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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001 COMMISSION FILE NO. 0-23981
WASTE CONNECTIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization)
94-3283464
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(I.R.S. Employer Identification No.)
620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630
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(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 12, 2001: 27,412,555 Shares of Common Stock
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2000 and
September 30, 2001 3
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 2000 and 2001 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION 18
Signatures 19
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
2000 2001
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ASSETS (UNAUDITED)
Current assets:
Cash and equivalents $ 2,461 $ 3,993
Accounts receivable, less allowance for doubtful
accounts of $1,899 at December 31, 2000 and
$1,661 at September 30, 2001 42,155 52,935
Prepaid expenses and other current assets 4,419 8,657
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Total current assets 49,035 65,585
Property and equipment, net 384,237 466,317
Intangible assets, net 363,505 421,171
Other assets 13,327 19,242
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$ 810,104 $ 972,315
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
notes payable $ 3,644 $ 7,788
Accounts payable 25,636 30,936
Deferred revenue 9,595 11,731
Accrued liabilities 20,558 28,671
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Total current liabilities 59,433 79,126
Long-term debt and notes payable, net 334,194 419,569
Other long-term liabilities 6,095 13,092
Deferred income taxes 76,174 76,745
Commitments and contingencies:
Minority interests - 18,837
Stockholders' equity:
Preferred stock $.01 par value; 7,500,000 shares
authorized; none issued and outstanding - -
Common stock: $.01 par value; 50,000,000 shares
authorized; 26,480,046 shares issued and
outstanding at December 31, 2000; 27,319,121
shares issued and outstanding at September
30, 2001 265 273
Additional paid-in capital 296,439 311,165
Retained earnings 37,504 58,849
Unrealized loss on market value of interest rate swap - (5,341)
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Total stockholders' equity 334,208 364,946
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$ 810,104 $ 972,315
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See accompanying notes.
3
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2001 2000 2001
---------- ---------- ---------- ----------
Revenues $ 81,510 $ 97,681 $ 221,543 $ 276,761
Operating expenses:
Cost of operations 46,730 54,820 127,583 153,945
Selling, general and administrative 6,722 7,735 18,514 22,571
Depreciation and amortization 7,251 9,056 19,836 25,952
Stock compensation 54 - 163 -
Acquisition related expenses - - 150 -
---------- ---------- ---------- ----------
Income from operations 20,753 26,070 55,297 74,293
Interest expense (7,426) (7,104) (21,147) (22,328)
Other income (expense), net 21 (93) (911) (10,876)
---------- ---------- ---------- ----------
Income before income tax provision and
minority interests 13,348 18,873 33,239 41,089
Minority interests - (1,871) - (5,370)
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Income before income tax provision 13,348 17,002 33,239 35,719
Income tax provision (5,401) (6,766) (13,620) (14,230)
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Net income before extraordinary item 7,947 10,236 19,619 21,489
Extraordinary item - extinguishment of
debt, net of tax benefit of $96 - - - (144)
---------- ---------- ---------- ----------
Net income $ 7,947 $ 10,236 $ 19,619 $ 21,345
========== ========== ========== ==========
Basic earnings per common share:
Income before extraordinary item $ 0.34 $ 0.38 $ 0.89 $ 0.80
Extraordinary item - - - (.01)
---------- ---------- ---------- ----------
Net income per common share $ 0.34 $ 0.38 $ 0.89 $ 0.79
========== ========== ========== ==========
Diluted earnings per common share:
Income before extraordinary item $ 0.32 $ 0.37 $ 0.86 $ 0.78
Extraordinary item - - - (.01)
---------- ---------- ---------- ----------
Net income per common share $ 0.32 $ 0.37 $ 0.86 $ 0.77
========== ========== ========== ==========
Shares used in the per share calculations:
Basic 23,650,205 27,181,791 22,149,002 27,030,199
========== ========== ========== ==========
Diluted 24,464,128 31,706,633 22,842,849 27,672,388
========== ========== ========== ==========
See accompanying notes.
4
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
2000 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,619 $ 21,345
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on disposal of assets 944 4,921
Depreciation 13,766 18,149
Amortization of intangibles 6,069 7,803
Loss on termination of interest rate swap - 6,337
Minority interests - 5,369
Amortization of debt issuance costs and debt
guarantee fees 485 1,110
Extraordinary item - early extinguishment
of debt - 240
Stock compensation 163 -
Net change in operating assets and liabilities,
net of acquisitions (5,487) (8,320)
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Net cash provided by operating activities 35,559 56,954
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (127,674) (46,672)
Capital expenditures for property and equipment (15,788) (26,719)
Proceeds from disposal of assets - 2,948
Decrease in other assets (552) (804)
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Net cash used in investing activities (144,014) (71,247)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 119,363 248,021
Principal payments on long-term debt (92,080) (223,310)
Termination of interest rate swap - (6,337)
Proceeds from sale of common stock 82,110 -
Distributions to minority interest shareholders - (2,391)
Proceeds from options and warrants 777 6,097
Debt issuance costs (1,696) (6,255)
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Net cash provided by financing activities 108,474 15,825
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Net increase in cash and equivalents 19 1,532
Cash and equivalents at beginning of period 2,393 2,461
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Cash and equivalents at end of period $ 2,412 $ 3,993
========== ==========
See accompanying notes.
