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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 SEPTEMBER 30, 2002 COMMISSION FILE NO. 0-23981
WASTE CONNECTIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization)
94-3283464
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(I.R.S. Employer Identification No.)
620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630
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(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 October 31, 2002: 27,944,389 Shares of Common Stock
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2001 and September 30, 2002
Condensed Consolidated Statements of Income
for the three and nine months ended September
30, 2001 and 2002
Condensed Consolidated Statements of Cash
Flows for the nine months ended September 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
Item 4 - Controls and Procedures
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits
Signatures
Certifications
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, SEPTEMBER 30,
2001 2002
----------- -----------
ASSETS (UNAUDITED)
Current assets:
Cash and equivalents $ 7,279 $ 5,638
Accounts receivable, less allowance for doubtful
accounts of $2,167 and $2,694 at December 31,
2001 and September 30, 2002, respectively 51,372 63,838
Prepaid expenses and other current assets 8,123 9,327
----------- -----------
Total current assets 66,774 78,803
Property and equipment, net 465,806 563,789
Goodwill, net 411,757 494,746
Intangible assets, net 16,248 30,758
Other assets, net 18,768 26,343
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$ 979,353 $ 1,194,439
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,224 $ 38,615
Accrued liabilities 23,555 36,820
Deferred revenue 13,355 16,895
Current portion of long-term debt and notes payable 5,305 3,643
----------- -----------
Total current liabilities 71,439 95,973
Long-term debt and notes payable 416,171 536,215
Other long-term liabilities 13,264 15,537
Deferred income taxes 78,689 94,662
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Total liabilities 579,563 742,387
Commitments and contingencies
Minority interests 19,825 21,267
Stockholders' equity:
Preferred stock: $0.01 par value; 7,500,000 shares
authorized; none issued and outstanding -- --
Common stock: $0.01 par value; 50,000,000 shares authorized;
27,423,669 and 27,926,855 shares issued and outstanding at
December 31, 2001 and September 30, 2002, respectively 274 279
Additional paid-in capital 316,594 326,413
Deferred stock compensation -- (859)
Retained earnings 68,032 109,738
Unrealized loss on market value of interest rate swaps (4,935) (4,786)
----------- -----------
Total stockholders' equity 379,965 430,785
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$ 979,353 $ 1,194,439
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See accompanying notes
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenues $ 97,681 $ 133,487 $ 276,761 $ 367,320
Operating expenses:
Cost of operations 54,820 75,148 153,945 206,349
Selling, general and administrative 7,735 12,613 22,571 34,468
Depreciation and amortization 9,056 10,483 25,952 28,596
Loss on disposal of operations -- -- 4,879 --
------------ ------------ ------------ ------------
Income from operations 26,070 35,243 69,414 97,907
Interest expense (7,104) (8,180) (22,328) (23,606)
Other expense, net (93) (162) (6,237) (743)
------------ ------------ ------------ ------------
Income before income tax provision and
minority interests 18,873 26,901 40,849 73,558
Minority interests (1,871) (2,585) (5,370) (6,821)
------------ ------------ ------------ ------------
Income before income tax provision 17,002 24,316 35,479 66,737
Income tax provision (6,766) (9,123) (14,134) (25,031)
------------ ------------ ------------ ------------
Net income $ 10,236 $ 15,193 $ 21,345 $ 41,706
============ ============ ============ ============
Basic earnings per common share $ 0.38 $ 0.55 $ 0.79 $ 1.51
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Diluted earnings per common share $ 0.37 $ 0.51 $ 0.77 $ 1.43
============ ============ ============ ============
Shares used in the per share calculations:
Basic 27,181,791 27,864,359 27,030,199 27,687,252
============ ============ ============ ============
Diluted 31,706,633 32,410,607 27,672,388 32,224,692
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See accompanying notes.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
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2001 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,345 $ 41,706
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on disposal of operations 4,879 --
Loss (gain) on sale of assets 42 (63)
Depreciation 18,149 27,547
Amortization of intangibles 7,803 1,049
Loss on termination of interest rate swap 6,337 --
Deferred taxes -- 10,859
Minority interests 5,370 6,821
Amortization of debt issuance costs and debt guarantee fees 1,110 1,606
Early extinguishment of debt 240 --
Stock compensation -- 763
Net change in operating assets and liabilities, net of acquisitions (8,321) 11,594
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Net cash provided by operating activities 56,954 101,882
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (46,672) (107,076)
Capital expenditures for property and equipment (26,719) (41,495)
Proceeds from disposal of assets 2,948 1,893
