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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 March 31, 2003
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)
N/A
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES ___ NO X
---
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 13,438,657 shares
(Class) (Outstanding at May 14, 2003)
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, March 31,
2002 2003
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,734 $ 2,374
Accounts receivable - trade, less allowance for
uncollectible accounts (2002 - $2,237; 2003 - $2,396) 28,200 29,187
Accounts receivable - other 1,395 487
Income taxes receivable 919 --
Inventories 1,552 1,516
Prepaid insurance 494 2,031
Prepaid expenses and other current assets (Note 5) 3,366 3,857
Deferred income taxes 759 757
--------- ---------
Total current assets 38,419 40,209
--------- ---------
Property and equipment, net 188,897 187,489
Intangible assets, net (Note 2) 68,338 71,940
Other noncurrent assets 2,854 2,620
--------- ---------
Total assets $ 298,508 $ 302,258
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 11,710 $ 10,731
Current maturities of capital lease obligations 599 475
Accounts payable - trade 10,501 10,226
Acquisition related obligations 305 769
Accrued interest payable 1,321 1,655
Accrued wages and benefits payable 3,860 3,961
Income taxes payable -- 82
Accrued expenses and other liabilities 5,188 6,364
Deferred revenue 1,997 2,618
--------- ---------
Total current liabilities 35,481 36,881
--------- ---------
Long-term debt, net of current maturities 140,875 142,303
Deferred income taxes 18,941 18,347
Landfill closure/post-closure 4,022 3,908
Interest rate swap (Note 5) 2,219 2,147
Commitments and contingencies (Note 6) -- --
Shareholders' equity: (Note 4)
Common stock, no par value, shares authorized - 80,000,000 shares
issued and outstanding: December 31, 2002 - 13,338,005;
March 31, 2003 - 13,404,896 38,116 38,658
Paid-in capital 7,245 7,245
Retained earnings 54,623 55,743
Accumulated other comprehensive loss, net (Note 5) (1,366) (1,326)
Shareholders' loans and other receivables (1,648) (1,648)
--------- ---------
Total shareholders' equity 96,970 98,672
--------- ---------
Total liabilities and shareholders' equity $ 298,508 $ 302,258
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
PART 1 - FINANCIAL INFORMATION
WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2003
-------- --------
Revenues:
Service $ 59,615 $ 62,486
Equipment 362 447
-------- --------
Total revenues 59,977 62,933
-------- --------
Operating costs and expenses:
Operations 38,076 40,212
Equipment 225 282
Selling, general and administrative 8,492 9,068
Depreciation and amortization 6,741 7,501
-------- --------
Total operating costs and expenses 53,534 57,063
-------- --------
Operating income 6,443 5,870
-------- --------
Interest expense (net) 2,743 2,458
Other expense (income) 44 (15)
-------- --------
Total other expense, net 2,787 2,443
-------- --------
Income before income taxes 3,656 3,427
Income tax expense 1,335 1,240
-------- --------
Income before cumulative effect of a change
in accounting principle 2,321 2,187
Cumulative effect of a change in accounting
principle, net of tax benefit of $614 -- (1,067)
-------- --------
Net Income $ 2,321 $ 1,120
======== ========
Basic and diluted earnings per share:
Income before cumulative effect of a change in
accounting principle $ 0.17 $ 0.16
Cumulative effect of a change in accounting principle -- (0.08)
-------- --------
Net Income $ 0.17 $ 0.08
======== ========
Weighted-average number of common shares outstanding
Basic 13,334 13,405
Diluted 13,339 13,418
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
PART 1 - FINANCIAL INFORMATION
WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2003
-------- --------
Operating Activities:
Net income $ 2,321 $ 1,120
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,741 7,501
Gain on sale of property and equipment (10) 11
Cumulative effect of a change in accounting principle -- 1,067
Provision for deferred income taxes 170 (624)
Changes in operating assets and liabilities, net of effects
from acquisition and disposition of related businesses (1,072) 981
-------- --------
Net cash provided by operating activities 8,150 10,056
-------- --------
Investing Activities:
Acquisition of related businesses, net of cash acquired -- (4,090)
Proceeds from sale of property and equipment 185 882
Purchases of property and equipment (3,956) (6,544)
-------- --------
Net cash used in investing activities (3,771) (9,752)
-------- --------
Financing Activities:
Proceeds from issuance of long-term debt -- 5,000
Principal payments of long-term debt (1,105) (4,550)
Principal payments of capital lease obligations (219) (124)
Net proceeds from common stock issuance 4 5
Net proceeds from exercised options -- 5
-------- --------
Net cash provided by (used in) financing activities (1,320) 336
-------- --------
Increase in cash and cash equivalents 3,059 640
Cash and cash equivalents, beginning of period 1,887 1,734
-------- --------
Cash and cash equivalents, end of period $ 4,946 $ 2,374
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,952 $ 3,235
======== ========
Cash paid for taxes $ 1,142 $ 239
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND RECENT DEVELOPMENTS
Basis of Presentation
The unaudited 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 that 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 other 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, 2002.
Recent Developments
Purchase Acquisitions:
During the three-month period ended March 31, 2003, the Company made the
following acquisition, which was accounted for as a purchase.
.. Effective January 1, 2003, the Company acquired Patriot Waste Systems for
approximately $4.6 million. This tuck-in acquisition provides commercial
and industrial waste collection services to existing operations in the
Greensboro and Graham, North Carolina markets. The acquisition was funded
with proceeds from borrowings under the Company's senior credit facility
and issuance of the Company's common stock with a fair value of
approximately $0.5 million.
Components of cash used for the acquisition reflected in the unaudited condensed
consolidated statement of cash flows for the three months ended March 31, 2003
are as follows (in thousands):
Tangible Net Assets Acquire at Fair Value:
Accounts receivable $ 212
Property and equipment 1,772
Liabilities assumed (3)
-------
Total net tangible assets acquired 1,981
Intangible Assets at Fair Value:
Customer lists, contracts and goodwill 2,641
-------
Total net assets acquired at fair value $ 4,622
=======
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 three-month
periods ended March 31, 2002 and 2003 assume the acquisition described above
occurred as of January 1, 2002 (in thousands):
5
2002 2003
-------- --------
Total revenues $ 63,697 $ 66,653
Operating income 7,654 7,081
Net income $ 2,876 $ 1,675
Earnings per common share:
Basic and Diluted $ 0.22 $ 0.12
======== ========
The pro forma financial information does not purport to be indicative of the
results of operations that would have occurred had the acquisition taken place
at the beginning of the periods presented or of future operating results.
