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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-23981
WASTE CONNECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
94-3283464
(I.R.S. EMPLOYER IDENTIFICATION NO.)
35 IRON POINT CIRCLE, SUITE 200, FOLSOM, CA 95630
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(916) 608-8200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
As of October 14, 2004: 47,968,208 shares of common stock
================================================================================
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2003 and
September 30, 2004
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 2003 and 2004
Condensed Consolidated Statement of Stockholders' Equity and
Comprehensive Income for the nine months ended September 30, 2004
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2004
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
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 2003 2004
------------ ------------
Current assets:
Cash and equivalents $ 5,276 $ 4,977
Accounts receivable, less allowance for doubtful
accounts of $2,570 and $2,434 at December 31, 2003
and September 30, 2004, respectively 72,474 77,898
Prepaid expenses and other current assets 11,270 11,551
------------ ------------
Total current assets 89,020 94,426
Property and equipment, net 613,225 635,999
Goodwill, net 590,054 603,489
Intangible assets, net 64,784 68,440
Restricted cash 17,734 13,777
Other assets, net 21,135 21,066
------------ ------------
$ 1,395,952 $ 1,437,197
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,682 $ 40,729
Accrued liabilities 31,920 35,863
Deferred revenue 23,738 25,966
Current portion of long-term debt and notes payable 9,740 10,105
------------ ------------
Total current liabilities 104,080 112,663
Long-term debt and notes payable 601,891 452,483
Other long-term liabilities 8,400 8,247
Deferred income taxes 120,162 135,582
------------ ------------
Total liabilities 834,533 708,975
Commitments and contingencies
Minority interests 23,925 24,052
Stockholders' equity:
Common stock: $0.01 par value; 50,000,000 and 100,000,000
shares authorized at December 31, 2003 and September 30,
2004, respectively; 43,000,182 and 47,861,766 shares issued
and outstanding at December 31, 2003 and September 30,
2004, respectively 430 479
Additional paid-in capital 348,003 456,950
Deferred stock compensation (436) (1,902)
Retained earnings 189,094 246,918
Accumulated other comprehensive income 403 1,725
------------ ------------
Total stockholders' equity 537,494 704,170
------------ ------------
$ 1,395,952 $ 1,437,197
============ ============
See accompanying notes.
1
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,
------------------------------ ------------------------------
2003 2004 2003 2004
------------ ------------ ------------ ------------
Revenues $ 146,178 $ 165,444 $ 413,515 $ 475,263
Operating expenses:
Cost of operations 82,407 92,006 231,655 267,958
Selling, general and administrative 13,702 16,104 39,762 47,143
Depreciation and amortization 12,293 14,551 34,155 41,846
------------ ------------ ------------ ------------
Operating income 37,776 42,783 107,943 118,316
Interest expense (8,002) (4,928) (23,838) (16,925)
Other income (expense) 12 184 (155) (1,312)
------------ ------------ ------------ ------------
Income before income tax provision and
minority interests 29,786 38,039 83,950 100,079
Minority interests (2,932) (3,309) (7,807) (8,995)
------------ ------------ ------------ ------------
Income before income tax provision 26,854 34,730 76,143 91,084
Income tax provision (9,882) (12,279) (28,119) (33,260)
------------ ------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 16,972 22,451 48,024 57,824
Cumulative effect of change in accounting
principle, net of tax expense of $166 -- -- 282 --
------------ ------------ ------------ ------------
Net income $ 16,972 $ 22,451 $ 48,306 $ 57,824
============ ============ ============ ============
Basic earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.40 $ 0.47 $ 1.13 $ 1.25
Cumulative effect of change in
accounting principle -- -- 0.01 --
------------ ------------ ------------ ------------
Net income per common share $ 0.40 $ 0.47 $ 1.14 $ 1.25
============ ============ ============ ============
Diluted earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.37 $ 0.46 $ 1.06 $ 1.20
Cumulative effect of change in
accounting principle -- -- 0.01 --
------------ ------------ ------------ ------------
Net income per common share $ 0.37 $ 0.46 $ 1.07 $ 1.20
============ ============ ============ ============
Shares used in the per share calculations:
Basic 42,627,645 47,725,447 42,384,377 46,152,184
============ ============ ============ ============
Diluted 49,426,433 48,966,181 49,206,116 49,538,370
============ ============ ============ ============
See accompanying notes.
2
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2004
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------
ACCUM-
ULATED
OTHER DEFERRED
COMMON STOCK ADDITIONAL COMPRE- STOCK
COMPREHENSIVE --------------------- PAID-IN HENSIVE COMPEN- RETAINED
INCOME SHARES AMOUNT CAPITAL INCOME SATION EARNINGS TOTAL
------------ ------------ ----- --------- ------ ------- -------- ---------
Balances at December 31, 2003 43,000,182 $ 430 $ 348,003 $ 403 $ (436) $189,094 $ 537,494
Issuance of common stock
warrants to consultants -- -- 249 -- -- -- 249
Conversion of 2006 Notes, net of
issuance costs of $1,729 4,876,968 49 121,870 -- -- -- 121,919
Vesting of restricted stock 7,394 -- -- -- -- -- --
Cancellation of unvested
restricted stock -- -- (160) -- 66 -- (94)
Issuance of unvested restricted
stock -- -- 2,242 -- (2,242) -- --
Amortization of deferred stock
compensation -- -- -- -- 710 -- 710
Exercise of stock options and
warrants, including tax benefit
of $6,099 1,827,959 18 35,935 -- -- -- 35,953
Repurchase of common stock (1,850,737) (18) (51,189) -- -- -- (51,207)
Net income $ 57,824 -- -- -- -- -- 57,824 57,824
Changes in fair value of interest
rate swaps, net of $784 of tax
effect 1,322 -- -- -- 1,322 -- -- 1,322
------------
Comprehensive income $ 59,146 -- -- -- -- -- -- --
============ ------------ ----- --------- ------ ------- -------- ---------
Balances at September 30, 2004 47,861,766 $ 479 $ 456,950 $1,725 $(1,902) $246,918 $ 704,170
============ ===== ========= ====== ======= ======== =========
See accompanying notes.
3
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine months ended
September 30,
--------------------------
2003 2004
---------- ----------
Cash flows from operating activities:
Net income $ 48,306 $ 57,824
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on disposal of assets 276 119
Depreciation 33,034 39,979
Amortization of intangibles 1,120 1,867
Deferred income taxes, net of acquisitions 14,060 15,420
Minority interests 7,807 8,995
Cumulative effect of change in accounting principle (448) --
Amortization of debt issuance costs 1,786 1,740
Stock-based compensation 151 736
Interest income on restricted cash (230) (206)
Closure and post-closure accretion 324 308
Net change in operating assets and liabilities, net of
acquisitions 8,457 9,699
---------- ----------
Net cash provided by operating activities 114,643 136,481
---------- ----------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (78,035) (13,737)
Capital expenditures for property and equipment (44,972) (56,201)
Proceeds from disposal of assets 907 718
Net change in other assets (6,283) 4,174
---------- ----------
Net cash used in investing activities (128,383) (65,046)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 88,940 127,000
Principal payments on notes payable and long-term debt (72,350) (167,962)
Distributions to minority interest holders (7,938) (8,869)
Proceeds from option and warrant exercises 8,124 29,760
Payments for repurchase of common stock -- (51,206)
Debt issuance costs (76) (457)
---------- ----------
Net cash provided by (used in) financing activities 16,700 (71,734)
---------- ----------
Net increase (decrease) in cash and equivalents 2,960 (299)
Cash and equivalents at beginning of period 4,067 5,276
---------- ----------
Cash and equivalents at end of period $ 7,027 $ 4,977
========== ==========
Non-cash financing activity:
Liabilities assumed and notes payable issued to sellers of
businesses acquired $ 22,827 $ 15,661
Conversion of 2006 Convertible Subordinated Notes to equity $ -- $ 123,648
See accompanying notes.
4
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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, 2004
and for the three and nine month periods ended September 30, 2003 and 2004. 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 U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. Operating results for the three and nine month
periods ended September 30, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
The Company's consolidated balance sheet as of September 30, 2004, the
consolidated statements of income for the three and nine months ended September
30, 2003 and 2004, the consolidated statements of stockholders' equity and
comprehensive income for the nine months ended September 30, 2004, and the
consolidated statements of cash flows for the nine months ended September 30,
2003 and 2004 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 2003 annual report on Form 10-K.