Decrease in other assets (804) (1,134)
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Net cash used in investing activities (71,247) (147,812)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 248,021 313,000
Principal payments on long-term debt (223,310) (264,997)
Termination of interest rate swap (6,337) --
Distributions to minority interest holders (2,391) (5,145)
Proceeds from options and warrants 6,097 7,874
Debt issuance costs (6,255) (6,443)
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Net cash provided by financing activities 15,825 44,289
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Net increase (decrease) in cash and equivalents 1,532 (1,641)
Cash and equivalents at beginning of period 2,461 7,279
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Cash and equivalents at end of period $ 3,993 $ 5,638
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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 September 30, 2002 and for the three and nine
month periods ended September 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 nine month periods
ended September 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 September 30, 2002, the
consolidated statements of income for the three and nine months ended September
30, 2001 and 2002, and the consolidated statements of cash flows for the nine
months ended September 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 nine months ended September 30, 2001, adjusted for
the nonamortization provisions of SFAS No. 142, was $11,960 and $26,480,
respectively. Basic and diluted shares outstanding were 27.2 million and 31.7
million, respectively, for the three months ended September 30, 2001 and 27.0
million and 27.7 million, respectively, for the nine months ended September 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 nine months ending
September 30, 2001 resulting from early extinguishments of debt.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", effective
for transactions occurring after December 31, 2002. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. The
Company's adoption of SFAS No. 146 is not expected to have a material effect on
its financial statements.
3. ACQUISITIONS
During the nine months ended September 30, 2002, the Company acquired 13
non-hazardous solid waste collection businesses that were accounted for using
the purchase method of accounting. Aggregate consideration, exclusive of debt
assumed totaling $68,162, for the acquisitions consisted of $107,076 in cash
(net of cash acquired), $2,217 of notes issued to sellers and warrants valued at
$488.
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 September 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 September 30, 2002, the Company had 15 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 nine months
ended September 30, 2002 is as follows:
Acquired assets:
Accounts receivable $ 9,643
Prepaid expenses and other current assets 928
Property and equipment 85,867
Goodwill 83,106
Indefinite-lived intangible assets 5,990
Contracts 8,630
Non-competition agreements 698
Assumed liabilities:
Deferred revenue (4,302)
Accounts payable (8,000)
Deferred taxes (5,115)
Debt and other liabilities assumed (67,664)
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$ 109,781
===========
Goodwill acquired in the nine months ended September 30, 2002 totaling $54,500
is expected to be deductible for tax purposes.
4. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consist of the following as of
September 30, 2002:
GROSS WEIGHTED-AVERAGE
CARRYING ACCUMULATED AMORTIZATION
AMOUNT AMORTIZATION PERIOD IN YEARS
----------- ------------ ---------------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 12,014 $ (836) 26
Non-competition agreements 3,556 (1,838) 5
Other, net 2,353 (694) 11
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$ 17,923 $ (3,368)
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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 $ 1,361
For the year ended December 31, 2003 1,144
For the year ended December 31, 2004 1,033
For the year ended December 31, 2005 959
For the year ended December 31, 2006 816
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 of the Company's common stock 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 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 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 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2002 2001 2002
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Numerator:
Net income for basic earning per share $ 10,236 $ 15,193 $ 21,345 $ 41,706
Interest expense on convertible
subordinated notes due 2006, net of tax
effects 1,385 1,459 -- 4,380
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Net income for diluted earnings per share $ 11,621 $ 16,652 $ 21,345 $ 46,086
=========== =========== =========== ===========
Denominator:
Basic shares outstanding 27,181,791 27,864,359 27,030,199 27,687,252
Dilutive effect of convertible
subordinated notes due 2006 3,944,775 3,944,775 -- 3,944,775
Dilutive effect of options and warrants 580,067 601,473 642,189 592,665
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Diluted shares outstanding 31,706,633 32,410,607 27,672,388 32,224,692
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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 nine months ended September 30, 2001 and