5
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND SUMMARY
The accompanying financial statements relate to Waste Connections, Inc. and its
subsidiaries (the "Company") as of September 30, 2001 and for the three and nine
month periods ended September 30, 2000 and 2001. The consolidated financial
statements of the Company include the accounts of Waste Connections, Inc. and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three and nine month periods
ended September 30, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001.
The Company's consolidated balance sheet as of September 30, 2001, the
consolidated statements of income for the three and nine months ended September
30, 2000 and 2001, and the consolidated statements of cash flows for the nine
months ended September 30, 2000 and 2001 are unaudited. In the opinion of
management, such financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows for the
periods presented. The consolidated financial statements presented herein should
be read in conjunction with the Company's annual report on Form 10-K for the
year 2000.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which was amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities (an Amendment of FASB Statement 133)," (collectively "SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income (Note 6) until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.
The Company's objective for utilizing derivative instruments is to reduce its
exposure to fluctuations in cash flows due to changes in the variable interest
rates under its credit facility. The Company's strategy to achieve that
objective involves entering into interest rate swaps that are specifically
designated to existing debt under its credit facility and accounted for as cash
flow hedges pursuant to SFAS 133. The Company has two interest rate swaps
outstanding, both expiring in December 2003. The first interest rate swap
changes the interest on $125,000 of its floating rate long-term debt under its
revolving credit facility to a fixed rate of 6.1% plus an applicable margin. The
second interest rate swap changes the interest on $15,000 of its floating rate
long-term debt under its revolving credit facility to a fixed rate of 7.01% plus
an applicable margin.
The Company adopted SFAS 133 effective January 1, 2001. The Company has
evaluated its derivative instruments, consisting solely of the two
aforementioned interest rate swaps, and believes these instruments qualify for
hedge accounting pursuant to SFAS 133. Upon adoption of SFAS 133, the Company
recorded the fair value of these interest rate swaps as an obligation of $3,576,
net of taxes of $2,364, with an equal amount recorded as an unrealized loss in
other comprehensive income. The adoption of SFAS 133 did not have a material
effect on the Company's results of operations. Because the relevant terms of the
interest rate swaps and the specific debts they
6
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
have been designated to hedge are identical, there was no ineffectiveness
required to be recognized into earnings. In addition, there are no components of
the derivative instruments' gain or loss that have been excluded from the
assessment of hedge effectiveness.
The estimated net amount of the existing losses as of September 30, 2001 (based
on the interest rate yield curve at that date) included in accumulated other
comprehensive income expected to be reclassified into the income statement as
payments are made under the terms of the interest rate protection agreements
within the next 12 months is approximately $4,949. As of January 1, 2001, that
amount was $2,702. The timing of actual amounts reclassified into earnings is
dependent on future movements in interest rates.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", (collectively, the "Statements") effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their estimated useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002, except, as provided
for under the Statements, goodwill and indefinite lived intangible assets
resulting from acquisitions completed after June 30, 2001 will not be amortized.
The Company has not yet determined the annual effect of application of the
non-amortization provisions of the Statements. However, management of the
Company expects the impact to result in a material increase in pre-tax income.
During the first quarter of 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", effective for fiscal years
beginning after June 15, 2002. This statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company is
currently evaluating the effect SFAS No. 143 will have on its financial
statements and related disclosures.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", effective for
fiscal years beginning after December 15, 2001. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The Company is currently evaluating the effect SFAS No. 144 will have on
its financial statements and related disclosures.
7
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
3. ACQUISITIONS
For the nine months ended September 30, 2001, the Company acquired 14 solid
waste collection businesses that were accounted for using the purchase method of
accounting. The aggregate consideration for these acquisitions was approximately
$46,672 in cash (net of cash acquired), $200 in notes to sellers and $8,637 in
equity issued.
Subsequent to June 30, 2001, the Company completed six acquisitions in which
goodwill and indefinite lived intangible assets were allocated $45,259 of the
total purchase price. In accordance with the provisions of SFAS Nos. 141 and
142, goodwill and indefinite lived intangible assets are not being amortized on
these acquisitions.