In preparing the Company's financial statements, several estimates and
assumptions are made that affect the accounting for and recognition of assets,
liabilities, revenues and expenses. These estimates and assumptions must be made
because certain of the information that is used in the preparation of the
Company's financial statements is dependent on future events, cannot be
calculated with a high degree of precision from data available or is simply not
capable of being readily calculated based on generally accepted methodologies.
In some cases, these estimates are particularly difficult to determine and the
Company must exercise significant judgment. The most difficult, subjective and
complex estimates and the assumptions that deal with the greatest amount of
uncertainty are related to the Company's accounting for landfills and asset
impairments. One additional area that involves estimation is when the Company
estimates the amount of potential exposure it may have with respect to
litigation, claims under our self-insurance program and assessments in
accordance with SFAS No. 5, Accounting for Contingencies. Actual results for all
estimates could differ materially from the estimates and assumptions that the
Company uses in the preparation of its financial statements.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
FIN 46
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") which was
subsequently amended in December 2003. FIN 46 requires that unconsolidated
variable interest entities be consolidated by their primary beneficiaries. A
primary beneficiary is the party that absorbs a majority of the entity's
expected losses or residual benefits. FIN 46 applies to variable interest
entities created after January 31, 2003 and to existing variable interest
entities beginning after June 15, 2003. The Company fully adopted FIN 46 on
March 31, 2004 and this adoption did not have a material impact on the Company's
financial statements.
5
EITF 04-8
In October 2004, the FASB reached a consensus on EITF Issue 04-8 ("EITF 04-8")
which requires contingently convertible debt instruments and other contingently
convertible instruments to be included in diluted earnings per share
calculations (if dilutive). The EITF requires restatement of all periods during
which the instrument was outstanding. The EITF is effective for periods ending
after December 15, 2004. The Company is currently evaluating the impact of
adopting EITF 04-8 on the Company's financial statements.
3. STOCK SPLIT
On May 26, 2004, the Company announced that its Board of Directors had declared
a three-for-two stock split of its common stock, in the form of a 50% stock
dividend to stockholders of record on June 10, 2004. Shares resulting from the
split were distributed on June 24, 2004 (payment date). Shares, share price, per
share amounts, common stock at par value and capital in excess of par value have
been restated to reflect the effect of the stock split for all periods presented
in this Form 10-Q. As a result of the stock split, fractional shares equal to
837 whole shares were repurchased at a price of $23, or an average price per
share of $28.13.
4. STOCK-BASED COMPENSATION
As permitted under the provisions of SFAS No. 123, the Company has elected to
account for stock-based compensation using the intrinsic value method prescribed
by APB 25. 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, 2003 and 2004:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------
Net income, as reported $ 16,972 $ 22,451 $ 48,306 $ 57,824
Add: stock-based employee compensation
expense included in reported net
income, net of related tax effects 61 178 96 463
Deduct: total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects (1,780) (2,065) (5,246) (6,319)
----------------------------------------------------------
Pro forma net income $ 15,253 $ 20,564 $ 43,156 $ 51,968
==========================================================
Earnings per share:
Basic - as reported $ 0.40 $ 0.47 $ 1.14 $ 1.25
Basic - pro forma $ 0.36 $ 0.43 $ 1.02 $ 1.15
Diluted - as reported $ 0.37 $ 0.46 $ 1.07 $ 1.20
Diluted - pro forma $ 0.34 $ 0.42 $ 0.97 $ 1.09
6
5. LANDFILL ACCOUNTING
At September 30, 2004, the Company owned 21 landfills, and operated, but did not
own, five landfills under life-of-site operating contracts and eight landfills
under operating contracts with finite terms. The Company also owns two Subtitle
D landfill sites that are permitted for operation, but not constructed as of
September 30, 2004. In October 2004, the Company gave notice to terminate the
contract for one landfill with a finite term, from which the Company generated
approximately $900 of annualized revenues. The contract for this landfill will
now expire in the second quarter of 2005. The Company's landfills have site
costs with a net book value of $392,216 at September 30, 2004. With the
exception of two owned landfills that only accept construction and demolition
waste, all landfills that the Company owns or operates are Subtitle D landfills.
For the Company's eight 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 four of the five
operating landfills that it operates under life-of-site operating contracts.
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 landfills and landfills operated 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 the property
is under option, purchase, operating or other agreements;
(2) Total development costs, final capping 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 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.
The Company is currently seeking to expand permitted capacity at seven of its
owned landfills and four landfills that it operates 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 landfills and landfills operated under
life-of-site operating contracts is 56 years, with lives ranging from 2 to 263
years.
The Company uses the units-of-production method to calculate the depletion rate
at the landfills it owns and the landfills it operates under life-of-site
operating contracts. This methodology divides the costs associated with
acquiring, permitting and developing the permitted and deemed permitted areas of
the landfill by the total remaining permitted and probable expansion 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, 2003 and 2004, the Company
expensed approximately $9,665 and $11,461, respectively, or an average of $2.30
and $2.33 per ton consumed, respectively, related to landfill depletion.
The Company reserves for closure and post-closure maintenance obligations at the
landfills it owns and certain landfills it operates under life-of-site operating
contracts. Final capping costs are included in the calculation of closure and
post-closure liabilities. The Company calculates the net present value of its
closure and post-closure commitments recorded in 2004 assuming a 2.5% inflation
rate and a 7.5% discount rate. The resulting closure and post-closure obligation
is recorded on the balance sheet as an addition to site costs and amortized to
depletion
7
expense as the landfill's airspace is consumed. During the nine months ended
September 30, 2003 and 2004, the Company expensed approximately $324 and $308,
respectively, or an average of $0.08 and $0.06 per ton consumed, respectively,
related to closure and post-closure accretion expense.
The following is a reconciliation of the Company's closure and post-closure
liability balance from December 31, 2003 to September 30, 2004:
Closure and post-closure liability at December 31, 2003 $ 5,479
Changes resulting from adjustments to the timing or amount
of undiscounted cash flows (880)
Liabilities incurred 319
Accretion expense 308
---------
Closure and post-closure liability at September 30, 2004 $ 5,226
=========
At September 30, 2004, $11,948 of the Company's restricted cash balance was for
purposes of settling future closure and post-closure liabilities.
6. ACQUISITIONS
During the nine months ended September 30, 2004, the Company acquired nine
non-hazardous solid waste collection and disposal businesses. Aggregate
consideration for the acquisitions consisted of $11,276 in cash (net of cash
acquired), $4,346 in notes payable to sellers, common stock warrants valued at
$223, and the assumption of debt totaling $11,220.
The results of operations of the acquired businesses have been included in the
Company's consolidated financial statements from their respective acquisition
dates.
The purchase prices have been allocated to the 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. 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, 2004, the Company had eight acquisitions for which purchase
price allocations were preliminary, mainly as a result of pending working
capital valuations. 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.
8
A summary of the preliminary purchase price allocations for the acquisitions
consummated in the nine months ended September 30, 2004 is as follows:
Acquired assets:
Accounts receivable $ 1,136
Prepaid expenses and other current assets 68
Property and equipment 9,488
Goodwill 13,904
Long-term franchise agreements and contracts 5,127
Other intangibles 299
Non-competition agreements 122
Assumed liabilities:
Accounts payable (1,377)
Accrued liabilities (1,687)
Deferred taxes (143)
Debt and other liabilities assumed (15,661)
--------
Total cash consideration, net $ 11,276
========
During the nine months ended September 30, 2004, the Company paid $2,684 of
acquisition-related liabilities accrued at December 31, 2003.
The nine acquisitions acquired in the nine months ended September 30, 2004 were
not significant to the Company's results of operations.
Goodwill and long-term franchise agreements, contracts, and other intangibles
acquired in the nine months ended September 30, 2004 totaling $12,721 and
$5,134, respectively, are expected to be deductible for tax purposes.
7. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consist of the following as of
September 30, 2004:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- -------- --------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 51,731 $ (3,268) $ 48,463
Non-competition agreements 4,084 (2,947) 1,137
Other, net 2,714 (1,076) 1,638
-------- -------- --------
58,529 (7,291) 51,238
Nonamortized intangible assets:
Indefinite-lived intangible assets 17,202 -- 17,202
-------- -------- --------
Intangible assets, exclusive of goodwill $ 75,731 $ (7,291) $ 68,440
======== ======== ========
The weighted-average amortization periods for long-term franchise agreements,
non-competition agreements and other intangibles acquired during the nine months
ended September 30, 2004 are 21.3 years, 5 years and 10 years, respectively.
9
Estimated future amortization expense of amortizable intangible assets for the
next five years is as follows:
For the year ended December 31, 2004 $ 2,453
For the year ended December 31, 2005 2,387
For the year ended December 31, 2006 2,208
For the year ended December 31, 2007 1,969
For the year ended December 31, 2008 1,775
8. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, September 30,
2003 2004
---------- ----------
Revolver under Credit Facility, bearing interest ranging from $ 53,000 $ 31,500
2.8% to 4.8%*
Term Loan under Credit Facility, bearing interest ranging 175,000 200,000
from 2.9% to 3.4%*
2006 Convertible Subordinated Notes, bearing interest 150,000 --
at 5.5%
2022 Floating Rate Convertible Subordinated Notes, bearing 175,000 175,000
interest ranging from 1.6% to 2.2%*
2001 Wasco Bonds, bearing interest ranging from 6.5% to 7.3%* 13,600 12,560
California Tax-Exempt Bonds, bearing interest ranging from
1.0% to 1.8* 28,970 25,685
Notes payable to sellers in connection with acquisitions,
unsecured, bearing interest at 5.5% to 9.0%*, principal
and interest payments due periodically with due dates
ranging from 2004 to 2012 5,356 8,433
Notes payable to third parties, secured by substantially all assets of
certain subsidiaries of the Company, bearing interest at 6.0% to
11.0%*, principal and interest payments
due periodically with due dates ranging from 2004 to 2010 10,705 9,410
---------- ----------
611,631 462,588
Less - current portion (9,740) (10,105)
---------- ----------
$ 601,891 $ 452,483
========== ==========
*Interest rates in the table above represent the range of interest rates
incurred during the nine month period ended September 30, 2004.
In March 2004, the Company refinanced the senior secured term loan portion of
its credit facility in order to reduce the effective borrowing cost. The
applicable margin on the senior secured term loan was reduced by 25 basis
points; all other terms remained consistent. In addition, the Company increased
the amount outstanding under the senior secured term loan from $175,000 to
$200,000, resulting in an increase in the size of the credit facility to
$600,000.
In April 2004, the Company redeemed its $150,000 aggregate principal amount 5.5%
Convertible Subordinated Notes due 2006. Holders of the notes chose to convert a
total of $123,648 principal amount of the notes into 4,876,968 shares of Waste
Connections common stock at a price of approximately $25.35 per share, or
approximately 39.443 shares per $1 principal amount of notes, plus cash in lieu
of fractional shares. The Company redeemed the balance of $26,352 principal
amount of the notes with proceeds from its credit facility at a redemption price
of $1.022 per $1 principal amount of the notes. All holders of the notes also
received accrued interest of $0.0275 per $1 principal amount of notes. As a
result of the redemption, the Company recognized $1,478 of pre-tax expense
($1,125 net of taxes) in April 2004.
10
In the third quarter of 2004, the Company completed an exchange offer with
respect to all of its $175,000 aggregate principal amount Floating Rate
Convertible Subordinated Notes due 2022 (the "2022 Notes"). The Company offered
to exchange $1 in principal amount of new 2022 Notes for each $1 in principal
amount of its old 2022 Notes accepted for exchange. Through the exchange offer,
the Company updated certain features of the old 2022 Notes with terms that are
now prevalent in the convertible note market. These features include required
payment of the redemption value in cash, a required net share settle of the
conversion value in excess of the redemption value of the notes and dividend
protection provisions. The dividend protection provisions provide a lowering of
the conversion price if a dividend is issued while the notes are still
outstanding. The initial conversion price of the new 2022 Notes is $32.26 per
share, which is equal to approximately 30.9981 shares per $1 in principal amount
of new 2022 New Notes, and reflects the Company's three-for-two split of its
common stock in June 2004. No other material terms of the 2022 notes, including
maturity date and interest rate, were changed.
The Company has entered into interest rate swap agreements to hedge risk
associated with fluctuations in interest rates. The interest rate swap
agreements have a notional amount of $250,000, expire in 2007, and effectively
fix the interest rate on the notional amount at an average interest rate of
2.55%, plus applicable margin. These interest rate swap agreements are effective
as cash flow hedges for a portion of the Company's variable rate debt and the
Company applies hedge accounting pursuant to SFAS No. 133 to account for these
instruments. The notional amounts and all other significant terms of the swap
agreements are closely matched to the provisions and terms of the variable rate
debt being hedged.
9. DILUTED EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of diluted earnings per common share:
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
2003 2004 2003 2004
------------ ------------ ------------ ------------
Numerator:
Net income for basic earnings per share $ 16,972 $ 22,451 $ 48,306 $ 57,824
Interest expense on convertible
subordinated notes due 2006, net of tax
effects 1,476 -- 4,427 1,707
---------------------------------------------------------------
Net income for diluted earnings per share $ 18,448 $ 22,451 $ 52,733 $ 59,531
===============================================================
Denominator:
Basic shares outstanding 42,627,645 47,725,447 42,384,377 46,152,184
Dilutive effect of convertible
subordinated notes due 2006 5,917,163 -- 5,917,163 2,275,832
Dilutive effect of options and warrants 878,595 1,208,960 899,377 1,088,212
Dilutive effect of restricted stock 3,030 31,774 5,199 22,142
---------------------------------------------------------------
Diluted shares outstanding 49,426,433 48,966,181 49,206,116 49,538,370
===============================================================
For the three months ended September 30, 2003 and 2004, stock options and
warrants to purchase 31,250 and 750 shares, respectively, were excluded from the
computation of diluted earnings per share as they were anti-dilutive. For the
nine months ended September 30, 2003 and 2004, stock options and warrants to
purchase 46,250 and 2,700 shares, respectively, were excluded from the
computation of diluted earnings per share as they were anti-dilutive.
11
10. 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, 2003 and
2004 is as follows:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2003 2004 2003 2004
-------- -------- -------- --------
Net income $ 16,972 $ 22,451 $ 48,306 $ 57,824
Unrealized gain on interest rate swaps, net of
tax expense of $1,154 and $1,872 for the
three months ended September 30, 2003
and 2004, respectively, and $1,857 and $784
for the nine months ended September 30, 2003
and 2004, respectively 1,963 3,174 3,075 1,322
-------- -------- -------- --------
Comprehensive income $ 18,935 $ 25,625 $ 51,381 $ 59,146
======== ======== ======== ========
The components of other comprehensive income and related tax effects for the
three and nine months ended September 30, 2003 and 2004 are as follows:
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
================================================
Three months ended September 30, 2004
------------------------------------------------
Gross Tax effect Net of tax
------------------------------------------------
Amounts reclassified into earnings $ 647 $ 239 $ 408
Changes in fair value of interest rate swaps 4,399 1,633 2,766
------------------------------------------------
$ 5,046 $ 1,872 $ 3,174
================================================
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
================================================
Nine months ended September 30, 2004
------------------------------------------------
Gross Tax effect Net of tax
------------------------------------------------
Amounts reclassified into earnings $ 2,013 $ 746 $ 1,267
Changes in fair value of interest rate swaps 93 38 55
------------------------------------------------
$ 2,106 $ 784 $ 1,322
================================================
11. SHARE REPURCHASE PROGRAM
On May 3, 2004, the Company announced that its Board of Directors had authorized
a common stock repurchase program for the repurchase of up to $200,000 of common
stock over a two-year period. Under the program, stock repurchases may be made
in the open market or in privately negotiated transactions from time to time at
management's discretion. The timing and amounts of any repurchases will depend
on many factors, including the Company's capital structure, the market price of
the common stock and overall market conditions. As of September
12
30, 2004, the Company had repurchased 1,850,737 shares of its common stock under
this program at a cost of $51,207.