Recently Adopted and Newly Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective January 1, 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards, or SFAS, No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 required the Company to change its method
of accounting for landfill closure and post-closure, as well as final capping,
obligations. See Notes 7 and 8 for a discussion of the Company's adoption of
SFAS No. 143.
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 144,
Accounting 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 Accounting Principles Board No. 30,
Reporting the Results of Operation--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and how the
results of a discontinued operation are to be measured and presented. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. SFAS No. 145 requires that gains
and losses from extinguishment of debt be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board Opinion ("Opinion") No.
30. Applying the provisions of Opinion No. 30 will distinguish transactions that
are part of an entity's recurring operations from those that are unusual and
infrequent and meet the criteria for classification as an extraordinary item.
SFAS No. 145 was effective for the Company beginning January 1, 2003. The
adoption of SFAS No. 145 had no impact on the Company's financial condition or
results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities, such as
restructurings, involuntarily terminating employees, and consolidating
facilities initiated after December 31, 2002. The adoption of SFAS No. 146 had
no impact on the Company's financial condition or results of operations.
Effective December 31, 2002, the Company adopted the provisions of SFAS No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment
of SFAS No. 123, Accounting for Stock-Based Compensation. This statement was
issued to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The amendments to SFAS No. 123 in
paragraphs 2(a)-2(e) of this statement were effective for financial statements
for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148
did not have an impact on the Company's results of operations or financial
condition. See the interim disclosures required by SFAS No. 148 as presented
below.
6
The Company measures compensation costs related to employee incentive stock
options using the intrinsic value of the equity instrument granted (i.e., the
excess of the market price of the stock to be issued over the exercise price of
the equity instrument at the date of grant) rather than the fair value of the
equity instrument.
Had compensation expense for all stock options been determined consistent with
SFAS No. 123, rather than Accounting Principles Board, or APB, No. 25,
Accounting for Stock Issued to Employees, the Company's net income and net
income per share for the three months ended March 31, 2003 and 2002 would have
been recorded at the pro forma amounts indicated below:
Three Months Ended March 31,
----------------------------
2002 2003
------- -------
Net Income:
As reported $ 2,321 $ 1,120
Deduct - total stock based compensation determined
under fair value based for all awards (189) (90)
------- -------
Pro forma - for SFAS No. 123 $ 2,132 $ 1,030
======= =======
Earnings per share basic and diluted:
As reported $ 0.17 $ 0.08
Pro forma - for SFAS No. 123 $ 0.16 $ 0.08
In November 2002, the FASB issued FASB Interpretation ("FIN") 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others. It clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee, including its ongoing
obligation to stand ready to perform over the term of the guarantee in the event
that the specified triggering events or conditions occur. The objective of the
initial measurement of the liability is the fair value of the guarantee at its
inception. The initial recognition and initial measurement provisions of FIN 45
are effective for the Company on a prospective basis to guarantees issued or
amended after December 31, 2002. The Company will record the fair value of
future material guarantees, if any. The adoption of FIN 45 had no significant
impact on the Company's financial condition or results of operations.
New-Issues Accounting Pronouncement Not Yet Fully Adopted
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 requires that unconsolidated variable interest entities must be
consolidated by their primary beneficiaries. A primary beneficiary is the party
that absorbs a majority of the entity's expected losses or residual benefits.
FIN 46 applies immediately to variable interest entities created after January
31, 2003 and to existing variable interest entities in the periods beginning
after June 15, 2003. The Company believes that the full adoption of FIN 46 will
not have a material impact on its financial condition or results of operations.
Segment Information
The Company identifies its operating segments based on geographical location.
The Company considers each of its six divisions that report stand-alone
financial information and have division managers that report to the Company's
chief operating decision maker to be an operating segment; however, all
operating segments have been aggregated together and are reported as a single
segment consisting of the collection, transfer, recycling and disposal of
non-hazardous solid waste primarily in the Southeastern United States.
Percentages of our total service revenue attributable to services provided:
7
Three Months Ended March 31,
2002 2003
-------- --------
Collection:
Residential 22% 23%
Commercial 28% 27%
Industrial 30% 30%
Disposal 15% 15%
Recycling 1% 1%
Other 4% 4%
-------- --------
Total service revenues 100% 100%
======== ========
Reclassifications
Certain 2002 financial statement amounts have been reclassified to conform with
the 2003 presentation.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS 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 transitional goodwill impairment test using the
provisions of SFAS No. 142 as of January 1, 2002 and determined that there was
no goodwill impairment.
SFAS No. 142 requires the Company to 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, will perform a goodwill impairment test between annual dates.
Impairment adjustments after adoption, if any, will be recognized as operating
expenses. During Fiscal 2002, the Company adopted July 31, 2002 as its annual
assessment date. The Company completed its annual impairment test as of July 31,
2002 and determined that there was no goodwill impairment.
Customer lists with a carrying value of $710,000 and $1,061,000 at March 31,
2002 and 2003, respectively, were net of accumulated amortization of $39,000 and
$107,000, respectively. Noncompete agreements with a carrying value of $135,000
and $104,000 at December 31, 2002 and March 31, 2003, respectively, were net of
accumulated amortization of $1,029,000 and $1,061,000 respectively. Amortization
expense was $70,000 and $164,000 for the three-month period ended March 31, 2002
and 2003, respectively. The weighted-average amortization period for all
noncompete agreements and customer lists is five years. Estimated amortization
expense for each of the succeeding five years is as follows: 2003 - $98,000;
2004 - $17,000; 2005 - $86,000; 2006 - $8,000; 2007 - $4,000; and thereafter -
$0.
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.
