred tax liability recorded through goodwill for the acquisition of a company inMay 2019 and$0.9 million deferred tax liability recorded through goodwill for the acquisition of two companies inJanuary 2018 . The deferred tax liabilities related to the acquisitions were based on the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the related tax bases. Deferred tax benefits of$(2.1) million and$(1.6) million were recognized in the quarters endedJune 30, 2019 andMarch 31, 2018 , respectively, based on initial estimates of the acquired temporary differences, and adjusted by$(0.3) million in the quarter endedDecember 31, 2019 and by$0.7 million in subsequent quarters of fiscal year 2018 based on the availability of better estimates of temporary differences upon the filing of prior year returns by the sellers. During fiscal year 2019, we recognized a$(0.3) million deferred tax benefit due to a reduction of the deferred tax liability related to indefinite lived assets. The financial statement value of indefinite lived goodwill was reduced as a result of a settlement of an acquisition contingency that pre-dated the effective date of ASC 805, which resulted in a reduction of the related deferred tax liability. OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Act") was enacted. The Act, which is also commonly referred to as "US tax reform," significantly changed US corporate income tax laws by, among other things, reducing the US corporate income tax rate from 35% to 21% starting in 2018. Under the Act, the alternative minimum tax has been repealed and minimum tax credit carryforwards became refundable beginning in 2018 and will be fully refunded, if not otherwise used to offset tax liabilities, in tax year 2021. Further, our$110.6 million in federal net operating loss carryforwards generated as of the end of 2017 continue to be carried forward for 20 years and are expected to be available to fully offset taxable income earned in future tax years. Federal net operating losses generated after 2017, totaling$67.4 million as of fiscal year 2019, are carried forward indefinitely, but generally may only offset up to 80% of taxable income earned in a tax year. In the quarter endingDecember 31, 2017 , we revalued our deferred tax assets and liabilities for changes under the Act including (a) revaluing our federal net deferred taxes assets before valuation allowance using the 21% tax rate; (b) revaluing our federal valuation allowance using the 21% tax rate; and (c) recognizing a federal deferred tax benefit for 80% of indefinite lived deferred tax liabilities, which are anticipated to be available as a source of taxable income upon reversal of deferred tax assets that would also have indefinite lives. The benefit for income taxes for fiscal years 2019 and 2018 incorporates the changes under the Act, including use of the 21% US corporate income tax rate and applying the new federal net operating loss carryforward rules. At the end of 2017, we had$3.8 million of minimum tax credit carryforwards of which$1.0 million is refundable for 2019 and$1.9 million was refunded for 2018. Current income tax benefits of$1.0 million , offset by a$1.0 million deferred tax provision, were recognized in fiscal year 2019 for the minimum tax credit carryforward refundable for the year. 40
--------------------------------------------------------------------------------
Table of Contents
Segment Reporting We report selected information about operating segments in a manner consistent with that used for internal management reporting. We classify our solid waste operations on a geographic basis through regional operating segments, our Western and Eastern regions. Revenues associated with our solid waste operations are derived mainly from solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services in the northeasternUnited States . Our revenues in the Recycling segment were derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales. Organics services, ancillary operations, along with major account and industrial services, were included in our Other segment. EffectiveJanuary 1, 2020 , we reorganized our operating segments as follows: we aligned our organics services and our major account and industrial services with our Recycling segment to form theResource Solutions segment, thus creating a single resource renewal-focused segment. We also moved our ancillary transportation services, which were previously included in our Other segment, into our Western region. Accordingly, as ofJanuary 1, 2020 , our operating segments consist of the Eastern and Western regions andResource Solutions . A summary of revenues by operating segment (in millions) follows: Fiscal Year Ended December 31, $ 2019 2018 Change Eastern$ 219.5 $ 206.5 $ 13.0 Western 343.4 286.3 57.1 Recycling 42.8 42.2 0.6 Other 137.6 125.7 11.9 Total$ 743.3 $ 660.7 $ 82.6 Eastern Region The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
Period-to-Period Change for Fiscal Year 2019 vs
Fiscal Year 2018
Amount % of Growth
Price $ 11.7 5.7 %
Volume (2.7) (1.3) %
Surcharges and other fees 2.1 1.0 %
Commodity price and volume (0.5) (0.3) %
Acquisitions 12.0 5.8 %
Closed landfill (9.6) (4.6) %
Solid waste revenues $ 13.0 6.3 %
Price.
The price change component in fiscal year 2019 solid waste revenues growth from
the prior year is a result of the following:
•$8.4 million from favorable collection pricing; and
•$3.3 million from favorable disposal pricing related to transfer stations and
landfills.
Volume.
The volume change component in fiscal year 2019 solid waste revenues growth from the prior year is a result of the following: •$(2.3) million from lower collection volumes as we continue to focus on pricing and the quality of revenue; •$(0.2) million from lower disposal volumes (of which$(0.5) million relates to lower landfill volumes and$0.3 million relates to higher transfer station volumes); and •$(0.2) million from lower processing volumes. 41
--------------------------------------------------------------------------------
Table of Contents
Surcharges and other fees. The surcharges and other fees change component in in fiscal year 2019 solid waste revenues growth from the prior year is associated primarily with the Energy component of the Energy and the Sustainability Recycling Adjustment fee. The Energy component of the fee floats on a monthly basis based on diesel fuel prices. The Sustainability Recycling Adjustment fee floats on a monthly basis based on recycled commodity prices. Commodity price and volume. The commodity price and volume change component in fiscal year 2019 total solid waste revenues growth is the result of lower landfill gas-to-energy production. Acquisitions. The acquisitions and divestitures change component in fiscal year 2019 solid waste revenues growth is primarily the result of the acquisition of three tuck-in solid waste collection businesses in the quarter endedJune 30, 2019 and two businesses comprised of solid waste collection and transfer operations during the prior year. Closed landfill. The closed landfill change component in fiscal year 2019 solid waste revenues growth from prior year is the result of the closure of ourSouthbridge Landfill in the quarter endedDecember 31, 2018 .Western Region The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
Period-to-Period Change for Fiscal Year 2019 vs
Fiscal Year 2018
Amount % of Growth
Price $ 13.5 4.7 %
Volume (1) (0.1) - %
Surcharges and other fees 2.9 1.0 %
Commodity price and volume (3.1) (1.1) %
Acquisitions 45.8 16.0 %
Closed operations (0.9) (0.3) %
Solid waste revenues $ 58.1 20.3 %
(1)Adjusted for $1.0 million of inter-company movements between solid waste
collection volume and Customer Solutions associated with the acquisition of a
business.
