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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, 2003 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.)
35 IRON POINT CIRCLE, SUITE 200, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of July 31, 2003: 28,412,540 Shares of Common Stock
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2002 and June 30, 2003
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2002 and 2003
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2002 and 2003
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 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
(Unaudited)
(In thousands, except share and per share amounts)
DECEMBER 31, JUNE 30,
ASSETS 2002 2003
- ------ ------------ ------------
Current assets:
Cash and equivalents $ 4,067 $ 6,000
Accounts receivable, less allowance for doubtful
accounts of $2,509 and $2,419 at December 31, 2002
and June 30, 2003, respectively 63,488 65,961
Prepaid expenses and other current assets 8,652 9,662
------------ ------------
Total current assets 76,207 81,623
Property and equipment, net 578,040 579,550
Goodwill, net 548,975 555,931
Intangible assets, net 33,498 39,019
Other assets, net 25,162 25,942
------------ ------------
$ 1,261,882 $ 1,282,065
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 30,688 $ 33,982
Accrued liabilities 45,905 39,095
Deferred revenue 19,016 21,757
Current portion of long-term debt and notes payable 3,646 5,309
------------ ------------
Total current liabilities 99,255 100,143
Long-term debt and notes payable 578,481 557,165
Other long-term liabilities 14,813 6,485
Deferred income taxes 94,543 103,661
------------ ------------
Total liabilities 787,092 767,454
Commitments and contingencies
Minority interests 23,078 23,347
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; 28,046,535 and 28,392,522 shares issued
and outstanding at December 31, 2002 and June 30,
2003, respectively 280 284
Additional paid-in capital 332,705 339,637
Deferred stock compensation (775) (605)
Retained earnings 123,498 154,832
Unrealized loss on market value of interest rate swaps (3,996) (2,884)
------------ ------------
Total stockholders' equity 451,712 491,264
------------ ------------
$ 1,261,882 $ 1,282,065
============ ============
See accompanying notes.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share and per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Revenues $ 128,091 $ 138,883 $ 233,833 $ 267,337
Operating expenses:
Cost of operations 72,174 77,427 131,489 149,248
Selling, general and administrative 12,465 13,179 21,855 26,060
Depreciation and amortization 10,085 11,282 18,113 21,862
------------ ------------ ------------ ------------
Operating income 33,367 36,995 62,376 70,167
Interest expense (7,769) (7,786) (15,138) (15,836)
Other income (expense), net (181) (205) (581) (167)
------------ ------------ ------------ ------------
Income before income tax provision and
minority interests 25,417 29,004 46,657 54,164
Minority interests (2,470) (2,593) (4,236) (4,875)
------------ ------------ ------------ ------------
Income before income tax provision 22,947 26,411 42,421 49,289
Income tax provision (8,605) (9,772) (15,908) (18,237)
------------ ------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 14,342 16,639 26,513 31,052
Cumulative effect of change in accounting
principle, net of tax expense of $166
(Note 2) -- -- -- 282
------------ ------------ ------------ ------------
Net income $ 14,342 $ 16,639 $ 26,513 $ 31,334
============ ============ ============ ============
Basic earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.52 $ 0.59 $ 0.96 $ 1.10
Cumulative effect of change in
accounting principle -- -- -- 0.01
------------ ------------ ------------ ------------
Net income per common share $ 0.52 $ 0.59 $ 0.96 $ 1.11
============ ============ ============ ============
Diluted earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.49 $ 0.55 $ 0.91 $ 1.04
Cumulative effect of change in
accounting principle -- -- -- 0.01
------------ ------------ ------------ ------------
Net income per common share $ 0.49 $ 0.55 $ 0.91 $ 1.05
============ ============ ============ ============
Shares used in the per share calculations:
Basic 27,723,136 28,265,001 27,676,913 28,173,817
============ ============ ============ ============
Diluted 32,347,458 32,799,715 32,214,488 32,729,293
============ ============ ============ ============
See accompanying notes.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
SIX MONTHS ENDED JUNE 30,
------------------------------
2002 2003
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Cash flows from operating activities:
Net income $ 26,513 $ 31,334
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss (gain) on disposal of assets (45) 219
Depreciation 17,317 21,198
Amortization of intangibles 796 664
Deferred income taxes -- 9,118
Minority interests 4,236 4,875
Cumulative effect of change in accounting principle -- (448)
Amortization of debt issuance costs 1,031 1,182
Stock-based compensation 679 55
Interest income on restricted cash (361) (189)
Net change in operating assets and liabilities,
net of acquisitions 10,141 5,726
------------ ------------
Net cash provided by operating activities 60,307 73,734
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets 1,875 526
Payments for acquisitions, net of cash acquired (100,511) (21,074)
Capital expenditures for property and equipment (24,929) (30,772)
Decrease in other assets (750) (1,719)
------------ ------------
Net cash used in investing activities (124,315) (53,039)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 300,000 27,000
Principal payments on notes payable and long-term debt (233,181) (48,153)
Distributions to minority interest holders (4,165) (4,606)
Proceeds from option and warrant exercises 5,604 7,050
Debt issuance costs (6,378) (53)
------------ ------------
Net cash provided by (used in) financing activities 61,880 (18,762)
------------ ------------
Net increase (decrease) in cash and equivalents (2,128) 1,933
Cash and equivalents at beginning of period 7,279 4,067
------------ ------------
Cash and equivalents at end of period $ 5,151 $ 6,000
============ ============
See accompanying notes.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share, per share and per ton amounts)
1. BASIS OF PRESENTATION AND SUMMARY
The accompanying condensed consolidated financial statements relate to Waste
Connections, Inc. and its subsidiaries (the "Company") as of June 30, 2003 and
for the three and six month periods ended June 30, 2002 and 2003. 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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States for complete financial statements. Operating
results for the three and six month periods ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
The Company's consolidated balance sheet as of June 30, 2003, the consolidated
statements of income for the three and six months ended June 30, 2002 and 2003,
and the consolidated statements of cash flows for the six months ended June 30,
2002 and 2003 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 2002.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS No. 143
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"), which provides standards for
accounting for obligations associated with the retirement of long-lived assets.
The adoption of SFAS No. 143 impacted the calculation and accounting for
landfill retirement obligations, which the Company has historically referred to
as closure and post-closure obligations, as follows:
(1) Landfill closure and post-closure liabilities are calculated by estimating
the total obligation in current dollars, inflating the obligation based
upon the expected date of the expenditure using an inflation rate of 3% and
discounting the inflated total to its present value using an 8.5% discount
rate. The 8.5% discount rate is higher than the 7.5% discount rate used
prior to the adoption of SFAS No. 143 because SFAS No. 143 requires the use
of a credit-adjusted risk-free rate. The resulting closure and post-closure
obligation is recorded on the balance sheet as the landfill's total
airspace is consumed. Discounting the obligation with a higher discount
rate and recording the liability as airspace is consumed resulted in a
decrease to the closure and post-closure liabilities recorded by the
Company before it adopted SFAS No. 143.
