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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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 October 17, 2003: 28,479,325 Shares of Common Stock
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2002 and September 30, 2003
Condensed Consolidated Statements of Income
for the three and nine months ended September 30, 2002 and 2003
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 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, SEPTEMBER 30,
ASSETS 2002 2003
------------ ------------
Current assets:
Cash and equivalents $ 4,067 $ 7,027
Accounts receivable, less allowance for doubtful
accounts of $2,509 and $2,564 at December 31,
2002 and September 30, 2003, respectively 63,488 72,034
Prepaid expenses and other current assets 8,652 9,904
------------ ------------
Total current assets 76,207 88,965
Property and equipment, net 578,040 602,056
Goodwill, net 548,975 587,277
Intangible assets, net 33,498 63,271
Restricted cash 11,314 16,605
Other assets, net 13,848 17,431
------------ ------------
$ 1,261,882 $ 1,375,605
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,688 $ 33,802
Accrued liabilities 45,905 47,601
Deferred revenue 19,016 23,057
Current portion of long-term debt and notes payable 3,646 8,118
------------ ------------
Total current liabilities 99,255 112,578
Long-term debt and notes payable 578,481 613,632
Other long-term liabilities 14,813 6,304
Deferred income taxes 94,543 108,603
------------ ------------
Total liabilities 787,092 841,117
Commitments and contingencies
Minority interests 23,078 22,947
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 28,442,326 shares issued and outstanding
at December 31, 2002 and September 30, 2003, respectively 280 284
Additional paid-in capital 332,705 340,890
Deferred stock compensation (775) (516)
Retained earnings 123,498 171,804
Accumulated other comprehensive loss (3,996) (921)
------------ ------------
Total stockholders' equity 451,712 511,541
------------ ------------
$ 1,261,882 $ 1,375,605
============ ============
See accompanying notes.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Revenues $ 133,487 $ 146,178 $ 367,320 $ 413,515
Operating expenses:
Cost of operations 75,467 82,407 206,956 231,655
Selling, general and administrative 12,613 13,702 34,468 39,762
Depreciation and amortization 10,483 12,293 28,596 34,155
------------ ------------ ------------ ------------
Operating income 34,924 37,776 97,300 107,943
Interest expense (7,861) (8,002) (22,999) (23,838)
Other income (expense), net (162) 12 (743) (155)
------------ ------------ ------------ ------------
Income before income tax provision and
minority interests 26,901 29,786 73,558 83,950
Minority interests (2,585) (2,932) (6,821) (7,807)
------------ ------------ ------------ ------------
Income before income tax provision 24,316 26,854 66,737 76,143
Income tax provision (9,123) (9,882) (25,031) (28,119)
------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 15,193 16,972 41,706 48,024
Cumulative effect of change in
accounting principle, net of tax
expense of $166 (Note 2) -- -- -- 282
------------ ------------ ------------ ------------
Net income $ 15,193 $ 16,972 $ 41,706 $ 48,306
============ ============ ============ ============
Basic earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.55 $ 0.60 $ 1.51 $ 1.70
Cumulative effect of change in
accounting principle -- -- -- .01
------------ ------------ ------------ ------------
Net income per common share $ 0.55 $ 0.60 $ 1.51 $ 1.71
============ ============ ============ ============
Diluted earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.51 $ 0.56 $ 1.43 $ 1.60
Cumulative effect of change in
accounting principle -- -- -- .01
------------ ------------ ------------ ------------
Net income per common share $ 0.51 $ 0.56 $ 1.43 $ 1.61
============ ============ ============ ============
Shares used in the per share calculations:
Basic 27,864,359 28,418,430 27,687,252 28,256,251
============ ============ ============ ============
Diluted 32,410,607 32,950,955 32,224,692 32,804,077
============ ============ ============ ============
See accompanying notes.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2002 2003
------------ ------------
Cash flows from operating activities:
Net income $ 41,706 $ 48,306
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss (gain) on disposal of assets (63) 276
Depreciation 27,547 33,034
Amortization of intangibles 1,049 1,120
Deferred income taxes 10,859 14,060
Minority interests 6,821 7,807
Cumulative effect of change in accounting principle -- (448)
Amortization of debt issuance costs 1,606 1,786
Stock-based compensation 763 151
Interest income on restricted cash (507) (230)
Net change in operating assets and liabilities,
net of acquisitions 12,101 8,781
------------ ------------
Net cash provided by operating activities 101,882 114,643
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets 1,893 907
Payments for acquisitions, net of cash acquired (107,076) (78,035)
Capital expenditures for property and equipment (41,495) (44,972)
Net change in other assets (1,134) (6,283)
------------ ------------
Net cash used in investing activities (147,812) (128,383)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 313,000 88,940
Principal payments on notes payable and long-term debt (264,997) (72,350)
Distributions to minority interest holders (5,145) (7,938)
Proceeds from option and warrant exercises 7,874 8,124
Debt issuance costs (6,443) (76)
------------ ------------
Net cash provided by financing activities 44,289 16,700
------------ ------------
Net increase (decrease) in cash and equivalents (1,641) 2,960
Cash and equivalents at beginning of period 7,279 4,067
------------ ------------
Cash and equivalents at end of period $ 5,638 $ 7,027
============ ============
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 September 30, 2003
and for the three and nine month periods ended September 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 nine month periods ended September 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 September 30, 2003, the
consolidated statements of income for the three and nine months ended September
30, 2002 and 2003, and the consolidated statements of cash flows for the nine
months ended September 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.
