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, 2019 ("fiscal year 2019") compared to the fiscal year endedDecember 31, 2018 is included under the heading Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 as filed with theSecurities and Exchange Commission onFebruary 21, 2020 . 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 manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services. We manage our larger-scale recycling and commodity brokerage operations along with our organics services and large scale commercial and industrial services through our single resource-renewal focusedResource Solutions operating segment. We restructured and formed theResource Solutions operating segment as ofJanuary 1, 2020 to be able to leverage our core competencies in materials processing, industrial recycling, clean energy, and organics service offerings in order to generate additional value from the waste stream for larger commercial and industrial customers with more diverse needs. As ofJanuary 31, 2021 , we owned and/or operated 46 solid waste collection operations, 58 transfer stations, 20 recycling facilities, eight Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition ("C&D") materials. 32
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Recent Developments
With the global outbreak of the novel coronavirus ("COVID-19") and the
declaration of a pandemic by the World Health Organization in March 2020 , the
U.S. Government and all of the states in which we operate have declared the
waste services industry as an essential services provider and as a result we are
committed to continue to operate and provide our full breadth of services. We
have prioritized the safety and well-being of our employees by strictly adhering
to recommendations of the Centers for Disease Control and Prevention as well as
executive orders of the states in which we operate.
The COVID-19 pandemic has caused, and will to continue to cause, economic
disruption across our geographic footprint and has adversely affected, and is
expected to continue to adversely affect, our business. The COVID-19 pandemic
negatively impacted our revenues starting at the end of the first quarter of
fiscal year 2020, as many small business and construction collection customers
required service level changes and volumes into our landfills declined due to
lower economic activity. Even with the continued negative impact of the COVID-19
pandemic, we did experience improved demand for services as local economies
started to reopen as allowed by State Governments. This positive trend continued
through December 31, 2020 , as additional small business collection customers
increased service levels, construction activity continued to rebound, and
overall higher economic activity across the northeast led to higher landfill
volumes. Despite these positive trends, our collection and disposal operations
were negatively impacted by lower volumes attributable to the COVID-19 pandemic
in the fiscal year ended December 31, 2020 ("fiscal year 2020"), extending into
the first quarter of the fiscal year ended December 31, 2021 .
The COVID-19 pandemic has negatively impacted and will continue to impact our
business in other ways, as we have experienced and continue to experience
increased costs in response to the COVID-19 pandemic, including, but not limited
to, higher costs associated with providing a safe working environment for our
employees (such as increased costs associated with the protection of our
employees, including costs for additional safety equipment, hygiene products and
enhanced facility cleaning), potential employee layoffs or furloughs, employee
impacts from illness, supporting a remote administration workforce, community
response measures, the inability of customers to continue to pay for services,
and temporary closures of our facilities or the facilities of our customers. In
early September 2020 , we also paid a special bonus to all our hourly employees
(both frontline and administrative) to recognize their hard work and commitment
to safety, environmental compliance and high customer service standards as
essential service providers during the COVID-19 pandemic. We have taken measures
to reduce costs in other areas and preserve liquidity during this period of
uncertainty. As of the date of this filing, we are unable to determine or
predict the nature, duration or scope of the overall impact that the COVID-19
pandemic will have on our business, results of operations, liquidity and capital
resources. For further information regarding the impact of the COVID-19 pandemic
on us, see Item 1A, "Risk Factors" included in this Annual Report on Form 10-K.
Acquisitions and Divestitures
Acquisitions
We have a business development team that identifies acquisition candidates,
categorizes the opportunity by strategic fit and perceived level of financial
accretion, establishes contact with the appropriate representative of the
acquisition candidate and gathers further information on the acquisition
candidate.
We have made in the past, and we may make in the future, acquisitions to densify
existing operations, expand service areas, and grow services for our customers.
These acquisitions may include "tuck-in" acquisitions within our existing
markets, assets that are adjacent to or outside of our existing markets, or
larger, more strategic acquisitions. In addition, from time to time, we may
acquire businesses that are complementary to our core business strategy. We face
competition for acquisition targets, particularly the larger and more meaningful
targets, but we believe that our strong relationships and reputation in New
England and New York help to offset this factor.
In fiscal year 2020, we acquired ten businesses: seven tuck-in solid waste
collection businesses and a solid waste collection business in our Western
region, a transportation business in our Eastern region, and one recycling
operation in our Resource Solutions operating segment for total consideration of
$33.5 million , including $29.0 million in cash and $4.5 million in holdbacks to
sellers.
In fiscal year 2019, we acquired nine businesses: three tuck-in solid waste
collection businesses in our Eastern region and four tuck-in solid waste
collection businesses, a business comprised of solid waste collection, transfer
and recycling operations, and a business comprised of solid waste hauling and
transfer assets in our Western region for total consideration of $82.2 million ,
including $72.1 million in cash, $5.5 million in non-cash consideration, $2.7
million notes payable and $1.9 million in holdbacks to sellers.
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Divestitures
From time to time, we may sell or divest certain investments or other components of our business. These divestitures may be undertaken for a number of reasons, including: to generate proceeds to pay down debt; as a result of a determination that the specified asset will provide inadequate returns to us or that the asset no longer serves a strategic purpose in connection with our business; or as a result of a determination that the asset may be more valuable to a third-party. We will continue to look to divest certain activities and investments that no longer enhance or complement our core business if the right opportunity presents itself. Results of Operations Revenues We manage our solid waste operations, which include a full range of solid waste services, on a geographic basis through two regional operating segments, which we designate as the Eastern and Western regions. Revenues in our Eastern and Western regions consist primarily of fees charged to customers for solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services. We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual households. Landfill and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations. We also generate and sell electricity at certain of our landfill facilities. We classify our resource-renewal services by service in ourResource Solutions operating segment. Revenues associated with our resource-renewal operations are derived from organics services, large scale commercial and industrial services, as well as recycling services generated from both municipalities and customers in the form of processing fees, tipping fees and commodity sales. The table below shows revenue attributable to services provided (in millions) for the following periods: Fiscal Year Ended December 31, $ 2020 2019 Change Collection $ 391.4$ 372.0 $ 19.4 Disposal 175.5 181.9 (6.4) Power 4.1 3.6 0.5 Processing 7.3 7.2 0.1 Solid waste 578.3 564.7 13.6 Organics 59.4 56.3 3.1 Customer solutions 86.7 79.5 7.2 Recycling 50.2 42.8 7.4 Resource Solutions 196.3 178.6 17.7 Total revenues $ 774.6$ 743.3 $ 31.3 Solid waste revenues A summary of the period-to-period change in solid waste revenues (dollars in millions and as percentage growth of solid waste revenues) follows:
Period-to-Period Change For
Fiscal Year 2020 vs Fiscal Year 2019
Amount % Growth
Price $ 25.1 4.5 %
Volume (1) (40.5) (7.2) %
Surcharges and other fees (0.7) (0.1) %
Commodity price and volume 0.1 - %
Acquisitions 31.0 5.5 %
Solid waste revenues $ 15.0 2.7 %
(1)Adjusted for
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Price.