(2) Final capping costs are included in the calculation of closure and
post-closure liabilities. Final capping costs are estimated using current
dollars, inflated to the expected date of the final capping expenditures,
discounted to a net present value and recorded on the balance sheet as a
component of closure and post-closure liabilities as landfill airspace is
consumed.
(3) Interest accretion was reduced as a result of the decrease in the recorded
closure and post-closure liabilities and has been reclassified from
interest expense to cost of operations, thus causing a reduction in income
from operations and an increase in net income. However, there has been no
change in operating cash flow.
(4) Depletion expense resulting from the closure and post-closure obligations
recorded as a component of landfill site costs will generally be less
during the early portion of a landfill's operating life and increase
thereafter.
In accordance with SFAS No. 143, the closure and post-closure liability is
recorded as an addition to site costs and amortized to depletion expense on a
units-of-consumption basis as landfill airspace is consumed. The impact of
changes determined to be changes in estimates, based on an annual update, is
accounted for on a prospective basis. These policies are unchanged from the
accounting policies the Company followed for closure and post-closure
obligations before it adopted SFAS No. 143.
Adopting SFAS No. 143 required a cumulative adjustment to reflect the change in
accounting for landfill obligations retroactively to the date of the inception
of the landfill. Inception of the asset retirement obligation is the date
operations commenced for landfills acquired in transactions accounted for as
poolings-of-interests or the date the asset was acquired in a transaction
accounted for as a purchase. Upon adopting SFAS No. 143 on January 1, 2003, the
Company recorded a cumulative effect of the change in accounting principle of
$448 ($282, net of tax), a decrease in its closure and post-closure liability of
$9,142 and a decrease in net landfill assets of $8,667.
The following is a reconciliation of the Company's closure and post-closure
liability balance from December 31, 2002 to June 30, 2003:
Closure and post-closure liability at December 31, 2002 $ 13,749
Decrease in closure and post-closure liability from
adopting SFAS No. 143 (9,142)
Liabilities incurred 209
Accretion expense 213
--------
Closure and post-closure liability at June 30, 2003 $ 5,029
========
Pro forma financial information to reflect the reported results of operations
for the three and six months ended June 30, 2002, as if SFAS No. 143 were
adopted on January 1, 2002, is as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
---------- ----------
Net income as reported $ 14,342 $ 26,513
Pro forma impact of applying SFAS No. 143, net of tax 41 78
---------- ----------
Pro forma net income $ 14,383 $ 26,591
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Basic earnings per share as reported $ 0.52 $ 0.96
Pro forma impact of applying SFAS No. 143, net of tax -- --
---------- ----------
Pro forma basic earnings per share $ 0.52 $ 0.96
========== ==========
Diluted earnings per share as reported $ 0.49 $ 0.91
Pro forma impact of applying SFAS No. 143, net of tax -- 0.01
---------- ----------
Pro forma diluted earnings per share $ 0.49 $ 0.92
========== ==========
At June 30, 2003, the Company had restricted cash of $9,808 for purposes of
settling future closure and post-closure liabilities.
SFAS No. 146
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No.
146"), 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 did not have a
material effect on its financial statements.
FIN 45
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). It
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. The objective of the initial measurement
of the liability is to determine the fair value of the guarantee at its
inception. The initial recognition and initial measurement provisions of FIN 45
are effective on a prospective basis to guarantees issued or modified after
December 31, 2002, and the Company will record the fair value of future material
guarantees, if any. The Company did not have any material guarantees at June 30,
2003.
FIN 46
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46
requires that unconsolidated variable interest entities be consolidated by their
primary beneficiaries. A primary beneficiary is the party that absorbs a
majority of the entity's expected losses or residual benefits. FIN 46 applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities, regardless of when created, in quarterly periods
beginning after June 15, 2003. The Company is continuing to evaluate the impact
that adoption of FIN 46 will have on its financial statements, but does not
believe the adoption of FIN 46 will have a material impact.
SFAS No. 148
In December 2002, the Financial Accounting Standards Board issued FASB Statement
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition to SFAS No. 123's
fair value method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No.
28, "Interim Financial Reporting", to require disclosure in the summary of
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for employee stock options using
the fair value method. The Company adopted the disclosure provisions of SFAS No.
148 and continues to account for stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Under the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price or fair
value of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement using a
Black-Scholes option pricing model For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The following table summarizes the Company's pro forma net
income and pro forma basic and diluted earnings per share for the three and six
months ended June 30, 2002 and 2003:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ ------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
Net income, as reported $ 14,342 $ 16,639 $ 26,513 $ 31,334
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects 413 -- 424 35
Deduct: total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects (1,835) (1,816) (3,222) (3,467)
---------- ---------- ---------- ----------
Pro forma net income $ 12,920 $ 14,823 $ 23,715 $ 27,902
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 0.52 $ 0.59 $ 0.96 $ 1.11
Basic - pro forma $ 0.47 $ 0.52 $ 0.86 $ 0.99
Diluted - as reported $ 0.49 $ 0.55 $ 0.91 $ 1.05
Diluted - pro forma $ 0.45 $ 0.50 $ 0.83 $ 0.95
SFAS No. 149
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS No. 149"), SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". With certain
exceptions, SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Company's adoption of SFAS No. 149 is not expected to have a material
effect on its financial statements.
SFAS No. 150
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company's adoption of SFAS No. 150 is not expected to have a material
effect on its financial statements.
3. LANDFILL ACCOUNTING
The Company owned and operated 20 landfills and operated, but did not own, ten
landfills at June 30, 2003. Of the ten landfills that the Company operated, but
did not own, three landfills were operated under life-of-site contracts and
seven landfills were operated under contracts with finite terms. The Company
also owns one Subtitle D landfill site that is permitted for operation, but not
constructed as of June 30, 2003. The Company's landfills have site costs with a
net book value of $372,158 at June 30, 2003. With the exception of one owned
landfill that only accepts construction and demolition waste, all landfills that
the Company owns or operates are Subtitle D landfills. For the Company's seven
landfills operated under contracts with finite terms, the owner of the property,
generally a municipality, usually owns the permit and is generally responsible
for closure and post-closure obligations. The Company is responsible for all
closure and post-closure liabilities for the three operating landfills that it
operates, but does not own, under life-of-site operating agreements.