Earnings per share is calculated as follows (in thousands, except per share
amounts):
8
Three Months Ended
March 31,
-------------------
2002 2003
-------- --------
Income before cumulative effect of a change in accounting
principle $ 2,321 $ 2,187
Cumulative effect of a change in accounting principle - (1,067)
-------- --------
Net income $ 2,321 $ 1,120
======== ========
Denominator used for basic earnings per share -
Weighted average number of shares outstanding 13,334 13,405
======== ========
Denominator used for diluted earnings per share:
Denominator used for basic earnings per share 13,334 13,405
Dilutive impact of stock options outstanding 5 13
-------- --------
Weighted average number of shares outstanding 13,339 13,418
======== ========
Basic and diluted earnings per share:
Income before cumulative effect of a change in
accounting principle $ 0.17 $ 0.16
Cumulative effect of a change in accounting principle - (0.08)
-------- --------
Net income $ 0.17 $ 0.08
======== ========
Antidilutive options to purchase common stock not included in
earnings per share calculation 377 365
======== ========
4. SHAREHOLDERS' EQUITY
The Company issued 642 and 652 shares of Company common stock with a fair value
of approximately $4,500 for each of the three-month periods ended March 31, 2002
and 2003, respectively, that were recorded as director's fees.
During the three-month period ended March 31, 2003, stock options for an
aggregate of 854 shares of Company common stock were exercised with net proceeds
of approximately $5,000. No stock options were exercised for the same period in
2002.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER COMPREHENSIVE INCOME (LOSS)
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 a 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. Under
hedge accounting, any gains or losses on the derivative instrument are
recognized as a separate component of other comprehensive income. 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.
9
Interest Rate Swap
The Company entered into an interest rate swap with Fleet National Bank
("Fleet") 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 $50.0 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 (loss). 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 fully effective during the three-month periods
ended March 31, 2003 and 2002.
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. The fair value of the interest rate
swap agreement was a liability of approximately $2.2 million and $2.1 million at
December 31, 2002 and March 31, 2003, respectively.
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 fuel prices. During January 2003, the Company entered
into an option agreement for approximately 1.7 million gallons of heating oil.
This option agreement, which was effective February 1, 2003, settles each month
in equal notional amounts through May 2003. The Company paid a fixed price of
approximately $60,000 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 shareholders' equity as a component of accumulated other
comprehensive income (loss). 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 No. 133 requires the ineffective portion of the hedge to
immediately be recognized in the statement of operations. 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 operating 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 March 31, 2003 was determined by a
third party to be approximately $20,000 and has been included in prepaid
expenses and other current assets. For the three-month period ended March 31,
2002 and 2003, the Company included a net loss of $34,000 and a net gain of
$70,000, respectively, in cost of operations.
The components of comprehensive income (loss), net of related taxes, are as
follows (in thousands):
10
Three Months Ended
March 31,
------------------
2002 2003
------- -------
Net income $ 2,321 $ 1,120
Other comprehensive income (loss) -
Unrealized gains (losses) on cash flow hedges,
net of deferred taxes of $192 and ($762),
respectively 333 (1,326)
------- -------
Comprehensive income (loss) $ 2,654 ($206)
======= =======
The components of unrealized gains (losses) on cash flow hedges, net of related
taxes, for the periods presented are as follows (amounts in thousands):
Three Months Ended
March 31,
------------------
2002 2003
------- -------
Change in unrealized gains (losses) on cash flow hedges $ 367 $(1,256)
Less: reclassification adjustment for (gains) losses
included in net income 34 (70)
------- -------
Net change in unrealized gains (losses) on qualifying
cash flow hedges $ 333 (1,326)
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 condition 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
could have a material adverse effect on the Company's financial condition and
results of operations.
7. ADOPTION OF SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, the Company adopted the provisions of SFAS No. 143,
Accounting for Asset Retirement Obligations, that addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The following table
summarizes the pro forma impact to income before cumulative effect of the change
in accounting principle and earnings per common share for the three-month period
ended March 31, 2002 of the accounting change implemented beginning January 1,
2002 (in thousands, except per share amounts).
11
Three Months Ended
March 31, 2002
---------------
Reported net income before cumulative effect of a change in
accounting principle $ 2,321
Adoption of SFAS No. 143, net of tax (140)
---------------
Pro forma net income before cumulative effect of a change in
accounting principle $ 2,181
===============
Basic and diluted earnings per common share:
Reported net income before cumulative effect of a change in
accounting principle $ 0.17
Adoption of SFAS No. 143, net of tax (0.01)
---------------
Pro forma net income before cumulative effect of a change in
accounting principle $ 0.16
===============
In connection with the adoption of SFAS No. 143, the Company recorded
approximately $1.1 million, net of taxes, or $0.08 per diluted share, for the
three-month period ended March 31, 2003 as a charge to cumulative effect of
change in accounting principle. The effect of applying the provisions of SFAS
No. 143 was a reduction in income for the three-month period ended March 31,
2003 of approximately $200,000, net of taxes, or $0.01 per diluted share.
Effective January 1, 2003, the Company's method of accounting for landfill
closure and post-closure, as well as landfill final capping, changed as a result
of its adoption of SFAS No. 143. SFAS No. 143 does not change the basic landfill
accounting that the Company and others in the industry have followed
historically. Through December 31, 2002, the waste industry generally recognized
expenses associated with (i) amortization of capitalized and future landfill
asset costs and (ii) future closure and post-closure obligations on a
units-of-consumption basis as airspace was consumed over the life of the related
landfill. This practice, referred to as life cycle accounting within the waste
industry, continues to be followed. The table below compares the Company's
historical practices and current practices of accounting for landfill final
capping, closure and post-closure activities.