The price change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following: •$15.6 million from favorable collection pricing; and •$9.5 million from favorable disposal pricing associated with our landfills and transfer stations. Volume. The volume change component in fiscal year 2020 solid waste revenues growth from the prior year is a result of the following: •$(21.8) million from lower collection volumes mainly due to the negative impacts of the COVID-19 pandemic; •$(18.4) million from lower disposal volumes (of which$(14.0) million relates to lower landfill volumes mainly due to the negative impacts of the COVID-19 pandemic,$(1.2) million relates to lower transfer station volumes mainly due to the negative impacts of the COVID-19 pandemic and$(3.3) million relates to lower transportation volumes associated primarily with one of our larger customers); and •$(0.3) million from lower processing volumes. Surcharges and other fees. The surcharges and other fees change component in fiscal year 2020 solid waste revenues growth from the prior year is associated with the energy component of the energy and environmental fee and the sustainability recycling adjustment fee, inclusive of the effect of acquisition activity. The energy component of the fee floats on a monthly basis based on diesel fuel prices. The sustainability recycling adjustment fee floats on a monthly basis based on recycled commodity prices. Acquisitions. The acquisitions change component in fiscal year 2020 solid waste revenues growth is a result of increased acquisition activity, including the following: •the acquisition of ten businesses in fiscal year 2020: seven tuck-in solid waste collection businesses and a solid waste collection business in our Western region, a transportation business in our Eastern region, and one recycling operation in ourResource Solutions operating segment; and •the acquisition of nine businesses in fiscal year 2019: seven tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations, and a business comprised of solid waste hauling and transfer assets.Resource Solutions revenues Organics revenues. Fiscal year 2020 organics revenues increased$3.1 million from the prior year as a result of higher volumes mainly associated with two large transportation and disposal contracts. Customer solutions revenues. Fiscal year 2020 revenues increased$5.8 million from the prior year as a result of higher volumes mainly due to multi-site retail and industrial services organic growth. The increase was adjusted for$1.4 million of inter-company movements between solid waste collection volume and customer solutions associated with the acquisition of a business. Recycling revenues. Fiscal year 2020 recycling revenues increased$7.4 million from the prior year as a result of the following: •$3.5 million from favorable commodity pricing in the marketplace with higher cardboard and paper pricing; •$1.8 million from higher recycling processing fees; •$1.1 million from the acquisition of a recycling operation; and •$1.0 million from higher commodity volumes. 35
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Operating Expenses
A summary of our cost of operations, general and administration expenses and
depreciation and amortization expenses is as follows (dollars in millions and as
a percentage of total revenues):
Fiscal Years Ended December 31,
2020 2019
Cost of operations $ 515.6 66.6 % $ 508.7 68.4 %
General and administration $ 102.4 13.2 % $ 92.8 12.5 %
Depreciation and amortization $ 90.8 11.7 % $ 79.8 10.7 %
Cost of Operations
Cost of operations includes labor costs, tipping fees paid to third-party
disposal facilities, fuel costs, maintenance and repair costs of vehicles and
equipment, workers' compensation and vehicle insurance costs, the cost of
purchasing materials to be recycled, third-party transportation costs, district
and state taxes, host community fees and royalties. Cost of operations also
includes accretion expense related to final capping, closure and post-closure
obligations, leachate treatment and disposal costs and depletion of landfill
operating lease obligations.
An explanation of the period-to-period change in cost of operations is as
follows:
Maintenance and repair costs in fiscal year 2020 increased $8.2 million from the
prior year while increasing approximately 50 basis points as a percentage of
revenues, due primarily to higher facility maintenance costs, and, to a lesser
extent, higher container maintenance and repair costs; partially offset by lower
overall fleet maintenance costs associated with less wear and tear based on
activity levels and lower volumes as a result of the COVID-19 pandemic, which
outweighed increased fleet maintenance costs associated with acquisition
activity.
Labor and related benefit costs in fiscal year 2020 increased $3.3 million from
the prior year but decreased approximately 10 basis points as a percentage of
revenues, due primarily to acquisition activity in the Western region and a
special $1.8 million discretionary bonus for our front-line employees associated
with operational execution during the COVID-19 pandemic, partially offset by
lower benefit costs, and lower labor costs due to decreased overtime.
Third-party direct costs in fiscal year 2020 decreased $(0.7) million from the
prior year while decreasing approximately 120 basis points as a percentage of
revenues due to the following:
•lower hauling and third-party transportation costs associated with lower
volumes mainly due to the negative impacts of the COVID-19 pandemic; partially
offset by higher hauling and third-party transportation costs associated with
(i) higher collection volumes related to acquisition activity in the Western
region; (ii) higher brokerage volumes in our customer solutions line-of-business
with high pass through direct costs; (iii) higher recycling volumes related to
organic growth and acquisition activity; and (iv) higher transportation rates;
and
•lower disposal costs associated with lower commercial collection, construction
and demolition, and landfill volumes, mainly due to the negative economic
impacts of the COVID-19 pandemic, combined with lower organic collection and
landfill volumes due to our focus on pricing; partially offset by higher
third-party disposal costs associated with (i) increased disposal pricing in the
northeastern United States ; (ii) additional volumes related to acquisition
activity in the Western region; and (iii) additional volumes within our Resource
Solutions operating segment due to multi-site retail and industrial services
organic growth in our customer solutions line-of-business and organic growth in
our organics line-of-business.