The purchase prices have been allocated to the identified intangible assets and
tangible assets acquired based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill. The purchase price
allocations are considered preliminary until the Company is no longer waiting
for information that it has arranged to obtain and that is known to be available
or obtainable. Although the time required to obtain the necessary information
will vary with circumstances specific to an individual acquisition, the
"allocation period" for finalizing purchase price allocations generally does not
exceed one year from the consummation of a business combination.
As of September 30, 2001, the Company had eleven acquisitions for which purchase
price allocations were preliminary mainly as a result of tax related
settlements. The Company believes the potential changes to its preliminary
purchase price allocations will not have a material impact on its financial
condition, results of operations or cash flows.
4. LONG-TERM DEBT
In April 2001, Waste Connections issued 5.5% Convertible Subordinated Notes Due
2006 (the "Notes") with an aggregate principal amount of $150,000 in a Rule 144A
private placement. The Notes are unsecured, rank junior to existing and future
Senior Indebtedness, as defined in the indenture governing the notes, and are
convertible at any time at the option of the holder into common stock at a
conversion price of $38.03 per share. The proceeds from the sale of the Notes
were used to repay a portion of the outstanding indebtedness and related costs
under the Company's credit facility.
8
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
5. EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of earnings per common share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2001 2000 2001
---------- ---------- ---------- ----------
Numerator:
Net income before extraordinary item $ 7,947 $ 10,236 $ 19,619 $ 21,489
Extraordinary item - - - (144)
---------- ---------- ---------- ----------
Net income for basic earnings per share 7,947 10,236 19,619 21,345
Interest expense on
convertible subordinated notes, net of
tax effects - 1,385 - -
---------- ---------- ---------- ----------
Net income for diluted earnings per share $ 7,947 $ 11,621 $ 19,619 $ 21,345
========== ========== ========== ==========
Denominator:
Basic shares outstanding 23,650,205 27,181,791 22,149,002 27,030,199
Dilutive effect of convertible
subordinated notes - 3,944,775 - -
Dilutive effect of options and warrants 813,923 580,067 693,847 642,189
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Basic shares outstanding 24,464,128 31,706,633 22,842,849 27,672,388
========== ========== ========== ==========
6. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate swaps
that qualify for hedge accounting (Note 2). The difference between net income
and comprehensive income for the three and nine months ended September 30, 2001
is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
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Net income $ 10,236 $ 21,345
Unrealized loss on interest rate swaps,
net of tax expense of $1,654 and $3,531
for the three and nine months ended
September 30, 2001, respectively (2,503) (5,341)
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Comprehensive income $ 7,733 $ 16,004
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9
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
The components of other comprehensive income and related tax effects for the
three and nine months ended September 30, 2001 are shown as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2001
Gross Tax effect Net of tax
---------- ---------- ----------
Amounts reclassified into earnings $ 906 $ 361 $ 545
Changes in fair value of interest rate swaps (5,063) (2,015) (3,048)
---------- ---------- ----------
$ (4,157) $ (1,654) $ (2,503)
========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2001
Gross Tax effect Net of tax
---------- ---------- ----------
Cumulative effect of accounting change $ (5,940) $ (2,364) $ (3,576)
Amounts reclassified into earnings 1,919 764 1,155
Changes in fair value of interest rate swaps (11,188) (4,453) (6,735)
Changes associated with current period hedging transactions
6,337 2,522 3,815
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$ (8,872) $ (3,531) $ (5,341)
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Changes associated with current period hedging transactions represents costs
incurred in connection with the termination of an interest rate swap. During the
three months ended March 31, 2001, the Company determined that the debt to which
an interest rate swap was designated would be repaid prior to its due date as a
result of the convertible subordinated debt offering (Note 4); therefore, it was
no longer probable that the variable cash flows under the related debt would
occur and the costs to terminate the interest rate swap were recorded as a loss
in other income (expense) in the accompanying financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere herein.
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q, including,
without limitation, information appearing under Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934) that involve risks and uncertainties. Factors set forth herein and
from time to time in our other filings with the Securities and Exchange
Commission could affect our actual results and could cause our actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, Waste Connections in this Quarterly Report on Form 10-Q.
Factors that could cause actual results to differ from those projected include,
but are not limited to, the following: (1) competition or unfavorable industry
conditions could lead to a decrease in demand for the Company's services and to
a decline in prices realized by the Company for its services, (2) the Company
may be required to pay increased prices for acquisitions, and it may experience
difficulty in integrating and deriving synergies from acquisitions, (3) the
Company cannot be certain that it will always have access to the additional
capital that it may require for its growth strategy or that its cost of capital
will not increase, (4) governmental regulations may require increased capital
expenditures or otherwise affect the Company's business, (5) companies that
Waste Connections acquires could have undiscovered liabilities, and (6) the
Company is highly dependent on the services of senior management. These risks
and uncertainties, as well as others, are discussed in greater detail in the
Company's filings with the Securities and Exchange Commission, including its
most recent Annual Report on Form 10-K and its subsequent Quarterly Reports on
Form 10-Q. The Company makes 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.