Based on remaining permitted capacity as of June 30, 2003, and projected annual
disposal volumes, the average remaining landfill life for the Company's 20 owned
and operated landfills and three landfills operated, but not owned, under
life-of-site operating contracts, is approximately 53 years. The seven landfills
that the Company operates under contracts with finite terms have remaining terms
of one to twelve years.
Many of the Company's existing landfills have the potential for expanded
disposal capacity beyond the amount currently permitted. The Company's internal
and third-party engineers perform surveys at least annually to estimate the
disposal capacity at its landfills. The Company's landfill depletion rates are
based on the remaining disposal capacity, considering both permitted and deemed
permitted airspace, at its 20 owned and operated landfills and three landfills
operated, but not owned, under life-of-site operating contracts. 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 the estimate of total landfill airspace. The
Company's internal criteria to determine when deemed permitted airspace may be
included as disposal capacity are as follows:
(1) The land where the expansion is being sought is contiguous to the current
disposal site, and the Company either owns it or has an option to purchase
it;
(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) The Company considers it probable that the expansion will be achieved. 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 are likely to impair the success of the
expansion; and
(6) The land where the expansion is being sought has the proper zoning or
proper zoning can readily be obtained.
The Company is currently seeking to expand permitted capacity at five of its
owned landfills and two landfills that it operates, but does not own, under
life-of-site operating contracts, and considers the achievement of these
expansions to be probable. Although the Company cannot be certain that all
future expansions will be permitted as designed, the average remaining life,
when considering remaining permitted capacity, probable expansion capacity and
projected annual disposal volume, of the Company's 20 owned and operated
landfills and three landfills operated, but not owned, under life-of-site
operating contracts is 61 years, with lives ranging from 6 to 313 years.
The Company uses the units-of-production method to calculate the depletion rate
at the landfills it owns and the landfills it operates, but does not own, under
life-of-site operating contracts. This methodology divides the costs associated
with acquiring, permitting and developing the entire landfill by the total
remaining disposal capacity of that landfill. The resulting per unit depletion
rate is applied to each ton of waste disposed at the landfill and is recorded as
expense for that period. During the six months ended June 30, 2002 and 2003, the
Company expensed approximately $5,733 and $6,123, respectively, or an average of
$2.22 and $2.30 per ton consumed, respectively, related to landfill depletion
and $287 and $213, respectively, or an average of $0.11 and $0.08 per ton
consumed, respectively, related to closure and post-closure accretion expense.
Landfill development costs include the costs of acquisition, construction
associated with excavation, liners, site berms, groundwater monitoring wells and
leachate collection systems. Estimated total future development costs of the
Company's 20 owned and operated landfills and three landfills operated, but not
owned, under life-of-site operating contracts were $334,327 at June 30, 2003.
4. ACQUISITIONS
During the six months ended June 30, 2003, the Company acquired four
non-hazardous solid waste collection businesses that were accounted for using
the purchase method of accounting. Aggregate consideration for the acquisitions
consisted of $21,074 in cash (net of cash acquired), exclusive of debt assumed
totaling $1,500.
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, 2003, the Company had 14 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,
2003 is as follows:
Acquired assets:
Accounts receivable $ 338
Prepaid expenses and other current assets 9
Property and equipment 1,167
Goodwill 6,956
Long-term franchise agreements and contracts 6,102
Non-competition agreements 83
Assumed liabilities:
Accounts payable (255)
Accrued liabilities (449)
Debt and other liabilities assumed (1,294)
----------
$ 12,657
==========
During the six months ended June 30, 2003, the Company paid $8,417 of accrued
acquisition-related liabilities.
Goodwill acquired in the six months ended June 30, 2003 totaling $6,270 is
expected to be deductible for tax purposes.
5. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consist of the following as of June
30, 2003:
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
-------- -------- --------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 20,639 $ (1,359) $ 19,280
Non-competition agreements 3,704 (2,265) 1,439
Other, net 2,416 (826) 1,590
-------- -------- --------
26,759 (4,450) 22,309
Nonamortized intangible assets:
Indefinite-lived intangible assets 16,710 -- 16,710
-------- -------- --------
Intangible assets, exclusive of goodwill $ 43,469 $ (4,450) $ 39,019
======== ======== ========
The weighted-average amortization periods of long-term franchise agreements and
non-competition agreements acquired during the six months ended June 30, 2003
are 40 years and 5 years, respectively.
Estimated future amortization expense for the next five years of amortizable
intangible assets is as follows:
For the year ended December 31, 2003 $ 1,437
For the year ended December 31, 2004 1,336
For the year ended December 31, 2005 1,216
For the year ended December 31, 2006 1,034
For the year ended December 31, 2007 831
6. LONG-TERM DEBT
In May 2003, the Company entered into two forward-starting interest rate swap
agreements. Each interest rate swap agreement has a notional amount of $87,500
and effectively fixes the interest rate on the notional amount at interest rates
ranging from 2.67% to 2.68%, plus applicable margin. The effective date of the
swap agreements is February 2004 and each swap agreement expires in February
2007. These interest rate swap agreements are effective as cash flow hedges of
our variable rate debt. The notional amounts and all other significant terms of
the swap agreements are matched to the provisions and terms of the variable rate
debt being hedged achieving 100% effectiveness. If significant terms do not
match we will assess any ineffectiveness and any ineffectiveness will
immediately be recorded in interest expense in our statements of income.
7. 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Numerator:
Net income for basic earnings per share $ 14,342 $ 16,639 $ 26,513 $ 31,334
Interest expense on convertible subordinated
notes due 2006, net of tax effects 1,462 1,476 2,921 2,951
------------ ------------ ------------ ------------
Net income for diluted earnings per share $ 15,804 $ 18,115 $ 29,434 $ 34,285
============ ============ ============ ============
Denominator:
Basic shares outstanding
Dilutive effect of convertible 27,723,136 28,265,001 27,676,913 28,173,817
subordinated notes due 2006 3,944,775 3,944,775 3,944,775 3,944,775
Dilutive effect of options and warrants 679,547 587,243 592,800 606,511
Dilutive effect of restricted stock -- 2,696 -- 4,190
------------ ------------ ------------ ------------
Diluted shares outstanding 32,347,458 32,799,715 32,214,488 32,729,293
============ ============ ============ ============
8. 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, 2002 and 2003
is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Net income $ 14,342 $ 16,639 $ 26,513 $ 31,334
Unrealized gain (loss) on interest rate swaps,
net of tax benefit (expense) of $491 and
$(119) for the three months ended June 30,
2002 and 2003, respectively, and $(345) and
$(703) for the six months ended June 30,
2002 and 2003, respectively (818) 203 162 1,112
------------ ------------ ------------ ------------
Comprehensive income $ 13,524 $ 16,842 $ 26,675 $ 32,446
============ ============ ============ ============
The components of other comprehensive income and related tax effects for the
three and six months ended June 30, 2002 and 2003 are as follows:
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)
============ ============ ============
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------------------
GROSS TAX EFFECT NET OF TAX
------------ ------------ ------------
Amounts reclassified into earnings $ 1,603 $ 593 $ 1,010
Changes in fair value of interest rate swaps (1,281) (474) (807)
------------ ------------ ------------
$ 322 $ 119 $ 203
============ ============ ============
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
============ ============ ============
SIX MONTHS ENDED JUNE 30, 2003
--------------------------------------------
GROSS TAX EFFECT NET OF TAX
------------ ------------ ------------
Amounts reclassified into earnings $ 3,108 $ 1,150 $ 1,958
Changes in fair value of interest rate swaps (1,293) (447) (846)
------------ ------------ ------------
$ 1,815 $ 703 $ 1,112
============ ============ ============
The estimated net amount of the existing losses as of June 30, 2003 (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 $3,769. The timing of actual amounts
reclassified into earnings is dependent on future movements in interest rates.
