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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002 COMMISSION FILE NO. 0-23981
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
94-3283464
(I.R.S. Employer Identification No.)
620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of July 31, 2002: 27,807,690 Shares of Common Stock
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2001 and June 30, 2002
Condensed Consolidated Statements of Income for the three and six months ended
June 30, 2001 and 2002
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, JUNE 30,
2001 2002
----------- -----------
ASSETS (UNAUDITED)
Current assets:
Cash and equivalents $ 7,279 $ 5,151
Accounts receivable, less allowance for doubtful
accounts of $2,167 and $1,928 at December 31, 2001
and June 30, 2002, respectively 51,372 63,560
Prepaid expenses and other current assets 8,123 9,601
----------- -----------
Total current assets 66,774 78,312
Property and equipment, net 465,806 549,087
Goodwill 411,757 493,024
Intangible assets, net 16,248 30,854
Other assets, net 18,768 25,544
----------- -----------
$ 979,353 $ 1,176,821
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,224 $ 35,175
Accrued liabilities 23,555 32,721
Deferred revenue 13,355 17,265
Current portion of long-term debt and notes payable 5,305 4,307
----------- -----------
Total current liabilities 71,439 89,468
Long-term debt and notes payable 416,171 552,404
Other long-term liabilities 13,264 18,619
Deferred income taxes 78,689 83,803
----------- -----------
Total liabilities 579,563 744,294
Commitments and contingencies
Minority interests 19,825 19,662
Stockholders' equity:
Preferred stock: $0.01 par value; 7,500,000 shares authorized;
none issued and outstanding -- --
Common stock: $0.01 par value; 50,000,000 shares authorized;
27,423,669 and 27,801,658 shares issued and outstanding at
December 31, 2001 and June 30, 2002, respectively 274 278
Additional paid-in capital 316,594 323,773
Deferred stock compensation -- (958)
Retained earnings 68,032 94,545
Unrealized loss on market value of interest rate swaps (4,935) (4,773)
----------- -----------
Total stockholders' equity 379,965 412,865
----------- -----------
$ 979,353 $ 1,176,821
=========== ===========
See accompanying notes.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenues $ 93,967 $ 128,091 $ 179,081 $ 233,833
Operating expenses:
Cost of operations 51,864 72,022 98,881 131,201
Selling, general and administrative 8,400 12,465 15,059 21,855
Depreciation and amortization 8,704 10,085 16,896 18,113
Loss on disposal of operations 4,879 -- 4,879 --
------------ ------------ ------------ ------------
Income from operations 20,120 33,519 43,366 62,664
Interest expense (7,643) (7,921) (15,245) (15,426)
Other income (expense), net 327 (181) (6,145) (581)
------------ ------------ ------------ ------------
Income before income tax provision and
Minority interests 12,804 25,417 21,976 46,657
Minority interests (2,168) (2,470) (3,498) (4,236)
------------ ------------ ------------ ------------
Income before income tax provision 10,636 22,947 18,478 42,421
Income tax provision (4,238) (8,605) (7,368) (15,908)
------------ ------------ ------------ ------------
Net income $ 6,398 $ 14,342 $ 11,110 $ 26,513
============ ============ ============ ============
Basic earnings per common share $ 0.24 $ 0.52 $ 0.41 $ 0.96
============ ============ ============ ============
Diluted earnings per common share $ 0.23 $ 0.49 $ 0.40 $ 0.91
============ ============ ============ ============
Shares used in the per share calculations:
Basic 27,067,906 27,723,136 26,953,148 27,676,913
============ ============ ============ ============
Diluted 27,637,147 32,347,458 27,626,398 32,214,488
============ ============ ============ ============
See accompanying notes.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2002
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
2001 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,110 $ 26,513
Adjustments to reconcile net income to
Net cash provided by operating activities:
Loss on disposal of operations 4,879 --
Gain on sale of assets -- (45)
Depreciation 11,723 17,317
Amortization of intangibles 5,173 796
Loss on termination of interest rate swap 6,337 --
Minority interests 3,498 4,236
Amortization of debt issuance costs and debt
guarantee fees 635 1,031
Early extinguishment of debt 240 --
Stock compensation -- 679
Net change in operating assets and liabilities,
net of acquisitions (14,794) 9,780
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Net cash provided by operating activities 28,801 60,307
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (28,275) (100,511)
Capital expenditures for property and equipment (15,886) (24,929)
Proceeds from disposal of assets 2,869 1,875
Decrease in other assets (336) (750)
--------- ---------
Net cash used in investing activities (41,628) (124,315)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 185,021 300,000
Principal payments on long-term debt (160,427) (233,181)
Termination of interest rate swap (6,337) --
Distributions to minority interest holders (1,230) (4,165)
Proceeds from options and warrants 4,640 5,604
Debt issuance costs (6,144) (6,378)
--------- ---------
Net cash provided by financing activities 15,523 61,880
--------- ---------
Net increase (decrease) in cash and equivalents 2,696 (2,128)
Cash and equivalents at beginning of period 2,461 7,279
--------- ---------
Cash and equivalents at end of period $ 5,157 $ 5,151
========= =========
See accompanying notes.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND SUMMARY
The accompanying financial statements relate to Waste Connections, Inc. and its
subsidiaries (the "Company") as of June 30, 2002 and for the three and six month
periods ended June 30, 2001 and 2002. The consolidated financial statements of
the Company include the accounts of Waste Connections, Inc. and its wholly-owned
and majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three and six month periods
ended June 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
The Company's consolidated balance sheet as of June 30, 2002, the consolidated
statements of income for the three and six months ended June 30, 2001 and 2002,
and the consolidated statements of cash flows for the six months ended June 30,
2001 and 2002 are unaudited. In the opinion of management, such financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position, results of operations, and cash flows for the periods presented. The
consolidated financial statements presented herein should be read in conjunction
with the Company's annual report on Form 10-K for the year 2001.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", (collectively, the "Statements") effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets, including those meeting new recognition criteria under the Statements,
will continue to be amortized over their estimated useful lives.
The Company fully adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The Company tests
goodwill for impairment using the two-step process prescribed in SFAS No. 142.
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. In 2002, the Company performed
the first of the required impairment tests of goodwill and indefinite-lived
intangible assets based on the carrying values as of January 1, 2002. As a
result of performing the test for potential impairment, the Company determined
that no impairment existed as of January 1, 2002 and therefore, it was not
necessary to write down any of its goodwill or indefinite-lived intangible
assets.
Net income for the three and six months ended June 30, 2001, adjusted for the
nonamortization provisions of SFAS No. 142, was $8,137 and $14,521,
respectively. Basic and diluted shares outstanding were 27,067,906 and
27,637,147, respectively, for the three months ended June 30, 2001 and
26,953,148 and 27,626,398, respectively, for the six months ended June 30, 2001.
The Company expects application of the nonamortization provisions of SFAS No.