Certain amounts reported in the Company's prior year financial statements have
been reclassified to conform with the 2003 presentation.
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 September 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 329
Accretion expense 325
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Closure and post-closure liability at September 30, 2003 $ 5,261
========
Pro forma financial information to reflect the reported results of operations
for the three and nine months ended September 30, 2002, as if SFAS No. 143 were
adopted on January 1, 2002, is as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
---------- ----------
Net income as reported $ 15,193 $ 41,706
Pro forma impact of applying SFAS No. 143, net of tax 146 223
---------- ----------
Pro forma net income $ 15,339 $ 41,929
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Basic earnings per share as reported $ 0.55 $ 1.51
Pro forma impact of applying SFAS No. 143, net of tax -- --
---------- ----------
Pro forma basic earnings per share $ 0.55 $ 1.51
========== ==========
Diluted earnings per share as reported $ 0.51 $ 1.43
Pro forma impact of applying SFAS No. 143, net of tax .01 .01
---------- ----------
Pro forma diluted earnings per share $ 0.52 $ 1.44
========== ==========
The adoption of SFAS No. 143 did not materially impact the Company's results of
operations for the three and nine months ended September 30, 2003.
At September 30, 2003, $11,268 of the Company's restricted cash balance was 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
were 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
September 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. The effective
date for FIN 46 was deferred until December 31, 2003. The Company is continuing
to assess the impact of FIN 46.
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 nine
months ended September 30, 2002 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2003 2002 2003
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Net income, as reported $ 15,193 $ 16,972 $ 41,706 $ 48,306
Add: stock-based employee compensation
expense included in reported net
income, net of related tax effects 52 61 477 96
Deduct: total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects (1,359) (1,780) (4,610) (5,246)
---------- ---------- ---------- ----------
Pro forma net income $ 13,886 $ 15,253 $ 37,573 $ 43,156
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 0.55 $ 0.60 $ 1.51 $ 1.71
Basic - pro forma $ 0.50 $ 0.54 $ 1.36 $ 1.53
Diluted - as reported $ 0.51 $ 0.56 $ 1.43 $ 1.61
Diluted - pro forma $ 0.48 $ 0.51 $ 1.31 $ 1.46
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 was 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 did not 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 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. The Company's adoption of SFAS No. 150 did not have a material effect on
its financial statements.
The minority interest holders of a majority-owned subsidiary of Waste
Connections have a currently exercisable option (the put option) to require
Waste Connections to complete the acquisition of this majority-owned subsidiary
by purchasing their minority ownership interests for fair market value. The put
option calculates the fair market value of the subsidiary based on its current
EBITDA, as defined in the put option agreement. The put option does not have a
stated termination date. At September 30, 2003, the minority interest holders'
pro rata share of the subsidiary's fair market value is estimated to be worth
between $60,000 and $75,000. Because the put is required at fair market value,
no amounts have been accrued relative to the put option.
3. LANDFILL ACCOUNTING
At September 30, 2003, the Company owned or operated under life-of-site
operating contracts 25 landfills, and operated, but did not own, nine landfills
under contracts with finite terms. The Company also owns one Subtitle D landfill
site that is permitted for operation, but not constructed as of September 30,
2003. The Company's landfills have site costs with a net book value of $379,924
at September 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 nine 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 five of the six operating landfills that it
operates, but does not own, under life-of-site operating agreements.
Based on remaining permitted capacity as of September 30, 2003, and projected
annual disposal volumes, the average remaining landfill life for the Company's
owned and operated landfills and landfills operated, but not owned, under
life-of-site operating contracts, is approximately 52 years. The remaining
contract terms for the landfills that the Company operates under contracts with
finite terms is one to 11 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 owned and operated landfills and 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 owned and operated landfills
and landfills operated, but not owned, under life-of-site operating contracts is
60 years, with lives ranging from six 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 nine months ended September 30, 2002 and
2003, the Company expensed approximately $607 and $325, respectively, or an
average of $0.15 and $0.08 per ton consumed, respectively, related to closure
and post-closure accretion expense and $9,162 and $9,665, respectively, or an
average of $2.28 and $2.30 per ton consumed, respectively, related to landfill
depletion.