9. CONTINGENCIES
In April 2003, the Company entered into a consent order with the Oklahoma
Department of Environmental Quality Land Protection Division (the "Department")
to settle all issues by mutual consent related to a dispute arising in 2002 due
to the Company's alleged failure to obtain the Department's prior approval of an
out-of-state disposal plan for waste received at its Red Carpet Landfill in
Oklahoma. In connection with the consent order, the Company implemented a
disposal plan subject to certain conditions imposed by the Department and agreed
to pay $160.
Additionally, the Company is 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.
The Company owns undeveloped property in Harper County, Kansas where it is
seeking permits to construct and operate a Subtitle D landfill. In 2002, the
Company received a special use permit from Harper County for zoning the landfill
and in 2003 it received a draft permit from the Kansas Department of Health and
Environment to construct and operate the landfill. In July 2003, the District
Court of Harper County invalidated the previously issued zoning permit. The
Company has appealed the District Court's decision to invalidate the zoning
permit. The Kansas Department of Health and Environment has notified the Company
that it will not issue a final permit to construct and operate the landfill
until the zoning matter is resolved. At June 30, 2003, the Company had $3,400 of
capitalized expenditures related to this landfill development project. Based on
the advice of counsel, the Company believes that it will prevail in this matter
and does not believe that an impairment of the capitalized expenditures exists.
If the Company does not prevail on appeal, however, it will be required to
expense in a future period the $3,400 of capitalized expenditures, less the
recoverable value of the undeveloped property, which would likely have a
material adverse effect on its reported income for that 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: (1) competition or unfavorable
industry or economic conditions could lead to a decrease in demand for our
services and 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, or finding acquisition targets suitable to our
growth strategy, (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) large, long-term collection contracts on
which we depend may not be replaced when they expire or are terminated, and (7)
we are highly dependent on the services of our senior management, who would 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 an integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
mostly secondary markets in the Western, Midwestern, Southwestern and
Southeastern U.S. As of June 30, 2003, we served more than 1,000,000 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 91 collection operations and
operated or owned 29 transfer stations, 29 Subtitle D landfills, one
construction and demolition landfill and 18 recycling facilities. We also own
one Subtitle D landfill site that is permitted for operation, but not
constructed as of June 30, 2003.
We generally intend to pursue an acquisition-based growth strategy and as of
June 30, 2003 have acquired 155 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.
Self-insurance liabilities. During the third quarter of 2002, we increased our
scope of self-insurance, becoming primarily self-insured for automobile
liability, general liability and workers' compensation claims. Previously, we
were primarily self-insured only for automobile collision 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 our
management and by our third-party claims administrator. The self-insurance
accruals are influenced by our past claims experience factors, for which we have
a limited history, and by published industry development factors. If we
experience insurance claims or costs above or below our historically evaluated
levels, our 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 our self-insurance liabilities. Additionally, the actual costs
to settle the self-insurance liabilities could materially differ from the
original estimates.
Accounting for landfills. Our adoption of SFAS No. 143 on January 1, 2003
resulted in a significant change to our accounting policies for landfill closure
and post-closure obligations. See discussion below under "New Accounting
Pronouncements" for additional information and analyses of the impact that
adopting SFAS No. 143 had on our balance sheet, and is expected to have on our
results of operations for the year ending December 31, 2003.
We recognize landfill depletion expense as airspace of the landfill is consumed.
Our landfill depletion rates are based on the remaining disposal capacity at our
landfills, considering both permitted and deemed permitted airspace. Landfill
closure and post-closure liabilities are calculated by estimating the total
obligation in current dollars, inflating the obligation based upon the expected
date of the expenditure and discounting the inflated total to its present value
using a credit-adjusted risk-free rate. The resulting closure and post-closure
obligation is recorded on the balance sheet as the landfill's total airspace is
consumed. 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.
Landfill development costs. Landfill development costs include the costs of
acquisition, construction associated with excavation, liners, site berms,
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 described
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 may affect our
cash flows by increasing our capital expenditures and thus affect our
results of operations by increasing our landfill depletion expense.
Closure and post-closure obligations. We reserve for estimated closure and
post-closure maintenance obligations at the landfills we own and certain
landfills that we operate, but do not own, under life-of-site operating
contracts. We could have additional material financial obligations relating
to closure and post-closure costs at other disposal facilities that we
currently own or operate or that we may own or operate in the future. We
calculate landfill closure and post-closure liabilities by estimating the
total obligation in current dollars, inflating the obligation based upon
the expected date of the expenditure using an inflation rate of 3% and
discounting the inflated total to its present value using an 8.5% discount
rate. A 1.0 percentage point increase in the inflation rate we currently
use would increase our landfill depletion and accretion expense by $0.3
million in 2003. A 1.0 percentage point decrease in the discount rate we
currently use would increase our landfill depletion and accretion expense
by $0.2 million in 2003. The resulting closure and post-closure obligation
is recorded on the balance sheet as an addition to site costs and amortized
as depletion expense as the landfill's total airspace is consumed.
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 costs could have a material adverse effect on our
financial condition and results of operations.
Disposal capacity. Our internal and third-party engineers perform surveys
at least annually to estimate the remaining disposal capacity at our
landfills. Our landfill depletion rates are based on the remaining disposal
capacity, considering both permitted and deemed permitted airspace, at the
landfills that we own and at the landfills that we operate, but do not own,
under life-of-site operating contracts. 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 determine when deemed permitted airspace may be included as
disposal capacity is as follows:
(1) The land where the expansion is being sought is contiguous to the
current disposal site, and we either own it or have an option to
purchase it;
(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) We consider it probable that we will achieve the expansion. 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 or
proper zoning can readily be obtained.