Price.
The price change component in fiscal year 2019 solid waste revenues growth from
the prior year is a result of the following:
•$7.8 million from favorable collection pricing; and
•$5.8 million from favorable disposal pricing related to transfer stations and
landfills; partially offset by
•$(0.1) million from unfavorable processing pricing.
Volume.
The volume change component in fiscal year 2019 solid waste revenues growth from
the prior year is a result of the following:
•$(0.3) million from lower processing volumes; and
•$(0.2) million from lower collection volumes; partially offset by
•$0.4 million from higher disposal volumes (of which $2.3 million relates to
higher landfill volumes and $1.5 million relates to higher transfer station
volumes and $(3.4) million relates to lower transportation volumes associated
with a large contaminated soils project that occurred in the prior year).
42--------------------------------------------------------------------------------
Table of Contents
Fuel surcharges and other fees. The surcharges and other fees change component in fiscal year 2019 solid waste revenues growth from the prior year is associated primarily with the Energy component of the Energy and Environmental fee and theSustainability Recycling Adjustment fee. The Energy component of the fee floats on a monthly basis based on diesel fuel prices. The Sustainability Recycling Adjustment fee floats on a monthly basis based on recycled commodity prices. Commodity price and volume. The commodity price and volume change component in fiscal year 2019 solid waste revenues growth from the prior year is primarily the result of unfavorable energy pricing, unfavorable commodity pricing, and lower commodity volumes within our processing operations. Acquisitions and divestitures. The acquisitions and divestitures change component in fiscal year 2019 solid waste revenues growth from the prior year is the result of the acquisition of a business comprised of solid waste collection, transfer and recycling operations; the acquisition of four tuck-in solid waste collection businesses and a business comprised of solid waste hauling and transfer assets; and six solid waste collection businesses and one transfer business throughout the prior year. Closed operations. The closed operations change component in fiscal year 2019 solid waste revenues growth from the prior year is the result of the closure of a transfer station. Operating Income (Loss) A summary of operating income (loss) by operating segments (in millions) follows: December 31, $ 2019 2018 Change Eastern$ 9.5 $ 4.7 $ 4.8 Western 41.9 41.5 0.4 Recycling (0.8) (7.8) 7.0 Other 2.5 1.3 1.2 Total$ 53.1 $ 39.7 $ 13.4 Eastern Region Eastern region operating income increased$4.8 million in fiscal year 2019 from the prior year. Excluding the impact of theSouthbridge Landfill closure charge, net, the multiemployer pension plan withdrawal costs, the development project charge and the expense from acquisition activities and other items, our operating performance in fiscal year 2019 improved as a result of revenue growth and the cost impacts discussed below. Cost of operations: Cost of operations increased$13.4 million in fiscal year 2019 from the prior year as a result of the following: •higher disposal costs associated with additional volumes related to acquisition activity, increased third-party disposal pricing in the northeasternUnited States , and redirection of waste previously disposed at theSouthbridge Landfill ; •higher hauling and third-party transportation costs associated with higher collection volumes related to acquisition activity, higher transportation rates, and higher transport costs as volumes were redirected from theSouthbridge Landfill ; •higher labor and related benefit costs due to higher labor costs related primarily to acquisition activity and wage increases associated with tight labor markets; •higher maintenance and repair costs due primarily to higher fleet and facility maintenance costs associated with acquisition activity and related business growth; and •higher fuel costs due primarily to higher volumes associated with acquisition activity; partially offset by •lower direct operational costs due to lower landfill operating lease amortization, lower landfill operating costs, and lower host royalty fees driven primarily by the closure of theSouthbridge Landfill ; and lower rent expense associated with operating leases. 43
--------------------------------------------------------------------------------
Table of Contents
General and administration: General and administration expense increased$0.6 million in fiscal year 2019 due primarily to higher labor and related benefit costs associated with acquisition activity and higher accrued incentive compensation, partially offset by lower professional service fees related to reduced legal costs and consulting fees. Depreciation and amortization: Depreciation and amortization expense decreased$(2.2) million in fiscal year 2019 due primarily to lower landfill amortization expense associated with lower landfill volumes due to the closure of theSouthbridge Landfill , partially offset by higher depreciation expense associated with acquisition activity.Western Region Western region operating income increased$0.4 million in fiscal year 2019 from the prior year. Excluding the impact of expense from acquisition activities and other items, our operating performance in fiscal year 2019 improved as a result of revenue growth and the cost impacts discussed below. Cost of operations: Cost of operations increased$53.3 million in fiscal year 2019 from the prior year as a result of the following: •higher disposal costs associated with additional volumes related to acquisition activity, and increased third-party disposal pricing in the northeasternUnited States ; •higher hauling and third-party transportation costs associated with higher collection volumes related to acquisition activity, and higher transportation rates; partially offset by lower hauling and third-party transportation costs associated with lower transportation volumes related to a large contaminated soils project that occurred in the prior year; •higher labor and related benefit costs due to higher labor costs related primarily to acquisition activity and wage increases associated with tight labor markets; •higher maintenance and repair costs due primarily to higher fleet and facility maintenance costs associated with acquisition activity and related business growth; •higher fuel costs due primarily to higher volumes associated with acquisition activity; and •higher direct operational costs due to higher auto insurance costs associated with claims activity, and increased operational activity related to acquisition activity and related business growth; partially offset by lower rent expense associated with operating leases. General and administration: General and administration expense increased$6.7 million in fiscal year 2019 due to higher labor and related benefit costs associated with acquisition activity, and an increased allocation of shared overhead costs based on business growth; partially offset by lower accrued incentive compensation costs. Depreciation and amortization: Depreciation and amortization expense increased$11.8 million in fiscal year 2019 due primarily to acquisition activity. Recycling Recycling operating income increased by$7.0 million in fiscal year 2019 from the prior year. Excluding the impact of expense from acquisition activities and other items and the contract settlement charge associated with the termination and discounted buy-out of a commodities marketing and brokerage agreement in the prior year, our operating performance in fiscal year 2019 improved primarily due to revenue growth on higher commodity volumes and recycling processing fees, combined with lower operating costs, including lower third-party disposal costs and lower purchased material costs on reduced commodity pricing in the marketplace. Other Other operating income increased by$1.2 million in fiscal year 2019 from the prior year based on the following: •improved operating performance of our Customer Solutions line-of-business, as revenue growth associated with increased volumes outpaced higher cost of operations associated with the corresponding increase in hauling, transportation and disposal costs; and •improved operating performance of our Organics line-of-business, as revenue growth associated with increased volumes, which were driven by two large transportation and disposal contracts, outpaced higher cost of operations as a result of internalizing disposal volumes that were previously directed to third-party sites. This offset the impact of intercompany profits in our Organics line-of-business passing through to landfill disposal sites resulting in lower margins. 44
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources We continually monitor our actual and forecasted cash flows, our liquidity, and our capital requirements in order to properly manage our cash needs based on the capital intensive nature of our business. Our capital requirements include fixed asset purchases (including capital expenditures for vehicles), debt servicing, landfill development and cell construction, landfill site and cell closure, as well as acquisitions. We generally meet our liquidity needs from operating cash flows and borrowings from our$200.0 million Revolving Credit Facility. A summary of cash and cash equivalents, restricted assets and debt balances, excluding any debt issuance costs, (in millions) follows: December 31, 2019 2018 Cash and cash equivalents$ 3.5 $ 4.0 Restricted assets: Restricted investments securities - landfill closure$ 1.6 $ 1.2 Debt: Current portion$ 4.3 $ 2.3 Non-current portion 518.4 552.9 Total debt$ 522.7 $ 555.2 Summary of Cash Flow Activity A summary of cash flows (in millions) follows: Fiscal Year Ended December 31, 2019 2018
Net cash provided by operating activities
45--------------------------------------------------------------------------------
Table of Contents
Cash flows from operating activities.