---------------------------------------------------------------------------------------------------------------
Description Historical Practice Current Practice
(Effective January 1, 2003)
---------------------------------------------------------------------------------------------------------------
Definitions:
Final Capping Capital asset related to installation of flexible Reflected as an asset retirement
membrane and geosynthetic clay liners, drainage obligation, on a discounted basis,
and compacted soil layers and topsoil constructed rather than a capital asset
over areas of landfill where total airspace capacity
has been consumed
---------------------------------------------------------------------------------------------------------------
Closure Includes last final capping event, final portion of No change, except that last final
methane gas collection system to be constructed, capping event of each landfill will
demobilization, and the routine maintenance costs be treated as a part of final
incurred after site ceases to accept waste, but prior capping
to being certified as closed
---------------------------------------------------------------------------------------------------------------
Post-closure Includes routine monitoring and maintenance of a No change
landfill after it has closed, ceased to accept waste
and been certified as closed by the applicable state
regulatory agency
---------------------------------------------------------------------------------------------------------------
12
-----------------------------------------------------------------------------------------------------------------------
Discount Rate: Landfill final capping, closure and post-closure Credit-adjusted, risk-free rate
obligations were not discounted (8.00% at January 1, 2003)
-----------------------------------------------------------------------------------------------------------------------
Cost Estimates: Costs were estimated based on performance, principally No change, except that the cost
by third parties, with a small portion performed by of any activities performed
the Company internally must be increased to
represent an estimate of the
amount a third party would charge
to perform such activity
-----------------------------------------------------------------------------------------------------------------------
Inflation: Landfill final capping, closure and post-closure Inflation rate of 2.5% effective
liabilities were not inflated to period of performance January 1, 2003
-----------------------------------------------------------------------------------------------------------------------
Recognition of Costs were capitalized as spent, except for the last All final capping is recorded
Assets and final capping event that occurs after the landfill as a liability and asset when
Liabilities: closes, which was accounted for as part of closure; incurred; the discounted cash
spending was included in capital expenditures flow associated with each final
Final Capping within investing activities in the statement capping event is recorded to the
of cash flows accrued liability with a corresponding
increase to landfill assets as airspace
is consumed related to the specific
final capping event; spending is
reflected as a change in liabilities
within operating activities in the
statement of cash flows
-----------------------------------------------------------------------------------------------------------------------
13
----------------------------------------------------------------------------------------------------------
Description Historical Practice Current Practice
(Effective January 1, 2003)
----------------------------------------------------------------------------------------------------------
Statement of
Operations Expense:
Liability accrual Expense charged to cost of operations at same Not applicable
amount accrued to liability
----------------------------------------------------------------------------------------------------------
Landfill asset Not applicable for landfill closure and post closure Landfill asset is amortized
amortization obligations to depreciation and
amortization expense as
airspace is consumed over
life of specific final
capping event or life of
landfill for closure and
post-closure
----------------------------------------------------------------------------------------------------------
Accretion Not applicable as landfill final capping, closure Expense, charged to cost of
and post-closure obligations were not discounted operations, is accreted at
credit-adjusted, risk-free
rate (8.00%) under the
effective interest method
----------------------------------------------------------------------------------------------------------
We amortize landfill retirement costs arising from closure and post-closure
obligations, which are capitalized as part of the landfill asset, using our
historical landfill accounting practices. We amortize landfill retirement costs
arising from final capping obligations, which are also capitalized as part of
the landfill asset, on a units-of-consumption basis over the number of tons of
waste that each final capping event covers.
8. LANDFILLS
The Company has material financial commitments for final capping, closure and
post-closure obligations with respect to its landfills. The Company developed
its estimates of final capping, closure and post-closure obligations using input
from its third party engineers and internal accounting. The Company's estimates
are based on its interpretation of current requirements and proposed regulatory
changes and are intended to approximate fair value. Absent quoted market prices,
the estimate of fair value should be based on the best available information,
including the results of present value techniques in accordance with Statement
of Financial Accounting Concepts No. 7, Using Cash Flow and Present Value in
Accounting Measurements. In general, the Company relies on third parties to
fulfill most of its obligations for final capping, closure and post-closure.
Accordingly, the fair market value of these obligations is based upon quoted and
actual prices paid for similar work. The Company intends to perform some of
these capping, closure and post-closure obligations using internal resources.
Where internal resources are expected to be used to fulfill an asset retirement
obligation, the Company has added a profit margin onto the estimated cost of
such services to better reflect its fair market value as required by SFAS No.
143. When the Company then performs these services internally, the added profit
margin is recognized as a component of operating income in the period earned.
SFAC No. 7 further states that an estimate of fair value should include the
price that marketplace participants are able to receive for bearing the
uncertainties in cash flows. However, when utilizing discounted cash flow
techniques, reliable estimates of market premiums may not be obtainable. In this
situation, SFAC No. 7 indicates that it is not necessary to consider a market
risk premium in the determination of expected cash flows. In the waste industry,
there is not an active market that can be utilized to determine the fair value
of these activities, as there is no market that exists for selling the
responsibility for final capping, closure and post-closure obligations
independent of selling the landfill in its entirety. Accordingly, the Company
believes that it is not possible to develop a methodology to reliably estimate a
market risk premium and has excluded a market risk premium from the Company's
determination of expected cash flows for landfill asset retirement obligations
in accordance with SFAC No. 7.
Once the Company has determined the estimates of final capping, closure and
post-closure obligations, the Company then inflates those costs to the expected
time of payment and discounts those expected future costs back to present value.
The Company is currently inflating these costs in current dollars until expected
time of payment using an inflation rate of 2.5% and is discounting these costs
to present value using a credit-adjusted, risk-free discount rate of
14
8.00%. The credit-adjusted, risk-free rate is based on the risk-free interest
rate adjusted for the Company's credit standing. Management reviews these
estimates at least once per year. Significant changes in future final capping,
closure and post-closure cost estimates and inflation rates typically result in
both (i) a current adjustment to the recorded liability (and corresponding
adjustment to the landfill asset), based on the landfill's capacity that has
been consumed, and (ii) a change in liability and asset amounts to be recorded
prospectively over the remaining capacity of the landfill. Any change related to
the capitalized and future cost of the landfill asset is then recognized in
amortization expense prospectively over the remaining capacity of the landfill.
Changes in the Company's credit-adjusted, risk-free rate do not change recorded
liabilities, but subsequently recognized obligations are measured using the
revised credit-adjusted risk-free rate.
The Company records the estimated fair value of final capping, closure and
post-closure obligations for its landfills based on the landfills' capacity that
has been consumed through the current period. This liability and corresponding
asset is accrued on a per-ton basis. The estimated fair value of each final
capping event will be fully accrued when the tons associated with such capping
event have been disposed in the landfill. Additionally, the estimated fair value
of total final capping, closure and post-closure costs will be fully accrued for
each landfill at the time the site discontinues accepting waste and is closed.
Closure and post-closure accruals consider estimates for methane gas control,
leachate management and ground-water monitoring and other operational and
maintenance costs to be incurred after the site discontinues accepting waste,
which is generally expected to be for a period of up to thirty years after final
site closure. Daily maintenance activities, which include many of these costs,
are incurred during the operating life of the landfill and are expensed as
incurred. Daily maintenance activities include leachate disposal; surface water,
groundwater, and methane gas monitoring and maintenance; other pollution control
activities; mowing and fertilizing the landfill cap; fence and road maintenance;
and third party inspection and reporting costs. For purchased disposal sites,
the Company assesses and records present value-based final capping, closure and
post-closure obligations at the time the Company assumes such responsibilities.