142 to result in an increase in pre-tax income of approximately $9,600 and an
increase in net income of approximately $6,800 in 2002, based on goodwill
amortization occurring in 2001 that will not occur in 2002. The Company
estimates its 2002 earnings per share will be calculated using basic and diluted
shares of 27.8 million and 32.4 million, respectively.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", effective for fiscal years
beginning after June 15, 2002. This Statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company's
adoption of SFAS No. 143 is not expected to have a material effect on its
financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements and related disclosures.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Modifications to Reporting of Extinguishments of Debt and Accounting for
Certain Capital Lease Modifications and Technical Corrections", effective for
transactions occurring after May 15, 2002. SFAS No. 145 requires gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items. SFAS No. 145 also
requires that certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor (or guarantor). The Company elected to adopt
SFAS No. 145 early, which resulted in the reclassification from extraordinary
items to other expenses of $240 of losses incurred during the six months ending
June 30, 2001 resulting from early extinguishments of debt.
3. ACQUISITIONS
During the six months ended June 30, 2002, the Company acquired eleven
non-hazardous solid waste collection businesses that were accounted for using
the purchase method of accounting. Aggregate consideration, exclusive of debt
assumed, for the acquisitions consisted of $100,511 in cash (net of cash
acquired), $217 of notes issued to sellers and warrants valued at $102.
In connection with an acquisition occurring in 2002, the Company may be required
to pay contingent consideration to certain former shareholders, subject to the
occurrence of specified events. As of June 30, 2002, the estimated potential
contingent payments relating to the 2002 acquisition totaled $2,000 in cash, and
are to be earned if an expansion permit for an acquired landfill is obtained.
The Company has not included any of the contingent consideration from the 2002
acquisition in these financial statements as it is too early in the contingency
period to assess the probability of obtaining the expansion permit.
The purchase prices have been allocated to the identified intangible assets and
tangible assets acquired based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill. The purchase price
allocations are considered preliminary until the Company is no longer waiting
for information that it has arranged to obtain and that is known to be available
or obtainable. Although the time required to obtain the necessary information
will vary with circumstances specific to an individual acquisition, the
"allocation period" for finalizing purchase price allocations generally does not
exceed one year from the consummation of a business combination.
As of June 30, 2002, the Company had 19 acquisitions for which purchase price
allocations were preliminary, mainly as a result of tax-related settlements. The
Company believes the potential changes to its preliminary purchase price
allocations will not have a material impact on its financial condition, results
of operations or cash flows. A summary of the preliminary purchase price
allocations for the acquisitions consummated in the six months ended June 30,
2002 is as follows:
Acquired assets:
Accounts receivable $ 9,738
Prepaid expenses and other current assets 653
Property and equipment 77,500
Goodwill 81,384
Indefinite-lived intangible assets 5,990
Contracts 8,630
Non-competition agreements 665
Assumed liabilities:
Deferred revenue (3,859)
Accounts payable (6,187)
Deferred taxes (5,115)
Debt and other liabilities assumed (68,569)
-----------
$ 100,830
===========
Goodwill acquired in the six months ended June 30, 2002 totaling $7,692 is
expected to be deductible for tax purposes.
4. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consist of the following as of June
30, 2002:
GROSS WEIGHTED-AVERAGE
CARRYING ACCUMULATED AMORTIZATION
AMOUNT AMORTIZATION PERIOD IN YEARS
------ ------------ ---------------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 12,014 $ (899) 26
Non-competition agreements 3,523 (1,688) 5
Other, net 2,229 (529) 13
---------- ----------
$ 17,766 $ (3,116)
========== ==========
Nonamortized intangible assets:
Indefinite-lived intangible assets $ 16,204 - -
========== ==========
The amounts assigned to indefinite-lived intangible assets consist of the value
of certain perpetual rights to provide solid waste collection and transportation
services in specified territories. These indefinite-lived intangible assets were
subject to amortization prior to the Company's adoption of SFAS No. 142.
Estimated future amortization expense for the next five years of amortizable
intangible assets is as follows:
For the year ended December 31, 2002 $ 1,224
For the year ended December 31, 2003 1,128
For the year ended December 31, 2004 991
For the year ended December 31, 2005 859
For the year ended December 31, 2006 703
5. LONG-TERM DEBT
In April 2002, Waste Connections issued Floating Rate Convertible Subordinated
Notes due 2022 (the "Notes") with an aggregate principal amount of $175,000 in a
Rule 144A private placement. The Notes are unsecured and rank pari passu with
the Company's 5.5% Convertible Subordinated Notes due 2006 and junior to all
other existing and future senior indebtedness, as defined in the indenture
governing the Notes. The Notes bear interest at the 3-month LIBOR rate plus 50
basis points, payable quarterly.
The holders may surrender notes for conversion into common stock at a conversion
price of $48.39 per share on or after August 1, 2002, but prior to the maturity
date, only if any of the following conditions are satisfied: (a) the closing
sale price per share for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the calendar quarter
preceding the calendar quarter in which the conversion occurs is more than 110%
of the conversion price per share on that thirtieth trading day; (b) during such
period, if any, that the credit ratings assigned to the Notes by Moody's
Investors Service, Inc. and Standard & Poor's Rating Group (the "Rating
Agencies") are reduced below B3 or B-, respectively; (c) if neither Rating
Agency is rating the Notes; (d) during the five business day period after any
nine consecutive trading day period in which the trading price of the Notes (per
$1,000 principal amount) for each day of such period is less than 95% of the
product of the closing sale price of the Company's common stock multiplied by
the number of shares issuable upon conversion of $1,000 principal amount of the
Notes; (e) upon the occurrence of specified corporate transactions; or (f) if
the Notes have been called for redemption and the redemption has not yet
occurred.
The Company may redeem all or a portion of the Notes for cash at any time on or
after May 7, 2006. Holders of the Notes may require the Company to purchase
their Notes at a price of $1,000 per Note in cash plus accrued interest, if any,
upon a change in control of the Company, as defined in the indenture, or on any
of the following dates: May 1, 2009, May 1, 2012 and May 1, 2017.
The proceeds from the sale of the Notes were used to repay a portion of the
outstanding indebtedness and related costs under the Company's credit facility
and for general corporate purposes, including payment for an acquisition.
6. EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of earnings per common share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------- -----------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Numerator:
Net income for basic earning per share $ 6,398 $ 14,342 $ 11,110 $ 26,513
Interest expense on convertible
subordinated notes due 2006, net of tax
effects -- 1,462 -- 2,921
----------- ----------- ----------- -----------
Net income for diluted earnings per share $ 6,398 $ 15,804 $ 11,110 $ 29,434
=========== =========== =========== ===========
Denominator:
Basic shares outstanding 27,067,906 27,723,136 26,953,148 27,676,913
Dilutive effect of convertible
subordinated notes due 2006 -- 3,944,775 -- 3,944,775
Dilutive effect of options and warrants 569,241 679,547 673,250 592,800
----------- ----------- ----------- -----------
Diluted shares outstanding 27,637,147 32,347,458 27,626,398 32,214,488
=========== =========== =========== ===========
7. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate swaps
that qualify for hedge accounting. The difference between net income and
comprehensive income for the three and six months ended June 30, 2001 and 2002
is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2001 2002 2001 2002
-------- -------- -------- --------
Net income $ 6,398 $ 14,342 $ 11,110 $ 26,513
Unrealized gain (loss) on interest
rate swaps, net of tax benefit
(expense) of $(155) and $491
for the three months ended June
30, 2001 and 2002,
respectively, and $1,881 and
$(345) for the six months ended
June 30, 2001 and 2002,
respectively 233 (818) (2,834) 162
-------- -------- -------- --------
Comprehensive income $ 6,631 $ 13,524 $ 8,276 $ 26,675
======== ======== ======== ========
The components of other comprehensive income and related tax effects for the
three and six months ended June 30, 2001 and 2002 are as follows:
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------
Gross Tax effect Net of tax
----- ---------- ----------
Amounts reclassified into earnings 603 241 362
Changes in fair value of interest rate swaps (215) (86) (129)
------- ------- -------
$ 388 $ 155 $ 233
======= ======= =======
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------
Gross Tax effect Net of tax
----- ---------- ----------
Amounts reclassified into earnings $ 1,573 $ 590 $ 983
Changes in fair value of interest rate swaps (2,882) (1,081) (1,801)
------- ------- -------
$(1,309) $ (491) $ (818)
======= ======= =======
SIX MONTHS ENDED JUNE 30, 2001
------------------------------
Gross Tax effect Net of tax
----- ---------- ----------
Cumulative effect of accounting change $(5,940) $(2,370) $(3,570)
Amounts reclassified into earnings 1,013 404 609
Changes in fair value of interest rate swaps (6,125) (2,444) (3,681)
Changes associated with current period swap
transactions 6,337 2,529 3,808
------- ------- -------
$(4,715) $(1,881) $(2,834)
======= ======= =======
SIX MONTHS ENDED JUNE 30, 2002
------------------------------
Gross Tax effect Net of tax
----- ---------- ----------
Amounts reclassified into earnings $ 3,095 $ 1,161 $ 1,934
Changes in fair value of interest rate swaps (2,588) (816) (1,772)
------- ------- -------
$ 507 $ 345 $ 162
======= ======= =======
The estimated net amount of the existing losses as of June 30, 2002 (based on
the interest rate yield curve at that date) included in accumulated other
comprehensive income expected to be reclassified into pre-tax earnings as
payments are made under the terms of the interest rate swap agreements within
the next 12 months is approximately $6,092. The timing of actual amounts
reclassified into earnings is dependent on future movements in interest rates.
8. LEGAL PROCEEDINGS
In January 2002,the Oklahoma Department of Environmental Quality Land Protection
Division (the "Department") issued an order to Waste Connections requiring the
Company to cease accepting more than 200 tons per day of out-of-state waste at
its Red Carpet Landfill in Oklahoma due to its alleged failure to obtain the
Department's prior approval of a disposal plan for that waste. At that time, the
Department assessed the Company a fine of $220 for past violations related to
accepting more than 200 tons per day of out-of-state waste prior to obtaining
the Department's approval of a disposal plan. While seeking the Department's
approval of a disposal plan, the Company continued to accept more than 200 tons
a day of out-of-state waste because it believed, based on the advice of legal
counsel, that the Department did not have the legal right to require the Company
to obtain its approval of a disposal plan prior to accepting more than 200 tons
per day of out-of-state waste. In June 2002, the Department issued an amended
order approving the Company's disposal plan subject to conditions and increasing
the fine assessed against the Company to $2,160 because the Company continued to
accept more than 200 tons per day of out of state waste prior to obtaining its
approval of the Company's plan. The Company has objected to some of the
conditions imposed in the order and has initiated litigation against the
Department challenging this order. Based on the advice of its legal counsel, the
Company believes that it will prevail in this litigation. Therefore, the Company
believes that any payment resulting from the order will not materially affect
its cash flows, financial condition or results of operations. As a result, the
Company has not recorded a liability in connection with this order.
9. RESTRICTED STOCK PLAN
During the second quarter of 2002, the Company's Board of Directors adopted a
restricted stock plan in which selected employees, other than officers and
directors, may participate (the "2002 Restricted Stock Plan"). Restricted stock
awards under the 2002 Restricted Stock Plan may or may not require a cash
payment from a participant to whom an award is made and become free of the
stated restrictions over periods determined at the date of the grant, subject to
continuing employment. A total of 95,000 shares were reserved for issuance under
the 2002 Restricted Stock Plan. During the second quarter of 2002, the Company
issued 23,428 shares of restricted stock to selected employees. The fair value
of the issued stock was $826 and will be amortized to expense over the three
year restriction period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere herein.
FORWARD LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q, including,
without limitation, information appearing under Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," is
forward-looking in nature These statements can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "will",
"should" or "anticipates" or the negative thereof or comparable terminology, or
by discussions of strategy. Our business and operations are subject to a variety
of risks and uncertainties and, consequently, actual results may materially
differ from those projected by any forward-looking statements in this Quarterly
Report on Form 10-Q. Factors that could cause actual results to differ from
those projected include, but are not limited to, the following: (1) competition
or unfavorable industry or economic conditions could lead to a decrease in
demand for our services and/or to a decline in prices we realize for our
services, (2) we depend in part on acquisitions for growth; we may be required
to pay higher prices for acquisitions, and we may experience difficulty in
integrating and deriving synergies from acquisitions, (3) we may not always have
access to the additional capital that we require to execute our growth strategy
or our cost of capital may increase, (4) governmental regulations may require
increased capital expenditures or otherwise affect our business, (5) businesses
that we acquire may have undiscovered liabilities, (6) we depend on large,
long-term collection contracts, and (7) key members of senior management may
depart and may be difficult or impossible to replace. These risks and
uncertainties, as well as others, are discussed in greater detail in our other
filings with the Securities and Exchange Commission. We make no commitment to
revise or update any forward-looking statements to reflect events or
circumstances after the date any such statement is made.
OVERVIEW
Waste Connections, Inc. is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in secondary markets located primarily in the Western U.S. As of June 30, 2002,
we served more than 925,000 commercial, industrial and residential customers in
Alabama, California, Colorado, Georgia, Illinois, Indiana, Iowa, Kansas,
Kentucky, New Mexico, Minnesota, Mississippi, Montana, Nebraska, Ohio, Oklahoma,
Oregon, South Dakota, Tennessee, Texas, Utah, Washington, and Wyoming. As of
that date, we owned 85 collection operations and operated or owned 40 transfer
stations, 30 Subtitle D landfills and 19 recycling facilities.
We generally intend to pursue an acquisition-based growth strategy and as of
June 30, 2002 had acquired 145 businesses since our inception in September 1997.
We anticipate that a substantial part of our future growth will come from
acquiring additional solid waste collection, transfer and disposal businesses
and, therefore, we expect additional acquisitions could continue to affect
period-to-period comparisons of our operating results.