A summary of operating cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2019 2018
Net income $ 31.7 $ 6.4
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 79.8 70.5
Depletion of landfill operating lease obligations 7.7 9.7
Interest accretion on landfill and environmental remediation liabilities
7.0 5.7
Amortization of debt issuance costs and discount on long-term debt
2.3 2.4
Stock-based compensation 7.2 8.4
Operating lease right-of-use assets expense 9.6 -
Gain on sale of property and equipment (0.9) (0.5)
Southbridge Landfill non-cash closure charge 0.1 16.2
Southbridge Landfill insurance recovery for investing activities - (3.5)
Development project charge - 0.3
Non-cash expense from acquisition activities and other items 0.1 0.8
Loss on debt extinguishment - 7.4
Impairment of investments - 1.1
Withdrawal costs - multiemployer pension plan 2.2 -
Deferred income taxes (1.2) 1.3
145.6 126.2
Changes in assets and liabilities, net (28.8) (5.4)
Net cash provided by operating activities $
116.8
Net cash provided by operating activities decreased$(4.0) million in fiscal year 2019 as compared to fiscal year 2018. This was the result of improved operational performance, being more than offset by the unfavorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures. For discussion over our improved operational performance fiscal year 2019 as compared to fiscal year 2018, see Results of Operations included in Item 7 of this Annual Report on Form 10-K. The$(23.4) million increase in the unfavorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures, which are affected by both cost changes and the timing of payments, in fiscal year 2019 as compared to fiscal year 2018 was due to the following: •a$(13.8) million unfavorable impact to operating cash flows associated with the change in accrued expenses and other liabilities associated primarily with higher final capping, closure and post-closure payments of$4.8 million and higher environmental remediation payments of$4.1 million associated primarily with ourPotsdam site. The cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures was also impacted by changes to the accounting for operating leases as a result of the implementation of Accounting Standards Update No. 2016-02, as amended throughMarch 2019 : Leases ("Topic 842") effectiveJanuary 1, 2019 , which are now accounted for as operating lease liabilities on our consolidated balance sheets; •a$(5.3) million unfavorable impact to operating cash flows associated with landfill operating lease contract expenditures being reclassified from investing activities to operating activities within our consolidated statements of cash flows as a result of the implementation of Topic 842; •a$(2.4) million unfavorable impact to operating cash flows associated with the change in accounts payable; and •a$(2.2) million unfavorable impact to operating cash flows associated with cash outflows associated with prepaid expenses, inventories and other assets; partially offset by •a$0.3 million favorable impact to operating cash flows associated with the change in accounts receivable. 46
--------------------------------------------------------------------------------
Table of Contents
Cash flows from investing activities.
A summary of investing cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2019 2018
Acquisitions, net of cash acquired $ (75.4) $ (88.9)
Additions to property, plant and equipment (103.2)
(73.2)
Payments on landfill operating lease contracts -
(7.4)
Proceeds from sale of property and equipment 0.8
0.8
Proceeds fromSouthbridge Landfill insurance recovery -
3.5
Proceeds from property insurance settlement 0.3
1.0
Net cash used in investing activities$ (177.5) $
(164.2)
A summary of the most significant items affecting the change in our investing cash flows follows: Acquisitions, net of cash acquired. In fiscal year 2019, we acquired seven tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations and a business comprised of solid waste hauling and transfer assets for total consideration of$82.2 million , including$72.1 million in cash, and paid$3.3 million in holdback payments on businesses previously acquired, as compared to fiscal year 2018, during which we acquired six solid waste collection businesses, one transfer business and two businesses comprised of solid waste collection and transfer operations for total consideration of$99.5 million , including$86.7 million in cash and$2.2 million in holdback payments on businesses previously acquired. Capital expenditures. Capital expenditures were$29.9 million higher in fiscal year 2019 as compared to fiscal year 2018 primarily due to capital expenditures associated with timing differences, business growth and acquisition activities. Capital expenditures associated with acquisition activities were included as capital investments in our pre-acquisition discounted cash flow analysis and are necessary to integrate operations, drive operating and back-office synergies and bring acquired operations up to our standards. Payments on landfill operating lease contracts. As a result of the implementation of Topic 842, payments on landfill operating lease contracts are classified as operating cash outflows in fiscal year 2019 as compared to investing cash outflows in fiscal year 2018. Proceeds fromSouthbridge Landfill insurance recovery. We recorded a recovery on environmental insurance settlement associated with theSouthbridge Landfill closure, of which$3.5 million related to the recovery of net cash previously used in investing activities. Proceeds from property insurance settlement. Recovery of insurance proceeds was$(0.7) million lower in fiscal year 2019 as compared to fiscal year 2018 due to increased recoveries in prior year pertaining to property damage related to a fire at a transfer station in our Western region. Cash flows from financing activities. A summary of financing cash flows (in millions) follows: Fiscal Year Ended December 31, 2019 2018 Proceeds from long-term borrowings$ 197.8 $ 634.7 Principal payments on long-term debt (243.4)
(584.2)
Payments of debt issuance costs (0.7)
(5.6)
Proceeds from the exercise of share-based awards 3.4
0.5
Proceeds from the public offering of Class A Common Stock 100.4
-
Proceeds from unregistered sale of Class A Common Stock 2.6
-
Net cash provided by financing activities$ 60.1
47--------------------------------------------------------------------------------
Table of Contents