OVERVIEW
Waste Connections, Inc. is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
primarily in secondary markets of the Western U.S. As of September 30, 2001, we
served more than 780,000 commercial, industrial and residential customers in
California, Colorado, Iowa, Kansas, Minnesota, Mississippi, Montana, Nebraska,
New Mexico, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington
and Wyoming. We currently own 73 collection operations and operate or own 35
transfer stations, 24 Subtitle D landfills and 17 recycling facilities.
We generally intend to pursue an acquisition-based growth strategy and as of
September 30, 2001 had acquired 129 businesses since our inception in September
1997. The results of operations of these acquired businesses have been included
in our financial statements only from the respective dates of acquisition,
except 14 acquisitions accounted for under the poolings-of-interests method of
accounting, which are included for all periods presented. We anticipate that a
substantial part of our future growth will come from acquiring additional solid
waste collection, transfer and disposal businesses and, therefore, we expect
additional acquisitions could continue to affect period-to-period comparisons of
our operating results.
GENERAL
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. A large part of our
collection revenues comes from providing commercial, industrial and residential
services. We frequently perform these services under service agreements or
franchise agreements with counties or municipal contracts. County franchise
agreements and municipal contracts generally last from one to ten years. Our
existing franchise agreements and all of our existing municipal contracts give
Waste Connections the exclusive right to provide specified waste services in the
specified territory during the contract term. These exclusive arrangements are
awarded, at least initially, on a competitive bid basis and subsequently on a
bid or negotiated basis. We also provide residential collection services on a
subscription basis with individual households. Approximately 50% of our revenues
for the nine months ended September 30, 2001 were derived from services provided
under exclusive franchise agreements, long term municipal contracts and
governmental certificates. Governmental certificates grant
11
Waste Connections perpetual and exclusive collection rights in the covered
areas. Contracts with counties and municipalities and governmental certificates
provide relatively consistent cash flow during the terms of the contracts.
Because we bill most residential customers quarterly, subscription agreements
also provide a stable source of revenues for Waste Connections. Our collection
business also generates revenues from the sale of recyclable commodities.
We charge transfer station and landfill customers a tipping fee on a per ton
basis for disposing of their solid waste at the transfer stations and the
landfill facilities we own and operate. Most of our transfer and landfill
customers have entered into one to ten year disposal contracts with us, most of
which provide for annual cost of living increases.
We typically determine the prices for our solid waste services by the collection
frequency and level of service, route density, volume, weight and type of waste
collected, type of equipment and containers furnished, the distance to the
disposal or processing facility, the cost of disposal or processing, and prices
charged by competitors for similar services. The terms of our contracts
sometimes limit our ability to pass on price increases. Long-term solid waste
collection contracts typically contain a formula, generally based on a published
price index that automatically adjusts fees to cover increases in some, but not
all, operating costs.
Costs of operations include labor, fuel, equipment maintenance and tipping fees
paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and host community fees and
royalties. As of September 30, 2001, Waste Connections owned and/or operated 35
transfer stations, which reduce our costs by allowing us to use collection
personnel and equipment more efficiently and by consolidating waste to gain more
favorable disposal rates that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation overhead costs associated with our
marketing and sales force, professional services and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
their estimated useful lives using the straight-line method and amortization of
goodwill and other intangible assets using the straight-line method. As
described more fully below, goodwill and indefinite lived intangibles totaling
$45.3 million, resulting from acquisitions completed after June 30, 2001 were
not amortized. Landfill permitting, acquisition and preparation costs are
amortized as permitted airspace of the landfill is consumed. Landfill
preparation costs include the costs of construction associated with excavation,
liners, site berms and the installation of leak detection and leachate
collection systems. In determining the amortization rate for a landfill,
preparation costs include the total estimated costs to complete construction of
the landfill's permitted capacity. Units-of-production amortization rates are
determined annually for our operating landfills. The rates are determined by
management based on estimates provided by our internal and third party engineers
and consider the information provided by surveys which are performed at least
annually.
Waste Connections capitalizes some third-party expenditures related to pending
acquisitions or development projects, such as legal, engineering and interest
expenses. We expense indirect acquisition costs, such as executive and corporate
overhead, public relations and other corporate services, as we incur them. We
charge against net income any unamortized capitalized expenditures and advances
(net of any portion that we believe we may recover, through sale or otherwise)
that relate to any operation that is permanently shut down and any pending
acquisition or landfill development project that, we believe, will not be
completed. We routinely evaluate all capitalized costs, and expense those
related to projects that we believe are not likely to succeed. As of September
30, 2001, Waste Connections had capitalized $114,000 of expenditures relating to
landfill development projects and $113,000 in capitalized expenditures relating
to pending acquisitions.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
(collectively, the "Statements") effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their estimated useful lives.