Fuel costs in fiscal year 2020 decreased $(1.5) million from the prior year
while decreasing approximately 30 basis points as a percentage of revenues, due
primarily to lower fuel prices, less traffic due to the COVID-19 pandemic, and
improved fleet efficiency, partially offset by higher volumes associated with
acquisition activity.
Direct operational costs in fiscal year 2020 decreased $(2.4) million from the
prior year while decreasing approximately 70 basis points as a percentage of
revenues, due to lower landfill operating costs, lower equipment operating lease
expense, lower short term equipment rental costs, and lower host community fees
on lower landfill volumes in our Western region; partially offset by higher
operating costs related to business growth.
General and Administration
General and administration expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with marketing, sales force and community relations efforts.
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The period-to-period change in general and administration expense can be primarily attributed to: higher labor costs of$8.2 million associated with acquisition activity, higher accrued incentive compensation, a special discretionary bonus for our hourly back-office employees associated with their execution during the COVID-19 pandemic, and severance costs; and higher bad debt expense based on challenges faced by our customers as a result of the economic downturn associated with the COVID-19 pandemic. Depreciation and Amortization Depreciation and amortization expense includes: (i) depreciation of property and equipment (including assets recorded for finance leases) on a straight-line basis over the estimated useful lives of the assets; (ii) amortization of landfill costs (including those costs incurred and all estimated future costs for landfill development and construction, along with asset retirement costs arising from closure and post-closure obligations) on a units-of-consumption method as landfill airspace is consumed over the total estimated remaining capacity of a site, which includes both permitted capacity and unpermitted expansion capacity that meets certain criteria for amortization purposes, and amortization of landfill asset retirement costs arising from final capping obligations on a units-of-consumption method as airspace is consumed over the estimated capacity associated with each final capping event; and (iii) amortization of intangible assets with a definite life, using either an economic benefit provided approach or on a straight-line basis over the definitive terms of the related agreements. A summary of the components of depreciation and amortization expense (dollars in millions and as a percentage of total revenues) follows: Fiscal Year Ended December 31, 2020 2019 Depreciation expense $ 54.4 7.0 %$ 45.1 6.1 % Landfill amortization expense 27.5 3.6 % 27.5 3.7 % Other amortization expense 8.9 1.1 % 7.2 0.9 % $ 90.8 11.7 %$ 79.8 10.7 % The period-to-period change in depreciation and amortization expense can be primarily attributed to increased investment in our fleet, acquisition activity and higher landfill amortization expense associated with changes in cost estimates and other assumptions, partially offset by lower landfill volumes mainly associated with the negative impacts of the COVID-19 pandemic. Multiemployer Pension Plan We make contributions to a multiemployer defined benefit pension plan, theNew England Teamsters andTrucking Industry Pension Fund (the "Pension Plan"), under the terms of a collective bargaining agreement ("CBA") that covers certain of our union represented employees. The EIN or Pension Plan Number for the Pension Plan is 04-6372430. The Pension Plan provides retirement benefits to participants based on their service to contributing employers. We do not administer the Pension Plan. The risks of participating in a multiemployer pension plan are different from a single-employer pension plan in that: (i) assets contributed to the multiemployer pension plan by one employer may be used to provide benefits to employees or former employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be required to be assumed by the remaining participating employers; and (iii) if we choose to stop participating in our multiemployer Pension Plan, we may be required to pay the plan a withdrawal amount based on the underfunded status of the plan. 37
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In fiscal year 2019, we reached an agreement to withdraw from the Pension Plan
by entering into Withdrawal and Re-entry Agreements with the Pension Plan
("Agreements"). In accordance with FASB ASC 450 - Contingencies, because of our
withdrawal from the Pension Plan, we recorded an obligation of $3.2 million and
a charge of $3.6 million as pension withdrawal expense, offset by a $0.4 million
retroactive contribution credit recorded as cost of operations, in fiscal year
2019. While the withdrawal generates a fixed yearly contingent liability for us
for a period of approximately seventeen (17) years, it caps our gross payments
at $4.2 million significantly reducing our cash exposure from the potential
$18.5 million withdrawal liability as determined based on a complete withdrawal
prior to withdrawing from the Pension Plan. As per the Re-entry Agreements and
upon withdrawal, we re-entered the Pension Plan as a new employer with certainty
from a liability perspective. As of December 31, 2020 , we had a remaining
obligation of $1.8 million associated with our withdrawal. We did not, however,
change the terms of our CBA with Local 170, which remained in effect until it
expired on June 30, 2020 , at which time a new agreement was entered into. As a
new employer in the Pension Plan, our contributions are projected to fully fund
the benefits accrued by our employee's in the Pension Plan. As of December 31,
2020 , our employees were fully funded as a new employer in the Pension Plan,
subject to the terms of the Agreements. Subsequent withdrawal from the Pension
Plan, under certain circumstances, may result in a change in the payment
schedule required to settle the remaining obligation associated with our
withdrawal. During fiscal years 2020 and 2019, we made contributions to the
Pension Plan of $0.4 million and $0.4 million , respectively.
Southbridge Landfill Closure Charge
In the fiscal year ended December 31, 2017 ("fiscal year 2017"), we initiated
the plan to cease operations of the Town of Southbridge, Massachusetts landfill
("Southbridge Landfill ") and later closed it in November 2018 when Southbridge
Landfill reached its final capacity. Accordingly, in fiscal years 2020 and 2019,
respectively, we recorded charges associated with the closure of our Southbridge
Landfill as follows:
Fiscal Year Ended
December 31,
2020 2019
Legal and transaction costs (1) $ 2.3 $ 2.7
Legal settlement charge (2) 2.0 -
Landfill closure project charge (3) 0.5 -
Environmental remediation charge (4) (0.2) -
Southbridge Landfill closure charge $ 4.6 $ 2.7
(1)We incurred legal costs as well as other transaction costs associated with
various matters as part of the Southbridge Landfill closure.
