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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
Commission File Number 000-31050
Waste Industries USA, Inc.
(exact name of Registrant as specified in its charter)
North Carolina 56-0954929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3301 Benson Drive, Suite 601
Raleigh, North Carolina
(Address of principal executive offices)
27609
(Zip Code)
(919) 325-3000
(Registrant's telephone number, including area code)
Waste Holdings, Inc.
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, No Par Value 13,335,583 shares
(Class) (Outstanding at August 12, 2002)
1
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 31, June 30,
2001 2002
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,887 $ 636
Accounts receivable - trade, less allowance for
uncollectible accounts (2001 - $2,096; 2002 - $2,411) 26,307 26,932
Inventories 1,541 1,487
Prepaid insurance 473 1,862
Prepaid expenses and other current assets 4,148 6,852
Deferred income taxes 2,337 2,580
--------- ---------
Total current assets 36,693 40,349
--------- ---------
Property and equipment, net 197,274 195,585
Intangible assets, net 65,972 67,698
Other noncurrent assets 2,682 2,635
--------- ---------
Total assets $ 302,621 $ 306,267
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 7,498 $ 7,379
Current maturities of capital lease obligations 931 950
Accounts payable - trade 10,512 9,313
Acquisition related obligations 1,629 2,241
Accrued interest payable 1,457 2,023
Accrued wages and benefits payable 3,647 4,281
Income taxes payable, net 84 43
Accrued expenses and other liabilities 3,568 5,666
Deferred revenue 1,800 2,231
--------- ---------
Total current liabilities 31,126 34,127
--------- ---------
Long-term debt, net of current maturities 162,840 158,264
Long-term capital lease obligations net of current maturities 397 -
Deferred income taxes 17,068 17,093
Closure/postclosure liabilities 3,762 4,190
Interest rate swap (Note 5) - 860
Commitments and contingencies (Note 6) - -
Shareholders' equity: (Note 4)
Common stock, no par value, shares authorized - 80,000,000 shares issued
and outstanding: 2001 - 13,334,061; 2002 - 13,335,583 38,088 38,099
Paid-in capital 7,245 7,245
Retained earnings 43,661 48,678
Accumulated other comprehensive income, net - (418)
Shareholders' loans and other receivables (1,566) (1,871)
--------- ---------
Total shareholders' equity 87,428 91,733
--------- ---------
Total liabilities and shareholders' equity $ 302,621 $ 306,267
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
PART 1 - FINANCIAL INFORMATION
WASTE INDUSTRIES USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------- ---------- ---------------------
2001 2002 2001 2002
----------- ---------- --------- ---------
Revenues:
Service $ 64,184 $ 63,347 $ 123,866 $ 122,962
Equipment 338 293 703 655
--------- --------- --------- ---------
Total revenues 64,522 63,640 124,569 123,617
--------- --------- --------- ---------
Operating costs and expenses:
Operations 40,965 41,029 78,060 79,104
Equipment 236 197 565 433
Selling, general and administrative 8,723 8,604 17,827 17,096
Depreciation and amortization 7,472 6,953 14,678 13,693
Organizational costs - - 570 -
Loss on sale of business unit 359 - 359 -
--------- --------- --------- ---------
Total operating costs and expenses 57,755 56,783 112,059 110,326
--------- --------- --------- ---------
Operating income: 6,767 6,857 12,510 13,291
--------- --------- --------- ---------
Interest expense (net) 3,511 2,818 7,466 5,560
Other income (19) (206) (94) (171)
--------- --------- --------- ---------
Total other expense, net 3,492 2,612 7,372 5,389
--------- --------- --------- ---------
Income before income taxes 3,275 4,245 5,138 7,902
Income tax expense 1,179 1,549 1,850 2,884
--------- --------- --------- ---------
Net income $ 2,096 $ 2,696 $ 3,288 $ 5,018
========= ========= ========= =========
Earnings per share
Basic and diluted $ 0.16 $ 0.20 $ 0.25 $ 0.38
Weighted-average number of shares outstanding
Basic 13,337 13,335 13,238 13,335
Diluted 13,350 13,354 13,242 13,350
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
PART 1 - FINANCIAL INFORMATION
WASTE INDUSTRIES USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------------
2001 2002
------------- -------------
Operating Activities:
Net income $ 3,288 $ 5,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,678 13,693
Loss/(Gain) on sale of property and equipment 18 (118)
Loss on sale of business unit 359 -
Provision for deferred income taxes (610) 22
Changes in operating assets and liabilities, net of effects
from acquisition and disposition of related businesses (14,010) (1,076)
------------- -------------
Net cash provided by operating activities 3,723 17,539
------------- -------------
Investing Activities:
Acquisitions of related business, net of cash acquired (5,001) (3,349)
Proceeds from sale of related business unit 426 -
Proceeds from sale of property and equipment 1,017 421
Purchases of property and equipment (14,305) (10,495)
------------- -------------
Net cash used in investing activities (17,863) (13,423)
------------- -------------
Financing Activities:
Proceeds from issuance of long term debt 47,742 17
Principal payments of long-term debt (40,298) (4,712)
Principal payments of capital lease obligations (487) (378)
Advances under shareholder loans and receivables, net (767) (305)
Net proceeds from common stock issuance 6 11
Net proceeds from exercised options 1,108 -
------------- -------------
Net cash provided by (used in) financing activities 7,304 (5,367)
------------- -------------
Decrease in cash and cash equivalents (6,836) (1,251)
Cash and cash equivalents, beginning of period 7,401 1,887
------------- -------------
Cash and cash equivalents, end of period $ 565 $ 636
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 7,893 $ 4,282
============= =============
Cash paid for taxes $ 1,519 $ 2,925
============= =============
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
WASTE INDUSTRIES USA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND RECENT DEVELOPMENTS
Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. As applicable under such regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the presentations and
disclosures in the financial statements included herein are adequate to make the
information not misleading. The financial statements reflect normal adjustments
which are necessary for a fair statement of the results for the interim periods
presented. Operating results for interim periods are not necessarily indicative
of the results for full years or the interim periods.