Critical Accounting Policies
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Allowance for doubtful accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers deteriorated,
impairing their ability to make payments, additional allowances may be required.
In addition, if certain customer and billing information is not properly
integrated from acquisitions that we close, additional allowances may be
required.
Impairment of intangible assets. We periodically evaluate acquired businesses
for potential impairment indicators. Our judgments regarding the existence of
impairment indicators are based on regulatory factors, market conditions and
operational performance of our acquired businesses. Future events could cause us
to conclude that impairment
indicators exist and that goodwill or other intangibles associated with our
acquired businesses are impaired. Any resulting impairment loss could have a
material adverse effect on our financial condition and results of operations. As
of June 30, 2002, goodwill and intangible assets represented 44.5% of our total
assets.
Accounting for landfills. We amortize landfill permitting, acquisition and
preparation costs using a units-of-production method as permitted airspace of
the landfill is consumed. Landfill preparation costs include the costs of
construction associated with excavation, liners, site berms and the installation
of leak detection and leachate collection systems. In determining the
amortization rate for a landfill, we include preparation costs in the total
estimated costs to complete construction of the landfill's permitted capacity.
We determine units-of-production amortization rates annually for our operating
landfills.
We periodically evaluate our landfill sites for potential impairment indicators.
Our judgments regarding the existence of impairment indicators are based on
regulatory factors, market conditions and operational performance of our
landfills. Future events could cause us to conclude that impairment indicators
exist and that our landfill carrying costs are impaired. Any resulting
impairment loss could have a material adverse effect on our financial condition
and results of operations.
Our management determines landfill depletion rates based on estimates provided
by our internal and third party engineers and information provided by surveys
that are performed at least annually. Significant changes in our estimates could
materially increase our landfill depletion rates, which could have a material
adverse effect on our financial condition and results of operations.
We reserve for estimated closure and post-closure maintenance costs at the
landfills we own. We could have additional material financial obligations
relating to closure and post-closure costs of the other disposal facilities that
we currently own or operate and that we may own or operate in the future. We
calculate the net present value of the closure and post closure commitment
assuming an inflation rate of 3% and a discount rate of 7.5%. We accrete
discounted amounts previously recorded to reflect the passage of time.
Significant reductions in our estimates of the remaining lives of our landfills
or significant increases in our estimates of the landfill closure and
post-closure maintenance costs could have a material adverse effect on our
financial condition and results of operations.
GENERAL
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. Our collection business
also generates revenues from the sale of recyclable commodities, which have
significant variability. A large part of our collection revenues comes from
providing commercial, industrial and residential services. We frequently perform
these services under service agreements or franchise agreements with counties or
municipal contracts. Our existing franchise agreements and all of our existing
municipal contracts give Waste Connections the exclusive right to provide
specified waste services in the specified territory during the contract term.
These exclusive arrangements are awarded, at least initially, on a competitive
bid basis and subsequently on a bid or negotiated basis. We also provide
residential collection services on a subscription basis with individual
households. Approximately 50% of our revenues for the three and six months ended
June 30, 2002 were derived from services provided under exclusive franchise
agreements, long term municipal contracts and governmental certificates.
Governmental certificates grant Waste Connections perpetual and exclusive
collection rights in the covered areas. Contracts with counties and
municipalities and governmental certificates provide relatively consistent cash
flow during the terms of the contracts. Because we bill most residential
customers quarterly, subscription agreements also provide a stable source of
revenues for Waste Connections.
We charge transfer station and landfill customers a tipping fee on a per ton
basis for disposing of their solid waste at the transfer stations and the
landfill facilities we own and operate. Many of our transfer and landfill
customers have entered into one to ten year disposal contracts with us, most of
which provide for annual indexed price increases.
We typically determine the prices for our solid waste services by the collection
frequency and 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 by competitors for similar services. The terms of our contracts
sometimes limit our ability to pass on price increases. Long-term solid waste
collection contracts often contain a formula, generally based on a published
price index that automatically adjusts fees to cover increases in some, but not
all, operating costs.
Costs of operations include labor, fuel, equipment maintenance and tipping fees
paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and host community fees and
royalties. As of June 30, 2002, Waste Connections owned and/or operated 40
transfer stations, which reduce our costs by allowing us to use collection
personnel and equipment more efficiently and by consolidating waste to reduce
transportation costs to remote sites and gain more favorable disposal rates that
may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation overhead costs associated with our
marketing and sales force, professional services and community relations
expense.
Depreciation expense includes depreciation of fixed assets over their estimated
useful lives using the straight-line method. Prior to January 1, 2002,
amortization expense included the amortization of goodwill (for businesses
acquired prior to July 1, 2001) and other intangible assets using the
straight-line method. As discussed more fully below, beginning January 1, 2002,
goodwill and indefinite-lived intangible assets are no longer amortized.
Waste Connections capitalizes some third-party expenditures related to pending
acquisitions or development projects, such as legal, engineering and interest
expenses. We expense indirect acquisition costs, such as executive and corporate
overhead, public relations and other corporate services, as we incur them. We
charge against net income any unamortized capitalized expenditures and advances
(net of any portion that we believe we may recover, through sale or otherwise)
that relate to any operation that is permanently shut down and any pending
acquisition or landfill development project that we believe will not be
completed. We routinely evaluate all capitalized costs, and expense those
related to projects that we believe are not likely to succeed. During the three
and six months ended June 30, 2002, we did not capitalize interest related to
landfill and transfer station development projects. At June 30, 2002, we had
$0.2 million in capitalized expenditures relating to pending acquisitions and
$1.1 million of capitalized expenditures related to landfill development
projects seeking to obtain permits for new landfill disposal sites.
Goodwill represents the excess of the purchase price over the fair value of the
net assets of the acquired entities. In allocating the purchase price of an
acquired company among its assets, we first assign value to the tangible assets,
followed by intangible assets, including covenants not to compete and certain
contracts. We determine the value of the other intangible assets by considering,
among other things, the present value of the cash flows associated with those
assets.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets"
(collectively, the "Statements"), effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized but are subject to annual
impairment tests in accordance with the Statements. Other intangible assets,
including those meeting new recognition criteria under the Statements, will
continue to be amortized over their estimated useful lives.
We adopted the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. In 2001, we recognized $7.4 million of
tax deductible goodwill amortization expense and $2.2 million of non-tax
deductible goodwill amortization expense. We expect application of the
nonamortization provisions of SFAS No. 142 to result in an increase in pre-tax
income of approximately $9.6 million and an increase in net income of
approximately $6.8 million in 2002, based on goodwill amortization occurring in
2001 that will not occur in 2002. We estimate our 2002 earnings per share will
be calculated using basic and diluted shares of 27.8 million and 32.4 million,
respectively. We are required to test goodwill for impairment using the two-step
process prescribed in SFAS No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
In 2002, we performed the first of the required impairment tests of goodwill and
indefinite-lived intangible assets based on the carrying values as of January 1,
2002. As a result of performing the test for potential impairment, we determined
that no impairment existed as of January 1, 2002 and therefore, it was not
necessary to write down any of our goodwill or indefinite-lived intangible
assets. We will continue to perform the potential impairment test on an annual
basis, beginning in the fourth quarter of 2002.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", effective for fiscal years
beginning after June 15, 2002. This Statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. We do not expect
the adoption of SFAS No. 143 to have a material effect on our financial
statements.
Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of SFAS No. 144 did not materially affect our financial statements
and related disclosures.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Modifications to Reporting of Extinguishments of Debt and Accounting for
Certain Capital Lease Modifications and Technical Corrections", effective for
transactions occurring after May 15, 2002. SFAS No. 145 requires gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items. SFAS No. 145 also
requires that certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor (or guarantor). We elected to adopt SFAS No.
145 early, which resulted in the reclassification from extraordinary items to
other expenses of $240 of losses incurred during the six months ending June 30,
2001 resulting from early extinguishments of debt.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2002
The following table sets forth items in Waste Connections' consolidated
statement of operations as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2001 2002 2001 2002
-------- -------- -------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 55.2 56.2 55.2 56.1
Selling, general and
administrative expenses 8.9 9.7 8.4 9.3
Depreciation and
amortization expense 9.3 7.9 9.5 7.8
Loss on disposal of operations 5.2 -- 2.7 --
-------- -------- -------- --------
Operating income 21.4 26.2 24.2 26.8
Interest expense, net (8.1) (6.2) (8.5) (6.6)
Other expense, net 0.3 (0.2) (3.4) (0.3)
Minority interests (2.3) (1.9) (2.0) (1.8)
Income tax expense (4.5) (6.7) (4.1) (6.8)
-------- -------- -------- --------
Net income 6.8% 11.2% 6.2% 11.3%
======== ======== ======== ========
Revenues. Total revenues increased $34.1 million, or 36.3%, to $128.1 million
for the three months ended June 30, 2002 from $94.0 million for the three months
ended June 30, 2001. Revenues earned in the three months ended June 30, 2002
from acquisitions closed throughout the balance of 2001 and the first six months
of 2002 totaled $28.1 million. The remaining increase was attributable to
selected price increases and growth in the existing business.
Revenues for the six months ended June 30, 2002 increased $54.7 million, or
30.6%, to $233.8 million from $179.1 million for the six months ended June 30,
2001. Revenues earned in the six months ended June 30, 2002 from acquisitions
closed throughout the balance of 2001 and the first six months of 2002 totaled
$44.4 million. The remaining increase was attributable to selected price
increases and growth in the existing business.
Cost of Operations. Total cost of operations increased $20.1 million, or 38.9%,
to $72.0 million for the three months ended June 30, 2002 from $51.9 million for
the three months ended June 30, 2001. Cost of operations for the six months
ended June 30, 2002 increased $32.3 million, or 32.7%, to $131.2 million from
$98.9 million for the six months ended June 30, 2001. The increases were
primarily attributable to acquisitions closed over the balance of 2001 and the
first six months of 2002, growth in our existing business and higher insurance
costs.
Cost of operations as a percentage of revenues increased 1.0 percentage point to
56.2% for the three months ended June 30, 2002 from 55.2% for the three months
ended June 30, 2001. Cost of operations as a percentage of revenues for the six
months ended June 30, 2002 increased 0.9 percentage points to 56.1% from 55.2%
for the six months ended June 30, 2001. The increases as a percentage of
revenues were primarily attributable to the mix of revenues associated with
acquisitions closed over the balance of 2001 and the first six months of 2002,
which had operating margins below our company average, and higher insurance
costs, partially offset by greater integration of collection volumes into
landfills we own or operate.
SG&A. SG&A expenses increased $4.1 million, or 48.4%, to $12.5 million for the
three months ended June 30, 2002 from $8.4 million for the three months ended
June 30, 2001. SG&A expenses for the six months ended June 30, 2002 increased
$6.8 million, or 45.1%, to $21.9 million from $15.1 million for the six months
ended June 30, 2001. Our SG&A expenses for the three and six months ended June
30, 2002 increased from the prior year periods as a result of additional
personnel from acquisitions closed over the balance of 2001 and the first six
months of 2002, additional corporate, regional and district level overhead and
the incurrence of $1.3 million of employment expenses associated with the
termination of our search for a chief operating officer and the hiring of two
new corporate officers. During the three months ended June 30, 2001, we
recognized $0.9 million of expenses related to the termination of negotiations
and due diligence for a large potential acquisition.
SG&A as a percentage of revenues increased 0.8 percentage points to 9.7% for the
three months ended June 30, 2002 from 8.9% for the three months ended June 30,
2001. SG&A as a percentage of revenues for the six months ended June 30, 2002
increased 0.9 percentage points to 9.3% from 8.4% for the six months ended June
30, 2001. The increases in SG&A as a percentage of revenues resulted from
additional corporate, regional and district level overhead to accommodate our
current and future growth and the incurrence of $1.3 million of employment
expenses associated with the termination of our search for a chief operating
officer and the hiring of two new corporate officers. The $1.3 million of
employment expense increased SG&A as a percentage of revenues 1.0 and 0.5
percentage points for the three and six months ended June 30, 2002,
respectively. The overall increases were partially offset by the recognition
during the three months ended June 30, 2001 of $0.9 million of expenses related
to the termination of negotiations and due diligence for a large potential
acquisition.
Depreciation and Amortization. Depreciation and amortization expense increased
$1.4 million, or 15.9%, to $10.1 million for the three months ended June 30,
2002 from $8.7 million for the three months ended June 30, 2001. Depreciation
and amortization expenses for the six months ended June 30, 2002 increased $1.2
million, or 7.2%, to $18.1 million from $16.9 million for the six months ended
June 30, 2001. The increases resulted primarily from increased depletion due to
higher volumes of waste disposed at our landfills and depreciation and depletion
associated with acquisitions closed over the balance of 2001 and the first six
months of 2002, partially offset by decreased amortization expense from not
amortizing goodwill during the three months and six months ended June 30, 2002,
due to the application of the nonamortization provisions of SFAS No. 142. Total
goodwill amortization expense recognized in the three and six months ended June
30, 2001 was $2.4 million and $4.8 million, respectively. No goodwill
amortization expense was recognized in the three and six months ended June 30,
2002.
Depreciation and amortization as a percentage of revenues decreased 1.4
percentage points to 7.9% for the three months ended June 30, 2002 from 9.3% for
the three months ended June 30, 2001. Depreciation and amortization as a
percentage of revenues for the six months ended June 30, 2002 decreased 1.7
percentage points to 7.8% from 9.5% for the six months ended June 30, 2001. The
decreases in depreciation and amortization as a percentage of revenues were the
result of applying the nonamortization provisions of SFAS No. 142, partially
offset by increased depletion due to higher volumes of waste disposed at our
landfills. Goodwill amortization expense as a percentage of revenues for the
three and six months ended June 30, 2001 was 2.5% and 2.7%, respectively.