(2)We established reserves associated with legal settlements associated with
claims against us as part of the Southbridge Landfill closure.
(3)We recorded a landfill closure project charge associated with increased costs
under the revised closure plan at our Southbridge Landfill .
(4)We recorded an environmental remediation reversal associated with the
completion of environmental remediation at the site.
See Note 13, Commitments and Contingencies to our consolidated financial
statements included under Item 8, "Financial Statements and Supplementary Data"
of this Annual Report on Form 10-K for further disclosure.
Expense from Acquisition Activities
In fiscal year 2020, we recorded a charge of $1.9 million comprised primarily of
legal, consulting and other similar costs associated with the acquisition and
integration of acquired businesses or select development projects. In fiscal
year 2019, we recorded a charge of $2.7 million associated primarily with
acquisition activities. See Note 5, Business Combinations to our consolidated
financial statements included under Item 8, "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for disclosure regarding
acquisition activity.
Other expenses
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Interest Expense, net Our interest expense, net decreased$(2.7) million in fiscal year 2020 due primarily to lower average interest rates associated with changes in LIBOR and the remarketing of ourNew York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014 ("New York Bonds 2014R-1") and our Business Finance Authority of the State of New Hampshire Solid Waste Disposal Revenue Bonds Series 2013 ("New Hampshire Bonds"). Benefit for Income Taxes Our benefit for income taxes was$(52.8) million in fiscal year 2020 and$(1.9) million in fiscal year 2019. The benefit for income taxes for fiscal years 2020 and 2019 includes a deferred tax benefit of$(52.3) million and$(1.2) million , respectively. On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In the fourth quarter of fiscal year 2020, we assessed the valuation allowance and considered positive evidence, including significant cumulative consolidated income over the three years endedDecember 31, 2020 , revenue growth and expectations of future profitability, and negative evidence, including the impact of a negative change in the economic climate, significant risks and uncertainties in the business and restrictions on tax loss utilization in certain state jurisdictions. After assessing both the positive evidence and the negative evidence, we determined it was more likely than not that the majority of our deferred tax assets would be realized in the future and released the valuation allowance on the majority of our net operating loss carryforwards and other deferred tax assets as ofDecember 31, 2020 , resulting in a benefit from income taxes of$61.3 million . As ofDecember 31, 2020 , we maintained a valuation allowance of$6.5 million , primarily related to deferred tax assets that would generate capital losses when realized and deferred tax assets related to certain state jurisdictions. During fiscal year 2019, we recognized a($0.3) million deferred tax benefit due to a reduction of the deferred tax liability related to indefinite lived assets. The financial statement value of indefinite lived goodwill was reduced as a result of a settlement of an acquisition contingency that pre-dated the effective date of Accounting Standards Codification 805, which resulted in a reduction of the related deferred tax liability. In addition, during fiscal year 2019, we recognized a$(2.4) million deferred tax benefit due to a reduction of the valuation allowance based on the recognition of additional reversing temporary differences related to the$2.4 million deferred tax liability recorded through goodwill for the acquisition of a company inMay 2019 . The deferred tax liability related to the acquisition was based on the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the related tax bases. A deferred tax benefit of$(2.1) million was recognized in quarter endingJune 30, 2019 based on initial estimates of the acquired temporary differences, and adjusted by$(0.3) million in quarter endingDecember 31, 2019 based on the availability of better estimates of temporary differences upon the filing of prior year returns by the sellers. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted which, among other things, allows the carryback of remaining minimum tax credit carryforwards to tax year 2018. Prior to the CARES Act, the minimum tax credit carryforwards were fully refundable through tax year 2021, if not otherwise used to offset tax liabilities. A current federal income tax benefit of$(1.0) million , offset by a$1.0 million deferred tax provision, was recognized in the quarter endedMarch 31, 2020 for the remaining minimum tax credit being carried back to tax year 2018 by us. In fiscal year 2019, we recognized a$(1.0) million current income tax benefit, offset by a$1.0 million deferred tax provision, for the portion of the minimum tax credit carryforward refundable for 2019 based on law then enacted. OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "TCJ Act") was enacted. The TCJ Act significantly changedU.S. corporate income tax laws by, among other things, changing carryforward rules for net operating losses. Our$92.5 million in federal net operating loss carryforwards generated as of the end of 2017 continue to be carried forward for 20 years and are expected to be available to fully offset taxable income earned in 2021 and future tax years. Federal net operating losses generated after 2017, totaling$46.5 million carried forward to 2021, will be carried forward indefinitely, but generally may only offset up to 80% of taxable income earned in a tax year. Although the CARES Act further modifies the net operating loss rules to permit net operating losses incurred in tax years 2018 through 2020 to be carried back 5 years and to temporarily permit such losses to offset 100% of taxable income in tax year 2020, these modifications have not impacted us. Other income tax changes under the CARES Act have not had a material impact. 39
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Segment Reporting We report selected information about our reportable operating segments in a manner consistent with that used for internal management reporting. We classify our solid waste operations on a geographic basis through regional operating segments, our Western and Eastern regions. Revenues associated with our solid waste operations are derived mainly from solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services in the northeasternUnited States . We classify our resource-renewal services by service in ourResource Solutions operating segment. Revenues associated with our resource-renewal operations are derived from organics services, large scale commercial and industrial services, as well as recycling services generated from both municipalities and customers in the form of processing fees, tipping fees and commodity sales. Legal, tax, information technology, human resources, marketing, certain finance and accounting and other administrative functions are included in our Corporate Entities operating segment. A summary of revenues by operating segment (in millions) follows: Fiscal Year Ended December 31, $ 2020 2019 Change Eastern $ 220.3$ 219.5 $ 0.8 Western 358.0 345.2 12.8 Resource Solutions 196.3 178.6 17.7 Total $ 774.6$ 743.3 $ 31.3 Eastern Region The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
Period-to-Period Change for Fiscal Year 2020 vs
Fiscal Year 2019
Amount % Growth
Price $ 8.5 3.9 %
Volume (8.9) (4.1) %
Surcharges and other fees (0.8) (0.4) %
Commodity price and volume 0.1 0.1 %
Acquisitions 1.9 0.9 %
Solid waste revenues $ 0.8 0.4 %
Price.