The condensed consolidated financial statements included herein should be read
in conjunction with the consolidated financial statements and the related notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
Recent Developments
Purchase Acquisitions
During the six months ended June 30, 2002, the Company made the
following acquisitions, which were accounted for as purchases.
. On April 1, 2002, the Company acquired commercial routes from
Hudgins Disposal, Inc. for approximately $0.4 million in cash.
This tuck-in acquisition further expands our existing
operations in our Nashville, Tennessee facility.
. On April 16, 2002, the Company acquired Georgia Waste and
Recycling Service, LLC for approximately $2.4 million in cash.
This tuck-in acquisition to our existing Atlanta facility
provides residential curbside and recycling service to the
east and northeast counties of the metro Atlanta area.
. On April 17, 2002, the Company acquired American Disposal,
LLC, located in the Memphis, Tennessee area, for approximately
$0.3 million in cash. This acquisition of hauling services is
a tuck-in to existing operation in the Memphis, Tennessee
market.
. On May 1, 2002, the Company acquired North and South
Sanitation, Inc. for approximately $0.1 million in cash. This
tuck-in acquisition provides rural residential routes to our
existing Raleigh and Wilson, North Carolina operations.
. On June 19, 2002, the Company acquired Pelican Container, Inc.
for approximately $0.1 million. This tuck-in acquisition,
which provides industrial hauling service in the southern
coastal counties of North Carolina, expands our customer base
in our existing Wilmington, North Carolina facility.
Components of cash used for the auquisitions reflected in the unaudited
condensed consolidated statement of cash flows for the six months ended June 30,
2002 are as follows (in thousands):
5
$1,621
Fair value of tangible assets acquired -
Liabilities assumed 1,728
Goodwill -------------
Total consideration paid, including direct costs,
net of cash acquired $3,349
=============
In accordance with the purchase method of accounting, the purchase
price has been allocated to the underlying assets and liabilities based on their
respective fair values at the date of acquisition. These purchase price
allocations are preliminary estimates, based on available information and
certain assumptions management believes are reasonable. Accordingly, these
purchase price allocations are subject to finalization.
The following unaudited pro forma results of operations for the
six-month periods ended June 30, 2001 and 2002 assume the acquisitions described
above occurred as of January 1, 2001 and 2002, after giving effect to
adjustments (in thousands):
2001 2002
--------------- ---------------
Total revenues $126,139 $124,500
Operating income 12,932 13,518
--------------- ---------------
Net income 3,473 5,116
============= =============
Earnings per common share:
Basic $ 0.26 $ 0.38
Diluted $ 0.26 $ 0.38
The pro forma financial information does not purport to be indicative
of the results of operations that would have occurred had the acquisitions taken
place at the beginning of the periods presented or of future operating results.
Property and equipment are stated at cost. Depreciation expense is
calculated on the straight-line method over a period between 5 to 30 years.
Certain 2001 financial statement amounts have been reclassified to
conform with the 2002 presentation.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. As a result, goodwill,
which had been amortized on a straight-line basis over 25 to 40 years, is no
longer amortized but reviewed, at least annually, for impairment. Other
intangible assets will continue to be amortized over their useful lives. The
Company has determined that it operates in one reporting unit based on the
current reporting structure and has assigned goodwill at the enterprise level.
The Company completed its initial assessment of impairment using the provisions
of SFAS No. 142. The Company completed its initial goodwill assessment as of
January 1, 2002 and determined that there was no goodwill impairment.
On an ongoing basis, the Company will perform an annual impairment test. At
least quarterly, the Company will analyze whether an event has occurred that
would more likely than not reduce its enterprise fair value below its carrying
amount and, if necessary, we will perform a goodwill impairment test between
annual dates. Impairment adjustment after adoption, if any, will be recognized
as operating expenses.