2002 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Net income $ 10,236 $ 15,193 $ 21,345 $ 41,706
Unrealized gain (loss) on interest
rate swaps, net of tax benefit (expense)
of $1,654 and $9 for the three months ended
September 30, 2001 and 2002, respectively,
and $3,531 and $(337) for the nine months
ended September 30, 2001 and 2002,
respectively (2,503) (13) (5,341) 149
----------- ----------- ----------- -----------
Comprehensive income $ 7,733 $ 15,180 $ 16,004 $ 41,855
=========== =========== =========== ===========
The components of other comprehensive income and related tax effects for the
three and nine months ended September 30, 2001 and 2002 are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------
Gross Tax effect Net of tax
----------- ----------- -----------
Amounts reclassified into earnings $ 906 $ 361 $ 545
Changes in fair value of interest rate swaps (5,063) (2,015) (3,048)
----------- ----------- -----------
$ (4,157) $ (1,654) $ (2,503)
=========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------
Gross Tax effect Net of tax
----------- ----------- -----------
Amounts reclassified into earnings $ 1,588 $ 595 $ 992
Changes in fair value of interest rate swaps (1,609) (604) (1,005)
----------- ----------- -----------
$ (21) $ (9) $ (13)
=========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------
Gross Tax effect Net of tax
----------- ----------- -----------
Cumulative effect of accounting change $ (5,940) $ (2,364) $ (3,576)
Amounts reclassified into earnings 1,919 764 1,155
Changes in fair value of interest rate swaps (11,188) (4,453) (6,735)
Changes associated with current period swap
transactions 6,337 2,522 3,815
----------- ----------- -----------
$ (8,872) $ (3,531) $ (5,341)
=========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2002
---------------------------------------
Gross Tax effect Net of tax
----------- ----------- -----------
Amounts reclassified into earnings $ 4,683 $ 1,756 $ 2,927
Changes in fair value of interest rate swaps (4,197) (1,419) (2,778)
----------- ----------- -----------
$ 486 $ 337 $ 149
=========== =========== ===========
The estimated net amount of the existing losses as of September 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 $6,260. 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 the Company requiring
it 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 the
Department's 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.
Additionally, the Company is 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. The Company's management does not
believe that these proceedings, either individually or in the aggregate, are
likely to have a material adverse effect on its business, financial condition,
operating results or cash flows.
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 nine months ended September 30, 2002,
the Company issued 23,003 shares of restricted stock to selected employees. The
fair value of the issued stock was $811 and will be amortized to expense over
the three year restriction period.
10. SELF-INSURANCE LIABILITIES
During the third quarter of 2002, the Company increased its scope of
self-insurance, becoming primarily self-insured for general liability and
workers' compensation claims. Previously, the Company was primarily self-insured
only for automobile and employee group health claims. The Company's
self-insurance accruals are based on claims filed and estimates of claims
incurred but not reported and are developed by the Company's management and by
its third party claims administrator. The self-insurance accruals are influenced
by the Company's past claims experience factors. If the Company experiences
insurance claims or costs above or below its historically evaluated levels, its
estimates could be materially affected. The frequency and amount of claims or
incidents could vary significantly over a period of time, which could materially
affect the Company's self-insurance liabilities. Additionally, the actual costs
to settle the self-insurance liabilities could materially differ from the
original estimates. At September 30, 2002, the Company's total accrual for
self-insurance liabilities was $2,878.
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 September 30,
2002, we served more than 925,000 commercial, industrial and residential
customers in Alabama, California, Colorado, Georgia, Illinois, 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 86 collection operations and operated or owned 28 transfer
stations, 31 Subtitle D landfills and 17 recycling facilities.
We generally intend to pursue an acquisition-based growth strategy and as of
September 30, 2002 had acquired 147 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,
anticipated cash flows 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 reduce our net worth and have a
material adverse effect on our financial condition and results of operations.
Additionally, our credit agreement contains a covenant requiring us to maintain
a minimum funded debt to capitalization ratio, and net worth is one of the
components of capitalization. A reduction in net worth, therefore, if
substantial, could limit the amount that we can borrow under our credit
agreement and any failure to comply with the agreement could result in an event
of default under the credit agreement. As of September 30, 2002, goodwill and
intangible assets represented 44.0% of our total assets.