12. COMMITMENTS AND CONTINGENCIES
The Company owns undeveloped property in Harper County, Kansas where it is
seeking permits to construct and operate a municipal solid waste 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. On August 20, 2004, the Kansas Court of Appeals reversed the District
Court ruling and upheld the zoning permit. The landfill opponents have appealed
this decision to the Kansas Supreme Court, which has not yet indicated whether
it will hear the appeal. At September 30, 2004, the Company had $4,263 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 an appeal is granted and if the Company does not prevail on the appeal,
however, it will be required to expense in a future period the $4,263 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.
The Company is primarily self-insured for automobile liability, general
liability and workers' compensation claims as a result of its high deductible
programs. The Company is a party to various claims and suits pending for alleged
damages to persons and property and alleged liabilities occurring during the
normal operations of the solid waste management business. On October 31, 2003,
the Company's subsidiary, Waste Connections of Nebraska, Inc., was named as a
defendant in the case of KAREN COLLERAN, CONSERVATOR OF THE ESTATE OF ROBERT
ROONEY V. WASTE CONNECTIONS OF NEBRASKA, INC. The plaintiff seeks recovery for
damages allegedly suffered by Father Robert Rooney when the bicycle he was
riding collided with one of the Company's garbage trucks in Valley County,
Nebraska. The complaint alleges that Father Rooney suffered serious bodily
injury, including traumatic brain injury. The plaintiff seeks recovery of past
medical expenses of approximately $430 and an unspecified amount for future
medical expenses, home healthcare, past pain and suffering, future pain and
suffering, lost income, loss of earning capacity, and permanent injury and
disability. The Company's primary defense is that the plaintiff is not entitled
to any damages under Nebraska law because the negligence of Father Rooney was
equal to or greater than any negligence on the part of the Company's driver, and
the Company intends to defend this case vigorously. This case is in the early
stages of discovery and the Company has not accrued any potential loss as of
September 30, 2004; however, an adverse outcome in this case coupled with a
significant award to the plaintiff could have an adverse effect on the Company's
reported income in the period incurred.
In the case of CRISTOBAL LOZOYA V. WASTE CONNECTIONS OF OKLAHOMA, INC. ET AL.,
which was filed on September 27, 2004, the plaintiff seeks recovery for injuries
he suffered in an accident at the Company's Oklahoma City landfill. The
defendants are Waste Connections of Oklahoma, the individual operator of the
Company's equipment involved in the accident, and a personnel agency that
employed the operator. The plaintiff has alleged that the defendants' actions
and/or omissions constituted gross negligence and a reckless disregard for the
rights and safety of others, thereby entitling plaintiff to punitive damages in
an unspecified amount. The Company intends to defend this action vigorously and
to seek contribution for any damage award from the personnel agency. If the case
proceeds to trial and punitive damages are awarded, they would not be covered by
insurance. This case is in the early stages of discovery. Any adverse outcome in
this case coupled with a significant award to the plaintiff could have a
material adverse effect on the Company's reported income in the period incurred.
Additionally, the Company is party to various legal and administrative
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.
13
13. SUBSEQUENT EVENT
In October 2004, one of the Company's trucks was involved in an accident in
which another driver sustained serious spinal cord injuries. The Company and its
third party claims administrator are in the preliminary stages of investigating
the accident. It is too early to determine the extent of damages incurred and,
therefore, too early to estimate a reserve. No case has yet been filed against
the Company. The Company expects to record a reserve related to this accident in
the fourth quarter of 2004. The Company has a $2,000 deductible under its
self-insurance program for any auto-related claim.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q, including,
without limitation, information appearing under this Part I, Item 2, includes
statements that are 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 differ materially from those projected by any
forward-looking statements in this Quarterly Report on Form 10-Q. Factors that
could cause actual results to differ from those projected include, but are not
limited to, the following: (1) difficulties in making acquisitions, acquiring
exclusive contracts and generating internal growth may cause our growth to be
slower than expected; (2) our growth and future financial performance depend
significantly on our ability to integrate acquired businesses into our
organization and operations; (3) our acquisitions may not be successful,
resulting in changes in strategy, operating losses or a loss on sale of the
business acquired; (4) we compete for acquisition candidates with other
purchasers, some of which have greater financial resources than we do, and these
other purchasers may be able to offer more favorable acquisition terms, thus
limiting our ability to grow through acquisition; (5) timing of acquisitions may
cause fluctuations in our quarterly results, which may cause our stock price to
decline; (6) rapid growth may strain our management, operational, financial and
other resources; (7) we may be unable to compete effectively with governmental
service providers and larger and better capitalized companies, which may result
in reduced revenues and lower profits; (8) we may lose contracts through
competitive bidding, early termination or governmental action, which would cause
our revenues to decline; (9) increases in the costs of labor, disposal, fuel or
energy could reduce operating margins; and (10) increases in insurance costs and
the amount that we self-insure for various risks could reduce our operating
margins and reported earnings. These risks and uncertainties, as well as others,
are discussed in greater detail in our other filings with the Securities and
Exchange Commission, including our most recent Annual Report on Form 10-K. There
may be additional risks of which we are not presently aware or that we currently
believe are immaterial which could have an adverse impact on our business. We
make no commitment to revise or update any forward-looking statements in order
to reflect events or circumstances after the date any such statement is made.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included elsewhere
herein.
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 Southern U.S. As of September 30,
2004, we served more than one million commercial, industrial and residential
customers from a network of operations in 23 states: Alabama, Arizona,
California, Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Minnesota,
Mississippi, Montana, Nebraska, New Mexico, Ohio, Oklahoma, Oregon, South
Dakota, Tennessee, Texas, Utah, Washington, and Wyoming. As of that date, we
owned 104 collection operations and operated or owned 33 transfer stations,
operated or owned 32 Subtitle D landfills, owned two construction and demolition
landfills and operated or owned 26 recycling facilities. We also owned two
Subtitle D landfill sites that are permitted for operation, but not constructed
as of September 30, 2004.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires estimates and assumptions that affect
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities in the consolidated
financial statements. As described by the Securities and Exchange Commission,
critical accounting estimates and assumptions are those that may be material due
to the levels of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change, and that have
a material impact on our financial condition or operating performance. There
were no significant changes to our critical accounting estimates and assumptions
in the nine months ended
15
September 30, 2004. Refer to our Annual Report on Form 10-K for a complete
description of our critical accounting estimates and assumptions.
GENERAL
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. Our collection business
also generates revenues from the sale of recyclable commodities, which have
significant variability. A large part of our collection revenues comes from
providing commercial, industrial and residential services. We frequently perform
these services under service agreements, municipal contracts or franchise
agreements with governmental entities. Our existing franchise agreements and all
of our existing municipal contracts give us the exclusive right to provide
specified waste services in the specified territory during the contract term.
These exclusive arrangements are awarded, at least initially, on a competitive
bid basis and subsequently on a bid or negotiated basis. We also provide
residential collection services on a subscription basis with individual
households. More than 50% of our revenues for the nine months ended September
30, 2004 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.
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 landfill facilities. Many of our transfer station 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 of 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, or that limit increases to less than 100% of the increase
in the applicable price index.
Cost of operations includes labor and benefits, tipping fees paid to third-party
disposal facilities, equipment maintenance, workers' compensation, vehicle
insurance, 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. Our single largest cost is labor, followed by third-party
disposal, cost of vehicle maintenance, taxes and fees and fuel. We use a number
of programs to reduce overall cost of operations, including increasing the use
of automated routes to reduce labor and workers' compensation exposure,
comprehensive maintenance and health and safety programs, and increasing the use
of transfer stations to further enhance internalization rates. Our
high-deductible insurance covers automobile liability, general liability,
workers' compensation claims, automobile collision and employee group health
claims. If we experience insurance claims or costs above or below our
historically evaluated levels, our estimates could be materially affected.
Selling, general and administrative ("SG&A") expenses include management, sales
force, clerical and administrative employee compensation and benefits, legal,
accounting and other professional services, bad debt expense, and rent expense
for our corporate headquarters.
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, customer lists, 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.
16
At September 30, 2004, we had 283.9 million tons of permitted remaining airspace
capacity and 83.3 million tons of deemed probable expansion airspace capacity at
our 26 owned and operated landfills and landfills operated under life-of-site
operating contracts. We do not measure remaining airspace capacity at the eight
landfills we operate under contracts with finite terms. Based on remaining
permitted capacity as of September 30, 2004, and projected annual disposal
volumes, the average remaining landfill life for our owned landfills and
landfills operated under life-of-site operating contracts is approximately 43
years. The operating contracts for which the contracted term is not the life of
the landfill have expiration dates from 2004 to 2013.