A summary of the most significant items affecting the change in our financing cash flows follows: Debt activity. Debt borrowings decreased by$(436.9) million and debt payments decreased by$(340.8) million in fiscal year 2019. The decrease in financing cash flows related to debt activity is associated with paying down our Revolving Credit Facility in fiscal year 2019, partially offset by increased borrowings related to acquisition activity, as compared to fiscal year 2018, when we increased borrowings related to acquisition activity and issued$15.0 million aggregate principal amount ofFinance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015R-2 ("FAME Bonds 2015R-2"). Payments of debt issuance costs. We made$0.7 million of debt issuance cost payments in fiscal year 2019 related to the remarketing of$11.0 million aggregate principal amount of senior unsecured Solid Waste Disposal Revenue Bonds Series 2013 issued by theBusiness Finance Authority of the State of New Hampshire ("New Hampshire Bonds") and$25.0 million aggregate principal amount of New York Bonds 2014. In fiscal year 2018, we made$5.6 million of debt issuance cost payments related primarily to the refinancing of our Credit Facility and the issuance of FAME Bonds 2015R-2. Proceeds from the exercise of share-based awards. We received$3.4 million of cash receipts associated with the exercise of stock options in fiscal year 2019 as compared to$0.5 million in fiscal year 2018 due primarily to the appreciation of our stock price. Proceeds from the public offering of Class A Common Stock. In fiscal year 2019, we completed a public offering of 3.6 million shares of our Class A common stock at a public offering price of$29.50 per share. The offering resulted in net proceeds to us of$100.4 million , after deducting underwriting discounts, commissions and offering expenses. The net proceeds from the offering were and are to be used for general corporate purposes, including potential acquisitions or development of new operations or assets with the goal of complementing or expanding our business, working capital and capital expenditures. Proceeds from the unregistered sale of Class A Common Stock. In fiscal year 2019, we completed the unregistered sale of 59,307 shares of our Class A common stock at a price of$44.15 per share. The sale resulted in net proceeds to us of$2.6 million . The shares were previously held in escrow according to the terms of our acquisition ofWaste Stream Inc. ("WSI") in 1999 and released to us for liquidation to offset costs associated with the environmental remediation of WSI'sPotsdam, New York site. See Note 12, Commitments and Contingencies to our consolidated financial statements included under Part II, Item 8 of this Annual Report on Form 10-K for additional disclosure. Outstanding Long-Term Debt Credit Facility In fiscal year 2018, we entered into a credit agreement ("Credit Agreement"), which provides for a$350.0 million aggregate principal amount Term Loan Facility and a$200.0 million Revolving Credit Facility. The net proceeds from this transaction were used to repay in full the amounts outstanding of the Term Loan B Facility and the$160.0 million revolving line of credit facility plus accrued and unpaid interest thereon and to pay related transaction expenses. We have the right to request, at our discretion, an increase in the amount of loans under the Credit Facility by an aggregate amount$125.0 million , subject to the terms and conditions set forth in the Credit Agreement. The Credit Facility has a 5-year term and bears interest at a rate of LIBOR plus 1.75%, which can be reduced to a rate of LIBOR plus 1.25% upon us reaching a consolidated net leverage ratio of less than 2.25x. The Credit Facility is guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries and secured by substantially all of our assets. As ofDecember 31, 2019 , further advances were available under the Credit Facility in the amount of$148.6 million . The available amount is net of outstanding irrevocable letters of credit totaling$24.5 million , at which date no amount had been drawn. The Credit Agreement requires us to maintain a minimum interest coverage ratio and a maximum consolidated net leverage ratio, to be measured at the end of each fiscal quarter. As ofDecember 31, 2019 , we were in compliance with all financial covenants contained in the Credit Agreement as follows (in millions): Fiscal Year Ended Covenant Requirements at Credit Facility Covenant December 31, 2019 December 31, 2019 Maximum consolidated net leverage ratio (1) 3.07 4.50 Minimum interest coverage ratio 7.33 3.00 48
--------------------------------------------------------------------------------
Table of Contents
(1)The maximum consolidated net leverage ratio is calculated as consolidated funded debt, net of unencumbered cash and cash equivalents in excess of$2.0 million (calculated at$521.3 million as ofDecember 31, 2019 , or$522.7 million of consolidated funded debt less$1.4 million of cash and cash equivalents in excess of$2.0 million as ofDecember 31, 2019 ), divided by minimum consolidated EBITDA. Minimum consolidated EBITDA is based on operating results for the twelve months preceding the measurement date ofDecember 31, 2019 . Consolidated funded debt, net unencumbered cash and cash equivalents in excess of$2.0 million , and minimum consolidated EBITDA are non-GAAP financial measures that should not be considered an alternative to any measure of financial performance calculated and presented in accordance with generally accepted accounting principles inthe United States . A reconciliation of minimum consolidated EBITDA to net cash provided by operating activities is as follows (in millions):
Twelve Months Ended
December 31, 2019
Net cash provided by operating activities $ 116.8
Changes in assets and liabilities, net of effects of acquisitions and divestitures
28.7
Gain on sale of property and equipment 0.9
Non-cash expense from acquisition activities and other items (0.1)
Withdrawal costs - multiemployer pension plan (2.2)
Stock based compensation (7.2)
Operating lease right-of-use assets expense (9.6)
Southbridge Landfill non-cash closure charge (0.1)
Interest expense, less amortization of debt issuance costs 22.8
Benefit for income taxes, net of deferred income taxes (0.6)
Adjustments as allowed by the Credit Agreement 20.5
Consolidated EBITDA $ 169.9
In addition to the financial covenants described above, the Credit Agreement
also contains a number of important customary affirmative and negative covenants
which restrict, among other things, our ability to sell assets, incur additional
debt, create liens, make investments, and pay dividends. We do not believe that
these restrictions impact our ability to meet future liquidity needs.