SELF-INSURANCE LIABILITIES. During the third quarter of 2002, we increased our
scope of self-insurance, becoming primarily self-insured for general liability
and workers' compensation claims. Previously, we were primarily self-insured
only for automobile and employee group health claims. Our self-insurance
accruals are based on claims filed and estimates of claims incurred but not
reported and are developed by us and by our third party claims administrator.
Our self-insurance accruals are influenced by our past claims experience
factors. If we experience insurance claims or costs above or below our
historically evaluated levels, our estimates could be materially affected. Our
frequency and amount of claims or incidents could vary significantly over a
period of time, which could materially affect our self-insurance liabilities.
Additionally, the actual costs to settle our self-insurance liabilities could
materially differ from our original estimates.
ACCOUNTING FOR LANDFILLS. We amortize certain costs at our landfills using a
units-of-production method as permitted airspace of the landfill is consumed.
Landfill closure and post-closure costs are recorded at net present value and
accreted to reflect the passage of time. The accounting methods discussed below
require us to make certain estimates and assumptions. Changes to these estimates
and assumptions could have a material effect on our financial position and
results of operations. Any changes to our estimates are applied prospectively.
o Landfill costs. Landfill development costs include the costs of
construction associated with excavation, liners, site berms and the
installation of methane gas monitoring probes, groundwater monitoring wells
and leachate collection systems. We estimate the total costs associated
with developing each landfill site to its final capacity. Total landfill
costs include the development costs associated with "deemed" permitted
airspace. Deemed permitted airspace is addressed below. Landfill
development costs are dependent upon future events and thus actual costs
could vary significantly from our estimates. Material differences between
estimated and actual development costs will affect our cash flows by
increasing our capital expenditures and affect our results of operations by
increasing our landfill depletion expense.
o Closure and post-closure costs. We reserve for estimated closure and
post-closure maintenance costs at the landfills we own and certain
landfills that we operate. 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.
o Disposal capacity. Our internal and third party engineers perform surveys
at least annually to estimate the disposal capacity at our landfills. Our
landfill depletion rates are based on the remaining disposal capacity,
considering both permitted and deemed permitted airspace, at our landfills.
Deemed permitted airspace consists of additional disposal capacity being
pursued through means of an expansion. Deemed permitted airspace that meets
certain internal criteria is included in our estimate of total landfill
airspace. Our internal criteria to include deemed permitted airspace as
disposal capacity is as follows:
(1) The land where the expansion is being sought is contiguous to the
current disposal site, and is either owned by us or we have a purchase
option;
(2) Total development costs and closure/post-closure costs have been
determined;
(3) Internal personnel have performed a financial analysis of the proposed
expansion site and have determined that it has a positive financial
and operational impact;
(4) Internal or external personnel are actively working to obtain the
necessary approvals to obtain the landfill expansion permit;
(5) Obtaining the expansion is considered probable. For a pursued
expansion to be considered probable, there must be no significant
known technical, legal, community, business, or political restrictions
or similar issues existing that could impair the success of the
expansion; and
(6) The land where the expansion is being sought has the proper zoning.
We may be unsuccessful in obtaining permits for disposal capacity that has
been deemed permitted. If we are unsuccessful in obtaining permits for
deemed permitted disposal capacity, we will charge the previously
capitalized development costs to expense. This will adversely affect our
operating results and cash flows and could result in greater landfill
depletion expense being recognized on a prospective basis.
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.
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 the Company 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 nine months ended September
30, 2002 were derived from market areas where services are provided
predominantly under exclusive franchise agreements, long term municipal
contracts and governmental certificates. Governmental certificates grant the
Company 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 the Company.
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 September 30, 2002, the Company owned and/or operated 28
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.
The Company 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 nine months ended September 30, 2002, we capitalized $0.2 million of
interest related to landfill development projects. At September 30, 2002, we had
$0.2 million in capitalized expenditures relating to pending acquisitions.
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 nine months ending
September 30, 2001 resulting from early extinguishments of debt.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", effective
for transactions occurring after December 31, 2002. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. Our
adoption of SFAS No. 146 is not expected to have a material effect on our
financial statements.
On October 7, 2002, approximately 55 employees who are represented by Teamsters
Union local 313 commenced a strike at our facilities in Pierce County,
Washington. We are operating with a crew of cross-overs and strike replacements.