12
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002, except, as provided for under the
new Statements, goodwill and indefinite lived intangible assets resulting from
acquisitions completed after June 30, 2001 will not be amortized. We have not
yet determined the annual effect of application of the non-amortization
provisions of the Statements. However, we expect the impact to result in a
material increase in pre-tax income. During the first quarter of 2002, we will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and we have not yet determined
what the effect of these tests will be on our earnings and financial position.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", effective for fiscal years
beginning after June 15, 2002. This statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. We are currently
evaluating the effect SFAS No. 143 will have on our financial statements and
related disclosures.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", effective for
fiscal years beginning after December 15, 2001. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. We are currently evaluating the effect SFAS No. 144 will have on our
financial statements and related disclosures.
We accrue for estimated landfill closure and post-closure maintenance costs at
the landfills we own. Under applicable regulations, Waste Connections and Madera
County, as operator and owner, respectively, are jointly liable for closure and
post-closure liabilities with respect to the Fairmead Landfill. We have not
accrued for such liabilities because Madera County, as required by state law,
has established a special fund into which it deposits a portion of tipping fee
surcharges to pay such liabilities. Consequently, we do not believe that we had
any financial obligation for closure and post-closure costs for the Fairmead
Landfill as of September 30, 2001. We will have additional material financial
obligations relating to closure and post-closure costs of the other disposal
facilities that we currently own or operate and that we may own or operate in
the future. Waste Connections accrues and will accrue for those obligations,
based on engineering estimates of consumption of permitted landfill airspace
over the useful life of such landfills.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 2001
The following table sets forth items in Waste Connections' consolidated
statement of operations as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2001 2000 2001
---------- ---------- ---------- ----------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 57.3 56.1 57.6 55.6
Selling, general and
administrative expenses 8.2 7.9 8.4 8.2
Depreciation and
amortization expense 8.9 9.3 8.9 9.4
Stock compensation 0.1 - 0.1 -
Acquisition related expenses - - - -
---------- ---------- ---------- ----------
Operating income 25.5 26.7 25.0 26.8
Interest expense, net (9.1) (7.3) (9.6) (8.1)
Other expense, net - (0.1) (0.4) (3.9)
Minority interests - (1.9) - (1.9)
Extraordinary item - - - (0.1)
Income tax expense (6.6) (6.9) (6.1) (5.1)
---------- ---------- ---------- ----------
Net income 9.8% 10.5% 8.9% 7.7%
========== ========== ========== ==========
13
REVENUES. Total revenues increased $16.2 million, or 19.8%, to $97.7 million for
the three months ended September 30, 2001 from $81.5 million for the three
months ended September 30, 2000. Revenues for the nine months ended September
30, 2001 increased $55.3 million, or 24.9%, to $276.8 million from $221.5
million for the nine months ended September 30, 2000. These increases were
primarily attributable to the inclusion of the acquisitions closed throughout
the balance of 2000 and the first nine months of 2001 and selected price
increases, partially offset by a decline in commodity prices.
COST OF OPERATIONS. Total cost of operations increased $8.1 million, or 17.3%,
to $54.8 million for the three months ended September 30, 2001 from $46.7
million for the three months ended September 30, 2000. Cost of operations for
the nine months ended September 30, 2001 increased $26.3 million, or 20.7%, to
$153.9 million from $127.6 million for the nine months ended September 30, 2000.
The increase was primarily attributable to acquisitions closed over the balance
of 2000 and the first nine months of 2001. Cost of operations as a percentage of
revenues declined 1.2 percentage points to 56.1% for the three months ended
September 30, 2001 from 57.3% for the three months ended September 30, 2000.
Cost of operations as a percentage of revenues for the nine months ended
September 30, 2001 declined 2.0 percentage points to 55.6% from 57.6% for the
nine months ended September 30, 2000. These decreases as a percentage of
revenues were primarily attributable to the effect of tuck-in acquisitions
closed during the course of 2000 and the first nine months of 2001, greater
integration of collection volumes into landfills we own or operate and selective
price increases.