Loss on Disposal of Operations. During the three months ended June 30, 2001, we
sold some of our Utah operations that were deemed to no longer be of strategic
importance. We recognized a non-cash pre-tax loss of $4,879 from this sale.
Operating Income. Operating income increased $13.4 million, or 66.6%, to $33.5
million for the three months ended June 30, 2002 from $20.1 million for the
three months ended June 30, 2001. Operating income for the six months ended June
30, 2002 increased $19.3 million, or 44.5%, to $62.7 million from $43.4 million
for the six months ended June 30, 2001. The increases were primarily
attributable to the growth in revenues, applying the nonamortization provisions
of SFAS No. 142 and the prior year loss associated with the disposal of some of
our Utah operations, partially offset by higher operating costs, depreciation
and SG&A expenses.
Operating income as a percentage of revenues increased 4.8 percentage points to
26.2% for the three months ended June 30, 2002 from 21.4% for the three months
ended June 30, 2001. Operating income as a percentage of revenues for the six
months ended June 30, 2002 increased 2.6 percentage points to 26.8% from 24.2%
for the six months ended June 30, 2001. The increases in operating income as a
percentage of revenues were attributable to applying the nonamortization
provisions of SFAS No. 142 and not incurring losses on the disposal of
operations, partially offset by declines in gross margins, higher depreciation
expenses and an increase in SG&A expenses as a percentage of revenues.
Interest Expense. Interest expense increased $0.3 million, or 3.6%, to $7.9
million for the three months ended June 30, 2002 from $7.6 million for the three
months ended June 30, 2001. Interest expense for the six months ended June 30,
2002 increased $0.2 million, or 1.2%, to $15.4 million from $15.2 million for
the six months ended June 30, 2001. The increases were primarily attributable to
higher debt levels incurred to fund our acquisitions, partially offset by lower
interest rates on our revolving credit facility and our replacing a portion of
the borrowings under our revolving credit facility with lower interest
subordinated debt obligations.
Other Income (Expense). Other income (expense) decreased to an expense total of
($0.2) million for the three months ended June 30, 2002 from an income total of
$0.3 million for the three months ended June 30, 2001. Other expense decreased
to an expense total of ($0.6) million for the six months ended June 30, 2002
from an expense total of ($6.1) million for the six months ended June 30, 2001.
The primary component of the net expense for the six months ended June 30, 2001
was $6.3 million of expenses resulting from cash payments for the early
termination of an interest rate swap. During the first quarter of 2001, we
determined that the debt, the specific cash flows of which an interest rate swap
was designated as hedging, would be repaid prior to its due date from the net
proceeds of our convertible subordinated debt offering; therefore, it was
probable that the future variable interest payments under the related debt (the
hedged transactions) would not occur. The remaining components of other income
(expense) for these periods were gains and losses incurred on the disposal of
certain assets.
Minority Interests. Minority interests increased $0.3 million, or 13.9%, to $2.5
million for the three months ended June 30, 2002, from $2.2 million for the
three months ended June 30, 2001. The increase for the three months ended June
30, 2002 was due to increased earnings by our majority-owned subsidiaries.
Minority interests increased $0.7 million, or 21.1%, to $4.2 million for the six
months ended June 30, 2002, from $3.5 million for the six months ended June 30,
2001. The increase for the six months ended June 30, 2002 is attributable to
increased earnings by our majority-owned subsidiaries, as well as our owning
majority interests in those entities, acquired in February 2001, for the entire
six months ended June 30, 2002, compared to owning them for approximately five
months of the six month period ended June 30, 2001.
Provision for Income Taxes. Income taxes increased $4.4 million, or 103.0%, to
$8.6 million for the three months ended June 30, 2002, from $4.2 million for the
three months ended June 30, 2001. Income taxes increased $8.5 million, or
115.9%, to $15.9 million for the six months ended June 30, 2002, from $7.4
million for the six months ended June 30, 2001. These increases were due to
increased pre-tax earnings, partially offset by a 1.5 percentage point reduction
in our effective tax rate due to the elimination of non-deductible goodwill. The
effective income tax rate for the three and six months ended June 30, 2002 was
37.5%, which is above the federal statutory rate of 35.0% primarily due to state
and local taxes.
Net Income. Net income increased $7.9 million, or 124.2%, to $14.3 million for
the three months ended June 30, 2002, from $6.4 million for the three months
ended June 30, 2001. The increase was primarily attributable to increased
operating income and the prior year loss associated with the disposal of some of
our Utah operations, partially offset by increases in interest expense, income
tax expense, other expense and minority interests.
Net income increased $15.4 million, or 138.6%, to $26.5 million for the six
months ended June 30, 2002, from $11.1 million for the six months ended June 30,
2001. The increase was primarily attributable to increased operating income and
prior year losses associated with the disposal of some of our Utah operations
and the termination of interest rate swaps, partially offset by increases in
interest expense, income tax expense and minority interests.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive. Our capital requirements include acquisitions
and fixed asset purchases. We expect that we will also make capital expenditures
for landfill cell construction, landfill development and landfill closure
activities in the future. We plan to meet our capital needs through various
financing sources, including internally generated funds, debt and equity
financings.
As of June 30, 2002, we had a working capital deficit of $11.2 million,
including cash and equivalents of $5.2 million. Our strategy in managing our
working capital is generally to apply the cash generated from our operations
that remains after satisfying our working capital and capital expenditure
requirements to reduce our indebtedness under our bank revolving credit facility
and to minimize our cash balances.
We have a $435 million revolving credit facility with a syndicate of banks for
which Fleet Boston Financial Corp. acts as agent (the "Credit Facility"). As of
June 30, 2002, we had an aggregate of $188.5 million outstanding under the
Credit Facility, and the interest rate on outstanding borrowings, including
unused credit fees and amortization of debt issuance costs, under the Credit
Facility was approximately 8.5%. The Credit Facility allows us to issue up to
$40 million in stand-by letters of credit, which reduce the amount of total
borrowings available under the Credit Facility. As of June 30, 2002, we had
$17.6 million of outstanding letters of credit issued under the Credit Facility.
Virtually all of our assets, including our interest in the equity securities of
our subsidiaries, secure our obligations under the Credit Facility. The Credit
Facility matures in 2005 and bears interest at a rate per annum equal to, at our
discretion, either the Fleet National Bank Base Rate plus applicable margin, or
the Eurodollar Rate plus applicable margin. The Credit Facility places certain
business, financial and operating restrictions on Waste Connections relating to,
among other things, incurring additional indebtedness, investments,
acquisitions, asset sales, mergers, dividends, distributions, and repurchases
and redemption of capital stock. The Credit Facility also contains covenants
requiring that specified financial ratios and balances be maintained. As of June
30, 2002, we are in compliance with these covenants. The Credit Facility also
requires the lenders' approval of acquisitions in certain circumstances. We use
the Credit Facility for acquisitions, capital expenditures, working capital,
standby letters of credit and general corporate purposes.