The employees have filed a petition to de-certify the union. In connection with
this labor dispute, we expect to incur costs of approximately $1.0 million in
the fourth quarter of 2002 relating to travel and costs for management
assistance, replacement workers, security, legal expenses and other expenses.
On October 24, 2002, we withdrew the listing of our common stock from the Nasdaq
National Market and began listing our common stock on the New York Stock
Exchange. In connection with the listing of our common stock on the New York
Stock Exchange, including legal and other expenses, we incurred expenses
totaling approximately $0.3 million, which will be recognized during the fourth
quarter of 2002.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2001 2002 2001 2002
------- ------- ------- -------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 56.1 56.3 55.6 56.2
Selling, general and
administrative expenses 7.9 9.4 8.2 9.4
Depreciation and amortization
expense 9.3 7.9 9.4 7.8
Loss on disposal of operations -- -- 1.7 --
------- ------- ------- -------
Operating income 26.7 26.4 25.1 26.6
Interest expense, net (7.3) (6.1) (8.1) (6.4)
Other expense, net (0.1) (0.1) (2.3) (0.2)
Minority interests (1.9) (2.0) (1.9) (1.8)
Income tax expense (6.9) (6.8) (5.1) (6.8)
------- ------- ------- -------
Net income 10.5% 11.4% 7.7% 11.4%
======= ======= ======= =======
REVENUES. Total revenues increased $35.8 million, or 36.7%, to $133.5 million
for the three months ended September 30, 2002 from $97.7 million for the three
months ended September 30, 2001. Revenues earned in the three months ended
September 30, 2002 from acquisitions closed throughout the balance of 2001 and
the first nine months of 2002 accounted for approximately 71% of the increase.
The remaining increase in revenues for the third quarter of 2002 over the third
quarter of 2001 was attributable to selected price increases and growth in our
existing business.
Revenues for the nine months ended September 30, 2002 increased $90.6 million,
or 32.7%, to $367.3 million from $276.7 million for the nine months ended
September 30, 2001. Revenues earned in the nine months ended
September 30, 2002 from acquisitions closed throughout the balance of 2001 and
the first nine months of 2002 accounted for approximately 77% of the increase.
The remaining increase in revenues for the first nine months of 2002 over the
first nine months of 2001 was attributable to selected price increases and
growth in our existing business.
COST OF OPERATIONS. Total cost of operations increased $20.3 million, or 37.1%,
to $75.1 million for the three months ended September 30, 2002 from $54.8
million for the three months ended September 30, 2001. Cost of operations for
the nine months ended September 30, 2002 increased $52.4 million, or 34.0%, to
$206.3 million from $153.9 million for the nine months ended September 30, 2001.
The increases were primarily attributable to acquisitions closed over the
balance of 2001 and the first nine months of 2002, growth in our existing
business and higher insurance costs.
Cost of operations as a percentage of revenues increased 0.2 percentage points
to 56.3% for the three months ended September 30, 2002 from 56.1% for the three
months ended September 30, 2001. Cost of operations as a percentage of revenues
for the nine months ended September 30, 2002 increased 0.6 percentage points to
56.2% from 55.6% for the nine months ended September 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 nine
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 $4.9 million, or 63.1%, to $12.6 million for the
three months ended September 30, 2002 from $7.7 million for the three months
ended September 30, 2001. SG&A expenses for the nine months ended September 30,
2002 increased $11.9 million, or 52.7%, to $34.5 million from $22.6 million for
the nine months ended September 30, 2001. Our SG&A expenses for the three and
nine months ended September 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 nine months of 2002, increased bad debt expense, increased legal
expenses, higher insurance costs, additional corporate, regional and district
level overhead, 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 and the incurrence of a $0.4 million expense
charge associated with the early termination of our corporate headquarters
property lease. During the nine months ended September 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 1.5 percentage points to 9.4% for the
three months ended September 30, 2002 from 7.9% for the three months ended
September 30, 2001. SG&A as a percentage of revenues for the nine months ended
September 30, 2002 increased 1.2 percentage points to 9.4% from 8.2% for the
nine months ended September 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, increased bad debt
expense, increased legal expenses, higher insurance costs, 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 and the incurrence of a $0.4 million expense charge associated with the
early termination of our corporate headquarter property lease. The increase for
the nine months ended September 30, 2002 were partially offset by the
recognition during 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 15.8%, to $10.5 million for the three months ended September
30, 2002 from $9.1 million for the three months ended September 30, 2001.