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 owned and operated landfills and landfills operated, but not owned,
under life-of-site operating contracts were $342,796 at September 30, 2003.
4. ACQUISITIONS
During the nine months ended September 30, 2003, the Company acquired 13
non-hazardous solid waste collection businesses, of which nine were acquired
during the three months ended September 30, 2003. Aggregate consideration for
the acquisitions, exclusive of debt assumed totaling $23,033, consisted of
$72,602 in cash (net of cash acquired) and common stock warrants valued at $172.
Additionally, the Company paid $5,433 during the nine months ended September 30,
2003 to settle acquisition-related liabilities accrued as of December 31, 2002,
related to businesses acquired in 2002.
The purchase prices have been allocated to the identified intangible assets and
tangible assets acquired based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill. The purchase price
allocations are considered preliminary until the Company is no longer waiting
for information that it has arranged to obtain and that is known to be available
or obtainable. Although the time required to obtain the necessary information
will vary with circumstances specific to an individual acquisition, the
"allocation period" for finalizing purchase price allocations generally does not
exceed one year from the consummation of a business combination.
As of September 30, 2003, the Company had 23 acquisitions for which purchase
price allocations were preliminary, mainly as a result of tax-related
settlements. The Company believes the potential changes to its preliminary
purchase price allocations will not have a material impact on its financial
condition, results of operations or cash flows. A summary of the preliminary
purchase price allocations for the acquisitions consummated in the nine months
ended September 30, 2003 is as follows:
Acquired assets:
Accounts receivable $ 5,799
Prepaid expenses and other current assets 851
Restricted cash 4,026
Property and equipment 21,625
Goodwill 38,302
Long-term franchise agreements and contracts 30,527
Non-competition agreements 351
Other long-term assets 60
Assumed liabilities:
Accounts payable (2,154)
Accrued liabilities (2,953)
Deferred revenue (833)
Debt and other liabilities assumed (22,827)
--------
$ 72,774
========
Goodwill and long-term franchise agreements and contracts acquired in the nine
months ended September 30, 2003 totaling $37,032 and $28,575, respectively, is
expected to be deductible for tax purposes.
5. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consist of the following as of
September 30, 2003:
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
---------- ---------- ----------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 45,080 $ (1,629) $ 43,451
Non-competition agreements 3,973 (2,408) 1,565
Other, net 2,415 (870) 1,545
---------- ---------- ----------
51,468 (4,907) 46,561
Nonamortized intangible assets:
Indefinite-lived intangible assets 16,710 -- 16,710
---------- ---------- ----------
Intangible assets, exclusive of goodwill $ 68,178 $ (4,907) $ 63,271
========== ========== ==========
The weighted-average amortization periods of long-term franchise agreements and
non-competition agreements acquired during the nine months ended September 30,
2003 are 37.4 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 $ 1,698
For the year ended December 31, 2004 1,986
For the year ended December 31, 2005 1,840
For the year ended December 31, 2006 1,592
For the year ended December 31, 2007 1,501
6. INVESTMENT IN UNCONSOLIDATED ENTITY
In August 2003, the Company paid $5,300 to acquire a 9.9% interest in a company
that, among other activities, issues financial surety bonds to secure landfill
closure and post-closure obligations for companies operating in the solid waste
industry. The Company accounts for this investment under the cost method of
accounting. At September 30, 2003, this investee company had written $17,815 of
the Company's financial surety bonds for landfill closure and post-closure
obligations. The Company's reimbursement obligations under these bonds are
secured by a pledge of its stock in the investee company.
7. 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 for
a portion of the Company's 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 a highly effective hedge
relationship.
8. EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of earnings per common share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Numerator:
Net income for basic earnings per share $ 15,193 $ 16,972 $ 41,706 $ 48,306
Interest expense on convertible subordinated
notes due 2006, net of tax effects 1,459 1,476 4,380 4,427
------------ ------------ ------------ ------------
Net income for diluted earnings per share $ 16,652 $ 18,448 $ 46,086 $ 52,733
============ ============ ============ ============
Denominator:
Basic shares outstanding 27,864,359 28,418,430 27,687,252 28,256,251
Dilutive effect of convertible subordinated
notes due 2006 3,944,775 3,944,775 3,944,775 3,944,775
Dilutive effect of options and warrants 601,473 585,730 592,665 599,585
Dilutive effect of restricted stock -- 2,020 -- 3,466
------------ ------------ ------------ ------------
Diluted shares outstanding 32,410,607 32,950,955 32,224,692 32,804,077
============ ============ ============ ============
9. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate swaps
that qualify for hedge accounting. The difference between net income and
comprehensive income for the three and nine months ended September 30, 2002 and
2003 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
Net income $ 15,193 $ 16,972 $ 41,706 $ 48,306
Unrealized gain (loss) on interest rate swaps, net of
tax benefit (expense) of $9 and $(1,154) for the three
months ended September 30, 2002 and 2003, respectively,
and $(337) and $(1,857) for the nine months ended
September 30, 2002 and 2003, respectively (13) 1,963 149 3,075
------------ ------------ ------------ ------------
Comprehensive income $ 15,180 $ 18,935 $ 41,855 $ 51,381
============ ============ ============ ============
The components of other comprehensive income and related tax effects for the
three and nine months ended September 30, 2002 and 2003 are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2002
--------------------------------------------
GROSS TAX EFFECT NET OF TAX
------------ ------------ ------------
Amounts reclassified into earnings $ 1,588 $ 595 $ 992
Changes in fair value of interest rate swaps (1,609) (604) (1,005)
------------ ------------ ------------
$ (21) $ (9) $ (13)
============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
GROSS TAX EFFECT NET OF TAX
------------ ------------ ------------
Amounts reclassified into earnings $ 1,842 $ 682 $ 1,160
Changes in fair value of interest rate swaps 1,275 472 803
------------ ------------ ------------
$ 3,117 $ 1,154 $ 1,963
============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 2002
--------------------------------------------
GROSS TAX EFFECT NET OF TAX
------------ ------------ ------------
Amounts reclassified into earnings $ 4,683 $ 1,756 $ 2,927
Changes in fair value of interest rate swaps (4,197) (1,419) (2,778)
------------ ------------ ------------
$ 486 $ 337 $ 149
============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
GROSS TAX EFFECT NET OF TAX
------------ ------------ ------------
Amounts reclassified into earnings $ 5,379 $ 1,990 $ 3,389
Changes in fair value of interest rate swaps (447) (133) (314)
------------ ------------ ------------
$ 4,932 $ 1,857 $ 3,075
============ ============ ============
The estimated net amount of the existing losses as of September 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 $1,461. The timing of actual amounts
reclassified into earnings is dependent on future movements in interest rates.
10. COMMITMENTS AND CONTINGENCIES
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 September 30, 2003, the Company had
$3,600 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 $3,600 of capitalized
expenditures, less the recoverable value of the undeveloped property and other
amounts recovered, which would likely have a material adverse effect on its
reported income for that period.
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.
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 and Southeastern U.S. As of September
30, 2003, we served more than 1,000,000 commercial, industrial and residential
customers from operations 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 98 collection operations and operated or
owned 36 transfer stations, operated or owned 34 Subtitle D landfills, owned one
construction and demolition landfill and operated or owned 20 recycling
facilities. We also owned one Subtitle D landfill site that is permitted for
operation, but not constructed as of September 30, 2003.
We generally intend to pursue an acquisition-based growth strategy and as of
September 30, 2003 have acquired 164 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 $0.2
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 $0.3 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 net worth. A reduction in net worth, if substantial, could limit the
amount that we can borrow under our credit agreement and any failure to comply
with the agreement could result in an event of default under the credit
agreement. As of September 30, 2003, goodwill and intangible assets represented
47.3% 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 many 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 nine months
ended September 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
and/or per yard 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 workers' 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 in our cost of operations. As of September 30, 2003, we
owned and/or operated 36 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 September 30, 2003, we had 292.1 million tons of permitted remaining airspace
capacity and 44.9 million tons of deemed probable expansion airspace capacity at
our 25 owned and operated landfills and landfills operated, but not
owned, under life-of-site operating contracts. We do not measure remaining
airspace capacity at the nine landfills we operate under contracts with finite
terms.