As of December 31, 2019 , we were in compliance with the covenants contained in
the Credit Agreement. An event of default under any of our debt agreements could
permit some of our lenders, including the lenders under the Credit Facility, to
declare all amounts borrowed from them to be immediately due and payable,
together with accrued and unpaid interest, or, in the case of the Credit
Facility, terminate the commitment to make further credit extensions thereunder,
which could, in turn, trigger cross-defaults under other debt obligations. If we
were unable to repay debt to our lenders, or were otherwise in default under any
provision governing our outstanding debt obligations, our secured lenders could
proceed against us and against the collateral securing that debt.
Based on the seasonality of our business, operating results in the late fall,
winter and early spring months are generally lower than the remainder of our
fiscal year. Given the cash flow impact that this seasonality, the capital
intensive nature of our business and the timing of debt payments has on our
business, we typically incur higher debt borrowings in order to meet our
liquidity needs during these times. Consequently, our availability and
performance against our financial covenants tighten during these times as well.
Tax-Exempt Financings
New York Bonds. In fiscal year 2019, we completed the remarketing of $25.0
million aggregate principal amount of New York Bonds 2014. As of December 31,
2019 , we had outstanding $25,000 aggregate principal amount of New York Bonds
2014 and $15,000 aggregate principal amount of New York Bonds 2014R-2 issued by
the New York State Environmental Facilities Corporation under the indenture
dated December 1, 2014 (collectively, the "New York Bonds"). The New York Bonds
2014 accrue interest at 2.875% per annum through December 2, 2029 , at which time
they may be converted from a fixed rate to a variable rate. The New York Bonds
2014R-2 accrue interest at 3.125% per annum through May 31, 2026 , at which time
they may be converted from a fixed rate to a variable rate. The New York Bonds,
which are unsecured and guaranteed jointly and severally, fully and
unconditionally by all of our significant wholly-owned subsidiaries, require
interest payments on June 1 and December 1 of each year and mature on
December 1, 2044 . We borrowed the proceeds of the New York Bonds to finance or
refinance certain capital projects in the state of New York and to pay certain
costs of issuance of the New York Bonds.
49--------------------------------------------------------------------------------
Table of Contents
Maine Bonds. In fiscal year 2018, we completed the issuance of$15.0 million aggregate principal amount of FAME Bonds 2015R-2. As ofDecember 31, 2019 , we had outstanding$25.0 million aggregate principal amount ofFinance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005 ("FAME Bonds 2005R-3"),$15.0 million aggregate principal amountFinance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015 ("FAME Bonds 2015R-1"), and$15.0 million aggregate principal amount of FAME Bonds 2015R-2 (collectively, the "FAME Bonds"). The FAME Bonds 2005R-3 accrue interest at 5.25% per annum, and interest is payable semiannually onFebruary 1 andAugust 1 of each year until such bonds mature onJanuary 1, 2025 . The FAME Bonds 2015R-1 accrue interest at 5.125% per annum throughAugust 1, 2025 , at which time they may be converted from a fixed to a variable rate, and interest is payable semiannually onFebruary 1 andAugust 1 of each year until the FAME Bonds 2015R-1 mature onAugust 1, 2035 . The FAME Bonds 2015R-2 accrue interest at 4.375% per annum throughJuly 31, 2025 , at which time they may be converted from a fixed to a variable rate, and interest is payable semiannually onMay 1 andNovember 1 of each year until the FAME Bonds 2015R-2 mature onAugust 1, 2035 . The FAME Bonds are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries. We borrowed the proceeds of the offering of the FAME Bonds to finance or refinance the costs of certain of our solid waste landfill facilities and solid waste collection, organics and transfer, recycling and hauling facilities, and to pay certain costs of the issuance of the FAME Bonds.Vermont Bonds . In fiscal year 2018, we completed the remarketing of$16.0 million aggregate principal amount of 4.75% fixed rate senior unsecuredVermont Bonds . As ofDecember 31, 2019 , we had outstanding$16.0 million aggregate principal amount ofVermont Bonds . The Vermont Bonds, which are guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 4.625% per annum throughApril 2, 2028 , after which time there is a mandatory tender, and interest is payable semiannually onMay 1 andNovember 1 of each year. The Vermont Bonds mature onApril 1, 2036 . We borrowed the proceeds of the Vermont Bonds to finance or refinance certain qualifying property, plant and equipment assets purchased in the state of Vermont. New Hampshire Bonds. In fiscal year 2019, we completed the remarketing of$11.0 million aggregate principal amount of senior unsecured New Hampshire Bonds. As ofDecember 31, 2019 , we had outstanding$11.0 million aggregate principal amount of New Hampshire Bonds. The New Hampshire Bonds, which are guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 2.95% per annum through maturity onApril 1, 2029 and interest. During the fixed interest rate period, the New Hampshire Bonds are not supported by a letter of credit. Interest is payable onApril 1 andOctober 1 of each year. We borrowed the proceeds of the New Hampshire Bonds to finance or refinance certain qualifying property, plant and equipment assets purchased in the state ofNew Hampshire . Contractual Obligations The following table summarizes our significant contractual obligations and commitments as ofDecember 31, 2019 (in thousands) and the anticipated effect of these obligations on our liquidity in future years: Less than More than 5 one year 1 - 3 years 3 - 5 years years Total Debt$ 4,302 $ 8,951 $ 382,837 $ 126,638 $ 522,728 Interest obligations (1) 19,572 38,545 24,456 51,841 134,414 Non-cancellable operating leases 7,715 9,096 2,166 5,048 24,025 Landfill operating lease contracts 5,495 10,990 10,990 58,669 86,144 Final capping, closure and post-closure 10,223 14,816 16,804 132,669 174,512 Total contractual cash obligations (2)$ 47,307 $ 82,398 $ 437,253 $ 374,865 $ 941,823 (1)Based on debt balances as ofDecember 31, 2019 . Interest obligations related to variable rate debt were calculated using variable rates in effect atDecember 31, 2019 . (2)Contractual cash obligations do not include accounts payable or accrued liabilities, which will be paid in the fiscal year endingDecember 31, 2020 . We have no contractual obligations related to unrecognized tax benefits atDecember 31, 2019 . For further description over contractual obligations, see Note 8, Leases, Note 10, Final Capping, Closure and Post-Closure Costs, Note 12, Commitments and Contingencies and Note 16, Income Taxes, to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. 50
--------------------------------------------------------------------------------
Table of Contents
Inflation