We may be unsuccessful in obtaining permits for deemed permitted disposal
capacity at our landfills. 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.
Impairment of intangible assets. We periodically evaluate acquired assets 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 assets.
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 June 30, 2003, goodwill and
intangible assets represented 46.4% of our total assets.
Allocation of acquisition purchase price. We allocate acquisition purchase
prices to identified intangible assets and tangible assets acquired and
liabilities assumed based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill.
We deem the total remaining permitted and deemed permitted airspace of an
acquired landfill to be a tangible asset. Therefore, for acquired landfills, we
initially allocate the purchase price to identified intangible and tangible
assets acquired, excluding landfill airspace, and liabilities assumed based on
their estimated fair values at the date of acquisition. Any residual amount is
allocated to landfill airspace.
We often consummate single acquisitions that include a combination of collection
operations and landfills. For each separately identified collection operation
and landfill acquired in a single acquisition, we perform an initial allocation
of total purchase price to the identified collection operations and landfills
based on their relative fair values. Following this initial allocation of total
purchase price to the identified collection operations and landfills, we further
allocate the identified intangible assets and tangible assets acquired and
liabilities assumed for each collection operation and landfill based on their
estimated fair values at the dates of acquisition, with any residual amounts
allocated to either goodwill or landfill site costs, as discussed above.
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 deteriorates,
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.
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 price 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 us 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, 2003 were derived from market areas where services are provided
predominantly under exclusive franchise agreements, long-term municipal
contracts and governmental certificates. Governmental certificates grant us
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 us. Our collection business also generates revenues from
the sale of recyclable commodities.
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 landfill facilities that we operate, but do not
own. 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, tipping fees paid to third-party disposal
facilities, equipment maintenance and worker's compensation and vehicle
insurance and claims expense, third-party transportation expense, fuel, the cost
of materials we purchase for recycling, district and state taxes and host
community fees and royalties. In 2002, we increased our scope of self-insurance,
becoming primarily self-insured for general liability, workers' compensation and
automobile liability. Previously, we were primarily self-insured only for
automobile collision and employee group health claims. The frequency and amount
of claims or incidents for the areas in which we are primarily self-insured
could vary significantly from quarter to quarter and/or year to year, resulting
in increased volatility of our cost of operations. As of June 30, 2003, we owned
and/or operated 29 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. Depletion expense includes
depletion of landfill site costs and total future development costs as remaining
airspace of the landfill is consumed. Remaining airspace at our landfills
includes both permitted and deemed permitted airspace. Amortization expense
includes the amortization of definite-lived intangible assets, consisting
primarily of long-term franchise agreements and contracts and non-competition
agreements, over their estimated useful lives using the straight-line method.
Goodwill and indefinite-lived intangible assets, consisting primarily of certain
perpetual rights to provide solid waste collection and transportation services
in specified territories, are not amortized.
At June 30, 2003, we had 288.2 million tons of permitted remaining airspace
capacity and 44.9 million tons of deemed probable expansion airspace capacity at
our 20 owned and operated landfills and three landfills operated, but not owned,
under life-of-site operating contracts.
The disposal tonnage that we received in the six months ended June 30, 2002 and
2003 at all of our landfills is shown below (tons in thousands):
JUNE 30, 2002 JUNE 30, 2003
--------------------- ---------------------
NUMBER TOTAL NUMBER TOTAL
OF SITES TONS OF SITES TONS
-------- -------- -------- --------
Owned and operated landfills 20 2,408 20 2,426
Operated landfills 8 337 7 366
Operated landfills under
life-of-site contracts 2 171 3 234
-------- -------- -------- --------
30 2,916 30 3,026
======== ======== ======== ========
We capitalize 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 may
become impaired, such as those 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. At
June 30, 2003, we had less than $0.1 million in capitalized interest related to
landfill development projects and $0.5 million in capitalized expenditures
relating to pending acquisitions. We own undeveloped property in Harper County,
Kansas where we are seeking permits to construct and operate a Subtitle D
landfill. In 2002, we received a special use permit from Harper County for
zoning the landfill and in 2003 we received a draft permit from the Kansas
Department of Health and Environment to construct and operate the landfill. In
July 2003, the District Court of Harper County invalidated the previously issued
zoning permit. We have appealed the District Court's decision to invalidate the
zoning permit. The Kansas Department of Health and Environment has notified us
that it will not issue a final permit to construct and operate the landfill
until the zoning matter is resolved. At June 30, 2003, we had $3.4 million of
capitalized expenditures related to this landfill development project. Based on
the advice of counsel, we believe that we will prevail in this matter and do not
believe that an impairment of the capitalized expenditures exists. If we do not
prevail on appeal, however, we will be required to expense in a future period
the $3.4 million of capitalized expenditures, less the recoverable value of the
undeveloped property, which would likely have a material adverse effect on our
reported income for that period.
We continually evaluate the value and future benefits of our intangible assets,
including goodwill. We assess the recoverability from future operations using
cash flows and income from operations of the related acquired businesses as
measures. Under this approach, the carrying value is reduced if it becomes
probable that our best estimate for expected future cash flows of the related
business would be less than the carrying amount of the intangible assets. As of
June 30, 2003, there have been no adjustments to the carrying amounts of
intangibles, including goodwill, resulting from these evaluations. As of June
30, 2003, goodwill and other intangible assets represented approximately 46.4%
of total assets and 121.1% of stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note 2 to
our Condensed Consolidated Financial Statements included under Item 1 of this
Form 10-Q.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2003
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,
--------------------- ---------------------
2002 2003 2002 2003
-------- -------- -------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 56.3 55.8 56.2 55.8
Selling, general and
administrative expenses 9.7 9.5 9.3 9.8
Depreciation and
amortization expense 7.9 8.1 7.8 8.2
-------- -------- -------- --------
Operating income 26.1 26.6 26.7 26.2
Interest expense, net (6.1) (5.6) (6.5) (5.9)
Other expense, net (0.2) (0.1) (0.3) (0.1)
Minority interests (1.9) (1.9) (1.8) (1.8)
Income tax expense (6.7) (7.0) (6.8) (6.8)
Cumulative effect of change
in accounting principle -- -- -- 0.1
-------- -------- -------- --------
Net income 11.2% 12.0% 11.3% 11.7%
======== ======== ======== ========
Revenues. Total revenues increased $10.8 million, or 8.4%, to $138.9 million for
the three months ended June 30, 2003 from $128.1 million for the three months
ended June 30, 2002. The increase in revenues in the three months ended June 30,
2003 resulted from the full-quarter inclusion of revenues from acquisitions
closed during the three months ended June 30, 2002 and the inclusion of revenues
from acquisitions closed subsequent to June 30, 2002, which together totaled
approximately $10.5 million. Of the remaining change in revenues, improved
recyclable commodity prices increased revenues by $0.5 million, and price and
volume changes in our existing business resulted in a net revenue decline of
$0.2 million. This decline was primarily the result of competitive pressures,
reduced special waste and transfer station volumes in certain markets and the
loss of certain municipal contracts that expired subsequent to June 30, 2002 and
were not renewed, partially offset by increased prices charged to our customers.