Other intangible assets consist primarily of noncompete agreements with a
carrying value of $230,000 and $196,000 at December 31, 2001 and June 30, 2002,
respectively (net of accumulated amortization of $882,000 and $958,000,
respectively). Amortization expense was $43,000 and $37,000 for the three-months
ended June 30, 2001 and 2002, respectively, and $84,000 and $76,000 for the
six-months ended June 30, 2001 and 2002, respectively. The weighted-average
amortization period for all noncompete agreements is 5 years. Estimated
amortization expense for each of the succeeding five years is as follows: 2002 -
$72,000; 2003 - $96,000; 2004 - $15,000; 2005 - $6,000; 2006 - $6,000; and
thereafter - $1,000.
The following pro forma information presents a summary of consolidated results
of operations as if the Company had adopted the provisions of SFAS No. 142 for
the six-months ended June 30, 2001 (in thousands, except per share data):
6
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- ---------------
2001 2001
-------------- ---------------
Net income $1,192 $3,288
Goodwill amortization, net (1) 400 800
-------------- ---------------
Proforma net income $1,592 $4,088
============== ===============
Proforma earnings per share basic and diluted $ 0.09 $ 0.25
Goodwill amortization, net .03 0.06
-------------- ---------------
Earnings per share - basic and diluted $ 0.12 $ 0.31
============== ===============
(1) Adjusted for the effect of income taxes at the Company's
effective tax rate
3. EARNINGS PER SHARE
Basic and diluted earnings per share computations are based on the
weighted-average common stock outstanding and include the dilutive effect of
stock options using the treasury stock method. For the six-month periods ended
June 30, 2001 and 2002, stock options of 389,845 and 376,516, respectively, were
excluded from the computations of diluted earnings per share because the impact
of their inclusion would be anti-dilutive.
4. SHAREHOLDERS' EQUITY
The Company issued 2,228 and 1,522 shares of Company common stock with a fair
value of approximately $5,000 and $6,500 for the six-month periods ended June
30, 2001 and 2002, respectively, that were recorded as director's fees.
During the six-month period ended June 30, 2001, stock options totaling 216,404
were exercised with net proceeds of approximately $1.1 million. No stock options
were exercised for the same period in 2002.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER COMPREHENSIVE INCOME
The Company formally documents its hedge relationships, including identifying
the hedge instruments and hedged items, as well as its risk management
objectives and strategies for entering into the hedge transaction. The Company's
derivative instruments qualify for hedge accounting treatment under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities. In order to qualify for hedge accounting, criteria must be met,
including a requirement that both at inception of the hedge, and on an ongoing
basis, the hedging relationship is expected to be highly effective in offsetting
cash flows attributable to the hedged risk during the term of the hedge. When it
is determined that a derivative ceases to be a highly effective hedge, the
Company discontinues hedge accounting, and any gains or losses on the derivative
instrument are recognized in earnings.
Interest Rate Swap
The Company entered into an interest rate swap with Fleet National Bank
effective January 1, 2002 to modify the interest characteristics of its
outstanding long-term debt and has designated the qualifying instrument as a
cash flow hedge. Under the agreement, the interest rate swap has a notional
value of $50 million with a fixed interest rate of 4.2%. This agreement expires
in November 2004.
The Company measures effectiveness of the interest rate swap by its ability to
offset cash flows associated with changes in the variable LIBOR rate associated
with the Company's Fleet credit facility using the hypothetical derivative
method. To the extent the interest rate swap is considered to be effective,
changes in fair value are recorded, net of tax, in shareholders' equity as a
component of accumulated other comprehensive income. To the extent the
instrument is considered ineffective, any changes in fair value relating to the
ineffective portion are immediately recognized in earnings as interest expense.
The Fleet interest rate swap was 100% effective during the six months ended June
30, 2002.
7
The fair value of the Company's interest rate swap is obtained from a dealer
quote. This value represents the estimated amount the Company would receive or
pay to terminate the interest rate swap agreement taking into consideration the
difference between the contract rate of interest and rates currently quoted for
an agreement of similar term and maturity. At June 30, 2002, the fair value of
the interest rate swap agreement was a liability of approximately $860,000 and
was included in noncurrent liabilities.
Fuel Hedge
The Company's results of operations are impacted by changes in the price of
diesel fuel. Because the market for derivatives in diesel fuel is limited, the
Company uses heating oil option agreements to manage a portion of its exposure
to fluctuations in diesel prices. During February 2002, the Company entered into
an option agreement for approximately 5.5 million gallons of heating oil. This
option agreement settles each month in equal notional amounts through December
2002. The Company paid a fixed price of approximately $188,000 for the option
agreement, which is structured as a cap indexed to the price of heating oil.
Under this option agreement, the Company receives payments based on the
difference between actual average heating oil prices and a predetermined fixed
price. This option agreement provides the Company protection from fuel prices
rising above a predetermined fixed price. In accordance with SFAS No. 133, to
the extent the option agreement is effective in hedging changes in diesel fuel
prices, unrealized gains and losses on these option agreements are recorded, net
of tax, in stockholders' equity as a component of accumulated other
comprehensive income. To the extent the change in the fuel option agreement does
not perfectly offset the change in value of diesel fuel purchases being hedged,
SFAS 133 requires the ineffective portion of the hedge to immediately be
recognized as selling, general and administrative expenses. The Company
periodically evaluates the effectiveness of this option agreement as a hedge
against future purchases of diesel fuel. If the option agreement were to become
other than highly effective, the unrealized accumulated gains and/or losses
would be immediately recognized in income. Realized gains and losses on this
option agreement are recognized as a component of fuel expense in the period in
which the corresponding fuel is purchased.