The disposal tonnage that we received in the nine months ended September 30,
2003 and 2004 at all of our landfills owned or operated during the respective
period is shown below (tons in thousands):
September 30, 2003 September 30, 2004
------------------------- -------------------------
Number of Total Number of Total
Sites Tons Sites Tons
---------- ---------- ---------- ----------
Owned landfills or landfills operated
under life-of-site contracts 25 4,205 26 4,915
Operated landfills under limited term
operating agreements 9 642 8 760
---------- ---------- ---------- ----------
34 4,847 34 5,675
========== ========== ========== ==========
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 test the
recoverability of the capitalized assets whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable.
Typical indicators that an asset may be impaired include any operation that is
permanently shut down and any pending acquisition or landfill development
project that we believe will not be completed. If any of these or other
indicators occur, a test of recoverability is performed by comparing the
carrying value of the asset or group to its undiscounted expected future cash
flows. If the fair value of the asset is determined to be less than the carrying
amount of the asset or group, an impairment in the amount of the difference is
recorded in the period that the impairment indicator occurs. At September 30,
2004, we had $0.3 million in capitalized expenditures and $0.4 million of
nonrefundable deposits relating to pending acquisitions.
We own undeveloped property in Harper County, Kansas, where we are seeking
permits to construct and operate a municipal solid waste 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. On
August 20, 2004, the Kansas Court of Appeals reversed the District Court ruling
and upheld the zoning permit. The landfill opponents have appealed this decision
to the Kansas Supreme Court, which has not yet indicated whether it will hear
the appeal. At September 30, 2004, we had $4,263 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 an appeal is granted and
if we do not prevail on the appeal, however, we will be required to expense in a
future period the $4,263 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 periodically evaluate acquired assets for potential impairment indicators. If
any impairment indicators are present, a test of recoverability is performed by
comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows. If the carrying values are in excess of undiscounted
expected future cash flows, impairment is measured by comparing the fair value
of the asset to its carrying value. If the fair value of an asset is determined
to be less than the carrying amount of the asset or asset group, an impairment
in the amount of the difference is recorded in the period that the impairment
indicator occurs. As of September 30, 2004, there have been no adjustments to
the carrying amounts of intangibles, including goodwill, resulting from these
evaluations. As of September 30, 2004, goodwill and other intangible assets
represented 46.8% of total assets and 95.4% of stockholders' equity.
17
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 Part I, Item 1 of
this Form 10-Q.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND
2004
The following table sets forth items in our consolidated statements of income as
a percentage of revenues for the periods indicated.
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2003 2004 2003 2004
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 56.4 55.6 56.0 56.4
Selling, general and
administrative expenses 9.4 9.7 9.6 9.9
Depreciation and
amortization expense 8.4 8.7 8.3 8.8
------------------------------------------
Operating income 25.8 26.0 26.1 24.9
Interest expense, net (5.5) (3.0) (5.8) (3.5)
Other income (expense) 0.0 0.1 0.0 (0.3)
Minority interests (2.0) (2.0) (1.9) (1.9)
Income tax expense (6.7) (7.5) (6.8) (7.0)
Cumulative effect of change in
accounting principle -- -- 0.1 --
------------------------------------------
Net income 11.6% 13.6% 11.7% 12.2%
==========================================
Revenues. Total revenues increased $19.2 million, or 13.2%, to $165.4 million
for the three months ended September 30, 2004, from $146.2 million for the three
months ended September 30, 2003. Acquisitions closed subsequent to September 30,
2003 increased revenues approximately $14.5 million. Increases in recyclable
commodity prices increased revenues by $1.2 million, and increased prices
charged to our customers and volume changes in our existing business resulted in
a net revenue increase of approximately $6.3 million. The volume increase was
partially offset by exiting the roll-off business at our Georgia operations.
Revenues for the nine months ended September 30, 2004, increased $61.8 million,
or 14.9%, to $475.3 million from $413.5 million for the nine months ended
September 30, 2003. Acquisitions closed subsequent to September 30, 2003, and
the full-period inclusion of revenues from acquisitions closed during the nine
months ended September 30, 2003, increased revenues approximately $45.2 million.
Increases in recyclable commodity prices increased revenues by $3.3 million, and
increased prices charged to our customers and volume changes in our existing
business resulted in a net revenue increase of $16.0 million. The volume
increase was partially offset by exiting the roll-off business at our Georgia
operations and the loss of certain municipal contracts that expired subsequent
to September 30, 2003, and were not renewed.
Cost of Operations. Total cost of operations increased $9.6 million, or 11.6%,
to $92.0 million for the three months ended September 30, 2004, from $82.4
million for the three months ended September 30, 2003. Cost of operations for
the nine months ended September 30, 2004, increased $36.3 million, or 15.7%, to
$268.0 million from $231.7 million for the nine months ended September 30, 2003.
The increase for the three months ended September 30, 2004, was primarily
attributable to operating costs associated with acquisitions closed subsequent
to September 30, 2003, higher fuel costs, increased disposal costs, labor
expenses and equipment maintenance costs associated with higher collection
volumes, and higher surety bond expenses associated with increased bonding
requirements at our facilities, partially offset by decreases in medical
insurance expenses under our self-insured medical program due to
18
increasing our employees' medical expense deductibles. The increase for the nine
months ended September 30, 2004, was primarily attributable to operating costs
associated with acquisitions closed subsequent to September 30, 2003, higher
fuel costs, increased disposal costs, labor expenses and equipment maintenance
costs associated with higher collection volumes, higher surety bond expenses
associated with increased bonding requirements at our facilities, higher
workers' compensation and auto liability expenses due to an increase in claims
volume and higher medical expenses under our self-insured medical program due to
increased claims volume during the first six months of 2004.
Cost of operations as a percentage of revenues decreased 0.8 percentage points
to 55.6% for the three months ended September 30, 2004, from 56.4% for the three
months ended September 30, 2003. Cost of operations as a percentage of revenues
for the nine months ended September 30, 2004, increased 0.4 percentage points to
56.4% from 56.0% for the nine months ended September 30, 2003. The decrease as a
percentage of revenues for the three months ended September 30, 2004, was
primarily attributable to a decrease in disposal expenses associated with
improved waste volume internalization, decreased medical insurance expenses due
to increasing our employees medical expense deductibles, and leveraging existing
labor and operating infrastructure to service volume increases, partially offset
by increased fuel costs, increased surety bond expenses and the acquisition of
companies subsequent to September 30, 2003, having operating margins below our
company average. The increase as a percentage of revenues for the nine months
ended September 30, 2004 was primarily attributable to companies acquired
subsequent to September 30, 2003, having operating margins below our company
average, increased fuel costs, and increased surety bond expenses, partially
offset by a decrease in labor and disposal expenses associated with improved
internalization and leveraging existing labor to service volume increases.
SG&A. SG&A expenses increased $2.4 million, or 17.5%, to $16.1 million for the
three months ended September 30, 2004, from $13.7 million for the three months
ended September 30, 2003. SG&A expenses for the nine months ended September 30,
2004, increased $7.3 million, or 18.6%, to $47.1 million from $39.8 million for
the nine months ended September 30, 2003. Our SG&A expenses for the three and
nine months ended September 30, 2004, increased from the prior year periods as a
result of additional personnel from acquisitions closed subsequent to September
30, 2003, increased employee bonus and stock compensation expense, and increased
payroll tax expenses resulting from an increase in exercises of stock options
during the first nine months of 2004.
SG&A expenses as a percentage of revenues for the three months ended September
30, 2004, increased 0.3 percentage points to 9.7% from 9.4% for the three months
ended September 30, 2003. SG&A as a percentage of revenues for the nine months
ended September 30, 2004, increased 0.3 percentage points to 9.9% from 9.6% for
the nine months ended September 30, 2003. The increases were primarily due to
increased employee bonus and stock compensation expense and increased payroll
tax expenses resulting from increases in exercises of stock options.