SG&A. SG&A expenses increased $1.0 million, or 15.1%, to $7.7 million for the
three months ended September 30, 2001 from $6.7 million for the three months
ended September 30, 2000. SG&A expenses for the nine months ended September 30,
2001 increased $4.1 million, or 21.9%, to $22.6 million from $18.5 million for
the nine months ended September 30, 2000. Our SG&A increased as a result of
additional personnel from companies acquired and additional corporate overhead
to accommodate our growth. SG&A as a percentage of revenues decreased 0.3
percentage points to 7.9% for the three months ended September 30, 2001 from
8.2% for the three months ended September 30, 2000. SG&A as a percentage of
revenues decreased 0.2 percentage points to 8.2% for the nine months ended
September 30, 2001 from 8.4% for the nine months ended September 30, 2000. The
decrease in SG&A as a percentage of revenues was the result of spreading
overhead expenses over a larger base of revenue from the acquisitions completed
in the course of 2000 and the first nine months of 2001.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$1.8 million, or 24.9% to $9.1 million for the three months ended September 30,
2001 from $7.3 million for the three months ended September 30, 2000.
Depreciation and amortization expenses for the nine months ended September 30,
2001 increased $6.1 million, or 30.8%, to $25.9 million from $19.8 million for
the nine months ended September 30, 2000. The increases resulted primarily from
acquisitions in 2000 and the first nine months of 2001 and the inclusion of
their depreciation and amortization, and the amortization of goodwill associated
with such acquisitions, and additional depreciation resulting from capital
expenditures. Depreciation and amortization as a percentage of revenues
increased 0.4 percentage points to 9.3% for the three months ended September 30,
2001 from 8.9% for the three months ended September 30, 2000. Depreciation and
amortization as a percentage of revenues for the nine months ended September 30,
2001 increased 0.5 percentage points to 9.4% from 8.9% for the nine months ended
September 30, 2000. The increases in depreciation and amortization as a
percentage of revenues were primarily a result of amortization of goodwill
associated with acquisitions and a higher proportion of landfill revenues, which
have higher variable depletion costs than collection revenues.
STOCK COMPENSATION EXPENSE. Stock compensation expense decreased to $0 for the
three and nine months ended September 30, 2001 from $54,000 and $163,000 for the
three and nine months ended September 30, 2000, respectively. Our prior year
stock compensation expense was attributable to the valuation of common stock
options and warrants with exercise prices less than the estimated fair value of
our common stock on the date of the grant and relates solely to stock options
granted prior to the initial public offering in May 1998. This compensation
expense was fully amortized on September 30, 2000.
ACQUISITION RELATED EXPENSES. Acquisition related expenses decreased to $0 for
the nine months ended September 30, 2001 from $150,000 for the nine months ended
September 30, 2000. The prior year acquisition related expenses were for
commissions, professional fees, and other direct costs resulting from the one
acquisition that was accounted for using the pooling-of-interests method.
14
OPERATING INCOME. Operating income increased $5.3 million, or 25.6%, to $26.1
million for the three months ended September 30, 2001 from $20.8 million for the
three months ended September 30, 2000. Operating income for the nine months
ended September 30, 2001 increased $19.0 million, or 34.4%, to $74.3 million
from $55.3 million for the nine months ended September 30, 2000. The increases
were primarily attributable to the inclusion of acquisitions closed in 2000 and
the first nine months of 2001, greater integration of collection volumes into
landfills we own or operate and selective price increases, partially offset by
higher depreciation and amortization expenses and SG&A expenses. Operating
income as a percentage of revenues increased 1.2 percentage points to 26.7% for
the three months ended September 30, 2001 from 25.5% for the three months ended
September 30, 2000. Operating income as a percentage of revenues for the nine
months ended September 30, 2001 increased 1.8 percentage points to 26.8% from
25.0% for the nine months ended September 30, 2000. The increase in operating
income is attributable to the improvement in gross margins and economies of
scale from a greater revenue base, partially offset by increases in depreciation
and amortization as a percentage of revenues.
INTEREST EXPENSE. Interest expense decreased $0.3 million, or 4.3%, to $7.1
million for the three months ended September 30, 2001 from $7.4 million for the
three months ended September 30, 2000. The decrease is attributable to lower
interest rates on our revolving credit facility and our replacing a portion of
the borrowings under our revolving credit facility with lower interest
subordinated debt obligations, partially offset by higher total debt levels.
Interest expense for the nine months ended September 30, 2001 increased $1.2
million, or 5.6%, to $22.3 million from $21.1 million for the nine months ended
September 30, 2000. The increase was primarily attributable to higher debt
levels incurred to fund certain of our acquisitions, partially offset by lower
interest rates on our revolving credit facility and our replacing a portion of
the borrowings under our revolving credit facility with lower interest
subordinated debt obligations.