The price change component in fiscal year 2020 solid waste revenues growth from
the prior year is a result of the following:
•$6.3 million from favorable collection pricing; and
•$2.2 million from favorable disposal pricing related to transfer stations and
landfills.
Volume.
The volume change component in fiscal year 2020 solid waste revenues growth from
the prior year is a result of the following:
•$(8.2) million from lower collection volumes mainly due to the negative impacts
of the COVID-19 pandemic;
•$(0.5) million from lower disposal volumes (of which $(1.2) million relates to
lower transfer station volumes mainly due to the negative impacts of the
COVID-19 pandemic, partially offset by $0.7 million from higher landfill volumes
in the Eastern region); and
•$(0.2) million from lower processing volumes.
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Surcharges and other fees. The surcharges and other fees change component in in fiscal year 2020 solid waste revenues growth from the prior year is associated with the energy component of the energy and environmental fee and the sustainability recycling adjustment fee, inclusive of the effect of acquisition activity. The energy component of the fee floats on a monthly basis based on diesel fuel prices. The sustainability recycling adjustment fee floats on a monthly basis based on recycled commodity prices. Acquisitions. The acquisitions and divestitures change component in fiscal year 2020 solid waste revenues growth is the result of the acquisition of a transportation business in fiscal year 2020 and the acquisition of three tuck-in solid waste collection businesses in the prior year.Western Region The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
Period-to-Period Change for Fiscal Year
2020 vs Fiscal Year 2019
Amount % Growth
Price $ 16.7 4.8 %
Volume (1) (31.6) (9.1) %
Surcharges and other fees 0.1 - %
Commodity price and volume (0.1) - %
Acquisitions 29.1 8.4 %
Solid waste revenues $ 14.2 4.1 %
(1)Adjusted for $1.4 million of inter-company movements between solid waste
collection volume and the customer solutions line-of-business associated with an
acquisition.
Price.
The price change component in fiscal year 2020 solid waste revenues growth from
the prior year is a result of the following:
•$9.4 million from favorable collection pricing; and
•$7.3 million from favorable disposal pricing related to landfills and transfer
stations.
Volume.
The volume change component in fiscal year 2020 solid waste revenues growth from
the prior year is a result of the following:
•$(18.0) million from lower disposal volumes related to landfills and
transportation mainly due to the negative impacts of the COVID-19 pandemic; and
•$(13.6) million from lower collection volumes mainly due to the negative
impacts of the COVID-19 pandemic.
Acquisitions and divestitures.
The acquisitions and divestitures change component in fiscal year 2020 solid
waste revenues growth from the prior year is the result of the acquisition of
seven tuck-in solid waste collection businesses and a solid waste collection
business in fiscal year 2020 and the acquisition of four tuck-in solid waste
collection businesses, a business comprised of solid waste collection, transfer
and recycling operations and a business comprised of solid waste hauling and
transfer assets in the prior year.
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Operating Income (Loss)
A summary of operating income (loss) by operating segments (in millions)
follows:
December 31, $
2020 2019 Change
Eastern $ 11.6 $ 9.5 $ 2.1
Western 42.7 42.0 0.7
Resource Solutions 7.4 5.8 1.6
Corporate Entities (2.4) (4.2) 1.8
Total $ 59.3 $ 53.1 $ 6.2
Eastern Region
Eastern region operating income increased $2.1 million in fiscal year 2020 from
the prior year. Excluding the impact of the Southbridge Landfill closure charge,
the multiemployer pension plan withdrawal costs, and the expense from
acquisition activities, our operating performance in fiscal year 2020 improved
as a result of revenue growth and the cost impacts discussed below.
Cost of operations: Cost of operations decreased $(2.9) million in fiscal year
2020 from the prior year as a result of the following:
•lower disposal costs associated with lower volumes mainly due to the negative
impacts of the COVID-19 pandemic and to a lesser extent our focus on pricing;
•lower hauling and third-party transportation costs associated with lower
collection volumes mainly due to the negative impacts of the COVID-19 pandemic,
which offset additional costs related to acquisition activity and higher
transportation rates;
•lower labor and related benefit costs due to decreased overtime and lower
benefit costs more than offsetting a special discretionary bonus for our
front-line employees associated with operational execution during the COVID-19
pandemic;
•lower fuel costs due primarily to lower fuel prices, less traffic and improved
fleet efficiency;
•lower direct operational costs, excluding the impact of gains associated with
fixed asset sales, due to landfill operations and lower equipment costs; and
•lower fleet maintenance costs due to less wear and tear based on activity
levels and lower volumes as a result of the COVID-19 pandemic; partially offset
by
•higher facility maintenance costs associated with acquisition activity and
related business growth.
General and administration: General and administration expense increased $0.7
million in fiscal year 2020 due to higher accrued incentive compensation,
combined with higher bad debt expense based on challenges faced by our customers
as a result of the economic downturn associated with the COVID-19 pandemic and a
special discretionary bonus for our hourly back-office employees associated with
their execution during the COVID-19 pandemic.
Depreciation and amortization: Depreciation and amortization expense increased
$1.3 million in fiscal year 2020 due to higher depreciation and amortization
expense associated with acquisition activity.
Western Region
Western region operating income increased $0.7 million in fiscal year 2020 from
the prior year. Excluding the impact of expense from acquisition activities, our
operating performance in fiscal year 2020 improved as a result of revenue growth
and the cost impacts discussed below.