The fair value of this option agreement at June 30, 2002 was determined by a
third party to be approximately $240,000 and has been included in other prepaid
expenses and other current assets. The ineffective portion of the change in fair
value was a loss of approximately $34,000 and $85,000 for the three and six
months ended June 30, 2002, respectively, and has been included cost of
operations.
The components of comprehensive income, net of related taxes, are as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2002
-------------------- --------------------
Net income 2,697 5,018
Unrealized losses on qualifying cash flow hedges,
net of deferred tax benefit of $432 and $240 (751) (418)
-------------------- --------------------
Comprehensive income $1,946 $4,600
==================== ====================
6. COMMITMENTS AND CONTINGENCIES
Claims and lawsuits arising in the ordinary course of business have been filed
or are pending against the Company. In the opinion of management, all these
matters have been adequately provided for, are adequately covered by insurance,
or are of such kind that if disposed of unfavorably, would not have a material
adverse effect on the Company's financial position or results of operations.
The Company will have material financial obligations relating to disposal site
closure and long-term care obligations of landfill facilities. The Company
provides accruals for future obligations (generally for a term of 30 to 40 years
after final closure of the landfill) based on engineering estimates of
consumption of permitted landfill airspace over the useful life of the landfill.
The Company's ultimate financial obligations for actual closing or post-closing
costs might exceed the amount accrued and reserved or amounts otherwise
receivable pursuant to insurance policies or trust funds. Such a circumstance
8
could have a material adverse effect on the Company's financial condition and
results of operations.
7. NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board, or FASB issued SFAS
No. 143, Accounting For Asset Retirement Obligations. This statement requires
recording the fair value of a liability for an asset retirement obligation in
the period in which it is incurred and a corresponding increase in the carrying
value of the related long-lived asset. Over time, the liability is accreted to
its present value each period and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, it is either
settled for its recorded amount or a gain or loss upon settlement is recorded.
This statement is effective for fiscal years beginning after June 15, 2002. The
Company is currently evaluating the effect, if any, SFAS No. 143 will have on
the Company's results of operations or financial position
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30 for the disposal of a segment of a business.
This statement retains many requirements of SFAS No. 121, but establishes
approaches to deal with fair value issues for long-lived assets.
SFAS No. 144 also retains the basic provisions of APB Opinion No. 30, but
broadens that presentation to include a component of an entity rather than a
segment of a business. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The adoption of SFAS No. 144 did not have a material
impact on the Company's results of operations or financial position.
9
ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion should be read in conjunction with our financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2001. Some matters discussed in this Management's
Discussion and Analysis are "forward-looking statements" intended to qualify for
the safe harbors from liability established by the Private Securities Litigation
Reform Act of 1995. These forward-looking statements can generally be identified
as such because the context of the statement will include words such as we
"believe," "anticipate," "expect" or words of similar meaning. Similarly,
statements that describe our future plans, objectives or goals are also
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
currently anticipated, including general economic conditions, the ability to
manage growth, the availability and integration of acquisition targets,
competition, geographic concentration, weather conditions, government regulation
and others set forth in our Form 10-K. You should consider these factors
carefully in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements.
OVERVIEW
Waste Industries USA, Inc. is a regional, vertically-integrated provider of
solid waste services. We operate primarily in North Carolina, South Carolina,
Virginia, Tennessee, Mississippi, Alabama, Georgia and Florida, providing solid
waste collection, transfer, recycling, processing and disposal services for
commercial, industrial, municipal and residential customers. As of June 30,
2002, we operated 40 collection operations, 26 transfer stations, approximately
100 county convenience drop-off centers, eight recycling facilities and 11
landfills in the southeastern United States. We had revenues of $249.3 million
and operating income of $24.4 million for the year ended December 31, 2001, and
revenues of $123.6 million and operating income of $13.3 million for the six
months ended June 30, 2002.
Our presence in growth markets in the southeastern United States, including
North Carolina, Georgia and Virginia, has supported our internal growth. In
addition, from 1990 through the six months ended June 30, 2002, we acquired 66
solid waste collection or disposal operations. Current levels of population
growth and economic development in the southeastern United States and our strong
market presence in the region should provide us with an opportunity to increase
our revenues and market share. As we add customers in our existing markets, our
density should improve, which we expect will increase our collection
efficiencies and profitability.
RESULTS OF OPERATIONS
General
Our branch waste collection operations generate revenues from fees collected
from commercial, industrial and residential collection and transfer station
customers. We derive a substantial portion of our collection revenues from
commercial and industrial services that are performed under one-year to
five-year service agreements. Our residential collection services are performed
either on a subscription basis with individual households, or under contracts
with municipalities, apartment owners, homeowners associations or mobile home
park operators. Residential customers on a subscription basis are billed
quarterly in advance and provide us with a stable source of revenues. A
liability for future service is recorded upon billing and revenues are
recognized at the end of each month in which services are actually provided.