Although inflationary increases in costs have affected our historical operating margins, we believe that inflation generally has not had a significant impact on our operating results. Consistent with industry practice, most of our contracts provide for a pass-through of certain costs to our customers, including increases in landfill tipping fees and in some cases fuel costs, intended to mitigate the impact of inflation on our operating results. We have also implemented a number of operating efficiency programs that seek to improve productivity and reduce our service costs, and a fuel surcharge, which is designed to recover escalating fuel price fluctuations above an annually reset floor. Based on these implementations, we believe we should be able to sufficiently offset most cost increases resulting from inflation. However, competitive factors may require us to absorb at least a portion of these cost increases. Additionally, management's estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities. Regional Economic Conditions Our business is primarily located in the northeasternUnited States . Therefore, our business, financial condition and results of operations are susceptible to downturns in the general economy in this geographic region and other factors affecting the region, such as state regulations and severe weather conditions. We are unable to forecast or determine the timing and/or the future impact of a sustained economic slowdown. Critical Accounting Estimates and Assumptions Our consolidated financial statements have been prepared in accordance with GAAP and necessarily include certain estimates and judgments made by management. On an on-going basis, management evaluates its estimates and judgments which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their 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. The following is a list of accounting policies that we believe are the most critical in understanding our consolidated financial position, results of operations and cash flows and that may require management to make subjective or complex judgments about matters that are inherently uncertain. Our significant accounting policies are more fully discussed in Note 3, Summary of Significant Accounting Policies of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Landfill Accounting Landfill Development Costs We estimate the total cost to develop each of our landfill sites to its remaining permitted and expansion capacity (see landfill development costs discussed within the "Property, Plant and Equipment" accounting policy more fully discussed in Note 3, Summary of Significant Accounting Policies of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). The projection of these landfill costs is dependent, in part, on future events. The remaining amortizable basis of each landfill includes costs to develop a site to its remaining permitted and expansion capacity and includes amounts previously expended and capitalized, net of accumulated airspace amortization, and projections of future purchase and development costs including capitalized interest. The interest capitalization rate is based on our weighted average interest rate incurred on borrowings outstanding during the period. Under life-cycle accounting, all costs related to acquisition and construction of landfill sites are capitalized and charged to expense based on tonnage placed into each site. Landfill permitting, acquisition and preparation costs are amortized on the units-of-consumption method as landfill airspace is consumed. In determining the amortization rate for each of our landfills, preparation costs include the total estimated costs to complete construction of the landfills' permitted and expansion capacity. Final Capping, Closure and Post-Closure Costs The cost estimates for final capping, closure and post-closure activities at landfills for which we have responsibility are estimated based on our interpretations of current requirements and proposed or anticipated regulatory changes. We also estimate additional costs based on the amount a third-party would charge us to perform such activities even when we expect to perform these activities internally. We estimate the airspace to be consumed related to each final capping event and the timing of construction related to each final capping event and of closure and post-closure activities. Because landfill final capping, closure and post-closure obligations are measured at estimated fair value using present value techniques, changes in the estimated timing of construction of future landfill final capping and closure and post-closure activities would have an effect on these liabilities, related assets and results of operations. 51
--------------------------------------------------------------------------------
Table of Contents
Final capping activities include the installation of liners, drainage, compacted
soil layers and topsoil over areas of a landfill where total airspace has been
consumed and waste is no longer being received. Final capping activities occur
throughout the life of the landfill. Our engineering personnel estimate the cost
for each final capping event based on the acreage to be capped, along with the
final capping materials and activities required. The estimates also consider
when these costs would actually be paid and factor in inflation and discount
rates. The engineers then quantify the landfill capacity associated with each
final capping event and the costs for each event are amortized over that
capacity as waste is received at the landfill.
Closure and post-closure costs represent future estimated costs related to
monitoring and maintenance of a solid waste landfill after a landfill facility
ceases to accept waste and closes. We estimate, based on input from our
engineers, accountants, lawyers, managers and others, our future cost
requirements for closure and post-closure monitoring and maintenance based on
our interpretation of the technical standards of the Subtitle D regulations and
the air emissions standards under the Clean Air Act of 1970, as amended, as they
are being applied on a state-by-state basis. Closure and post-closure accruals
for the cost of monitoring and maintenance include site inspection, groundwater
monitoring, leachate management, methane gas control and recovery, and operation
and maintenance costs to be incurred for a period which is generally for a term
of 30 years after final closure of a landfill. In determining estimated future
closure and post-closure costs, we consider costs associated with permitted and
permittable airspace.
See Note 10, Final Capping, Closure and Post-Closure Costs to our consolidated
financial statements included under Item 8 of this Annual Report on Form 10-K
for further disclosure.
Remaining Permitted Airspace
Our engineers, in consultation with third-party engineering consultants and
surveyors, are responsible for determining remaining permitted airspace at our
landfills. The remaining permitted airspace is determined by an annual survey,
which is then used to compare the existing landfill topography to the expected
final landfill topography.
Expansion Airspace
We currently include unpermitted expansion airspace in our estimate of remaining
permitted and expansion airspace in certain circumstances. To be considered
expansion airspace all of the following criteria must be met:
•we control the land on which the expansion is sought;
•all technical siting criteria have been met or a variance has been obtained or
is reasonably expected to be obtained;
•we have not identified any legal or political impediments which we believe will
not be resolved in our favor;
•we are actively working on obtaining any necessary permits and we expect that
all required permits will be received; and
•senior management has approved the project based on a review of the engineering
design and determination that the financial return profile meets our investment
criteria.
For unpermitted airspace to be included in our estimate of remaining permitted
and expansion airspace, the expansion effort must meet all of the criteria
listed above. These criteria are evaluated annually by our engineers,
accountants, lawyers, managers and others to identify potential obstacles to
obtaining the permits. Once the remaining permitted and expansion airspace is
determined in cubic yards, an airspace utilization factor ("AUF") is established
to calculate the remaining permitted and expansion capacity in tons. The AUF is
established using a process that considers the measured density obtained from
annual surveys. When we include the expansion airspace in our calculation of
remaining permitted and expansion airspace, we include the projected costs for
development, as well as the projected asset retirement costs related to final
capping, closure and post-closure of the expansion airspace in the amortization
basis of the landfill.