The disposal tonnage that we received in the nine months ended September 30,
2002 and 2003 at all of our landfills is shown below (tons in thousands):
SEPTEMBER 30, 2002 SEPTEMBER 30, 2003
--------------------- ---------------------
NUMBER OF TOTAL NUMBER OF TOTAL
SITES TONS SITES TONS
---------- ---------- ---------- ----------
Owned landfills or landfills operated
under life-of-site contracts 23 3,920 25 4,205
Operated landfills 8 520 9 642
---------- ---------- ---------- ----------
31 4,540 34 4,847
========== ========== ========== ==========
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
September 30, 2003, we had less than $0.1 million in capitalized interest
related to landfill development projects and $0.1 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 September 30, 2003, we had
$3.6 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 $3.6 million of capitalized expenditures, less the
recoverable value of the undeveloped property and other amounts recovered, 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
September 30, 2003, there have been no adjustments to the carrying amounts of
intangibles, including goodwill, resulting from these evaluations. As of
September 30, 2003, goodwill and other intangible assets represented 47.3% of
total assets and 127.2% 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 NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2003
The following table sets forth items in Waste Connections' consolidated
statements of income as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2002 2003 2002 2003
-------- -------- -------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 56.5 56.4 56.3 56.0
Selling, general and
administrative expenses 9.4 9.4 9.4 9.6
Depreciation and
amortization expense 7.9 8.4 7.8 8.3
-------- -------- -------- --------
Operating income 26.2 25.8 26.5 26.1
Interest expense, net (5.9) (5.5) (6.2) (5.8)
Other expense, net (0.1) 0.0 (0.2) 0.0
Minority interests (2.0) (2.0) (1.9) (1.9)
Income tax expense (6.8) (6.7) (6.8) (6.8)
Cumulative effect of change
in accounting principle -- -- -- 0.1
-------- -------- -------- --------
Net income 11.4% 11.6% 11.4% 11.7%
======== ======== ======== ========
Revenues. Total revenues increased $12.7 million, or 9.5%, to $146.2 million for
the three months ended September 30, 2003 from $133.5 million for the three
months ended September 30, 2002. The increase in revenues in the three months
ended September 30, 2003 resulted primarily from the full-quarter inclusion of
revenues from acquisitions closed during the three months ended September 30,
2002 and the inclusion of revenues from acquisitions closed subsequent to
September 30, 2002, which together totaled approximately $13.2 million. Of the
remaining change in revenues, declines in recyclable commodity prices decreased
revenues by $0.7 million, and price and volume changes in our existing business
resulted in a net revenue increase of $0.2 million. The net increase in revenue
from price and volume changes in our existing business consisted of increased
prices charged to our customers, partially offset by competitive pressures in
certain markets, a difficult comparison based on revenue derived from fires in
Oregon in the year ago period, reduced transfer station volumes in certain
markets and the loss of certain municipal contracts that expired subsequent to
September 30, 2002 and were not renewed.
Revenues for the nine months ended September 30, 2003 increased $46.2 million,
or 12.6%, to $413.5 million from $367.3 million for the nine months ended
September 30, 2002. The increase in revenues in the nine months ended September
30, 2003 primarily resulted from the full-quarter inclusion of revenues from
acquisitions closed during the nine months ended September 30, 2002 and the
inclusion of revenues from acquisitions closed subsequent to September 30, 2002,
which together totaled approximately $46.6 million. Of the remaining change in
revenues, improved recyclable commodity prices increased revenues by $0.7
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 September 30, 2002 and were not renewed,
partially offset by increased prices charged to our customers.
Cost of Operations. Total cost of operations increased $6.9 million, or 9.2%, to
$82.4 million for the three months ended September 30, 2003 from $75.5 million
for the three months ended September 30, 2002. Cost of operations for the nine
months ended September 30, 2003 increased $24.7 million, or 11.9%, to $231.7
million from $207.0 million for the nine months ended September 30, 2002. The
increases were primarily attributable to operating costs associated with
acquisitions closed over the balance of 2002 and the first nine months of 2003
and increased fuel costs at locations not covered by our fuel hedge agreement.
Cost of operations as a percentage of revenues decreased 0.1 percentage points
to 56.4% for the three months ended September 30, 2003 from 56.5% for the three
months ended September 30, 2002. Cost of operations as a percentage of revenues
for the nine months ended September 30, 2003 decreased 0.3 percentage points to
56.0% from 56.3% for the nine months ended September 30, 2002. The decreases as
a percentage of revenues were primarily attributable to price increases and
increased internalization of waste collected, 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 nine months of 2003,
which had operating margins below our company average, and increased fuel costs
at locations not covered by our fuel hedge agreement.
SG&A. SG&A expenses increased $1.1 million, or 8.6%, to $13.7 million for the
three months ended September 30, 2003 from $12.6 million for the three months
ended September 30, 2002. SG&A expenses for the nine months ended September 30,
2003 increased $5.3 million, or 15.4%, to $39.8 million from $34.5 million for
the nine months ended September 30, 2002. Our SG&A expenses for the three months
ended September 30, 2003 increased from the prior year period as a result of
additional personnel from acquisitions closed over the balance of 2002 and the
first nine months of 2003, additional overhead, and additional expenses
associated with our conversion to a centralized customer billing system,
partially offset by a decrease in bad debt expenses and the incurrence of a $0.4
million expense charge in the three months ended September 30, 2002 that did not
recur in 2003 associated with the early termination of our corporate
headquarters property lease. Our SG&A expenses for the nine months ended
September 30, 2003 increased from the prior year period as a result of
additional personnel from acquisitions closed over the balance of 2002 and the
first nine 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, partially offset by a decline in bad debt
expenses, the incurrence in 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, and the incurrence of a $0.4 million expense
charge in 2002 that did not recur in 2003 associated with the early termination
of our corporate headquarters property lease.