Municipal contracts in our existing markets are typically awarded, at least
initially, on a competitive bid basis and thereafter on a bid or negotiated
basis and usually range in duration from one to five years. Municipal contracts
generally provide consistent cash flow during the term of the contracts.
Our prices for our solid waste services are typically determined by the
collection frequency, level of service, route density, volume, weight and type
of waste collected, type of equipment and containers furnished, the distance to
the disposal or processing facility, the cost of disposal or processing and
prices charged in our markets for similar services.
Our ability to pass on price increases is sometimes limited by the terms of our
contracts. Long-term solid waste collection contracts typically contain a
formula, generally based on a predetermined published price index, for automatic
adjustment of fees to cover increases in some, but not all, operating costs.
At June 30, 2002, we operated approximately 100 convenience sites under contract
with 14 counties in order to consolidate waste in rural areas. These contracts,
which are usually competitively bid, generally have terms of one to five years
and provide consistent cash flow during the term of the contract since we are
paid regularly by the local government. At June 30, 2002, we also operated eight
recycling processing facilities as part of our collection and transfer
operations where we
10
collect, process, sort and recycle paper products, aluminum and steel cans,
pallets, plastics, glass and other items. Our recycling facilities generate
revenues from the collection, processing and resale of recycled commodities,
particularly recycled wastepaper. Through a centralized effort, we resell
recycled commodities using commercially reasonable practices and seek to manage
commodity pricing risk by spreading the risk among our customers. We also
operate curbside residential recycling programs in connection with our
residential collection operations in most of the communities we serve.
Operating expenses for our collection operations include labor, fuel, insurance,
equipment maintenance and tipping fees paid to landfills. At June 30, 2002, we
owned, operated or transferred from 26 transfer stations that reduce our costs
by improving our utilization of collection personnel and equipment and by
consolidating the waste stream to gain more favorable disposal rates and
transportation costs. At June 30, 2002, we operated 11 landfills. Operating
expenses for these landfill operations include labor, equipment, legal and
administrative, ongoing environmental compliance, host community taxes, site
maintenance and accruals for closure and post-closure maintenance. Cost of
equipment sales primarily consists of our cost to purchase the equipment that we
resell.
We capitalize some expenditures related to pending acquisitions or development
projects. Indirect acquisition and project development costs, such as executive
and corporate overhead, public relations and other corporate services, are
expensed as incurred. Our policy is to charge to operating costs any unamortized
capitalized expenditures and advances (net of any portion thereof that we
estimate to be recoverable, through sale or otherwise) relating to any operation
that is permanently shut down, any pending acquisition that is not consummated
and any landfill development project that is not expected to be successfully
completed. Engineering, legal, permitting, construction and other costs directly
associated with the acquisition or development of a landfill, together with
associated interest, are capitalized.
Selling, general and administrative expenses, or SG&A, include management
salaries, clerical and administrative overhead, professional services, costs
associated with our marketing and sales force and community relations expense.
Property and equipment is depreciated over the estimated useful life of the
assets using the straight-line method.
Other income and expense, which is comprised primarily of interest income, has
not historically been material to our results of operations.
To date, inflation has not had a significant impact on our operations.
Critical Accounting Policies
We have established various accounting policies in accordance with accounting
principles generally accepted in the United States in the preparation of our
financial statements. Our significant accounting policies are described in Note
1 to the Consolidated Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2001. Accounting policies require us to
make significant estimates and assumptions that have a material impact on the
carrying value of our assets and liabilities, and we consider these to be
critical accounting policies. The estimates and assumptions we use are based on
historical experience and other factors, which we believe to be reasonable under
the circumstances. Actual results could differ significantly from these
estimates and assumptions that could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and our results of
operations for the reporting periods.
In addition to the accounting policies disclosed in Management's Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the year ended December 31, 2001, in January 2002, we adopted a
new critical accounting policy that governs our hedging activities and which is
discussed below.
We formally document our hedge relationships, including identifying the hedge
instruments and hedged items, as well as our risk management objectives and
strategies for entering into the hedge transaction. Our derivative instruments
qualify for hedge accounting treatment under SFAS No. 133. In order to qualify
for hedge accounting, criteria must be met, including a requirement that both at
inception of the hedge, and on an ongoing basis, the hedging relationship is
expected to be highly effective in offsetting cash flows attributable to the
hedged risk during the term of the hedge. When it is determined that a
derivative ceases to be a highly effective hedge, we discontinue hedge
accounting, and any gains or losses on the derivative instrument are recognized
in earnings.
The following table sets forth for the periods indicated the percentage of
revenues represented by the individual line items reflected in our unaudited
condensed statements of operations.