During April 2002, we sold $175 million of Floating Rate Convertible
Subordinated Notes due 2022 (the "Notes"). The Notes bear interest at the
3-month LIBOR rate plus 50 basis points, payable quarterly. The Notes are
unsecured and rank pari passu with our 5.5% Convertible Subordinated Notes due
2006 and junior to all existing and future senior indebtedness, as defined in
the indenture governing the Notes. Upon the incurrence of certain conditions,
the Notes are convertible into common stock at 20.6654 shares per $1,000
principal amount of notes. No change in the available borrowing capacity under
our Credit Facility or material covenants resulted from our issuance of the
Notes. Proceeds from the sale of the Notes were used to repay a portion of the
outstanding indebtedness and related costs under our credit facility and for
general corporate purposes.
As of June 30, 2002, we had the following contractual obligations and commercial
commitments (in thousands):
PAYMENTS DUE BY PERIOD
- --------------------------- ------------------------------------------------------------------------------
Contractual Obligations Total Less Than 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
- --------------------------- -------------- ------------------ -------------- -------------- --------------
Long-Term Debt $ 556,711 $ 4,307 $ 7,725 $ 342,764 $ 201,915
- --------------------------- -------------- ------------------ -------------- -------------- --------------
Operating Leases 7,098 1,433 2,506 1,779 1,380
- --------------------------- -------------- ------------------ -------------- -------------- --------------
Unconditional Purchase
Obligations 3,052 3,052 - - -
- --------------------------- -------------- ------------------ -------------- -------------- --------------
Total Contractual Cash
Obligations $ 566,861 $ 8,792 $ 10,231 $ 344,543 $ 203,295
- --------------------------- -------------- ------------------ -------------- -------------- --------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
- ----------------------------- -------------------------------------------------------------------------------
Total Amounts
Commercial Commitments Committed Less Than 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
- ----------------------------- --------------- ------------------ -------------- -------------- --------------
Standby Letters of Credit $ 17,608 $ 17,608 $ - $ - $ -
- ----------------------------- --------------- ------------------ -------------- -------------- --------------
Performance Bonds 50,334 45,661 4,663 10 -
- ----------------------------- --------------- ------------------ -------------- -------------- --------------
Total Commercial Commitments $ 67,942 $ 63,269 $ 4,663 $ 10 $ -
- ----------------------------- --------------- ------------------ -------------- -------------- --------------
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. We have experienced less
availability of performance bonds for our current operations due to changes in
the insurance industry. At June 30, 2002, we had provided customers and various
regulatory authorities with surety in the aggregate amount of approximately
$50.3 million to secure our obligations (exclusive of letters of credit backing
certain municipal bond obligations). Our current surety bond underwriters have
provided us with non-binding commitments to issue up to $50 million of
performance bonds. This facility does not have a stated expiration date;
however, individual performance bonds issued typically have expiration dates
ranging from one to five years. If we are unable to increase the maximum
commitment by our surety bond underwriters, obtain surety bonds through new
underwriters, or obtain letters of credit in sufficient amounts or at acceptable
rates, we could have difficulty retaining existing or entering into new
municipal solid waste collection contracts or obtaining or retaining landfill
operating permits.
For the six months ended June 30, 2002, net cash provided by operations was
approximately $60.3 million. Of this, $9.8 million was provided by working
capital for the period.
For the six months ended June 30, 2002, net cash used by investing activities
was $124.3 million. Of this, $100.5 million was used to fund the cash portion of
acquisitions. Cash used for capital expenditures was $24.9 million, which was
primarily for investments in fixed assets, consisting primarily of trucks,
containers, landfill development and other equipment. Cash inflows from
investing activities include $1.9 million received from the disposal of assets.
For the six months ended June 30, 2002, net cash provided by financing
activities was $61.9 million, which was provided by $66.8 million of net
borrowings under our various debt arrangements and $5.6 million of proceeds from
stock option and warrant exercises, less $4.2 million of cash distributions to
minority interest holders and $6.4 million of debt issuance costs.
We made approximately $24.9 million in capital expenditures during the six
months ended June 30, 2002. We expect to make capital expenditures of
approximately $48 million in 2002 in connection with our existing business. We
intend to fund our planned 2002 capital expenditures principally through
existing cash, internally generated funds, and borrowings under our existing
credit facility. In addition, we may make substantial additional capital
expenditures in acquiring solid waste collection and disposal businesses. If we
acquire additional landfill disposal facilities, we may also have to make
significant expenditures to bring them into compliance with applicable
regulatory requirements, obtain permits or expand our available disposal
capacity. We cannot currently determine the amount of these expenditures because
they will depend on the number, nature, condition and permitted status of any
acquired landfill disposal facilities. We believe that our credit facility and
the funds we expect to generate from operations will provide adequate cash to
fund our working capital and other cash needs for the foreseeable future.
From time to time we evaluate our existing operations and their strategic
importance to Waste Connections. If we determine that a given operating unit
does not have future strategic importance, we may sell or otherwise dispose of
those operations. Although we believe our operations would not be impaired by
such dispositions, we could incur losses on them.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to market risk, including
changes in interest rates and certain commodity prices. We use hedge agreements
to manage a portion of our risks related to interest rates. While we are exposed
to credit risk in the event of non-performance by counterparties to our hedge
agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue
derivative financial instruments for trading purposes. We monitor our hedge
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
In December 1999, we entered into an interest rate swap with Fleet Boston
Financial Corporation. Under the swap agreement, which was effective through
December 2001, the interest rate on a $125 million LIBOR-based loan under the
Credit Facility was effectively fixed with an interest rate of 6.1% plus an
applicable margin. This rate remained at 6.1% if LIBOR was less than 7.0%. If
LIBOR exceeded 7.0%, the interest rate under the swap agreement would increase
one basis point for every LIBOR basis point above 7.0%.
In May 2000, we entered into another interest rate swap with Union Bank of
California. Under the swap agreement, which was effective through December 2003,
the interest rate on a separate $125 million LIBOR-based loan under the Credit
Facility was effectively fixed with an interest rate of 7.0% plus an applicable
margin.
In December 2000, we restructured both of those interest rate swap agreements,
extending their maturity through December 2003 and removing their embedded
option features. As of December 31, 2000, the Fleet Boston swap had a notional
amount of $125 million at a fixed rate of 6.17% plus applicable margin and the
Union Bank of California swap had a notional amount of $125 million at a fixed
rate of 7.01% plus applicable margin. In March 2001, $110 million of the
notional amount under the Union Bank of California swap was terminated because
we used the proceeds from our Convertible Subordinated Notes offering to repay
$110 million of the LIBOR loan, the cash flows of which this swap was designated
as hedging.