Net of a $0.4 million expense charge in the three months ended September 30,
2002, that did not recur in 2003, associated with the early termination of our
corporate headquarters lease, being offset by acquisitions closed over the
balance of 2002 and the first nine months of 2003 having SG&A as a percentage of
revenue costs in excess of our historical average, our SG&A as a percentage of
revenue was unchanged from the prior year at 9.4%. SG&A as a percentage of
revenues for the nine months ended September 30, 2003 increased 0.2 percentage
points to 9.6% from 9.4% for the nine months ended September 30, 2002. The
increase was due to acquisitions closed over the balance of 2002 and the first
nine months of 2003 having SG&A as a percentage of revenue costs in excess of
our historical average, percentage of revenue increases in corporate overhead,
legal expenses, management information system expense and stock compensation
expense, partially offset by the incurrence in 2002 of $1.3 million of one-time
employment expenses and a $0.4 million expense charge in 2002 that did not recur
in 2003 associated with the early termination of our corporate headquarters
property lease.
Depreciation and Amortization. Depreciation and amortization expense increased
$1.8 million, or 17.3%, to $12.3 million for the three months ended September
30, 2003 from $10.5 million for the three months ended September 30, 2002.
Depreciation and amortization expenses for the nine months ended September 30,
2003 increased $5.6 million, or 19.4%, to $34.2 million from $28.6 million for
the nine months ended September 30, 2002. The increases were primarily
attributable to depreciation and depletion associated with acquisitions closed
over the balance of 2002 and the first nine months of 2003,increased
depreciation expense resulting from new equipment acquired to support our base
operations and increased amortization from long-term contracts.
Depreciation and amortization as a percentage of revenues increased 0.5
percentage points to 8.4% for the three months ended September 30, 2003 from
7.9% for the three months ended September 30, 2002. Depreciation and
amortization as a percentage of revenues for the nine months ended September 30,
2002 increased 0.5 percentage points to 8.3% from 7.8% for the nine months ended
September 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 September 30, 2002, which had depreciation
rates that were in excess of our historical average.
Operating Income. Operating income increased $2.9 million, or 8.2%, to $37.8
million for the three months ended September 30, 2003 from $34.9 million for the
three months ended September 30, 2002. Operating income for the nine months
ended September 30, 2003 increased $10.6 million, or 10.9%, to $107.9 million
from $97.3 million for the nine months ended September 30, 2002. The increases
were primarily attributable to the growth in revenues and the incurrence in 2002
of $1.3 million of one-time employment expenses and a $0.4 million expense
charge in 2002 that did not recur in 2003 associated with the early termination
of our corporate headquarters property lease, 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 decreased 0.4 percentage points to
25.8% for the three months ended September 30, 2003 from 26.2% for the three
months ended September 30, 2002. Operating income as a percentage of revenues
for the nine months ended September 30, 2003 decreased 0.4 percentage points to
26.1% from 26.5% for the nine months ended September 30, 2002. The decreases
were due to the aforementioned percentage of revenue increases in recurring SG&A
expenses and depreciation expenses, partially offset by percentage of revenue
decreases in operating expenses, the incurrence in 2002 of $1.3 million of
one-time employment expenses and a $0.4 million expense charge in 2002 that did
not recur in 2003 associated with the early termination of our corporate
headquarters property lease.
Interest Expense. Interest expense increased $0.1 million, or 1.8%, to $8.0
million for the three months ended September 30, 2003, from $7.9 million for the
three months ended September 30, 2002. Interest expense for the nine months
ended September 30, 2003 increased $0.8 million, or 3.6%, to $23.8 million from
$23.0 million for the nine months ended September 30, 2002. The increases were
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) increased from an expense total
of $(0.2) million for the three months ended September 30, 2002 to approximately
$0 for the three months ended September 30, 2003. Other expense decreased from
an expense total of $(0.7) million for the nine months ended September 30, 2002
to an expense total of $(0.2) million for the nine months ended September 30,
2003. The primary components of other expense are net losses incurred on the
disposal of certain assets.
Minority Interests. Minority interests increased $0.3 million, or 13.4%, to $2.9
million for the three months ended September 30, 2003, from $2.6 million for the
three months ended September 30, 2002. Minority interests increased $1.0
million, or 14.5% to $7.8 million for the nine months ended September 30, 2003,
from $6.8 million for the nine months ended September 30, 2002. The increases in
minority interests were due to increased earnings by our majority-owned
subsidiaries.
Provision for Income Taxes. Income taxes increased $0.8 million, or 8.3%, to
$9.9 million for the three months ended September 30, 2003, from $9.1 million
for the three months ended September 30, 2002. Income taxes increased $3.1
million, or 12.3%, to $28.1 million for the nine months ended September 30,
2003, from $25.0 million for the nine months ended September 30, 2002. These
increases were due to increased pre-tax earnings, partially offset by reductions
in our effective tax rate due to the reduction in our blended state tax rate and
the reversal of certain tax-related accruals for contingencies no longer
existing.