11
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
2001 2002 2001 2002
---------------- ----------- -------------- ----------
Total revenues 100.0% 100.0% 100.0% 100.0%
Service 99.5% 99.5% 99.4% 99.5%
Equipment 0.5% 0.5% 0.6% 0.5%
---------------- ----------- -------------- ----------
Total cost of operations 63.8% 64.8% 63.1% 64.3%
Selling, general and administrative 13.5% 13.5% 14.3% 13.8%
Depreciation and amortization 11.6% 10.9% 11.8% 11.1%
Loss on disposal of business units 0.6% 0.0% 0.3% 0.0%
Organizational costs 0.0% 0.0% 0.5% 0.0%
---------------- ----------- -------------- ----------
Operating income 10.5% 10.8% 10.0% 10.8%
---------------- ----------- -------------- ----------
Interest expense (net) 5.5% 4.4% 6.0% 4.5%
Other (income) loss 0.0% -0.2% -0.1% 0.1%
---------------- ----------- -------------- ----------
Income before income taxes 5.0% 6.6% 4.1% 6.4%
Income taxes 1.8% 2.4% 1.5% 2.3%
---------------- ----------- -------------- ----------
Net income 3.2% 4.2% 2.6% 4.1%
================ =========== ============== ==========
Three- and Six-Month Periods Ended June 30, 2002 vs. Three- and Six-Month
Periods Ended June 30, 2001
REVENUES. Total revenues decreased approximately $0.9 million, or 1.4%, and $1.0
million, or 0.8%, respectively, for the three- and six-month periods ended June
30, 2002, compared to the same periods in 2001. This decrease was primarily
attributable to a decrease in one-time annexation fees of $1.0 million for the
three- and six-month periods ended June 30, 2002, compared to the same periods
in 2001.
TOTAL COST OF OPERATIONS. Total cost of operations remained level for the
three-month period ended June 30, 2002 compared to the same period in 2001, and
increased $0.9 million, or 1.2%, for the six-month periods ended June 30, 2002,
compared to the same periods in 2001. The increase was in the six-month period
was attributed to a $2.6 million increase in property, casualty and health
insurance and a $0.9 million increase in fleet maintenance costs. These
increases were offset by a decrease in landfill and disposal fees of $1.7
million and a decrease in fuel costs of $0.8 million. Total cost of operations
as a percentage of revenues increased to 64.8% from 63.8% and 64.3% from 63.1%
for the three- and six-month periods ended June 30, 2002 and 2001, respectively.
SG&A. SG&A decreased $0.1 million, or 1.4%, and $0.7 million, or 4.1%,
respectively, for the three- and six-month periods ended June 30, 2002, compared
with the same periods in 2001. The decrease was primarily attributable to an
increased management focus and evaluation of expenditures. SG&A as a percentage
of revenues remained stable at 13.5% for the three-month periods ended June 30,
2002 and 2001 and decreased to 13.8% from 14.3% for the six-month periods ended
June 30, 2002 and 2001, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $0.5
million, or 6.9%, and $1.0 million, or 6.7%, respectively, for the three- and
six-month periods ended June 30, 2002, compared to the same periods in 2001.
Depreciation and amortization, as a percentage of revenues, decreased to 10.9%
from 11.6% and to 11.1% from 11.8%, respectively, for the three- and six-month
periods ended June 30, 2002 and 2001. The primary component of this decrease was
the adoption of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets. In accordance with SFAS No. 142, we ceased
amortizing goodwill effective January 1, 2002.
INTEREST EXPENSE. Interest expense (net of interest income) decreased $0.7
million, or 19.7%, and $1.9 million, or 25.5%, respectively, for the three- and
six-month periods ended June 30, 2002, compared to the same periods in 2001. The
decrease was primarily due to the lower average interest rate of 5.2%, compared
to 7.0% for the six month periods ended June 30, 2002 and 2001, respectively,
and lower debt levels of $166.6 million, compared to $204.8 million for the
six-month periods ended June 30, 2002 and 2001, respectively.
ORGANIZATIONAL COSTS. We incurred organizational costs of approximately $570,000
during the six-months ended
12
June 30, 2001 that were primarily related to our holding company reorganization.
The reorganization enabled us to (1) simplify our organizational structure, (2)
segregate for operational and liability purposes our distinct business
activities and those of our subsidiaries, (3) allow greater autonomy to
companies currently owned or to be acquired by us in the future, and (4) make it
easier to implement future secured credit facilities at reduced costs of
implementation.
INCOME TAX EXPENSE. Income tax expense increased $0.4 million, or 31.4%, and
$1.0 million, or 55.9%, respectively, for the three- and six-month periods ended
June 30, 2002, compared to the same periods in 2001 due to an increase in income
before taxes.
NET INCOME. Net income increased $0.6 million, or 28.6%, and $1.7 million, or
52.6%, respectively, for the three- and six-month periods ended June 30, 2002,
compared to the same periods in 2001. The increase was primarily related to a
decrease in total operating costs, including goodwill amortization, and a
decrease in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at June 30, 2002 was $6.2 million compared to $5.6 million
at December 31, 2001. Our strategy in managing our working capital has been to
apply the cash generated from operations that remains available after satisfying
our working capital and capital expenditure requirements to reduce indebtedness
under our bank revolving credit facilities and to minimize our cash balances. We
generally finance our working capital requirements from internally generated
funds and bank borrowings. In addition to internally generated funds, we have in
place financing arrangements to satisfy our currently anticipated working
capital needs in 2002. Prior to 2000, we had fully drawn upon our three $25
million term facilities with Prudential Insurance Company of America. In 2000,
we began principal repayments on the first $25 million term facility. The
Prudential facilities require us to maintain financial ratios, such as minimum
net worth, net income, and limits on capital expenditures and indebtedness.