Depreciation and amortization expenses for the nine months ended September 30,
2002 increased $2.6 million, or 10.2%, to $28.6 million from $26.0 million for
the nine months ended September 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 nine months of 2002, partially offset by decreased
amortization expense from not amortizing goodwill during the three months and
nine months ended September 30, 2002, due to the application of the
nonamortization provisions of SFAS No. 142. Total goodwill amortization expense
recognized in the three and nine months ended September 30, 2001 was $2.4
million and $7.2 million, respectively. No goodwill amortization expense was
recognized in the three and nine months ended September 30, 2002.
Depreciation and amortization as a percentage of revenues decreased 1.4
percentage points to 7.9% for the three months ended September 30, 2002 from
9.3% for the three months ended September 30, 2001. Depreciation and
amortization as a percentage of revenues for the nine months ended September 30,
2002 decreased 1.6 percentage points to 7.8% from 9.4% for the nine months ended
September 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 nine months ended September 30,
2001 was 2.5% and 2.6%, 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 $4.9 million from this
sale.
OPERATING INCOME. Operating income increased $9.1 million, or 35.2%, to $35.2
million for the three months ended September 30, 2002 from $26.1 million for the
three months ended September 30, 2001. Operating income for the nine months
ended September 30, 2002 increased $28.5 million, or 41.0%, to $97.9 million
from $69.4 million for the nine months ended September 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 decreased 0.3 percentage points to
26.4% for the three months ended September 30, 2002 from 26.7% for the three
months ended September 30, 2001. The decrease in operating income as a
percentage of revenues for this period was attributable to declines in gross
margins, higher depreciation expenses and an increase in SG&A expenses as a
percentage of revenues, partially offset by applying the nonamortization
provisions of SFAS No. 142. A portion of the decline in gross margins was due to
the inclusion of financial results from acquisitions which had lower average
operating margins than our existing corporate average. Operating income as a
percentage of revenues for the nine months ended September 30, 2002 increased
1.5 percentage points to 26.6% from 25.1% for the nine months ended September
30, 2001. The increase in operating income as a percentage of revenues for this
period was 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 $1.1 million, or 15.1%, to $8.2
million for the three months ended September 30, 2002 from $7.1 million for the
three months ended September 30, 2001. Interest expense for the nine months
ended September 30, 2002 increased $1.3 million, or 5.7%, to $23.6 million from
$22.3 million for the nine months ended September 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 EXPENSE. Other income expense increased to $0.2 million for the three
months ended September 30, 2002 from $0.1 million for the three months ended
September 30, 2001. Other expense decreased to $0.7 million for the nine months
ended September 30, 2002 from $6.2 million for the nine months ended September
30, 2001. The primary component of other expense for the nine months ended
September 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
expense for these periods were net losses incurred on the disposal of certain
assets.
MINORITY INTERESTS. Minority interests increased $0.7 million, or 38.2%, to $2.6
million for the three months ended September 30, 2002, from $1.9 million for the
three months ended September 30, 2001. The increase for the three months ended
September 30, 2002 was due to increased earnings by our majority-owned
subsidiaries.
Minority interests increased $1.4 million, or 27.0%, to $6.8 million for the
nine months ended September 30, 2002, from $5.4 million for the nine months
ended September 30, 2001. The increase for the nine months ended
September 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 nine months ended September 30, 2002,
compared to owning them for approximately eight months of the nine month period
ended September 30, 2001.
PROVISION FOR INCOME TAXES. Income taxes increased $2.3 million, or 34.8%, to
$9.1 million for the three months ended September 30, 2002, from $6.8 million
for the three months ended September 30, 2001. Income taxes increased $10.9
million, or 77.1%, to $25.0 million for the nine months ended September 30,
2002, from $14.1 million for the nine months ended September 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 nine
months ended September 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 $5.0 million, or 48.4%, to $15.2 million for
the three months ended September 30, 2002, from $10.2 million for the three
months ended September 30, 2001. The increase was primarily attributable to
increased operating income, partially offset by increases in interest expense,
income tax expense, other expense and minority interests.