Revenues for the six months ended June 30, 2003 increased $33.5 million, or
14.3%, to $267.3 million from $233.8 million for the six months ended June 30,
2002. The increase in revenues in the six months ended June 30, 2003 resulted
from the full-quarter inclusion of revenues from acquisitions closed during the
six months ended June 30, 2002 and the inclusion of revenues from acquisitions
closed subsequent to June 30, 2002, which together totaled approximately $33.2
million. Of the remaining change in revenues, improved recyclable commodity
prices increased revenues by $1.5 million and price and volume changes in our
existing business resulted in a net revenue decline of $1.1 million. This
decline was primarily the result of competitive pressures, reduced special waste
and transfer station volumes in certain markets, severe winter weather
conditions encountered at some of our operations during the first quarter of
2003 and the loss of certain municipal contracts that expired subsequent to June
30, 2002 and were not renewed, partially offset by increased prices charged to
our customers.
Cost of Operations. Total cost of operations increased $5.3 million, or 7.3%, to
$77.4 million for the three months ended June 30, 2003 from $72.2 million for
the three months ended June 30, 2002. Cost of operations for the six months
ended June 30, 2003 increased $17.7 million, or 13.5%, to $149.2 million from
$131.5 million for the six months ended June 30, 2002. The increases were
primarily attributable to acquisitions closed over the balance of 2002 and the
first six months of 2003, partially offset by reduced insurance costs associated
with the high deductible insurance program we implemented in August 2002.
Cost of operations as a percentage of revenues decreased 0.5 percentage points
to 55.8% for the three months ended June 30, 2003 from 56.3% for the three
months ended June 30, 2002. Cost of operations as a percentage of revenues for
the six months ended June 30, 2003 decreased 0.4 percentage points to 56.2% from
55.8% for the six months ended June 30, 2002. The decreases as a percentage of
revenues were primarily attributable to price increases, reduced insurance
costs, and improved operations at certain locations, partially offset by the
decline in higher margin one-time projects and the mix of revenues associated
with acquisitions closed over the balance of 2002 and the first six months of
2003, which had operating margins below our company average.
SG&A. SG&A expenses increased $0.7 million, or 5.7%, to $13.2 million for the
three months ended June 30, 2003 from $12.5 million for the three months ended
June 30, 2002. SG&A expenses for the six months ended June 30, 2003 increased
$4.2 million, or 19.2%, to $26.1 million from $21.9 million for the six months
ended June 30, 2002. Our SG&A expenses for the three and six months ended June
30, 2003 increased from the prior year periods as a result of additional
personnel from acquisitions closed over the balance of 2002 and the first six
months of 2003, additional corporate, regional and district level overhead,
increased legal expenses, increased management information system expenses
incurred to support our administrative activities and additional stock
compensation expense related to the issuance of restricted stock to
district-level personnel in May 2002, net of the incurrence in the three months
ended June 30, 2002 of $1.3 million of one-time employment expenses, which
included $0.6 million of stock compensation expense, associated with the
termination of our search for a chief operating officer and the hiring of two
new corporate officers.
SG&A as a percentage of revenues decreased 0.2 percentage points to 9.5% for the
three months ended June 30, 2003 from 9.7% for the three months ended June 30,
2002. The decrease was due to the incurrence in the three months ended June 30,
2002 of $1.3 million of employment expense that did not recur in 2003, partially
offset by percentage of revenue increases in corporate overhead, legal expenses,
management information system expense and stock compensation expense. SG&A as a
percentage of revenues for the six months ended June 30, 2003 increased 0.5
percentage points to 9.8% from 9.3% for the six months ended June 30, 2002. The
increase was due to percentage of revenue increases in corporate overhead, legal
expenses, management information system expense and stock compensation expense,
partially offset by the $1.3 million of employment expense incurred in 2002 that
did not recur in 2003.
Depreciation and Amortization. Depreciation and amortization expense increased
$1.2 million, or 11.9%, to $11.3 million for the three months ended June 30,
2003 from $10.1 million for the three months ended June 30, 2002. Depreciation
and amortization expenses for the six months ended June 30, 2003 increased $3.8
million, or 20.7%, to $21.9 million from $18.1 million for the six months ended
June 30, 2002. The increase was primarily attributable to depreciation and
depletion associated with acquisitions closed over the balance of 2002 and the
first six months of 2003 and increased depreciation expense resulting from new
equipment acquired to support our base operations, partially offset by decreased
depletion expense at landfills acquired prior to 2002 due to decreased landfill
volumes.
Depreciation and amortization as a percentage of revenues increased 0.2
percentage points to 8.1% for the three months ended June 30, 2003 from 7.9% for
the three months ended June 30, 2002. Depreciation and amortization as a
percentage of revenues for the six months ended June 30, 2002 increased 0.4
percentage points to 8.2% from 7.8% for the six months ended June 30, 2002. The
increases in depreciation and amortization as a percentage of revenues were the
result of depreciation expense associated with new equipment acquired subsequent
to June 30, 2002, which had depreciation rates that were in excess of our
historical average.
Operating Income. Operating income increased $3.6 million, or 10.9%, to $37.0
million for the three months ended June 30, 2003 from $33.4 million for the
three months ended June 30, 2002. Operating income for the six months ended June
30, 2003 increased $7.8 million, or 12.5%, to $70.2 million from $62.4 million
for the six months ended June 30, 2002. The increases were primarily
attributable to the growth in revenues and the incurrence of $1.3 million of
employment expenses in 2002 that did not recur in 2003, partially offset by
increased operating costs and recurring SG&A expenses to support the revenue
growth and increased depreciation and amortization expenses.
Operating income as a percentage of revenues increased 0.5 percentage points to
26.6% for the three months ended June 30, 2003 from 26.1% for the three months
ended June 30, 2002. The increase was due to the incurrence in the three months
ended June 30, 2002 of $1.3 million of employment expenses that did not recur in
2003 and improved gross margins, partially offset by increased recurring SG&A
expenses and increased depreciation expenses.