Interest on the three Prudential facilities is paid quarterly, based on fixed
rates for the three facilities of 7.53%, 7.21% and 7.09%, respectively, and the
facilities mature as follows: $17.9 million in April 2006, $25 million in June
2008 and $25 million in February 2009, subject to renewal.
We maintain a revolving credit agreement with a syndicate of lending
institutions for which Fleet National Bank, formerly known as BankBoston, N.A.,
acts as agent. This credit facility provides up to $200 million through November
2004. Virtually all of our assets and those of our subsidiaries, including our
interest in the equity securities of our subsidiaries, secure our obligations
under the Fleet credit facility. Pursuant to an intercreditor agreement with
Fleet, Prudential shares in the collateral pledged under the Fleet credit
facility. In addition, our subsidiaries have guaranteed our obligations under
the Prudential term loan facilities. The Fleet credit facility bears interest at
a rate per annum equal to, at our option, either a Fleet base rate or at the
Eurodollar rate (based on Eurodollar interbank market rates) plus, in each case,
a percentage rate that fluctuates, based on the ratio of our funded debt to
EBITDA, from 0.25% to 0.75% for base rate borrowings and 1.75% to 2.75% for
Eurodollar rate borrowings. The Fleet facility requires us to maintain financial
ratios and satisfy other requirements, such as minimum net worth, net income,
and limits on capital expenditures and indebtedness. It also requires the
lenders' approval of acquisitions in some circumstances. As of June 30, 2002, an
aggregate of approximately $70 million was outstanding under the Fleet credit
facility, and the average interest rate on outstanding borrowings was
approximately 4.09%.
As of June 30, 2002, we had the following contractual obligations and commercial
commitments (in thousands):
PAYMENT DUE BY PERIOD
------------------------------------------------------------------------------------
Contractual Less Than
Obligations Total 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
- ---------------- -------------- -------------- -------------- -------------- --------------
Long-Term Debt $ 165,643 $ 10,959 $ 21,495 $ 21,483 $ 111,706
Operating Leases 9,299 1,375 3,126 1,666 3,132
Capital Leases 950 950 - - -
-------------- -------------- -------------- -------------- --------------
Total Contractual Cash
Obligations $ 175,892 $ 13,284 $ 24,621 $ 23,149 $ 114,838
============== ============== ============== ============== ==============
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-----------------------------------------------------------------------------------
Commerical Total Amounts Less Than
Commitments Committed 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
- ------------------ -------------- --------------- -------------- --------------- --------------
Standby Letters of Credit (1) $ 8,739 $ 8,739 $ - $ - $ -
Performance Bonds 20,811 16,685 4,126 - -
-------------- --------------- -------------- --------------- --------------
Total Commericial
Commitments $ 29,550 $ 25,424 $ 4,126 $ - $ -
============== =============== ============== =============== ==============
(1) Includes letter of credit for variable rate bond
Net cash provided by operating activities increased $13.8 million to $17.5
million for the six-month period ended June 30, 2002, compared to net cash
provided by operating activities of $3.7 million for the six-month period ended
June 30, 2001. Cash used related to net operating assets for the six-month
period ended June 30, 2002 was $1.1 million, compared to $14.0 million for the
six-month period ended June 30, 2001. Also, net income increased $1.7 million
for the six-month period ended June 30, 2002, compared to the same period in
2001.
Net cash used in investing activities decreased $4.4 million to $13.8 million
for the six-month period ended June 30, 2002, compared to $17.9 million for the
six-month period ended June 30, 2001. This increase in cash available was caused
principally by a decrease in acquisitions of related businesses of $1.6 million,
a decrease in proceeds from the sale of property and equipment of $0.6 million
and a decrease in capital expenditures of $3.8 million.
We currently expect capital expenditures for 2002 to be approximately $20.0
million, compared to $25.0 million in 2001. In 2002, we expect to use
approximately $7.2 million for vehicle and equipment additions and replacements,
approximately $6.8 million for landfill site and cell development, approximately
$4.4 million for support equipment and approximately $1.6 million for
facilities, additions and improvements. We expect to fund our planned 2002
capital expenditures principally through internally generated funds and
borrowings under existing credit facilities. As an owner and potential acquirer
of additional new landfill disposal facilities, we might also be required to
make significant expenditures to bring newly acquired disposal facilities into
compliance with applicable regulatory requirements, obtain permits for newly
acquired disposal facilities or expand the available disposal capacity at any
such newly acquired disposal
13
facilities. The amount of these expenditures cannot be currently determined
because they will depend on the nature and extent of any acquired landfill
disposal facilities, the condition of any facilities acquired and the permitting
status of any acquired sites. We expect we would fund any capital expenditures
to acquire solid waste collection and disposal business, to the extent we could
not fund such acquisitions with our common stock, and any regulatory expenses
for newly acquired disposal facilities through borrowings under our existing
credit facilities.