Cost of operations: Cost of operations increased $15.7 million in fiscal year
2020 from the prior year as a result of the following:
•higher labor and benefit costs associated with acquisition activity and a
special discretionary bonus for our front-line employees associated with
operational execution during the COVID-19 pandemic, partially offset by lower
labor costs on decreased overtime;
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•higher maintenance and repair costs associated with higher facility maintenance costs, and to a lesser extent, higher fleet maintenance costs associated with acquisition activity and related business growth, which was partially offset by fleet maintenance cost savings associated with less wear and tear based on activity levels and lower volumes as a result of the COVID-19 pandemic; and •higher disposal costs associated with increased disposal pricing in the northeasternUnited States and additional volumes related to acquisition activity, more than offsetting lower commercial collection, construction and demolition, and landfill volumes, mainly due to the negative impacts of the COVID-19 pandemic and our focus on pricing; partially offset by •lower hauling and third-party transportation costs associated with lower collection volumes, partially offset by higher costs related to increased collection volumes associated with acquisition activity and higher transportation rates; •lower direct operational costs associated with lower landfill operating costs, partially offset by higher operating costs related to business growth; and •lower fuel costs associated with lower fuel prices and improved fleet efficiency, partially offset by higher fuel costs related to increased volumes associated with acquisition activity. General and administration: General and administration expense increased$5.9 million in fiscal year 2020 due to higher labor costs associated with acquisition activity, higher bad debt expense based on challenges faced by our customers as a result of the economic downturn associated with the COVID-19 pandemic, higher accrued incentive compensation and a special discretionary bonus for our hourly back-office employees associated with execution during the COVID-19 pandemic. Depreciation and amortization: Depreciation and amortization expense increased$8.8 million in fiscal year 2020 due primarily to acquisition activity and higher landfill amortization expense associated with changes in cost estimates and other assumptions, partially offset by lower landfill volumes mainly associated with the negative impacts of the COVID-19 pandemic.Resource Solutions Operating income increased$1.6 million in fiscal year 2020 from the prior year due to the following: Recycling. Our operating performance in fiscal year 2020 improved primarily due to revenue growth on higher recycling processing fees and higher commodity pricing in the marketplace with higher cardboard and paper pricing, and higher recycling volumes both organically and as a result of acquisition activity, partially offset by higher operating costs, including disposal costs and facility and operational support costs, driven primarily by volume growth. Organics. Our operating performance remained flat in fiscal year 2020 as higher volumes were offset by higher operating and disposal costs. Customer solutions. Our operating performance in fiscal year 2020 declined as revenue growth associated with increased volumes was outpaced by higher cost of operations including an increase in hauling, transportation and disposal costs, higher labor and personnel costs, and higher depreciation expense. Liquidity and Capital Resources Recent Events We continue to monitor the impact that the COVID-19 pandemic has had and will continue to have on our actual and forecasted cash flows, our liquidity, and our capital requirements in order to properly manage our liquidity needs as we move forward. Because of the nature of the services we provide, we expect to continue to generate positive operating cash flows through stable revenue sources. To counter the impact of expected revenue declines, we have initiated steps to reduce discretionary spending and delay certain capital expenditures and can further scale down these expenditures to meet liquidity needs. We have$173.6 million of undrawn capacity from our$200.0 million revolving line of credit facility ("Revolving Credit Facility") and$154.3 million of cash and cash equivalents as ofDecember 31, 2020 to help meet our liquidity needs, and our next significant debt maturity, which is comprised of our Revolving Credit Facility and term loan A facility ("Term Loan Facility", and together with the Revolving Credit Facility, the "Credit Facility"), is inMay 2023 . We believe that we will remain in compliance with all necessary covenants of our Credit Facility over the remaining term of this facility. 43
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A summary of cash and cash equivalents, restricted assets and debt balances, excluding any debt issuance costs, (in millions) follows:
December 31,
2020 2019
Cash and cash equivalents $ 154.3 $ 3.5
Restricted assets:
Restricted investments securities - landfill closure $ 1.8 $ 1.6
Debt:
Current portion $ 9.2 $ 4.3
Non-current portion 539.2 518.4
Total debt $ 548.4 $ 522.7
Summary of Cash Flow Activity
A summary of cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2020 2019
Net cash provided by operating activities
Cash flows from operating activities.
A summary of operating cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2020 2019
Net income $ 91.1 $ 31.7
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 90.8 79.8
Depletion of landfill operating lease obligations 7.8 7.7
Interest accretion on landfill and environmental remediation liabilities
7.1 7.0
Amortization of debt issuance costs and discount on long-term debt
2.2 2.3
Stock-based compensation 8.2 7.2
Operating lease right-of-use assets expense 8.5 9.6
Loss (gain) on sale of property and equipment 0.9 (0.9)
Southbridge Landfill non-cash closure charge 0.3 0.1
Non-cash expense from acquisition activities and other items 0.6 0.1
Withdrawal costs - multiemployer pension plan - 2.2
Deferred income taxes (52.3) (1.2)
165.2 145.6
Changes in assets and liabilities, net (25.3) (28.8)
Net cash provided by operating activities $
139.9
Net cash provided by operating activities increased$23.1 million in fiscal year 2020 as compared to fiscal year 2019. This was the result of improved operational performance combined with the favorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures. For discussion of our improved operational performance in fiscal year 2020 as compared to fiscal year 2019, see Results of Operations included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K. The favorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures, which are affected by both cost changes and the timing of payments, in fiscal year 2020 as compared to fiscal year 2019 was due primarily to the following: 44
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•a$13.8 million favorable impact to operating cash flows associated with the change in accrued expenses and other liabilities due primarily to the timing of environmental remediation payments and final capping, closure and post-closure payments, which increased in fiscal year 2019 and then decreased in fiscal year 2020; and •a$11.3 million favorable impact to operating cash flows associated with the change in accounts receivable; and •a$0.5 million favorable impact to operating cash flows associated with the change in prepaid expenses, inventories and other assets; partially offset by •a$(22.0) million unfavorable impact to operating cash flows associated with the change in accounts payable based on differences in the timing of payments. Cash flows from investing activities. A summary of investing cash flows (in millions) follows: Fiscal Year Ended December 31, 2020 2019 Acquisitions, net of cash acquired$ (32.5) $ (75.4)
Additions to property, plant and equipment (108.0) (103.2)
Proceeds from sale of property and equipment 0.5 0.8 Proceeds from property insurance settlement - 0.3
Net cash used in investing activities
A summary of the most significant items affecting the change in our investing cash flows follows: Acquisitions, net of cash acquired. In fiscal year 2020, we acquired seven tuck-in solid waste collection businesses and a solid waste collection business, a transportation business, and one recycling operation for total consideration of$33.5 million , including$29.0 million in cash, and paid$3.5 million in holdback payments on businesses previously acquired, as compared to fiscal year 2019, during which we acquired seven tuck-in solid waste collection businesses, a business comprised of solid waste collection, transfer and recycling operations and a business comprised of solid waste hauling and transfer assets for total consideration of$82.2 million , including$72.1 million in cash and$3.3 million in holdback payments on businesses previously acquired. Capital expenditures. Capital expenditures were$4.8 million higher in fiscal year 2020 as compared to fiscal year 2019 primarily due to timing differences and the following items: •$5.7 million in additional capital expenditures from phase VI construction and development costs related to long-term infrastructure at the Subtitle D landfill inCoventry, Vermont ("Waste USA Landfill ") to facilitate future landfill airspace construction which will significantly enhance the economic useful life of theWaste USA Landfill once construction is finished; partially offset by •$(1.8) million from lower capital expenditures associated with the integration of newly acquired operations, which includes planned capital expenditures following an acquisition, as well as non-routine development investments that are expected to provide long-term returns. Proceeds from property insurance settlement. Recovery of insurance proceeds was$(0.3) million lower in fiscal year 2020 as compared to fiscal year 2019 due to increased recoveries in prior year pertaining to property damage related to a fire at a transfer station in our Western region. 45
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Cash flows from financing activities.