Such liabilities are based on the estimated final capping, closure and
post-closure costs and the percentage of airspace consumed related to such
obligations as of the date the Company assumed the responsibility. Thereafter,
the Company accounts for the landfill and related final capping, closure and
post-closure obligations consistent with the policy described above.
Interest accretion on final capping, closure and post-closure obligations is
recorded using the effective interest method and is recorded as final capping,
closure and post-closure expense, which is included in operating costs on the
income statement.
In the United States, the closure and post-closure obligations are established
by the EPA's Subtitles C and D regulations, as implemented and applied on a
state-by-state basis. The costs to comply with these obligations could increase
in the future as a result of legislation or regulation.
Liabilities for final capping, closure and post-closure costs consisted of the
following at the dates presented (in thousands):
December 31, March 31,
2002 2003
--------------------------------------- -------------------------------------
Final Closure/ Final Closure/
Capping Post-closure Total Capping Post-closure Total
------- ------------ ----- ------- ------------ -----
Current (in accrued liabilities) $ 361 $ 92 $ 453 $ 144 $ - $ 144
Long-term 2,355 1,214 3,569 3,758 6 3,764
--------------------------------------- -------------------------------------
$ 2,716 $ 1,306 $ 4,022 $ 3,902 $ 6 $ 3,908
======================================= =====================================
The changes to landfill liabilities were as follows for the periods presented
(in thousands):
15
Three Months Ended
March 31,
------------------
2002 2003
------- -------
Beginning balance $ 3,090 $ 4,022
Cumulative effect of change in accounting principle - (111)
Obligations incurred 232 245
Obligations settled (30) (354)
Interest accretion - 106
------- -------
Ending balance $ 3,292 $ 3,908
======= =======
16
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, 2002. 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 March 31,
2003, we operated 40 collection operations, 27 transfer stations, approximately
90 county convenience drop-off centers, eight recycling facilities and 11
landfills in the southeastern United States. We had revenues of $251.8 million
and operating income of $27.7 million for the year ended December 31, 2002, and
revenues of $62.9 million and operating income of $5.9 million for the
three-month period ended March 31, 2003.
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 three-month period ended March 31, 2003, we
acquired 70 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 March 31, 2003, we operated approximately 90 convenience sites under contract
with 13 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 March 31, 2003, we also operated
eight recycling processing facilities as part of our collection and
17
transfer operations where we 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 March 31, 2003, we
owned, operated or transferred from 27 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 March 31, 2003, 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, 2002. 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.
Adoption of SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS No.
143")
Effective January 1, 2003, we adopted the provisions of SFAS No. 143, Accounting
for Asset Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs.
In connection with the adoption of SFAS No. 143, we recorded approximately $1.1
million, net of taxes, or $0.08 per diluted share, in the first quarter of 2003
as a charge to cumulative effect of a change in accounting principle. The effect
of applying the provisions of SFAS No. 143 was a reduction in income for the
three months ended March 31, 2003 of approximately $200,000, net of taxes, or
$0.01 per diluted share.
Effective January 1, 2003, our method of accounting for landfill closure and
post-closure, as well as landfill final capping, changed as a result of our
adoption of SFAS No. 143. SFAS No. 143 does not change the basic landfill
accounting that we and others in the industry have followed historically.
Through December 31, 2002, the waste industry generally recognized expenses
associated with (i) amortization of capitalized and future landfill asset costs
and
18
(ii) future closure and post-closure obligations on a units-of-consumption basis
as airspace was consumed over the life of the related landfill. This practice,
referred to as life cycle accounting within the waste industry, continues to be
followed. The table below compares our historical practices and current
practices of accounting for landfill final capping, closure and post-closure
activities.
----------------------------------------------------------------------------------------------------------------------
Description Historical Practice Current Practice
(Effective January 1, 2003)
----------------------------------------------------------------------------------------------------------------------
Definitions:
Final Capping Capital asset related to installation of Reflected as an asset
flexible membrane and geosynthetic clay retirement obligation, on a
liners, drainage and compacted soil layers discounted basis, rather than
and topsoil constructed over areas of a capital asset
landfill where total airspace capacity has
been consumed
----------------------------------------------------------------------------------------------------------------------
Closure Includes last final capping event, final No change, except that last
portion of methane gas collection system to final capping event of each
be constructed, demobilization, and the landfill will be treated as a
routine maintenance costs incurred after site part of final capping
ceases to accept waste, but prior to being
certified as closed
----------------------------------------------------------------------------------------------------------------------
Post-closure Includes routine monitoring and maintenance No change
of a landfill after it has closed, ceased
to accept waste and been certified as closed by
the applicable state regulatory agency
----------------------------------------------------------------------------------------------------------------------
Discount Rate: Landfill final capping, closure and Credit-adjusted, risk-free
post-closure obligations were not discounted rate (8.00% at January 1,
2003)
----------------------------------------------------------------------------------------------------------------------
Cost Estimates: Costs were estimated based on performance, No change, except that the
principally by third parties, with a small cost of any activities
portion performed by the Company performed internally must be
increased to represent an
estimate of the amount a
third party would charge to
perform such activity
----------------------------------------------------------------------------------------------------------------------
Inflation: Landfill final capping, closure and Inflation rate of 2.5%
post-closure liabilities were not inflated to effective January 1, 2003
period of performance
----------------------------------------------------------------------------------------------------------------------
Recognition of Assets and
Liabilities:
Costs were capitalized as spent, except for All final capping is recorded
Final Capping the last final capping event that occurs as a liability and asset when
after the landfill closes, which was incurred; the discounted cash
accounted for as part of closure; spending flow associated with each
was included in capital expenditures within final capping event is
investing activities in the statement of cash recorded to the accrued
flows liability with a corresponding
increase to landfill assets as
airspace is consumed related
to the specific final capping
event; spending is reflected
as a change in liabilities within
operating activities in the
statement of cash flows
----------------------------------------------------------------------------------------------------------------------
19
-----------------------------------------------------------------------------------------------------------------------
Description Historical Practice Current Practice
(Effective January 1, 2003)
-----------------------------------------------------------------------------------------------------------------------
Statement of Operations
Expense:
Liability accrual Expense charged to cost of operations at Not applicable
same amount accrued to liability
-----------------------------------------------------------------------------------------------------------------------
Landfill asset amortization Not applicable for landfill closure and post Landfill asset is amortized
closure obligations to depreciation and
amortization expense as
airspace is consumed over
life of specific final
capping event or life of
landfill for closure and
post-closure
-----------------------------------------------------------------------------------------------------------------------
Accretion Not applicable as landfill final capping, Expense, charged to cost of
closure and post-closure obligations were not operations, is accreted at
discounted credit-adjusted, risk-free
rate (8.00%) under the
effective interest method
-----------------------------------------------------------------------------------------------------------------------
We amortize landfill retirement costs arising from closure and post-closure
obligations, which are capitalized as part of the landfill asset, using our
historical landfill accounting practices. We amortize landfill retirement costs
arising from final capping obligations, which are also capitalized as part of
the landfill asset, on a units-of-consumption basis over the number of tons of
waste that each final capping event covers.