After determining the costs and the remaining permitted and expansion capacity
at each of our landfills, we determine the per ton rates that will be expensed
as waste is received and deposited at each of our landfills by dividing the
costs by the corresponding number of tons. We calculate per ton amortization
rates for assets associated with each final capping event, for assets related to
closure and post-closure activities, and for all other costs capitalized or to
be capitalized in the future for each landfill. These rates per ton are updated
annually, or more frequently, as significant facts change.
52--------------------------------------------------------------------------------
Table of Contents
It is possible that actual results, including the amount of costs incurred, the timing of final capping, closure and post-closure activities, our airspace utilization or the success of our expansion efforts could ultimately turn out to be significantly different from our estimates and assumptions. To the extent that such estimates or related assumptions prove to be significantly different than actual results, lower profitability may be experienced due to higher amortization rates, higher final capping, closure or post-closure rates, or higher expenses. Higher profitability may result if the opposite occurs. Most significantly, if it is determined that the expansion capacity should no longer be considered in calculating the recoverability of the landfill asset, we may be required to recognize an asset impairment. If it is determined that the likelihood of receiving an expansion permit has become remote, the capitalized costs related to the expansion effort are expensed immediately. Environmental Remediation Liabilities We have recorded environmental remediation liabilities representing our estimate of the most likely outcome of the matters for which we have determined that a liability is probable. These liabilities include potentially responsible party investigations, settlements, certain legal and consultant fees, as well as costs directly associated with site investigation and clean up, such as materials and incremental internal costs directly related to the remedy. We provide for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. We estimate costs required to remediate sites where it is probable that a liability has been incurred based on site-specific facts and circumstances. Estimates of the cost for the likely remedy are developed using third-party environmental engineers or other service providers. Where we believe that both the amount of a particular environmental remediation liability and timing of payments are reliably determinable, we inflate the cost in current dollars until the expected time of payment and discount the cost to present value. See Note 12, Commitments and Contingencies to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for further disclosure. Accounts Receivable, Net of Allowance for Doubtful Accounts Accounts receivable represent receivables from customers for collection, transfer, recycling, disposal and other services. Our accounts receivable are recorded when billed or when related revenue is earned, if earlier, and represent claims against third-parties that will be settled in cash. The carrying value of our accounts receivable, net of allowance for doubtful accounts, represents its estimated net realizable value. Estimates are used in determining our allowance for doubtful accounts based on our historical collection experience, current economic conditions and trends, credit policy and a review of our accounts receivable by aging category. Our reserve is evaluated and revised on a monthly basis. Past-due accounts receivable are written off when deemed to be uncollectible.Goodwill and Other Intangibles We annually assess goodwill for impairment at the end of our fiscal year or more frequently if events or circumstances indicate that impairment may exist. We may assess whether a goodwill impairment exists using either a qualitative or a quantitative assessment. If we perform a qualitative assessment, it involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we will not perform a quantitative assessment. If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, we perform a quantitative assessment, or two-step impairment test, to determine whether goodwill impairment exists at the reporting unit. In the first step (defined as "Step 1") of testing for goodwill impairment, we estimate the fair value of each reporting unit, which we have determined to be our geographic operating segments, our Recycling segment and our Customer Solutions business, which is included in the Other segment, and compare the fair value with the carrying value of the net assets of each reporting unit. If the fair value is less than its carrying value, then we would perform a second step (defined as "Step 2") and determine the fair value of the goodwill. In Step 2, the fair value of goodwill is determined by deducting the fair value of a reporting unit's identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated. To determine the fair value of each of our reporting units as a whole we use discounted cash flow analyses, which require significant assumptions and estimates about the future operations of each reporting unit. Significant judgments inherent in this analysis include the determination of appropriate discount rates, the amount and timing of expected future cash flows and growth rates. The cash flows employed in our discounted cash flow analyses are based on financial forecasts developed internally by management. Our discount rate assumptions are based on an assessment of our risk adjusted discount rate, applicable for each reporting unit. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate our results against our current market capitalization 53
--------------------------------------------------------------------------------
Table of Contents
If the fair value of goodwill is less than its carrying value for a reporting unit, an impairment charge would be recorded to earnings. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill becomes its new accounting basis. In addition to an annual goodwill impairment assessment, we would evaluate a reporting unit for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include the following: •a significant adverse change in legal status or in the business climate; •an adverse action or assessment by a regulator; •a more likely than not expectation that a segment or a significant portion thereof will be sold; or •the testing for recoverability of a significant asset group within the segment. We elected to perform a quantitative analysis as part of our annual goodwill impairment test for fiscal year 2019. As ofDecember 31, 2019 , the Step 1 testing for goodwill impairment performed for our Eastern, Western, Recycling and Customer Solutions reporting units indicated that the fair value of each reporting unit exceeded its carrying amount, including goodwill. Furthermore, the Step 1 test indicated that in each case the fair value of our Eastern, Western, Recycling and Customer Solutions reporting units exceeded its carrying value by in excess of 34.4%. We incurred no impairment of goodwill as a result of our annual goodwill impairment tests in fiscal years 2019, 2018 and 2017. However, there can be no assurance that goodwill will not be impaired at any time in the future. EffectiveJanuary 1, 2020 , we adopted Accounting Standards Update 2017-04, Intangibles -Goodwill and Other (Topic 350). Under this guidance Step 2 of the testing for goodwill impairment was eliminated and that going forward we would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, noting that the amount is not to exceed the total amount of goodwill allocated to that reporting unit. Intangible assets consist primarily of covenants not-to-compete and customer lists. Intangible assets are recorded at fair value and are amortized based on the economic benefit provided or using the straight-line method over their estimated useful lives. Covenants not-to-compete and customer lists are typically amortized over a term of no more than 10 years. See Note 9,Goodwill and Intangible Assets to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for further disclosure. Recovery of Long-Lived Assets We continually assess whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of our long-lived assets (other than goodwill) or whether the remaining balances of those assets should be evaluated for possible impairment. Long-lived assets include, for example, capitalized landfill costs, other property and equipment, identifiable intangible assets, and operating lease right-of-use assets. Events or changes in circumstances that may indicate that an asset may be impaired include the following: •a significant decrease in the market price of an asset or asset group; •a significant adverse change in the extent or manner in which an asset or asset group is being used or in its physical condition; •a significant adverse change in legal factors or in the business climate that could affect the value of an asset or asset group, including an adverse action or assessment by a regulator; •an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; •a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; •a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life; or •an impairment of goodwill at a reporting unit. There are certain indicators listed above that require significant judgment and understanding of the waste industry when applied to landfill development or expansion. For example, a regulator may initially deny a landfill expansion permit application although the expansion permit is ultimately granted. In addition, management may periodically divert waste from one landfill to another to conserve remaining permitted landfill airspace. Therefore, certain events could occur in the ordinary course of business and not necessarily be considered indicators of impairment due to the unique nature of the waste industry. 54