A summary of financing cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2020 2019
Proceeds from debt borrowings $ 157.0 $ 197.8
Principal payments on debt (149.4) (243.4)
Payments of debt issuance costs (1.5) (0.7)
Proceeds from the exercise of share-based awards 0.1
3.4
Proceeds from the public offering of Class A Common Stock 144.8
100.4
Proceeds from unregistered sale of Class A Common Stock -
2.6
Net cash provided by financing activities$ 151.0
A summary of the most significant items affecting the change in our financing cash flows follows: Debt activity. Net cash provided by debt activity increased$53.2 million year-over-year. The increase in financing cash flows related to debt activity is primarily associated with the timing of the pay down of our Revolving Credit Facility and an increase in new finance lease obligations. Payments of debt issuance costs. We made$1.5 million of debt issuance cost payments in fiscal year 2020 related to the issuance of$40.0 million aggregate principal amount ofNew York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2020 ("New York Bonds 2020") as compared to$0.7 million of debt issuance cost payments in fiscal year 2019 related to the remarketing of$11.0 million aggregate principal amount of New Hampshire Bonds and$25.0 million aggregate principal amount of New York Bonds 2014R-1. Proceeds from the exercise of share-based awards. We received$0.1 million of cash receipts associated with the exercise of stock options in fiscal year 2020 as compared to$3.4 million in the prior year. Proceeds from the public offering of Class A Common Stock. In fiscal year 2020, we completed a public offering of 2.7 million shares of our Class A common stock at a public offering price of$56.00 per share. The offering resulted in net proceeds to us of$144.8 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, and for working capital and capital expenditures. 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 used for general corporate purposes, including acquisitions, 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 13, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional disclosure. Outstanding Long-Term Debt Credit Facility As ofDecember 31, 2020 , under our credit agreement ("Credit Agreement"), we had outstanding$350.0 million aggregate principal amount of borrowings under our Term Loan Facility and no borrowings under our$200.0 million Revolving Credit Facility. We have the right to request, at our discretion, an increase in the amount of loans under the Credit Facility by an aggregate amount of$125.0 million , subject to the terms and conditions set forth in the Credit Agreement. 46
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The Credit Facility has a 5-year term that matures inMay 2023 and bears interest at a rate of LIBOR plus 1.75% per annum, which will be reduced to a rate of LIBOR plus as low as 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, 2020 , further advances were available under the Credit Facility in the amount of$173.6 million . The available amount is net of outstanding irrevocable letters of credit totaling$26.4 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, 2020 , 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, 2020 December 31, 2020 Maximum consolidated net leverage ratio (1) 2.76 4.00 Minimum interest coverage ratio 8.71 3.00 (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 and up to$50.0 million (calculated at$498.4 million as ofDecember 31, 2020 , or$548.4 million of consolidated funded debt less$50.0 million of cash and cash equivalents in excess of$2.0 million and up to$50.0 million as ofDecember 31, 2020 ), divided by consolidated EBITDA. Consolidated EBITDA is based on operating results for the twelve months preceding the measurement date ofDecember 31, 2020 . Consolidated funded debt, net of unencumbered cash and cash equivalents in excess of$2.0 million and up to$50.0 million , and consolidated EBITDA as defined by the Credit Agreement ("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 net cash provided by operating activities to Consolidated EBITDA is as follows (in millions): Twelve Months Ended December 31, 2020 Net cash provided by operating activities $ 139.9
Changes in assets and liabilities, net of effects of acquisitions and divestitures
25.3
Loss on sale of property and equipment (0.9)
Non-cash expense from acquisition activities and other items (0.6)
Stock based compensation (8.2)
Operating lease right-of-use assets expense (8.5)
Southbridge Landfill non-cash closure charge (0.3)
Interest expense, less amortization of debt issuance costs 20.2
Benefit for income taxes, net of deferred income taxes (0.5)
Adjustments as allowed by the Credit Agreement 14.1
Consolidated EBITDA $ 180.5
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, 2020 , 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.