Landfills
We have material financial commitments for final capping, closure and
post-closure obligations with respect to our landfills. We develop our estimates
of final capping, closure and post-closure obligations using input from our
third-party engineers and internal accounting. Our estimates are based on our
interpretation of current requirements and proposed regulatory changes and are
intended to approximate fair value. Absent quoted market prices, the estimate of
fair value should be based on the best available information, including the
results of present value techniques in accordance with Statement of Financial
Accounting Concepts No. 7, Using Cash Flow and Present Value in Accounting
Measurements. In general, we rely on third parties to fulfill most of our
obligations for final capping, closure and post-closure. Accordingly, the fair
market value of these obligations is based upon quoted and actual prices paid
for similar work. We intend to perform some of these capping, closure and
post-closure obligations using internal resources. Where internal resources are
expected to be used to fulfill an asset retirement obligation, we have added a
profit margin onto the estimated cost of such services to better reflect their
fair market value as required by SFAS No. 143. When we then perform these
services internally, the added profit margin is recognized as a component of
operating income in the period earned. SFAC No. 7 further states that an
estimate of fair value should include the price that marketplace participants
are able to receive for bearing the uncertainties in cash flows. However, when
utilizing discounted cash flow techniques, reliable estimates of market premiums
may not be obtainable. In this situation, SFAC No. 7 indicates that it is not
necessary to consider a market risk premium in the determination of expected
cash flows. In the waste industry, there is not an active market that can be
utilized to determine the fair value of these activities as there is no market
that exists for selling the responsibility for final capping, closure and
post-closure obligations independent of selling the landfill in its entirety.
Accordingly, we believe that it is not possible to develop a methodology to
reliably estimate a market risk premium and have excluded a market risk premium
from our determination of expected cash flows for landfill asset retirement
obligations in accordance with SFAC No. 7.
Once we have determined the estimates of final capping, closure and post-closure
obligations, we then inflate those costs to the expected time of payment and
discount those expected future costs back to present value. The Company is
currently inflating these costs in current dollars until expected time of
payment using an inflation rate of 2.5% and is discounting these costs to
present value using a credit-adjusted, risk-free discount rate of 8.00%. The
credit-adjusted, risk-free rate is based on the risk-free interest rate adjusted
for our credit standing. Management reviews these estimates at least once per
year. Significant changes in future final capping, closure and post-closure cost
estimates and
20
inflation rates typically result in both (i) a current adjustment to the
recorded liability (and corresponding adjustment to the landfill asset), based
on the landfill's capacity that has been consumed, and (ii) a change in
liability and asset amounts to be recorded prospectively over the remaining
capacity of the landfill. Any change related to the capitalized and future cost
of the landfill asset is then recognized in amortization expense prospectively
over the remaining capacity of the landfill. Changes in our credit-adjusted,
risk-free rate do not change recorded liabilities, but subsequently recognized
obligations are measured using the revised credit-adjusted risk-free rate.
We record the estimated fair value of final capping, closure and post-closure
obligations for our landfills based on the landfills' capacity that has been
consumed through the current period. This liability and corresponding asset is
accrued on a per-ton basis. The estimated fair value of each final capping event
will be fully accrued when the tons associated with such capping event have been
disposed in the landfill. Additionally, the estimated fair value of total final
capping, closure and post-closure costs will be fully accrued for each landfill
at the time the site discontinues accepting waste and is closed. Closure and
post-closure accruals consider estimates for methane gas control, leachate
management and ground-water monitoring and other operational and maintenance
costs to be incurred after the site discontinues accepting waste, which is
generally expected to be for a period of up to thirty years after final site
closure. Daily maintenance activities, which include many of these costs, are
incurred during the operating life of the landfill and are expensed as incurred.
Daily maintenance activities include leachate disposal; surface water,
groundwater, and methane gas monitoring and maintenance; other pollution control
activities; mowing and fertilizing the landfill cap; fence and road maintenance;
and third party inspection and reporting costs. For purchased disposal sites, we
assess and record present value-based final capping, closure and post-closure
obligations at the time we assume such responsibilities. Such liabilities are
based on the estimated final capping, closure and post-closure costs and the
percentage of airspace consumed related to such obligations as of the date we
assumed the responsibility. Thereafter, we account for the landfill and related
final capping, closure and post-closure obligations consistent with the policy
described above.
Interest accretion on final capping, closure and post-closure obligations is
recorded using the effective interest method and is recorded as final capping,
closure and post-closure expense, which is included in operating costs on the
income statement.
In the United States, the closure and post-closure obligations are established
by the EPA's Subtitles C and D regulations, as implemented and applied on a
state-by-state basis. The costs to comply with these obligations could increase
in the future as a result of legislation or regulation.
Three-Month Period Ended March 31, 2003 vs. Three-Month Period Ended March 31,
2002
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.
21
Three Months Ended
March 31,
-----------------------
2002 2003
--------- ---------
Total revenues 100.0% 100.0%
Service 99.4% 99.3%
Equipment 0.6% 0.7%
--------- ---------
Total cost of operations 63.9% 64.3%
Selling, general and administrative 14.2% 14.4%
Depreciation and amortization 11.2% 11.9%
--------- ---------
Operating income 10.7% 9.4%
--------- ---------
Interest expense (net) 4.5% 3.9%
Other expense (income) 0.1% 0.0%
--------- ---------
Income before income taxes 6.1% 5.5%
Income taxes 2.2% 2.0%
--------- ---------
Net income before cumulative effect of a change in
accounting principle, net 3.9% 3.5%
Cumulative effect of a change in accounting principle 0.0% -1.7%
--------- ---------
Net income 3.9% 1.8%
========= =========
REVENUES. Total revenues increased approximately $3.0 million, or 4.9%, for the
three-month period ended March 31, 2003, compared to the same period in 2002.