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 $1.8 million, or 11.7% to $17.0 million for the
three months ended September 30, 2003, from $15.2 million for the three months
ended September 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.
Net income increased $6.6 million, or 15.8%, to $48.3 million for the nine
months ended September 30, 2003, from $41.7 million for the nine months ended
September 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 September 30, 2003, we had a working capital deficit of $23.6 million,
including cash and equivalents of $7.0 million. Our strategy in managing our
working capital is generally to apply the cash generated from our operations
that remains after satisfying our working capital and capital expenditure
requirements to reduce our indebtedness under our credit facility and to
minimize our cash balances.
As of September 30, 2003, we had a $435 million revolving credit facility with a
syndicate of banks for which Fleet Boston Financial Corp. acts as agent. As of
September 30, 2003, we had an aggregate of $237.0 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
September 30, 2003, we had $23.6 million of outstanding letters of credit issued
under the credit facility. Thus, at September 30, 2003 we had approximately
$174.4 million in borrowing capacity available under our credit facility. At
September 30, 2003 we had $20.0 of outstanding letters of credit not issued
under the credit facility.
In October 2003, we entered into a new credit facility to increase the maximum
borrowings to $575 million. This new credit facility consists of a $400 million
senior secured revolving credit facility with a syndicate of banks for which
Fleet National Bank acts as agent and a $175 million senior secured term loan.
The senior secured revolving credit facility matures in October 2008. The senior
secured term loan requires annual principal payments equal to 1% of the initial
term loan amount with all remaining outstanding amounts due October 2010. Under
the new credit facility, there is no maximum amount of stand-by letters of
credit that can be issued; however, the issuance of stand-by letters of credit
reduces the amount of total borrowings available. We are able to increase the
maximum borrowings under the new credit facility to $675 million, although no
existing lender will have any obligation to increase its commitment, provided
that no event of default, defined in the new credit facility, has occurred. The
borrowings under the new credit facility bear 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 applicable margin under
the revolving credit facility varies depending on our leverage ratio. The
applicable margin on the term loan is 50 basis points in the case of loans based
on the Base Rate and 200 basis points in the case of loans based on the LIBOR
rate. Virtually all of our assets, including our interest in the equity
securities of our subsidiaries, secure our obligations under the new credit
facility.
The new 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
new credit facility also requires us to comply with financial covenants relating
to:
(i) interest coverage;
(ii) the ratio of funded debt to EBITDA;
(iii) the ratio of senior funded debt to EBITDA;
(iv) consolidated net worth; and
(v) capital expenditures.
Each of these covenants is defined in the new 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"), as defined in the credit agreement, for the
four fiscal quarters then ending to (B) our consolidated total interest expense,
as defined in the credit agreement, for such period, to be less than 2.5 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 of our funded debt, as defined
in the credit agreement, to (B) our EBIT plus depreciation and amortization
expense, as defined in the credit agreement, ("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 of our senior funded debt, as defined in the credit agreement,
to (B) our EBITDA for the four fiscal quarters then ending to exceed 3.25 to 1.
The consolidated net worth covenant requires that our consolidated net worth, as
defined in the credit agreement, at the end of any fiscal quarter will not be
less than the sum of (A) $442 million plus (B) on a cumulative basis, 50% of our
positive consolidated net income for each fiscal quarter beginning with the
fiscal quarter ended September 30, 2003, plus (C) 100% of the proceeds of any
sale of our equity securities occurring after the fiscal quarter ended September
30, 2003, plus (D) any conversion of any of our convertible subordinated notes
to equity interests. The capital expenditures covenant requires that capital
expenditures in any fiscal year will not exceed 2.5 times the actual
depreciation expenses, depletion and landfill amortization expenses for such
fiscal year. As of September 30, 2003, we would have been in compliance with all
covenants under the new credit facility had they been in effect. The new 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 September 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) $ 621,750 $ 8,118 $ 169,451 $ 14,938 $ 429,243
Operating leases 30,593 4,009 6,952 5,387 14,245
Unconditional purchase
obligations 1,950 1,950 - - -
------------------------------------------------------------------
Total contractual cash
obligations $ 654,293 $ 14,077 $ 176,403 $ 20,325 $ 443,488
==================================================================
(1) Long-term debt payments include $237 million due 2005 under our then
existing credit facility. As of September 30, 2003, our credit facility
allowed us to borrow up to $435 million.
Amount of Commitment Expiration Per Period
------------------------------------------
Commercial Less Than
Commitments Total 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
- ----------- ---------- ---------- ---------- ---------- ----------
Standby letters of credit $ 43,637 $ 43,637 $ - $ - $ -
Financial surety bonds (2) 88,380 86,952 1,418 10 -
------------------------------------------------------------------
Total commercial
commitments $ 132,017 $ 130,589 $ 1,418 $ 10 $ -
==================================================================
Our commercial commitments consist of financial assurance instruments obtained
from third parties in the normal course of business and are not debt of Waste
Connections. Because 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. 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.