Depreciation and Amortization. Depreciation and amortization expense increased
$2.3 million, or 18.4%, to $14.6 million for the three months ended September
30, 2004, from $12.3 million for the three months ended September 30, 2003.
Depreciation and amortization expense for the nine months ended September 30,
2004, increased $7.6 million, or 22.5%, to $41.8 million from $34.2 million for
the nine months ended September 30, 2003. The increases were primarily
attributable to depreciation and depletion associated with acquisitions closed
subsequent to September 30, 2003, increased depreciation expense resulting from
new equipment acquired to support our base operations, increased amortization
expense associated with intangible assets acquired in acquisitions closed
subsequent to September 30, 2003, and increased depletion expense resulting from
higher volumes at our landfill operations.
Depreciation and amortization expense as a percentage of revenues increased 0.3
percentage points to 8.7% for the three months ended September 30, 2004, from
8.4% for the three months ended September 30, 2003. Depreciation and
amortization expense as a percentage of revenues for the nine months ended
September 30, 2004, increased 0.5 percentage points to 8.8% from 8.3% for the
nine months ended September 30, 2003. 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, 2003, which
replaced older equipment with lower depreciation costs, and increased
amortization expense associated with intangible assets acquired in acquisitions
closed subsequent to September 30, 2003.
19
Operating Income. Operating income increased $5.0 million, or 13.3%, to $42.8
million for the three months ended September 30, 2004, from $37.8 million for
the three months ended September 30, 2003. Operating income for the nine months
ended September 30, 2004, increased $10.4 million, or 9.6%, to $118.3 million
from $107.9 million for the nine months ended September 30, 2003. The increases
were primarily attributable to the growth in revenues, partially offset by
increased operating costs, recurring SG&A expenses to support the revenue
growth, increases in employee bonus and stock compensation expense and increased
depreciation and amortization expenses.
Operating income as a percentage of revenues increased 0.2 percentage points to
26.0% for the three months ended September 30, 2004, from 25.8% for the three
months ended September 30, 2003. Operating income as a percentage of revenues
for the nine months ended September 30, 2004, decreased 1.2 percentage points to
24.9% from 26.1% for the nine months ended September 30, 2003. The increase in
operating income as a percentage of revenues for the three months ended
September 30, 2004 was due to the percentage of revenues decrease in cost of
operations partially offset by the percentage of revenues increases in SG&A
expenses and depreciation and amortization expenses. The decrease in operating
income as a percentage of revenues for the nine months ended September 30, 2004
was due to the percentage of revenues increases in cost of operations, SG&A
expenses, and depreciation and amortization expenses.
Interest Expense. Interest expense decreased $3.1 million, or 38.4%, to $4.9
million for the three months ended September 30, 2004, from $8.0 million for the
three months ended September 30, 2003. Interest expense for the nine months
ended September 30, 2004, decreased $6.9 million, or 29.0%, to $16.9 million
from $23.8 million for the nine months ended September 30, 2003. The decreases
were attributable to declines in our total outstanding debt balances and a
decrease in the effective interest rate of our aggregate debt balance, due
primarily to the expiration of two interest rate swap agreements in late 2003
that required fixed interest payments in excess of our variable rate borrowing
cost. The decrease in our total outstanding debt balance was primarily due to
the redemption of our $150 million aggregate principal amount, 5.5% Convertible
Subordinated Notes due 2006, which resulted in $123.6 million of the outstanding
note principal being converted into our common stock, partially offset by
additional borrowings to fund acquisitions and repurchases of our common stock.
Other Income (Expense). Other income increased to $0.2 million for the three
months ended September 30, 2004, from approximately $0 for the three months
ended September 30, 2003. Other expense increased to $1.3 million for the nine
months ended September 30, 2004, from $0.2 million for the nine months ended
September 30, 2003. Other income, net, in the three months ended September 30,
2004, includes $0.2 million of net gains incurred on the disposal of certain
assets. Other expense, net, in the nine months ended September 30, 2004,
primarily includes $1.5 million of costs associated with the redemption of our
$150 million 5.5% Convertible Subordinated Notes due 2006. These redemption
costs included early redemption premium payments and the write-off of a portion
of the unamortized debt issuance costs. The remaining components of other
expense in 2003 and 2004 were net gains incurred on the disposal of certain
assets.
Minority Interests. Minority interests increased $0.4 million, or 12.9%, to $3.3
million for the three months ended September 30, 2004, from $2.9 million for the
three months ended September 30, 2003. Minority interests increased $1.2
million, or 15.2%, to $9.0 million for the nine months ended September 30, 2004,
from $7.8 million for the nine months ended September 30, 2003. The increases in
minority interests were due to increased earnings by our majority-owned
subsidiaries.
Provision for Income Taxes. Income taxes increased $2.4 million, or 24.3%, to
$12.3 million for the three months ended September 30, 2004, from $9.9 million
for the three months ended September 30, 2003. Income taxes increased $5.2
million, or 18.3%, to $33.3 million for the nine months ended September 30,
2004, from $28.1 million for the nine months ended September 30, 2003. These
increases were due to increased pre-tax earnings which were partially offset by
a decrease in our effective tax rate. Our effective tax rates for the three and
nine months ended September 30, 2004 were 35.4% and 36.5%, respectively, a
decrease from 36.8% and 36.9% in the three and nine months ended September 30,
2003, respectively. The decrease in our effective tax rate was due to the
reversal of certain tax contingencies that expired in the current year periods.
Cumulative Effect of Change in Accounting Principle. Cumulative effect of change
in accounting principle for the nine months ended September 30, 2003, consisted
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
20
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 $5.5 million, or 32.3%, to $22.5 million for
the three months ended September 30, 2004, from $17.0 million for the three
months ended September 30, 2003. Net income increased $9.5 million, or 19.7% to
$57.8 million for the nine months ended September 30, 2004, from $48.3 million
for the nine months ended September 30, 2003. The increases were primarily
attributable to increased operating income and decreased interest expense,
partially offset by increased minority interest expense, other expense and
income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive. Our capital requirements include fleet and
containers, facilities, and 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, 2004, we had a working capital deficit of $18.2 million,
including cash and equivalents of $5.0 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.
In October 2003, we entered into a new credit facility to increase the maximum
borrowings available to us to $575 million. This new credit facility consisted
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. In March 2004, we refinanced the senior secured term loan
portion of our credit facility in order to reduce the effective borrowing cost.
The applicable margin on the senior secured term loan was reduced by 25 basis
points; all other terms remained consistent. In addition, we increased the
amount outstanding under the senior secured term loan from $175 million to $200
million, resulting in an increase in the size of the facility to $600 million.
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 has 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. At
September 30, 2004, the applicable margin on the term loan was 25 basis points
in the case of loans based on the Base Rate and 175 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 us relating to, among other things, additional indebtedness,
investments, acquisitions, asset sales, mergers, dividends, distributions, and
repurchases and redemption of capital stock. The new credit facility also
requires that we maintain specified financial ratios and balances. As of
September 30, 2004, we were in compliance with all applicable covenants in our
outstanding credit facility. The credit facility also requires the lenders'
approval of acquisitions in certain circumstances. We use the credit facility
for acquisitions, capital expenditures, working capital, standby letters of
credit and general corporate purposes. The $3.5 million increase in outstanding
borrowings under our credit facility in 2004 was primarily due to our cash
redemption of a portion of our $150 million aggregate principal amount, 5.5%
Convertible Subordinated Notes due 2006 and our repurchase of outstanding common
stock, offset by cash generated from operations and the proceeds from stock
option exercises. 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.
21
As of September 30, 2004, we had the following contractual obligations (in
thousands):
Principal Payments Due by Period
--------------------------------
Less Than 2 to 3 4 to 5 Over 5
Recorded Obligations Total 1 Year Years Years Years
- -------------------- ----- ------ ------- ------- --------
Long-term debt (1) $462,588 $10,105 $16,736 $53,559 $382,188
--------------------------------------------------
Total contractual
cash obligations $462,588 $10,105 $16,736 $53,559 $382,188
==================================================
(1) Long-term debt payments include $31.5 million in principal payments due in
2008 related to our senior secured revolving credit facility and $200
million in principal payments due in 2010 related to our senior secured
term loan, both under our credit facility. As of September 30, 2004, our
credit facility allowed us to borrow up to $600 million.