The increase was attributable to the effect of eight businesses and contracts
acquired during the year ended December 31, 2002 and one business during the
three-month period ended March 31, 2003, resulting in an increase of
approximately $2.0 million, an increase of approximately $1.0 million in
disposal revenue and an increase in annexation fees, fuel surcharges and other
miscellaneous revenue of approximately $1.0 million, offset by a decrease of
approximately $1.0 million in transfer station hauling revenue due to our
outsourcing those services, compared to the same period in 2002.
TOTAL COST OF OPERATIONS. Total cost of operations increased $2.2 million, or
5.7% for the three-month period ended March 31, 2003, compared to the same
period in 2002. The increase was primarily attributed to increased disposal and
transfer expenses of approximately $1.1 million, fuel costs of approximately
$0.4 million, property, repairs and maintenance of approximately $0.3 million,
casualty and worker compensation insurance of $0.2 million and landfill site
maintenance of approximately $0.2 million. These increases are primarily due to
the increased volume attributed to the effect of eight businesses acquired
during 2002 and the one business acquired during the three-month period ended
March 31, 2003. Total cost of operations as a percentage of revenues increased
to 64.3% from 63.9% for the three-month period ended March 31, 2003 as compared
to the same period in 2002.
SG&A. SG&A increased $0.6 million, or 6.8%, for the three-month period ended
March 31, 2003, compared with the same period in 2002. For the three-month
period ended March 31, 2003, the increase was primarily attributable to
increased labor costs of $0.3 million, increased bad debt expense of $0.2
million and increased professional fees of $0.1 million compared to the same
period in 2002. SG&A as a percentage of revenues increased to 14.4% from 14.2%
for the three-month period ended March 31, 2003 as compared to the same period
in 2002.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $0.8
million, or 11.3%, for the three- month period ended March 31, 2003, compared to
the same period in 2002. Depreciation and amortization, as a percentage of
revenues, increased to 11.9% from 11.2% for the three-month period ended March
31, 2003 and 2002. The primary component of this increase was the adoption of
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations. In accordance with SFAS No. 143, effective January 1,
2003, landfill assets are amortized to depreciation and amortization expense as
airspace is consumed over the life of specific final capping event or the life
of the landfill for closure and post-closure.
INTEREST EXPENSE. Interest expense (net of interest income) decreased $0.3
million, or 10.4%, for the three-month period ended March 31, 2003 compared to
the same period in 2002. This decrease is primarily attributable to lower debt
22
levels of $153.5 million during the three months ended March 31, 2003 compared
to $170.3 million during the three months ended March 31, 2002, The overall
decrease in interest expense was partially offset by a 40 basis point increase
in the cost of borrowings during the three-month period ended March 31, 2003
compared to the same period in 2002.
INCOME TAX EXPENSE. Income tax expense decreased $95,000, or 7.1%, for the
three-month period ended March 31, 2003, compared to the same period in 2002 due
to a decrease in income before taxes.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. Effective January 1,
2003, we adopted the provisions of SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. As a result, for the three-month period ended March 31,
2003, we recognized a cumulative effect of a change in accounting principle of
$1.1 million (net of tax benefit of $0.6 million). For a discussion of SFAS No.
143, see "RESULTS OF OPERATIONS - Critical Accounting Policies".
NET INCOME. Net income decreased $1.2 million, or 51.7%, for the three-month
period ended March 31, 2003, compared to the same period in 2002. The decrease
was primarily related to increases in cost of operations, SG&A, depreciation and
amortization and a charge for a cumulative effect of a change in accounting
principle, which offset our total revenues.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at March 31, 2003 was $3.3 million compared to $2.9 million
at December 31, 2002. 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 2003. Prior to 2000, we had fully drawn upon our three $25.0
million term facilities with Prudential Insurance Company of America. In 2000,
we began principal repayments on the first $25.0 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: $10.7 million in April 2006, $25.0 million in June
2008 and $25.0 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 $200.0 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 March 31,
2003, an aggregate of approximately $65.0 million was outstanding under the
Fleet credit facility, and the average interest rate on outstanding borrowings
was approximately 3.7%.
We currently hold a variable rate development bond with Sampson County ("Sampson
facility") of income tax exempt funding. As of March 31 2003, an aggregate of
approximately $30.9 million was outstanding under the Sampson facility. The
bonds are backed by a letter of credit issued by Wachovia Bank & Trust as a
participating lender under our Fleet syndication. The average interest rate on
outstanding borrowings under the Sampson facility was approximately 3.8% at
March 31, 2003.
As of March 31, 2003, we had the following contractual obligations and
commercial commitments (in thousands):
23
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
Contractual Less Than
Obligations Total 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
- ------------------------- --------- --------- ------------ ------------ ------------
Long-term debt (1) $ 153,034 $ 7,169 $ 97,152 $ 17,856 $ 30,855
Expected aggregate environmental liabilities(2) 91,238 410 5,186 262 85,379
Operating leases 7,882 1,776 2,761 1,967 1,378
Capital leases 475 475 - - -
--------- --------- ------------ ------------ ------------
Total contractual cash
Obligations $ 252,629 $ 9,830 $ 105,099 $ 20,085 $ 117,612
========= ========= ============ ============ ============
(1) As of March 31, 2003, our Fleet credit facility allows us to borrow up to
$200 million provided our loan covenants are maintained.
(2) Environmental liabilities are based on current costs and include final
closure, post closure and environmental remediation costs
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-----------------------------------------------------------------------------
Commercial Total Amounts Less Than
Commitments Committed 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
- ----------- ------------- ---------- ------------ ------------ ------------
Standby letters of credit $ 10,224 $ 10,224 $ - $ - $ -
Performance bonds 3,530 2,230 1,300 - -
------------- ---------- ------------ ------------ ------------
Total commercial
Commitments $ 13,754 $ 12,454 $ 1,300 $ - $ -
============= ========== ============ ============ ============
Net cash provided by operating activities increased $1.9 million to $10.1
million for the three-month period ended March 31, 2003, compared to net cash
provided by operating activities of $8.2 million for the three-month period
ended March 31, 2002. Cash provided consisted of income from operations and cash
generated from changes in operating assets and liabilities.