Operating income as a percentage of revenues for the six months ended June 30,
2003 decreased 0.5 percentage points to 26.2% from 26.7% for the six months
ended June 30, 2002. The decrease resulted from increased recurring SG&A
expenses and increased depreciation expenses, partially offset by improved gross
margins and the incurrence in 2002 of $1.3 million of employment expenses that
did not recur in 2003.
Interest Expense. Interest expense was relatively unchanged at $7.8 million for
the three months ended June 30, 2002 and 2003. Interest expense for the six
months ended June 30, 2003 increased $0.7 million, or 4.6%, to $15.8 million
from $15.1 million for the six months ended June 30, 2002. The increase for the
six months ended June 30, 2003 was primarily attributable to higher debt levels
incurred to fund our acquisitions, partially offset by lower interest rates on
our floating rate borrowings.
Other Income (Expense). Other income (expense) was unchanged at a total of
$(0.2) million for the three months ended June 30, 2002 and 2003. Other expense
decreased from an expense total of $(0.6) million for the six months ended June
30, 2002 to an expense total of ($0.2) million for the six months ended June 30,
2002. The primary components of other expense are net losses incurred on the
disposal of certain assets.
Minority Interests. Minority interests increased $0.1 million, or 5.0%, to $2.6
million for the three months ended June 30, 2003, from $2.5 million for the
three months ended June 30, 2002. Minority interests increased $0.6 million, or
15.1%, to $4.9 million for the six months ended June 30, 2003, from $4.2 million
for the six months ended June 30, 2002. The increases in minority interests were
due to increased earnings by our majority-owned subsidiaries.
Provision for Income Taxes. Income taxes increased $1.2 million, or 13.6%, to
$9.8 million for the three months ended June 30, 2003, from $8.6 million for the
three months ended June 30, 2002. Income taxes increased $2.3 million, or 14.6%,
to $18.2 million for the six months ended June 30, 2003, from $15.9 million for
the six months ended June 30, 2002. These increases were due to increased
pre-tax earnings, partially offset by a 0.5 percentage point reduction in our
effective tax rate due to the reduction in our blended state tax rate. The
effective income tax rate for the three and six months ended June 30, 2003 was
37.0%, which is above the federal statutory rate of 35.0% primarily due to state
and local taxes.
Cumulative Effect of Change in Accounting Principle. Cumulative effect of change
in accounting principle consists of a $0.3 million gain, net of tax effects,
resulting from our adoption of SFAS No. 143 on January 1, 2003. Our adoption of
SFAS No. 143 required us to record a cumulative change in accounting for
landfill closure and post-closure obligations retroactively to the date of the
acquisition of each landfill.
Net Income. Net income increased $2.3 million, or 16.0%, to $16.6 million for
the three months ended June 30, 2003, from $14.3 million for the three months
ended June 30, 2002. The increase was primarily attributable to increased
operating income and a reduction in our effective tax rate.
Net income increased $4.8 million, or 18.2%, to $31.3 million for the six months
ended June 30, 2003, from $26.5 million for the six months ended June 30, 2002.
The increase was primarily attributable to increased operating income and a
reduction in our effective tax rate, partially offset by increased interest and
minority interest expense.
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, 2003, we had a working capital deficit of $18.5 million,
including cash and equivalents of $6.0. million. Our working capital deficit
decreased $4.5 million from $23.0 million at December 31, 2002, due primarily to
using cash generated from operations to pay $8.4 million of accrued
acquisition-related liabilities. 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 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. As of June 30, 2003, we had an
aggregate of $197.0 million outstanding under the credit facility, exclusive of
stand-by letters of credit. The credit facility allows us to issue up to $80
million in stand-by letters of credit, which reduce the amount of total
borrowings available under the credit facility. As of June 30, 2003, we had
$23.6 million of outstanding letters of credit issued under the credit facility.
Thus, at June 30, 2003 we had approximately $214.4 million in borrowing capacity
available under our 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 LIBOR 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 requires us to maintain the following financial
covenants: (i) an interest coverage ratio; (ii) funded debt to EBITDA; (iii)
senior funded debt to EBITDA; (iv) funded debt to capitalization; and (v)
profitable operations, all as defined in the credit facility solely for the
purpose of determining compliance with the covenants. The interest coverage
ratio requires that at the end of any fiscal quarter we will not permit the
ratio of (A) our consolidated net income plus interest expense and income taxes
("EBIT") for the four fiscal quarters then ending to (B) consolidated total
interest expense for such period, to be less than 2 to 1. The funded debt to
EBITDA covenant requires that at the end of any fiscal quarter, we will not
permit the ratio of (A) all funded debt to (B) EBIT plus depreciation and
amortization expense ("EBITDA") for the four fiscal quarters then ending to
exceed 4.25 to 1. The senior funded debt to EBITDA covenant requires that at the
end of any fiscal quarter, we will not permit the ratio of (A) all senior funded
debt to (B) EBITDA for the four fiscal quarters then ending to exceed 3.25 to 1.
The funded debt to capitalization covenant requires that at the end of any
fiscal quarter we will not permit the ratio of (A) funded debt to (B) the sum of
funded debt plus consolidated net worth to exceed 65%. The profitable operations
covenant requires that at the end of any fiscal quarter we will not permit
consolidated net income to be less than $1.00. As of June 30, 2003, we were in
compliance with all covenants under our credit facility. 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. If we are unable to
incur additional indebtedness under our credit facility or obtain additional
capital through future debt or equity financings, our rate of growth through
acquisitions may decline.
As of June 30, 2003, we had the following contractual obligations and commercial
commitments (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
CONTRACTUAL LESS THAN
OBLIGATIONS TOTAL 1 YEAR 1 TO 3 YEARS 4 TO 5 YEARS OVER 5 YEARS
- ----------- ---------- ---------- ---------- ---------- ----------
Long-term debt (1) $ 562,474 $ 5,309 $ 354,212 $ 4,356 $ 198,597
Operating leases 24,467 3,408 5,749 3,945 11,365
Unconditional purchase obligations 3,901 3,901 -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 590,842 $ 12,618 $ 359,961 $ 8,301 $ 209,962
========== ========== ========== ========== ==========
(1) Long-term debt payments include $197.0 million due in 2005 under our credit
facility. As of June 30, 2003, our credit facility allows us to borrow up
to $435 million.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
----------------------------------------------------------------------
CONTRACTUAL LESS THAN
COMMITMENTS TOTAL 1 YEAR 1 TO 3 YEARS 4 TO 5 YEARS OVER 5 YEARS
- ----------- ---------- ---------- ---------- ---------- ----------
Standby letters of credit $ 23,635 $ 23,635 $ -- $ -- $ --
Financial surety bonds (2) 76,045 71,709 4,336 -- --
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 99,680 $ 95,344 $ 4,336 $ -- $ --
========== ========== ========== ========== ==========
Our commercial commitments consist of financial assurance instruments issued in
the normal course of business and are not debt of Waste Connections. Since we
have no current liability for these financial assurance instruments, they are
not reflected in the accompanying Condensed Consolidated Balance Sheets. The
underlying obligations of our financial assurance instruments would be valued
and recorded in the Condensed Consolidated Balance Sheets if it were probable
that we would be unable to perform our obligations under the financial assurance
contracts. We do not expect this to occur.