The minority interest holders of a majority-owned subsidiary of Waste
Connections have a currently exercisable option (the put option) to require
Waste Connections to complete the acquisition of this majority-owned subsidiary
by purchasing their minority ownership interests for fair market value. The put
option calculates the fair market value of the subsidiary based on its current
EBITDA, as defined in the put option agreement. The put option does not have a
stated termination date. At September 30, 2003, the minority interest holders'
pro rata share of the subsidiary's fair market value is estimated to be worth
between $60 million and $75 million.
For the nine months ended September 30, 2003, net cash provided by operations
was approximately $114.6 million. Of this, $8.8 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 nine months ended September
30, 2003 consist of non-cash expenses including $34.2 million of depreciation
and amortization, $7.8 million of minority interest expense, $1.8 million of
debt issuance cost amortization, and the deferral of $14.1 million of income tax
expense resulting from temporary differences between the recognition of income
and expenses for financial reporting and income tax purposes.
For the nine months ended September 30, 2003, net cash used in investing
activities was $128.4 million. Of this, $78.0 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 $45.0 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 $5.3 million
paid to purchase a minority interest in an unconsolidated subsidiary that issues
financial surety bonds.
For the nine months ended September 30, 2003, net cash provided by financing
activities was $16.7 million, which included $16.6 million of net borrowings
under our various debt arrangements and $8.1 million of proceeds from stock
option and warrant exercises, less $7.9 million of cash distributions to
minority interest holders.
We made approximately $45.0 million in capital expenditures during the nine
months ended September 30, 2003. We expect to make capital expenditures of
approximately $63.0 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 September 30, 2003, we had two additional interest rate swap agreements that
expire in December 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 $97 million remaining floating rate balance
owed under our credit facility, $175 million of our Floating Rate Convertible
Subordinated Notes due 2022, $8.1 million of floating rate debt under various
notes payable to third parties and floating rate municipal bond obligations of
approximately $29.0 million. A one percentage point increase in interest rates
on our variable-rate debt as of September 30, 2003 would decrease our annual
pre-tax income by approximately $3.1 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 or
operate 20 recycling processing facilities and sell other collected recyclable
materials to third parties for processing before resale. We often share the
profits from our resale of recycled materials with other parties to our
recycling contracts. For example, certain of our municipal recycling contracts
in Washington, negotiated before we acquired those businesses, specify benchmark
resale prices for recycled commodities. If the prices we actually receive for
the processed recycled commodities collected under the contract exceed the
prices specified in the contract, we share the excess with the municipality,
after recovering any previous shortfalls resulting from actual market prices
falling below the prices specified in the contract. To reduce our exposure to
commodity price risk with respect to recycled materials, we have adopted a
pricing strategy of charging collection and processing fees for recycling volume
collected from third parties. Although there can be no assurance of market
recoveries in the event of a decline, because of the provisions within certain
of our contracts that pass commodity risk along to the customers, we believe,
given historical trends and fluctuations in the recycling commodities market,
that a 10% decrease in average recycled commodity prices from the prices that
were in effect at September 30, 2003 would not materially affect our cash flows
or pre-tax income.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of September 30, 2003. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the we file or submit under the Exchange Act is recorded, processed,
summarized and reported as and when required.
During the quarter ended September 30, 2003, there were no significant changes
in our internal controls or in other factors that could significantly affect
these controls subsequent to the date they were evaluated in connection with the
preparation of this quarterly report on Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Legal Proceedings" in our quarterly report on Form 10-Q for the quarter
ended June 30, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description of Exhibits
------ -----------------------
31 Certifications
32 Certificate of Chief Executive Officer and Chief Financial Officer
b. Reports on Form 8-K:
On July 23, 2003, we filed a report on Form 8-K announcing the results of
our earnings for the second quarter of 2003.
On July 23, 2003, we filed a report on Form 8-K to provide estimates for
certain components of our results of operations, cash flow generation and
capital expenditures for the year ended December 31, 2003.
On July 23, 2003, we filed a report on Form 8-K/A amending our previously
filed report on Form 8-K filed on July 23, 2003 due to a typographical
error contained in the report.
On September 18, 2003, we filed a report on Form 8-K to announce the
closing of acquisitions in California, Mississippi, Iowa, Nebraska and
South Dakota and to update previous third quarter 2003 guidance for revenue
and operating income before depreciation and amortization.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WASTE CONNECTIONS, INC.
BY: /s/ Ronald J. Mittelstaedt
--------------------------------------
Date: November 3, 2003 Ronald J. Mittelstaedt,
President and Chief Executive Officer
BY: /s/ Steven F. Bouck
--------------------------------------
Date: November 3, 2003 Steven F. Bouck,
Executive Vice President and
Chief Financial Officer