OTHER INCOME (EXPENSE). Other income (expense) increased to ($93,000) for the
three months ended September 30, 2001 from $21,000 for the three months ended
September 30, 2000. Other income (expense) increased $10.0 million to ($10.9)
million for the nine months ended September 30, 2001 from ($0.9) million for the
nine months ended September 30, 2000. The primary components of the net expense
for the nine months ended September 30, 2001 were a $4.9 million non-cash loss
recognized on the sale of certain Utah operations that were deemed to no longer
be of strategic importance to us and $6.3 million of expenses resulting from the
early termination of an interest rate swap. During the three months ended March
31, 2001, we determined that the debt to which an interest rate swap related
would be repaid prior to its due date from the net proceeds of our convertible
subordinated debt offering; therefore, it was no longer probable that the
variable cash flows under the related debt would occur.
MINORITY INTERESTS. Minority interests were $1.9 million and $5.4 million for
the three and nine month periods ended September 30, 2001, respectively,
compared to $0 for both the three and nine month periods ended September 30,
2000. The increase is attributable to the purchase by Waste Connections during
the first quarter of 2001 of majority interests in two unrelated entities, one
in California and one in Washington.
PROVISION FOR INCOME TAXES. Income taxes increased $1.4 to $6.8 million for the
three months ended September 30, 2001 from $5.4 million for the three months
ended September 30, 2000. Income taxes increased $0.6 million to $14.2 million
for the nine months ended September 30, 2001 from $13.6 million for the nine
months ended September 30, 2000. The effective income tax rate for the three and
nine months ended September 30, 2001 was 39.8%, which is above the federal
statutory rate of 35.0% as the result of state and local taxes and
non-deductible goodwill associated with certain acquisitions.
NET INCOME BEFORE EXTRAORDINARY ITEM. Net income before extraordinary item
increased $2.3 to $10.2 million for the three months ended September 30, 2001,
from $7.9 million for the three months ended September 30, 2000. The increase
was primarily attributable to the inclusion of acquisitions closed in the last
year and first nine months of 2001, greater integration of collection volumes
into landfills we own or operate, economies of scale from a greater revenue
base, lower interest expense as a percentage of revenues and selective price
increases, partially offset by higher depreciation and amortization expenses as
a percentage of revenues. Net income before extraordinary item increased $1.9 to
$21.5 million for the nine months ended September 30, 2001, from $19.6 million
for the nine months ended September 30, 2000. The increase was primarily
attributable to the inclusion of acquisitions closed in the last year, economies
of scale from a greater revenue base, greater integration of collection volumes
into landfills we own or operate, lower interest expense as a percentage of
revenues and selective price increases, partially offset by higher depreciation
and amortization expenses as a percentage of revenues, the cost associated with
the early termination of an interest rate swap, the loss recognized on the sale
of certain Utah operations and expenses related to the termination of a large
potential acquisition.
15
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we had a working capital deficit of $13.5 million,
including cash and equivalents of $4.0 million. Our strategy in managing our
working capital is generally to apply the cash generated from our operations
that remains available after satisfying our working capital and capital
expenditure requirements to reduce our indebtedness under our bank revolving
credit facility and to minimize our cash balances.
We have a revolving credit facility with a syndicate of banks for which Fleet
Boston Financial Corporation acts as agent, under which we can borrow up to $435
million and which is secured by virtually all assets of Waste Connections,
including our interest in the equity securities of our subsidiaries. The credit
facility matures in 2005 and bears interest at a rate per annum equal to, at our
discretion, either: (i) the Prime Rate; or (ii) the Eurodollar Rate plus
applicable margin. The credit facility requires us to maintain certain financial
ratios and satisfy other predetermined requirements, such as minimum net worth,
net income and limits on capital expenditures. It also requires the lenders'
approval of acquisitions in certain circumstances. As of September 30, 2001, an
aggregate of approximately $230.7 million was outstanding under our credit
facility, and the interest rate on outstanding borrowings, including
amortization of fees, under the credit facility was approximately 8.0%.
During April 2001, we sold $150 million of our 5.5% subordinated convertible
notes. The notes are unsecured and are convertible at any time by the holders
into common stock at a conversion price of $38.03 per share. Concurrent with the
closing of this financing, we modified certain of our revolving credit covenants
allowing us to increase our overall leverage ratios. Proceeds from the offering
were used to repay a portion of our debt under the revolving credit facility and
associated costs.
For the nine months ended September 30, 2001, net cash provided by operations
was approximately $57.0 million. $8.3 million of cash provided by operations was
used to fund increases in working capital for the period.
For the nine months ended September 30, 2001, net cash used by investing
activities was $71.2 million. Of this, $46.7 million was used to fund the cash
portion of acquisitions. Cash used for capital expenditures was $26.7 million,
which was primarily for investments in fixed assets, consisting primarily of
trucks, containers and other equipment. Cash inflows from investing activities
include $2.9 million received from the sale of a subsidiary.