Net cash used in financing activities totaled $5.4 million for the six-month
period ended June 30, 2002, compared to $7.3 million provided by financing
activities for the six-month period ended June 30, 2001. The decrease was
primarily attributable to decreased borrowings (net of repayments) of $12.1
million and a decrease in net proceeds from exercised options of $1.1 million.
At June 30, 2002, we had approximately $166.6 million of long-term and
short-term borrowings outstanding (including capital lease obligations) and
approximately $40.8 million in letters of credit. At June 30, 2002, the ratio of
our total debt (including capital lease obligations) to total capitalization was
64.5%, compared to 66.3% at December 31, 2001.
Prepaid insurance increased approximately $1.4 million to $1.9 million at June
30, 2002 from $0.5 million at December 31, 2001 due primarily to the prepayment
of certain liability insurance policies that were renewed in June 2002.
Accrued expenses and other liabilities increased approximately $2.1 million to
$5.7 million at June 30, 2002 from $3.6 million at December 31, 2001 due
primarily to an increase of $1.2 million in our retained liabilities for
property and casualty insurance, an increase of $0.5 million in accrued health
insurance and an increase of $0.4 million in accrued property taxes.
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. As a result, goodwill,
which had been amortized on a straight-line basis over 25 to 40 years, is no
longer amortized but reviewed, at least annually, for impairment. Other
intangible assets will continue to be amortized over their useful lives. The
Company has determined that it operates in one reporting unit based on the
current reporting structure and has assigned goodwill at the enterprise level.
The Company completed its initial assessment of impairment using the provisions
of SFAS No. 142. The Company completed its initial goodwill assessment as of
January 1, 2002 and determined that there was no goodwill impairment.
On an ongoing basis, the Company will perform an annual impairment test. At
least quarterly, the Company will analyze whether an event has occurred that
would more likely than not reduce its enterprise fair value below its carrying
amount and, if necessary, we will perform a goodwill impairment test between
annual dates. Impairment adjustment after adoption, if any, will be recognized
as operating expenses.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In August 2001, the Financial Accounting Standards Board, or FASB issued SFAS
No. 143, Accounting For Asset Retirement Obligations. This statement requires
recording the fair value of a liability for an asset retirement obligation in
the period in which it is incurred and a corresponding increase in the carrying
value of the related long-lived asset. Over time, the liability is accreted to
its present value each period and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, it is either
settled for its recorded amount or a gain or loss upon settlement is recorded.
This statement is effective for fiscal years beginning after June 15, 2002. The
Company is currently evaluating the effect, if any, SFAS No. 143 will have on
the Company's results of operations or financial position.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30 for the disposal of a segment of a business.
This statement retains many requirements of SFAS No. 121, but establishes
approaches to deal with fair value issues for long-lived assets.
SFAS No. 144 also retains the basic provisions of APB Opinion No. 30, but
broadens that presentation to include a component of an entity rather than a
segment of a business. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The adoption of SFAS No. 144 did not have a material
impact on the Company's results of operations or financial position.
SEASONALITY
Our results of operations tend to vary seasonally, with the first quarter
typically generating the least amount of revenues, higher revenues in the second
and third quarters, and a decline in the fourth quarter. This seasonality
reflects the lower volume of waste generated during the fall and winter months.
Also, operating and fixed costs remain relatively constant throughout the
calendar year, which, when offset by these revenues, results in a similar
seasonality of operating income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We entered into an interest rate swap with Fleet National Bank effective January
1, 2002 to modify the interest characteristics of our outstanding long-term debt
and have designated the qualifying instrument as a cash flow hedge. Under the
agreement, the interest rate swap has a notional value of $50 million with a
fixed interest rate of 4.2%. This agreement expires in November 2004.
Our results of operations are impacted by changes in the price of diesel fuel.
Because the market for derivatives in diesel fuel is limited, we use heating oil
option agreements to manage a portion of our exposure to fluctuations in diesel
prices. During February 2002, we entered into an option agreement for
approximately 5.5 million gallons of heating oil. This option agreement settles
each month in equal notional amounts through December 2002. We paid a fixed
price of approximately $188,000 for the option agreement, which is structured as
a cap indexed to the price of heating oil.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See exhibit index.
(b) Reports on 8-K
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who certify that to their knowledge this
report fully complies with the requirements of Section 13(a) or 15(d) of that
Act and the information contained in this report fairly presents, in all
material respects, the financial condition and results of operations of the
registrant as of and for the periods ended June 30, 2002.
Dated: August 14, 2002 Waste Industries USA, Inc.
(Registrant)
By: /s/ Jim W. Perry
--------------------------
Jim W. Perry
President and Chief Executive Officer
Dated: August 14, 2002 Waste Industries USA, Inc.
(Registrant)
By: /s/ D. Stephen Grissom
--------------------------------
D. Stephen Grissom
Chief Financial Officer
15
WASTE INDUSTRIES USA, INC.
EXHIBIT INDEX
Second Quarter 2002
Exhibit Number Exhibit Description
11 Computation of Earnings Per Share
16