Net income increased $20.4 million, or 95.4%, to $41.7 million for the nine
months ended September 30, 2002, from $21.3 million for the nine months ended
September 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 September 30, 2002, we had a working capital deficit of $17.2 million,
including cash and equivalents of $5.6 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
September 30, 2002, we had an aggregate of $172.5 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 8.9%. 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 September 30, 2002, we had
$21.5 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 the Company 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 September 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, including payment for an
acquisition.
As of September 30, 2002, we had the following contractual obligations and
commercial commitments (in thousands):
PAYMENTS DUE BY PERIOD
- ------------------------------------------------------------------------------------------------------------
Less Than 1
Contractual Obligations Total Year 1 to 3 Years 4 to 5 Years Over 5 Years
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
Long-Term Debt $ 539,858 $ 3,643 $ 180,820 $ 155,597 $ 199,798
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
Operating Leases 13,584 1,433 3,803 3,077 5,271
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
Unconditional Purchase
Obligations 1,526 1,526 -- -- --
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
Total Contractual Cash
Obligations $ 554,968 $ 6,602 $ 184,623 $ 158,674 $ 205,069
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
- ------------------------------------------------------------------------------------------------------------
Commercial Total Amounts Less Than 1
Commitments Committed Year 1 to 3 Years 4 to 5 Years Over 5 Years
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
Standby Letters of Credit $ 21,515 $ 21,119 $ 396 $ -- $ --
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
Performance Bonds $ 49,403 $ 46,415 $ 2,968 $ 20 --
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
Total Commercial
Commitments $ 70,918 $ 67,534 $ 3,364 $ 20 $ --
- -------------------------- ------------- --------------- ---------------- ----------------- ----------------
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 September 30, 2002, we had provided customers and
various regulatory authorities with surety in the aggregate amount of
approximately $49.4 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 nine months ended September 30, 2002, net cash provided by operations
was approximately $101.9 million. Of this, $11.6 million was provided by working
capital for the period.
For the nine months ended September 30, 2002, net cash used by investing
activities was $147.8 million. Of this, $107.1 million was used to fund the cash
portion of acquisitions. Cash used for capital expenditures was $41.5 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 nine months ended September 30, 2002, net cash provided by financing
activities was $44.3 million, which was provided by $48.0 million of net
borrowings under our various debt arrangements and $7.9 million of proceeds from
stock option and warrant exercises, less $5.1 million of cash distributions to
minority interest holders and $6.4 million of debt issuance costs.
We made approximately $41.5 million in capital expenditures during the nine
months ended September 30, 2002. We expect to make capital expenditures of
approximately $54 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 5.5% 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 $32.5 million remaining floating rate balance owed under our
credit facility, $175 million of our Floating Rate Convertible Subordinated
Notes due 2022, $9.5 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 September 30, 2002 would decrease our annual pre-tax
income by approximately $2.3 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 September 30, 2002 would not materially affect our cash flows
or pre-tax income.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing of this report, the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required .
There have been no significant changes (including corrective actions with regard
to significant deficiencies and material weaknesses ) in the Company's internal
controls or in other factors subsequent to the date the Company carried out its
evaluation that could significantly affect these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Legal Proceedings" in the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 2002.
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 6. EXHIBITS
a. Exhibits:
Exhibit
Number Description of Exhibits
------ -----------------------
99.1 Certificate of Chief Executive Officer and Chief Financial Officer
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.
BY: /s/ Ronald J. Mittelstaedt
------------------------------------
Date: November 12, 2002 Ron J. Mittelstaedt,
President and Chief Executive Officer
BY: /s/ Steven F. Bouck
--------------------------------------
Date: November 12, 2002 Steven F. Bouck,
Executive Vice President and Chief
Financial Officer
CERTIFICATIONS
I, Ronald J. Mittelstaedt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waste Connections,
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 officers 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
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 officers 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: November 12, 2002
/s/ Ronald J. Mittelstaedt
-------------------------------------
Ron J. Mittelstaedt,
President and Chief Executive Officer
I, Steven F. Bouck, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waste Connections,
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 officers 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
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 officers 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: November 12, 2002
/s/ Steven F. Bouck
----------------------------------
Steven F. Bouck,
Executive Vice President and Chief
Financial Officer