For the nine months ended September 30, 2001, net cash provided by financing
activities was $15.8 million, which was provided by $24.7 million of net
borrowings under our various debt arrangements and $6.1 million of proceeds from
stock option and warrant exercises, less $6.3 million of cash paid for debt
issuance costs, $6.3 million of cash paid to terminate an interest rate swap and
$2.4 million of cash distributions to minority interest holders.
Capital expenditures relating to existing businesses for the remainder of 2001
are currently expected to be approximately $12 million. We intend to fund our
remaining planned 2001 capital expenditures principally through internally
generated funds, and borrowings under our existing credit facility. We intend to
fund our future acquisitions and capital requirements through internally
generated funds, additional borrowings under our credit facility and funds
raised from sale of our equity securities under appropriate market conditions.
We believe that the credit facility, and the funds expected to be generated from
operations, will provide adequate cash to fund our working capital and other
cash needs for the foreseeable future. However, increased use of debt to fund
our capital requirements will increase our interest expense. It may also raise
our debt-to-equity ratio, which could hinder our ability to obtain additional
credit. If we are unable to obtain additional debt financing or to sell
additional equity securities in the future, we may be unable to fund future
acquisitions, which could cause a decline in the growth rate of our revenues.
From time to time we evaluate our existing operations and their strategic
importance to Waste Connections. If we determine that a given operating unit
does not have future strategic importance, we may sell or otherwise dispose of
those operations. Although we believe our operations would not be impaired by
such dispositions, we could incur losses on their sale.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to market risk, including
changes in interest rates and certain commodity prices. We use hedge agreements
to manage a portion of our risks related to interest rates. While we are exposed
to credit risk in the event of non-performance by counterparties to our hedge
agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue
derivative financial instruments for trading purposes. We monitor our hedge
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
In December 1999, we entered into an interest rate swap agreement with
BankBoston, N.A. Under this swap agreement, which was effective through December
2001, the interest rate on $125 million of our floating rate long-term debt was
effectively fixed with an interest rate of 6.1% plus an applicable margin. This
rate remained at 6.1% if LIBOR was less than 7.0%. If LIBOR exceeded 7.0%, the
interest rate under this swap agreement would increase one basis point for every
LIBOR basis point above 7.0%.
In May 2000, we entered into an interest rate swap with Union Bank of
California, N.A. Under this swap agreement, which was effective through May
2003, the interest rate on $125 million of our floating rate long-term debt was
effectively fixed with an interest rate of 7.19% plus an applicable margin. The
rate remained at 7.19% if LIBOR was less than 8.0%. If LIBOR exceeded 8.0%, the
interest rate under this swap agreement would increase one basis point for every
LIBOR basis point above 8%.
In December 2000, we restructured both of the previously outstanding interest
rate swap agreements, extending their maturity through December 2003 and
removing the embedded option features of the agreements. The Fleet Bank swap
(formerly the Bank Boston, N.A. swap) is now on a notional amount of $125
million at a fixed rate of 6.17% plus applicable margin. After the December 2000
restructuring, the Union Bank of California swap was on a notional amount of
$125 million at a fixed rate of 7.01% plus applicable margin; in March 2001, we
terminated $110 million of this swap.
We have performed sensitivity analyses using a discounted cash flow model to
determine how market rate changes will affect the fair value of our market risk
sensitive hedge positions and all other debt. Such an analysis is inherently
limited in that it represents a singular, hypothetical set of assumptions.
Actual market movements may vary significantly from our assumptions. Fair value
sensitivity is not necessarily indicative of the ultimate cash flow or earnings
effect we would recognize from the assumed market rate movements.
We are exposed to cash flow risk due to changes in interest rates with respect
to the $90.7 million remaining floating rate balance owed under our credit
facility and floating rate municipal bond obligations in the combined amount of
approximately $1.8 million associated with Madera. A one percentage point
increase in interest rates on our variable-rate debt as of September 30, 2001
would decrease our annual pre-tax income by approximately $925,000.
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 17 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 certain
benchmark resale prices for recycled commodities. To the extent 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 which pass commodity risk along to
the customers, we believe, given historical trends and fluctuations within the
recycling commodities market, that the ultimate net impact of a 10% decrease in
average recycled commodity prices at September 30, 2001 would not have a
material impact on our cash flows or pre-tax income.
17
WASTE CONNECTIONS, INC.
PART II. OTHER INFORMATION
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WASTE CONNECTIONS, INC.
BY: /s/ Ronald J. Mittelstaedt
-------------------------------------
Date: November 14, 2001 Ron J. Mittelstaedt,
President and Chief Executive Officer
BY: /s/ Steven F. Bouck
-------------------------------------
Date: November 14, 2001 Steven F. Bouck,
Executive Vice President and Chief
Financial Officer
19