(2) We use financial surety bonds for a variety of corporate guarantees. The
two largest uses of financial surety bonds are for municipal contract
performance guarantees and landfill closure and post-closure financial
assurance required under certain environmental regulations. As a result of
recent changes in the insurance industry, we have experienced less
availability and increased costs of surety bonds for landfill closure and
post-closure requirements. We generally have not experienced significant
difficulty in obtaining surety bonds for performance under our municipal
collection contracts or landfill operating agreements. Environmental
regulations require demonstrated financial assurance to meet closure and
post-closure requirements for landfills. In addition to surety bonds, these
requirements may also be met through alternative financial assurance
instruments, including insurance, letters of credit and restricted cash
deposits.
At June 30, 2003, we had provided customers and various regulatory
authorities with surety bonds in the aggregate amount of approximately
$47.9 million to secure our landfill closure and post-closure requirements
and $27.1 million to secure performance under collection contracts and
landfill operating agreements. These surety bonds were issued by our
current surety bond underwriters under non-binding commitments. These
non-binding commitments do not have a stated expiration date; however,
individual bonds issued typically have a term of one year. If our current
bond underwriters are unwilling to issue additional bonds under the current
non-binding commitments, renew existing bonds upon expiration, or increase
their total commitment upon reaching the maximum issuance amount under the
current non-binding commitments, or if we are unable to obtain surety bonds
through new underwriters as such needs arise, we would need to arrange
other means of financial assurance, such as a cash trust or a letter of
credit, to secure contract performance or meet closure and post-closure
requirements. While such alternate financial assurance has been readily
available, it may result in additional expense or capital outlays.
For the six months ended June 30, 2003, net cash provided by operations was
approximately $73.7 million. Of this, $5.7 million was provided by working
capital for the period. The remaining components of the reconciliation of net
income to net cash provided by operations for the six months ended June 30, 2003
consist of non-cash expenses including $21.8 million of depreciation and
amortization, $4.9 million of minority interest expense and $1.2 million of debt
issuance cost amortization, and the deferral of $9.1 million of income tax
expense resulting from timing differences between the recognition of income and
expenses for financial reporting and tax. .
For the six months ended June 30, 2003, net cash used in investing activities
was $53.0 million. Of this, $21.1 million was used to fund the cash portion of
acquisitions and to pay a portion of acquisition costs that were included as a
component of accrued liabilities at December 31, 2002. Cash used for capital
expenditures was $30.8 million, which was primarily for investments in fixed
assets, consisting of trucks, containers, other equipment and landfill
development. Other cash outflows from investing activities include $1.9 million
of restricted cash funding for our landfill closure and post-closure
obligations.
For the six months ended June 30, 2003, net cash used in financing activities
was $18.8 million, which included $21.2 million of net repayments under our
various debt arrangements and $4.6 million of cash distributions to minority
interest holders, less $7.1 million of proceeds from stock option and warrant
exercises.
We made approximately $30.8 million in capital expenditures during the six
months ended June 30, 2003. We expect to make capital expenditures of
approximately $60.0 million in 2003 in connection with our existing business. We
intend to fund our planned 2003 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 May 2003, we entered into two forward-starting interest rate swap agreements.
Each interest rate swap agreement has a notional amount of $87.5 million and
effectively fixes the interest rate on the notional amount at interest rates
ranging from 2.67% to 2.68%, plus applicable margin. The effective date of the
swap agreements is February 2004 and each swap agreement expires in February
2007.
At June 30, 2003, we had two additional interest rate swap agreements that
expire in 2003. The first swap agreement effectively fixes the interest rate on
a notional amount of $125 million at 6.17%, plus applicable margin. The second
interest rate swap agreement effectively fixes the interest rate on a notional
amount of $15 million at 7.01%, plus applicable margin.
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 reflects 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 $57.0 million remaining floating rate balance
owed under our credit facility, $175 million of our Floating Rate Convertible
Subordinated Notes due 2022, $8.5 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 June 30, 2003 would decrease our annual pre-tax
income by approximately $2.5 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 18 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, 2003 would not materially affect our cash flows or
pre-tax income.
ITEM 4. CONTROLS AND PROCEDURES
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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June
30, 2003. 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 or submits under the
Exchange Act is recorded, processed, summarized and reported as and when
required.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Legal Proceedings" in our quarterly report on Form 10-Q for the quarter
ended March 31, 2003.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of stockholders was held on May 23, 2003.
Michael W. Harlan was elected as director by the votes indicated:
Total Votes For: 25,123,075
Total Votes Withheld: 994,293
William J. Razzouk was elected as director by the votes indicated:
Total Votes For: 25,123,440
Total Votes Withheld: 993,928
The terms for Messrs. Harlan and Razzouk expire on the date of the annual
meeting in 2006.
The following proposal was 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 2003:
Total Votes For: 25,656,755
Total Votes Against: 443,109
Total Votes Abstained: 17,504
The following proposal was defeated at the annual meeting because it failed to
receive votes in favor of the proposal equal to or greater than a majority of
the 28,152,853 shares of common stock outstanding on the record date of the
annual meeting:
To approve the amendment of our Certificate of Incorporation to increase the
authorized number of shares of common stock from 50,000,000 to 150,000,000
shares:
Total Votes For: 13,924,013
Total Votes Against: 12,171,492
Total Votes Abstained: 21,863
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description of Exhibits
------ -----------------------
10.1 Employment Agreement between Waste Connections, Inc.
and David G. Eddie
10.2 Employment Agreement between Waste Connections, Inc.
and Worthing F. Jackman
31 Certifications
32 Certificate of Chief Executive Officer and Chief
Financial Officer
b. Reports on Form 8-K:
On April 23, 2003, we filed a report on Form 8-K announcing the
results of our earnings for the first quarter of 2003.
On April 29, 2003, we filed a report on Form 8-K announcing new
appointments to our executive management team.
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: August 13, 2003 Ronald J. Mittelstaedt,
President and Chief
Executive Officer
BY: /s/ Steven F. Bouck
----------------------------
Date: August 13, 2003 Steven F. Bouck,
Executive Vice President and
Chief Financial Officer