--------------------------------------------------------------------------------
Table of Contents
If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. We group our long-lived assets for this purpose at the lowest level for which identifiable cash flows are primarily independent of the cash flows of other assets or asset groups. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value. To determine fair value, we use discounted cash flow analyses and estimates about the future cash flows of the asset or asset group. This analysis includes a determination of an appropriate discount rate, the amount and timing of expected future cash flows and growth rates. The cash flows employed in our discounted cash flow analyses are typically based on financial forecasts developed internally by management. The discount rate used is commensurate with the risks involved. We may also rely on third-party valuations and or information available regarding the market value for similar assets. If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded in the period that the impairment occurs. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized. Investments in Unconsolidated Entities Investments in unconsolidated entities over which we have significant influence over the investees' operating and financing activities are accounted for under the equity method of accounting, as applicable. Investments in affiliates in which we do not have the ability to exert significant influence over the investees' operating and financing activities are accounted for under the cost method of accounting. We monitor and assess the carrying value of our investments throughout the year for potential impairment and write them down to their fair value when other-than-temporary declines exist. Fair value is generally based on (i) other third-party investors' recent transactions in the securities; (ii) other information available regarding the current market for similar assets and/or (iii) a market or income approach, as deemed appropriate. When we assess the carrying value of our investments for potential impairment, determining the fair value of our investments is reliant upon the availability of market information and/or other information provided by third-parties to be able to develop an estimate of fair value. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or other holders of these investments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a significant effect on the estimated fair values. The current estimates of fair value could differ significantly from the amounts presented. Self-Insurance Liabilities and Related Costs We are self-insured for vehicles and workers' compensation with reinsurance coverage limiting our maximum exposure. Our maximum exposure in fiscal year 2019 under the workers' compensation plan was$1.25 million per individual event. Our maximum exposure in fiscal year 2019 under the automobile plan was$1.2 million per individual event. The liability for unpaid claims and associated expenses, including incurred but not reported losses, is determined by management with the assistance of a third-party actuary and reflected in our consolidated balance sheet as an accrued liability. We use a third-party to track and evaluate actual claims experience for consistency with the data used in the annual actuarial valuation. The actuarially determined liability is calculated based on historical data, which considers both the frequency and settlement amount of claims. Our estimated accruals for these liabilities could be significantly different than our ultimate obligations if variables such as the frequency or severity of future events differ significantly from our assumptions. Income Taxes We use estimates to determine our provision for income taxes and related assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Valuation allowances have been established for the possibility that tax benefits may not be realized for certain deferred tax assets. Deferred income taxes are recognized based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using currently enacted tax rates. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we will make an adjustment to the valuation allowance which would reduce the provision for income taxes. We account for income tax uncertainties according to guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. We recognize interest and penalties relating to income tax matters as a component of income tax expense. 55
--------------------------------------------------------------------------------
Table of Contents
As previously discussed, the Act, which is also commonly referred to as "U.S. tax reform," significantly changedUnited States corporate income tax laws by, among other things, reducing the US corporate income tax rate from 35% to 21% starting in 2018. See Note 16, Income Taxes to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for further disclosure, including the effect of the Act on income taxes. Contingent Liabilities We are subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty. We determine whether to disclose or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable, and whether it can be reasonably estimated. We analyze our litigation and regulatory matters based on available information to assess the potential liabilities. Management's assessment is developed based on an analysis of possible outcomes under various strategies. We accrue for loss contingencies when such amounts are probable and reasonably estimable. If a contingent liability is only reasonably possible, we will disclose the potential range of the loss, if estimable. We record losses related to contingencies in cost of operations or general and administration expenses, depending on the nature of the underlying transaction leading to the loss contingency. Contingent liabilities accounted for under purchase accounting are recorded at their fair values. These fair values may be different from the values we would have otherwise recorded, had the contingent liability not been assumed as part of an acquisition of a business. See Note 12, Commitments and Contingencies to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for further disclosure. Stock-Based Compensation All share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense-in general and administration expense over the employee's requisite service period. For purposes of calculating stock-based compensation expense, forfeitures are accounted for as they occur. Our equity awards granted generally consist of stock options, including market-based performance stock options, restricted stock, restricted stock units and performance stock units, including market-based performance stock units. The fair value of each stock option grant is estimated using a Black-Scholes option-pricing model, with the exception of market-based performance stock option grants which are valued using aMonte Carlo option-pricing model. The fair value of restricted stock, restricted stock unit and performance stock unit grants is at a price equal to the fair market value of our Class A common stock at the date of grant. The fair value of market-based performance stock unit grants is valued using aMonte Carlo pricing model. See Note 13, Stockholders' Equity to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for further disclosure. Defined Benefit Pension Plan We currently make contributions to one qualified multiemployer defined benefit pension plan, the Pension Plan. The Pension Plan provides retirement benefits to participants based on their service to contributing employers. We do not administer this plan. The Pension Plan's benefit formula is based on credited years of service and hours worked as defined in the Pension Plan document. Our pension contributions are made in accordance with funding standards established by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code, as amended by the Pension Protection Act of 2006. The Pension Plan's assets have been invested as determined by the Pension Plan's fiduciaries in accordance with the Pension Plan's investment policy. The Pension Plan's asset allocation is based on the Pension Plan's investment policy and is reviewed as deemed necessary. See Note 15, Employee Benefit Plans to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for further disclosure. New Accounting Standards For a description of the new accounting standards that may affect us, see Note 2, Accounting Changes to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
© Edgar Online, source