Net cash used in investing activities increased $6.0 million to $9.8 million for
the three-month period ended March 31, 2003, compared to $3.8 million for the
three-month period ended March 31, 2002. The increase in cash used related to an
increase in acquisition of related businesses of $4.1 million and an increase in
capital expenditures of $2.6 million.
We currently expect capital expenditures for 2003 to be approximately $32.4
million, compared to $18.2 million in 2002. In 2003, we expect to use
approximately $8.7 million for vehicle and equipment additions and replacements,
approximately $13.2 million for landfill site and cell development,
approximately $7.1 million for support equipment and approximately $3.4 million
for facilities, additions and improvements. We expect to fund our planned 2003
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 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.
24
Net cash provided in financing activities totaled $0.3 million for the
three-month period ended March 31, 2003, compared to $1.3 million used by
financing activities for the three-month period ended March 31, 2002. Borrowings
(repayments) of long-term debt were $0.5 million and $(1.1) million for the
three-month periods ended March 31, 2003 and 2002, respectively.
At March 31, 2003, we had approximately $153.5 million of total borrowings
outstanding (including capital lease obligations) and approximately $10.2
million in letters of credit. At March 31, 2003, the ratio of our total debt
(including capital lease obligations) to total capitalization was 60.9%,
compared to 61.2% at December 31, 2002.
Accounts receivable increased approximately $1.0 million to $29.2 million at
March 31, 2003 from $28.2 million at December 31, 2002 due primarily to
increased revenues of $3.0 million offset by cash collections.
Prepaid insurance increased approximately $1.5 million to $2.0 million at March
31, 2003 from $0.5 million at December 31, 2002 due primarily to the prepayment
of our annual insurance premium for auto liability and physical damage coverage
and workers' compensation coverage.
Accrued expenses and other liabilities increased approximately $1.3 million to
$5.6 million at March 31, 2003 from $4.3 million at December 31, 2002 due
primarily to an increase of $0.5 million in accrued expenses related to the
settlement of acquisitions, an increase of $0.3 million in accrued interest, an
increase of $0.2 million in accrued property tax, an increase of $0.2 million
for property and casualty insurance and an increase of $0.1 million in accrued
employee benefits.
Recently Adopted and Newly Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective January 1, 2003, we adopted the provisions of SFAS No. 143, Accounting
for Asset Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 required us to change our
method of accounting for landfill closure and post-closure, as well as final
capping, obligations. See "RESULTS OF OPERATIONS - Critical Accounting
Policies," for a discussion of our adoption of SFAS No. 143.
Effective January 1, 2002, we adopted the provisions of SFAS No. 144, Accounting
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 Accounting Principles Board No. 30,
Reporting the Results of Operation--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and how the
results of a discontinued operation are to be measured and presented. The
adoption of SFAS No. 144 did not have a material impact on our results of
financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion ("Opinion") No. 30. Applying the provisions of Opinion
No. 30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent and meet the criteria for
classification as an extraordinary item. SFAS No. 145 was effective for us
beginning January 1, 2003. The adoption of SFAS No. 145 had no impact on our
financial condition or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities, such as
restructurings, involuntarily terminating employees, and consolidating
facilities initiated after December 31, 2002. The adoption of SFAS No. 146 had
no impact on our financial condition or results of operations.
Effective December 31, 2002, we adopted the provisions of SFAS No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment
of SFAS No. 123, Accounting for Stock-Based Compensation. This statement was
issued to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. In
addition, this statement amends the disclosure requirements of SFAS
25
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The amendments to SFAS
No. 123 in paragraphs 2(a)-2(e) of this statement were effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of SFAS
No. 148 did not have an impact on our results of operations or financial
condition.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others. It clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee, including its ongoing
obligation to stand ready to perform over the term of the guarantee in the event
that the specified triggering events or conditions occur. The objective of the
initial measurement of the liability is the fair value of the guarantee at its
inception. The initial recognition and initial measurement provisions of FIN 45
are effective for us on a prospective basis to guarantees issued or amended
after December 31, 2002. We will record the fair value of future material
guarantees, if any. The adoption of FIN 45 had no significant impact on our
financial condition or results of operations.
New-Issues Accounting Pronouncement Not Yet Fully Adopted
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 requires that unconsolidated variable interest entities must be
consolidated by their primary beneficiaries. A primary beneficiary is the party
that absorbs a majority of the entity's expected losses or residual benefits.
FIN 46 applies immediately to variable interest entities created after January
31, 2003 and to existing variable interest entities in the periods beginning
after June 15, 2003. We do not believe the full adoption of FIN 46 will have a
material impact on our financial condition or results of operations.
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 $50.0 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
fuel prices. During January 2003, we entered into an option agreement for
approximately 1.7 million gallons of heating oil. This option agreement, which
was effective February 1, 2003, settles each month in equal notional amounts
through May 2003. We paid a fixed price of approximately $60,000 for the option
agreement, which is structured as a cap indexed to the price of heating oil.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
26
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See exhibit index.
(b) Reports on 8-K
None.
27
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.
Dated: May 15, 2003 Waste Industries USA, Inc.
(Registrant)
By: /s/ Jim W. Perry
--------------------------------------
Jim W. Perry
President and Chief Executive Officer
Dated: May 15, 2003 Waste Industries USA, Inc.
(Registrant)
By: /s/ D. Stephen Grissom
--------------------------------------
D. Stephen Grissom
Chief Financial Officer
28
CERTIFICATION
I, Jim W. Perry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waste Industries
USA, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ Jim W. Perry
---------------- -------------------------------------
Jim W. Perry
President and Chief Executive Officer
29
I, D. Stephen Grissom, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waste Industries
USA, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
c. The registrant's other certifying officer and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ D. Stephen Grissom
---------------- -------------------------------------
D. Stephen Grissom
Chief Financial Officer
30
WASTE INDUSTRIES USA, INC.
EXHIBIT INDEX
First Quarter 2003
Exhibit Number Exhibit Description
- -------------- -------------------
Exhibit 99.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
31