We have performed sensitivity analyses to determine how market rate changes will
affect the fair value of our market risk sensitive hedge positions and all other
debt. Such an analysis is inherently limited in that it represents a singular,
hypothetical set of assumptions. Actual market movements may vary significantly
from our assumptions. Fair value sensitivity is not necessarily indicative of
the ultimate cash flow or earnings effect we would recognize from the assumed
market rate movements. We are exposed to cash flow risk due to changes in
interest rates with respect to the $48.5 million remaining floating rate balance
owed under our credit facility, $175 million of our Floating Rate Convertible
Subordinated Notes due 2022, $12.3 million of floating rate debt under various
notes payable to third parties and floating rate municipal bond obligations of
approximately $8.9 million. A one percentage point increase in interest rates on
our variable-rate debt as of June 30, 2002 would decrease our annual pre-tax
income by approximately $2.4 million. All of our remaining debt instruments are
at fixed rates, or effectively fixed under the interest rate swap agreements
described above; therefore, changes in market interest rates under these
instruments would not significantly impact our cash flows or results of
operations.
We market a variety of recyclable materials, including cardboard, office paper,
plastic containers, glass bottles and ferrous and aluminum metals. We own and
operate 19 recycling processing facilities and sell other collected recyclable
materials to third parties for processing before resale. We often share the
profits from our resale of recycled materials with other parties to our
recycling contracts. For example, certain of our municipal recycling contracts
in Washington, negotiated before we acquired those businesses, specify benchmark
resale prices for recycled commodities. If the prices we actually receive for
the processed recycled commodities collected under the contract exceed the
prices specified in the contract, we share the excess with the municipality,
after recovering any previous shortfalls resulting from actual market prices
falling below the prices specified in the contract. To reduce our exposure to
commodity price risk with respect to recycled materials, we have adopted a
pricing strategy of charging collection and processing fees for recycling volume
collected from third parties. Although there can be no assurance of market
recoveries in the event of a decline, because of the provisions within certain
of our contracts that pass commodity risk along to the customers, we believe,
given historical trends and fluctuations in the recycling commodities market,
that a 10% decrease in average recycled commodity prices from the prices that
were in effect at June 30, 2002 would not materially affect our cash flows or
pre-tax income.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2002,the Oklahoma Department of Environmental Quality Land Protection
Division (the "Department") issued an order to Waste Connections requiring us to
cease accepting more than 200 tons per day of out-of-state waste at our Red
Carpet Landfill in Oklahoma due to our alleged failure to obtain the
Department's prior approval of a disposal plan for that waste. At that time, the
Department assessed Waste Connections a fine of $0.2 million for past violations
related to accepting more than 200 tons per day of out-of-state waste prior to
obtaining the Department's approval of a disposal plan. While seeking the
Department's approval of a disposal plan, we continued to accept more than 200
tons a day of out-of-state waste because we believed, based on the advice of our
legal counsel, that the Department did not have the legal right to require us to
obtain its approval of a disposal plan prior to accepting more than 200 tons per
day of out-of-state waste. In June 2002, the Department issued an amended order
approving our disposal plan subject to conditions and increasing the fine
assessed against us to $2.2 million because we continued to accept more than 200
tons per day of out of state waste prior to obtaining its approval of our plan.
We have objected to some of the conditions imposed in the order and have
initiated litigation against the Department challenging this order. Based on the
advice of our legal counsel, we believe that we will prevail in this litigation.
Therefore, we believe that any payment resulting from the order will not
materially affect our cash flows, financial condition or results of operations.
As a result, we have not recorded a liability in connection with this order.
Additionally, we are a party to various legal proceedings in the ordinary course
of business and as a result of the extensive governmental regulation of the
solid waste industry. Our management does not believe that these proceedings,
either individually or in the aggregate, are likely to have a material adverse
effect on our business, financial condition, operating results or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2002, we issued warrants to purchase 500
shares of our common stock to a business development consultant as part of a
compensation plan for services rendered. This consultant is a sophisticated
investor, familiar with our business and industry in which we operate. The
consultant is also an "accredited investor" as defined in Rule 501(a) under the
Securities Act, received copies of our most recent annual report to shareholders
and the proxy statement accompanying that annual report, and had access to all
of our reports filed with the Securities and Exchange Commission during our last
fiscal year and the current year. The consultant was able to ask questions of
our management concerning the terms of offering and to obtain additional
information necessary to verify the accuracy of information to which he had
access. No general solicitation or advertising was used in connection with the
issuance of the warrants. The warrants were issued with legends stating that
they have not been registered under the Securities Act and setting forth
restrictions on transfer. The warrants were issued in reliance on the exemptions
from registration provided by Sections 3(b) and 4(2) of the Securities Act and
Regulation D under that Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of stockholders was held on May 16, 2002.
Robert H. Davis was elected as director by the votes indicated:
Total Votes For: 22,656,579
Total Votes Withheld: 1,137,248
Total Votes Instructed: 2,380
Eugene V. Dupreau was elected as director by the votes indicated:
Total Votes For: 22,658,359
Total Votes Withheld: 1,135,468
Total Votes Instructed: 2,380
The terms for Messrs. Davis and Dupreau expire on the date of the annual meeting
in 2005.
The following proposals were also adopted at the annual meeting by the votes
indicated:
To ratify the appointment of Ernst & Young LLP as Independent Auditors for Waste
Connections for the year 2002:
Total Votes For: 23,204,624
Total Votes Against: 564,057
Total Votes Abstained: 25,146
To approve the adoption of the 2002 Senior Management Equity Incentive Plan:
Total Votes For: 13,315,150
Total Votes Against: 8,121,527
Total Votes Abstained: 2,357,150
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description of Exhibits
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4.1* Form of Note for Waste Connections, Inc.'s Floating Rate
Convertible Subordinated Notes Due 2022
4.2* Indenture between Waste Connections, Inc., as Issuer, and State
Street Bank and Trust Company of California, N.A., as Trustee,
dated as of April 30, 2002
4.3* Purchase Agreement between Waste Connections, Inc. and Deutsche
Bank Securities Inc. dated April 26, 2002
4.4* Registration Rights Agreement between Waste Connections, Inc. and
Deutsche Bank Securities Inc. dated as of April 30, 2002
10.1 Employment Agreement between Waste Connections, Inc. and Kenneth
O. Rose
10.2 Employment Agreement between Waste Connections, Inc. and Robert
D. Evans
10.3** Waste Connections, Inc. 2002 Senior Management Equity Incentive
Plan
99.1 Certificate of Chief Executive Officer and Chief Financial
Officer
*Incorporated by reference to the exhibits to Waste Connections, Inc.'s
registration statement on Form S-3 (No. 333-97231).
**Incorporated by reference to the exhibit to Waste Connections, Inc.'s
registration statement on Form S-8 (No. 333-83172).
b. Reports on Form 8-K:
On April 24, 2002, we filed a report on Form 8-K reporting our sale of
$150 million principal amount of Floating Rate Convertible Subordinated
Notes due 2022 in a private placement, with an option to issue up to an
additional $25 million of notes.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WASTE CONNECTIONS, INC.
Date: August 13, 2002 BY: /s/ Ronald J. Mittelstaedt
--------------------------------------
Ron J. Mittelstaedt,
President and Chief Executive Officer
Date: August 13, 2002 BY: /s/ Steven F. Bouck
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Steven F. Bouck,
Executive Vice President and Chief
Financial Officer