Amount of Commitment Expiration Per Period
------------------------------------------
Less Than 2 to 3 4 to 5 Over 5
Unrecorded Obligations Total 1 Year Years Years Years
- ---------------------- ----- ------ ------ ------ -------
Operating leases (2) $27,102 $ 3,994 $6,289 $4,628 $12,191
Unconditional purchase
obligations (2) 13,327 10,577 2,750 -- --
-------------------------------------------------
Total commercial
commitments $40,429 $14,571 $9,039 $4,628 $12,191
=================================================
(2) We are party to operating lease agreements and unconditional purchase
obligations. These lease agreements and purchase obligations are
established in the ordinary course of our business and are designed to
provide us with access to facilities and products at competitive,
market-driven prices. These arrangements have not materially affected our
financial position, results of operations or liquidity during the three or
nine months ended September 30, 2004, nor are they expected to have a
material impact on our future financial position, results of operations or
liquidity.
We are party to stand-by letters of credit and financial surety bonds. These
stand-by letters of credit and financial surety bonds are generally established
to support our financial assurance needs and landfill operations. These
arrangements have not materially affected our financial position, results of
operations or liquidity during the three or nine months ended September 30,
2004, nor are they expected to have a material impact on our future financial
position, results of operations or liquidity.
The minority interest holders of one of our majority-owned subsidiaries have a
currently exercisable option (the "put option") to require us 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 operating income before
depreciation and amortization, as defined in the put option agreement. The put
option does not have a stated termination date. At September 30, 2004, the
minority interest holders' pro rata share of the subsidiary's fair market value
is estimated to be worth between $72 million and $85 million. Because the put
option is required at fair market value, no amounts have been accrued relative
to the put option.
For the nine months ended September 30, 2004, net cash provided by operating
activities was $136.5 million. Of this amount, $9.7 million was provided by
changes in working capital for the period. The primary components of the
reconciliation of net income to net cash provided by operations for the nine
months ended September 30, 2004, consist of non-cash expenses including $41.8
million of depreciation and amortization, $9.0 million of minority interest
expense, $1.7 million of debt issuance cost amortization, and the deferral of
$15.4 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, 2004, net cash used in investing
activities was $65.0 million. Of this amount, $13.7 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, 2003. Cash used
for capital expenditures was $56.2 million, which was primarily for investments
in fixed assets, consisting of trucks, containers, other equipment and landfill
development. Cash provided by investing activities included $4.2 million of net
draws of restricted cash.
22
For the nine months ended September 30, 2004, net cash used in financing
activities was $71.7 million, which included $29.8 million of proceeds from
stock option and warrant exercises, less $41.0 million of net payments under our
various debt arrangements, $51.2 million to repurchase shares of our common
stock, $8.9 million of cash distributions to minority interest holders and $0.5
million of debt issuance costs, primarily related to our amended credit
facility.
We made approximately $56.2 million in capital expenditures for property and
equipment during the nine months ended September 30, 2004. We expect to make
capital expenditures of approximately $70 million in 2004 in connection with our
existing business. We intend to fund our planned 2004 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 other 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 us. 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 as a result.
FREE CASH FLOW
We are providing free cash flow, a non-GAAP financial measure, because it is
widely used by investors as a valuation, liquidity and financial performance
measure in the solid waste industry. This measure should be used in conjunction
with GAAP financial measures. Management uses free cash flow as one of the
principal measures to evaluate and monitor the ongoing financial performance of
our operations. We define free cash flow as net cash provided by operating
activities plus cash proceeds from disposal of assets less capital expenditures
and distributions to minority interest holders. Other companies may calculate
free cash flow differently. Our free cash flow for the three and nine months
ended September 30, 2003 and 2004 is calculated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2004 2003 2004
---- ---- ---- ----
Net cash provided by
operating activities $ 40,908 $ 51,929 $ 114,643 $ 136,481
Plus cash proceeds from
disposal of assets 381 371 907 718
Less: Capital expenditures (14,200) (22,306) (44,972) (56,201)
Less: Distributions to
minority interest holders (3,332) (2,940) (7,938) (8,869)
----------------------------------------------
Free cash flow $ 23,757 $ 27,054 $ 62,640 $ 72,129
SEASONALITY
Based on historic trends, we expect our operating results to vary seasonally,
with revenues typically lowest in the first quarter, higher in the second and
third quarters and lower in the fourth quarter than in the second and third
quarters. We expect the fluctuation in our revenues between our highest and
lowest quarters to be approximately 10% to 12%. This seasonality reflects the
lower volume of solid waste generated during the late fall, winter and early
spring months because of decreased construction and demolition activities during
the winter months in the U.S. In addition, some of our operating costs may be
higher in the winter months. Adverse winter weather conditions slow waste
collection activities, resulting in higher labor and operational costs. Greater
precipitation in the winter increases the weight of collected waste, resulting
in higher disposal costs, which are calculated on a per ton basis.
23
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 fixed 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 was February 2004 and each swap agreement expires in February
2007.
In March 2004, we entered into two additional three-year interest rate swap
agreements. Each interest rate swap agreement has a notional amount of $37.5
million and effectively fixed the interest rate on the notional amount at an
interest rate of 2.25%, 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 net floating rate balances owed at September
30, 2003 and 2004, of $309.1 million and $187.7 million, respectively, including
floating rate debt under our credit facility, our 2022 Notes, various floating
rate notes payable to third parties and floating rate municipal bond
obligations, offset by our debt effectively fixed under interest rate swap
agreements. A one percentage point increase in interest rates on our
variable-rate debt as of September 30, 2003 and 2004, would decrease our annual
pre-tax income by approximately $3.1 million and $1.9 million, respectively. All
of our remaining debt instruments are at fixed rates, or effectively fixed under
the interest rate swap agreements described above; therefore, changes in market
interest rates under these instruments would not significantly impact our cash
flows or results of operations.
We market a variety of recyclable materials, including cardboard, office paper,
plastic containers, glass bottles and ferrous and aluminum metals. We own and
operate 26 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, 2004 would not materially affect our cash flows
or results of operations.
24
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 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, 2004. 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 we file or submit under the Exchange Act is recorded, processed,
summarized and reported as and when required.
During the quarter ended September 30, 2004, 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.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We own undeveloped property in Harper County, Kansas, where we are seeking
permits to construct and operate a municipal solid waste 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. On
August 20, 2004, the Kansas Court of Appeals reversed the District Court ruling
and upheld the zoning permit. The landfill opponents have appealed this decision
to the Kansas Supreme Court, which has not yet indicated whether it will hear
the appeal. At September 30, 2004, we had $4.3 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 an appeal is
granted and if we do not prevail on the appeal, however, we will be required to
expense in a future period the $4.3 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 are primarily self-insured for automobile liability, general liability and
workers' compensation claims as a result of our high deductible programs. We are
a party to various claims and suits pending for alleged damages to persons and
property and alleged liabilities occurring during the normal operations of our
solid waste management business. In the case of KAREN COLLERAN, CONSERVATOR OF
THE ESTATE OF ROBERT ROONEY V. WASTE CONNECTIONS OF NEBRASKA, INC., the
plaintiff seeks recovery for damages allegedly suffered by Father Robert Rooney
when the bicycle he was riding collided with one of our garbage trucks in Valley
County, Nebraska. The complaint alleges that Father Rooney suffered serious
bodily injury, including traumatic brain injury. The plaintiff seeks recovery of
past medical expenses of approximately $430,000 and an unspecified amount for
future medical expenses and home healthcare, past pain and suffering, future
pain and suffering, lost income, loss of earning capacity, and permanent injury
and disability. Our primary defense is that the plaintiff is not entitled to any
damages under Nebraska law because the negligence of Father Rooney was equal to
or greater than any negligence on the part of our driver, and we intend to
defend this case vigorously on these and other grounds. This case is in the
early stages of discovery, and we have not accrued any potential loss as of
September 30, 2004; however, an adverse outcome in this case coupled with a
significant award to the plaintiff could have an adverse effect on our reported
income in the period incurred.