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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 2020, we completed the issuance of$40.0 million aggregate principal amount of New York Bonds 2020. The New York Bonds 2020, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 2.75% per annum fromSeptember 2, 2020 throughSeptember 1, 2025 , at which time they may be converted to a variable interest rate period or to a new term interest rate period. The New York Bonds 2020 mature onSeptember 1, 2050 . As ofDecember 31, 2020 , we had outstanding$40.0 million aggregate principal amount of New York Bonds 2020. In fiscal year 2019, we completed the remarketing of$25.0 million aggregate principal amount of New York Bonds 2014R-1. As ofDecember 31, 2020 , we had outstanding$25.0 million aggregate principal amount of New York Bonds 2014R-1 and$15.0 million aggregate principal amount ofNew York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014R-2 ("New York Bonds 2014R-2") issued by theNew York State Environmental Facilities Corporation under the indenture datedDecember 1, 2014 (collectively, the "New York Bonds 2014"). The New York Bonds 2014R-1 accrue interest at 2.875% per annum throughDecember 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 throughMay 31, 2026 , at which time they may be converted from a fixed rate to a variable rate. The New York Bonds 2014, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, require interest payments onJune 1 andDecember 1 of each year and mature onDecember 1, 2044 . We borrowed the proceeds of the New York Bonds 2014 to finance or refinance certain capital projects in the state ofNew York and to pay certain costs of issuance of the New York Bonds 2014. Maine Bonds. As ofDecember 31, 2020 , 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 ofFinance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015R-2 ("FAME Bonds 2015R-2"). 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 2005R-3, 2015R-1 and 2015R-2 (collectively, 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 . As ofDecember 31, 2020 , we had outstanding$16.0 million aggregate principal amount of Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013 ("Vermont 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, 2020 , we had outstanding$11.0 million aggregate principal amount of New Hampshire Bonds. The New Hampshire Bonds, which are guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 2.95% per annum through maturity onApril 1, 2029 . During the fixed interest rate period, the New Hampshire Bonds are not supported by a letter of credit. Interest is payable onApril 1 andOctober 1 of each year. We borrowed the proceeds of the New Hampshire Bonds to finance or refinance certain qualifying property, plant and equipment assets purchased in the state ofNew Hampshire . 48
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Contractual Obligations The following table summarizes our significant contractual obligations and commitments as ofDecember 31, 2020 (in thousands) and the anticipated effect of these obligations on our liquidity in future years: Less than More than 5 one year 1 - 3 years 3 - 5 years years Total Debt$ 9,240 $ 360,143 $ 36,066 $ 142,970 $ 548,419 Interest obligations (1) 14,575 27,999 13,932 68,440 124,946 Non-cancellable operating leases 6,097 6,109 1,740 4,698 18,644 Landfill operating lease contracts 5,605 10,990 12,410 42,872 71,877 Pension plan contributions 147 294 294 1,583 2,318 Environmental remediations 377 654 665 4,667 6,363 Final capping, closure and post-closure 8,840 12,286 13,089 180,919 215,134 Total contractual cash obligations (2)$ 44,881 $ 418,475 $ 78,196 $ 446,149 $ 987,701 (1)Based on debt balances as ofDecember 31, 2020 . Interest obligations related to variable rate debt were calculated using variable rates in effect atDecember 31, 2020 . (2)Contractual cash obligations do not include accounts payable or accrued liabilities, which will be paid in the fiscal year endingDecember 31, 2021 . We have no contractual obligations related to unrecognized tax benefits atDecember 31, 2020 . For further description over contractual obligations, see Note 9, Leases, Note 11, Final Capping, Closure and Post-Closure Costs, Note 13, Commitments and Contingencies and Note 17, Income Taxes, to our consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 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, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 49
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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,
"Financial Statements and Supplementary Data" 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.
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 11, Final Capping, Closure and Post-Closure Costs
to our consolidated financial statements included under Item 8, "Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K for
further disclosure.
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.
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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.
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 13, Commitments and Contingencies
to our consolidated financial statements included under Item 8, "Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K for
further disclosure.
Accounts Receivable, Net of Allowance for Credit Losses
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 credit losses
represents its estimated net realizable value. Estimates are used in determining
our allowance for credit losses based on, among other things, our historical
loss trends, the age of outstanding accounts receivable, and current and
expected economic conditions. Additions - charged to expense in fiscal year 2020
consider the current economic conditions associated with the COVID-19 pandemic
and the potential impact to our customers' ability to pay for services that we
have provided. Our reserve is evaluated and revised on a monthly basis. Past due
accounts receivable are written off when deemed to be uncollectible. See Note 6,
Accounts Receivable, Net of Allowance for Credit Losses to our consolidated
financial statements under Item 8, "Financial Statements and Supplementary Data"
of this Annual Report on Form 10-K for further disclosure.
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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 to determine whether goodwill impairment exists at the reporting unit. 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 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. In testing for goodwill impairment, we estimate the fair value of each reporting unit, which we have determined to be our geographic operating segments and our recycling, and customer solutions lines-of-business, which are included in ourResource Solutions operating 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 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. 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. 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 an operating segment or a significant portion thereof will be sold; or •the testing for recoverability of a significant asset group within the operating segment. We elected to perform a quantitative analysis as part of our annual goodwill impairment test for fiscal year 2020. As ofOctober 1, 2020 , 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, in each case the fair value of our Eastern, Western, recycling, and customer solutions reporting units exceeded its carrying value by in excess of 77.2%. We incurred no impairment of goodwill as a result of our annual goodwill impairment tests in fiscal years 2020, 2019 or 2018. However, there can be no assurance that goodwill will not be impaired at any time in the future. 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 10,Goodwill and Intangible Assets to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure. 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: 52
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•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.
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.
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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 2020 under the workers' compensation plan was$1.25 million per individual event. Our maximum exposure in fiscal year 2020 under the automobile plan was$3.65 million per individual event. 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 actuarial-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. In the fourth quarter of 2020, we determined it was more likely than not that our deferred tax assets would be realized in the future and released the valuation allowance on the majority of our net operating loss carryforwards and other deferred tax assets as ofDecember 31, 2020 , resulting in a benefit of$61.3 million in income taxes. See Note 17, Income Taxes to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure, including the effect of the valuation allowance release. 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 13, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure. 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. 54
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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 14, Stockholders' Equity to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure. Defined Benefit Pension Plan We make contributions to one qualified multiemployer defined benefit pension plan, theNew England Teamsters andTrucking Industry Pension Fund ("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 16, Employee Benefit Plans to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure. 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, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
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