In the case of CRISTOBAL LOZOYA V. WASTE CONNECTIONS OF OKLAHOMA, INC. ET AL.,
which was filed on September 27, 2004, the plaintiff seeks recovery for injuries
he suffered in an accident at our Oklahoma City landfill. The defendants are
Waste Connections of Oklahoma, the individual operator of our equipment involved
in the accident, and a personnel agency that employed the operator. The
plaintiff has alleged that the defendants' actions and/or omissions constituted
gross negligence and a reckless disregard for the rights and safety of others,
thereby entitling plaintiff to punitive damages in an unspecified amount. We
intend to defend this action vigorously and to seek contribution for any damage
award from the personnel agency. If the case proceeds to trial and punitive
damages are awarded, they would not be covered by insurance. This case is in the
early stages of discovery, and we have not accrued any potential loss for
punitive damages as of September 30, 2004; however, an adverse outcome in this
case coupled with a significant award to the plaintiff could have a material
adverse effect on our reported income in the period incurred.
Additionally, we are a party to various legal and administrative proceedings
resulting from the ordinary course of business and 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.
26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 3, 2004, we announced that our Board of Directors had authorized a common
stock repurchase program for the repurchase of up to $200 million of our common
stock over a two-year period. Under the program, we may repurchase stock in the
open market or in privately negotiated transactions from time to time at
management's discretion. The timing and amounts of any repurchases will depend
on many factors, including our capital structure, the market price of our common
stock and overall market conditions. The table below reflects repurchases we
have made as of September 30, 2004:
(In thousands, except share and per share amounts; amounts below reflect our
three-for-two split of our common stock in June 2004):
Total Number Maximum
of Shares Approximate Dollar
Total Number Average Purchased as Value of Shares that
of Shares Price Paid Part of Publicly May Yet Be Purchased
Period Purchased Per Share(1) Announced Program Under the Program
- --------------------------------------------------------------------------------------
7/1/04-7/31/04 393,800 $ 28.66 393,800 $ 169,754
8/1/04-8/31/04 426,800 28.14 426,800 157,745
9/1/04-9/30/04 -- -- -- 157,745
-------------------------------------------------------------------
Total 820,600 $ 28.39 820,600 $ 157,745
(1) This amount represents the weighted average price paid per common share.
This price includes a per share commission paid for all repurchases.
27
ITEM 6. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
3.1 (r) Amended and Restated Certificate of Incorporation of the
Registrant, in effect as of the date hereof
3.2 (s) Amended and Restated Bylaws of the Registrant, in effect
as of the date hereof
4.1 (a) Form of Common Stock Certificate
4.2 (h) Note for the Registrant's 5.5% Convertible Subordinated
Notes due April 15, 2006
4.3 (h) (+) Indenture between the Registrant, as Issuer, and State
Street Bank and Trust Company, as Trustee, dated as of
April 4, 2001
4.4 (h) (+) Purchase Agreement between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, dated March
30, 2001
4.5 (h) (+) Registration Rights Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated
as of April 4, 2001
4.6 (i) Form of Note for the Registrant's Floating Rate Convertible
Subordinated Notes Due 2022
4.7 (i) (+) Indenture between the Registrant, as Issuer, and State
Street Bank and Trust Company of California, N.A., as
Trustee, dated as of April 30, 2002
4.8 (i) (+) Purchase Agreement between the Registrant and Deutsche Bank
Securities Inc., dated April 26, 2002
4.9 (i) (+) Registration Rights Agreement between the Registrant and
Deutsche Bank Securities Inc., dated as of April 30, 2002
4.10 Note No. 1 for the Registrant's new Floating Rate
Convertible Subordinated Notes Due 2022
4.11 (+) Indenture between the Registrant, as Issuer, and U.S. Bank
National Association, as Trustee, dated as of July 21, 2004
4.12 Note No. 2 for the Registrant's new Floating Rate
Convertible Subordinated Notes due 2022
10.1 (d) Second Amended and Restated 1997 Stock Option Plan
10.2 (a) Form of Option Agreement
10.3 (a) Form of Warrant Agreement
10.4 (a) Form of Stock Purchase Agreement dated as of September 30,
1997
10.5 (c) Form of Third Amended and Restated Investors' Rights
Agreement, dated as of December 31, 1998
10.6 (e) Second Amended Employment Agreement between the Registrant
and Darrell Chambliss, dated as of June 1, 2000
10.7 (e) Second Amended Employment Agreement between the Registrant
and Michael Foos, dated as of June 1, 2000
10.8 (a) Employment Agreement between the Registrant and Eugene V.
Dupreau, dated as of February 23, 1998
10.9 (a) Form of Indemnification Agreement entered into by the
Registrant and each of its directors and officers
10.10 (b) (+) Loan Agreement, dated as of June 1, 1998, between Madera
Disposal Systems, Inc. and the California Pollution Control
Financing Authority
10.11 (b) Employment Agreement between the Registrant and David M.
Hall, dated as of July 8, 1998
28
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
10.12 (g) Employment Agreement between the Registrant and James M.
Little, dated as of September 13, 1999
10.13 (g) Employment Agreement between the Registrant and Jerri L.
Hunt, dated as of October 25, 1999
10.14 (j) Employment Agreement between the Registrant and Kenneth O.
Rose, dated as of May 1, 2002
10.15 (j) Employment Agreement between the Registrant and Robert D.
Evans, dated as of May 10, 2002
10.16 (k) 2002 Senior Management Equity Incentive Plan
10.17 (k) 2002 Stock Option Plan
10.18 (l) 2002 Restricted Stock Plan
10.19 (m) Consultant Incentive Plan
10.20 (n) Employment Agreement between the Registrant and David G.
Eddie, dated as of May 15, 2001
10.21 (n) Employment Agreement between the Registrant and Worthing F.
Jackman, dated as of April 11, 2003
10.22 (o) Amended and Restated Revolving Credit and Term Loan
Agreement, dated as of October 22, 2003
10.23 (p) Refinancing Facility Amendment to Amended and Restated
Revolving Credit and Term Loan Agreement, dated as of March
2, 2004
10.24 (q) Second Amended and Restated Employment Agreement between
the Registrant and Ronald J. Mittelstaedt, dated March 1,
2004
10.25 (s) Amendment No. 2 to Amended and Restated Revolving Credit
and Term Loan Agreement, dated May 4, 2004
10.26 (s) Nonqualified Deferred Compensation Plan, dated July 1, 2004
10.27 (s) 2004 Equity Incentive Plan, as amended and restated July
20, 2004
10.28 Second Amended and Restated Employment Agreement between
the Registrant and Steven Bouck, dated as of October 1,
2004
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certificate of Chief Executive Officer and Chief Financial
Officer
(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-48029.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 333-59199.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 333-65615.
(d) Incorporated by reference to the exhibit filed with the Registrant's
Form S-8, filed on July 24, 2000.
(e) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-Q filed on November 14, 2000.
29
(f) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-Q filed on August 7, 2000.
(g) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-K filed on March 13, 2000.
(h) Incorporated by reference to the exhibit filed with the Registrant's
Form S-3 filed on June 5, 2001.
(i) Incorporated by reference to the exhibit filed with the Registrant's
Form S-3 filed on July 29, 2002.
(j) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-Q filed on August 13, 2002.
(k) Incorporated by reference to the exhibit filed with the Registrant's
Form S-8 filed on February 21, 2002.
(l) Incorporated by reference to the exhibit filed with the Registrant's
Form S-8 filed on June 19, 2002.
(m) Incorporated by reference to the exhibit filed with the Registrant's
Form S-8 filed on January 8, 2003.
(n) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-Q filed on August 13, 2003.
(o) Incorporated by reference to the exhibit filed with the Registrant's
Form 8-K filed on October 23, 2003.
(p) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-K filed on March 12, 2004.
(q) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-Q filed on April 22, 2004.
(r) Incorporated by reference to the exhibit filed with the Registrant's
Form T-3 filed on June 16, 2004.
(s) Incorporated by reference to the exhibit filed with the Registrant's
Form 10-Q filed on July 22, 2004.
(+) Filed without exhibits and schedules (to be provided supplementally on
request of the Commission).
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASTE CONNECTIONS, INC.
BY: /s/ Ronald J. Mittelstaedt
------------------------------
Date: October 22, 2004 Ronald J. Mittelstaedt,
Chief Executive Officer
BY: /s/ Worthing F. Jackman
------------------------------
Date: October 22, 2004 Worthing F. Jackman,
Executive Vice President and
Chief Financial Officer
31