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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2010
or
o | 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: 000-25955
Waste Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 01-0780204 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(905) 319-1237
(Registrant’s telephone number, including area code)
(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. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at April 26, 2010 was 46,784,123.
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION | ||||||||
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37 | ||||||||
PART II — OTHER INFORMATION | ||||||||
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
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PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
WASTE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 5,793 | $ | 3,699 | ||||
Accounts receivable (net of allowance for doubtful accounts of $432 and $511 as of March 31, 2010 and December 31, 2009, respectively) | 58,886 | 60,808 | ||||||
Prepaid expenses and other current assets | 14,683 | 19,816 | ||||||
Total current assets | 79,362 | 84,323 | ||||||
Property and equipment, net | 212,500 | 204,505 | ||||||
Landfill sites, net | 194,007 | 196,342 | ||||||
Goodwill and other intangible assets, net | 422,516 | 419,439 | ||||||
Other assets | 9,932 | 10,383 | ||||||
Total assets | $ | 918,317 | $ | 914,992 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 22,392 | $ | 31,039 | ||||
Accrued expenses and other current liabilities | 63,471 | 63,807 | ||||||
Short-term financing and current portion of long-term debt | 22,671 | 20,059 | ||||||
Total current liabilities | 108,534 | 114,905 | ||||||
Long-term debt | 376,663 | 381,393 | ||||||
Deferred income taxes | 41,842 | 39,912 | ||||||
Accrued closure, post-closure and other obligations | 20,915 | 19,434 | ||||||
Total liabilities | 547,954 | 555,644 | ||||||
Shareholders’ equity: | ||||||||
Common stock $0.01 par value: 166,666,666 shares authorized, 46,778,957 and 46,253,107 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively | 467 | 462 | ||||||
Additional paid-in capital | 504,318 | 502,049 | ||||||
Accumulated other comprehensive income | 51,146 | 47,988 | ||||||
Accumulated deficit | (185,568 | ) | (191,151 | ) | ||||
Total shareholders’ equity | 370,363 | 359,348 | ||||||
Total liabilities and shareholders’ equity | $ | 918,317 | $ | 914,992 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue | $ | 119,393 | $ | 95,792 | ||||
Operating and other expenses: | ||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 72,740 | 63,208 | ||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 17,258 | 13,209 | ||||||
Depreciation, depletion and amortization | 12,149 | 10,360 | ||||||
Gain on sale of property and equipment, foreign exchange and other | (33 | ) | (3,310 | ) | ||||
Income from operations | 17,279 | 12,325 | ||||||
Interest expense | 8,422 | 7,498 | ||||||
Change in fair value of warrants | (177 | ) | (1,771 | ) | ||||
Income from operations before income taxes | 9,034 | 6,598 | ||||||
Income tax provision | 3,451 | 2,588 | ||||||
Net income | $ | 5,583 | $ | 4,010 | ||||
Earnings per share — basic and diluted | $ | 0.12 | $ | 0.09 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 46,346 | 46,110 | ||||||
Diluted | 46,991 | 46,136 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2010
(In thousands)
Accumulated | ||||||||||||||||||||||||
Waste Services, Inc. | Additional | Other | Total | |||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Shareholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||
Balance, December 31, 2009 | 46,253 | $ | 462 | $ | 502,049 | $ | 47,988 | $ | (191,151 | ) | $ | 359,348 | ||||||||||||
Stock-based compensation | 435 | 4 | 1,509 | — | — | 1,513 | ||||||||||||||||||
Exercise of stock options and warrants | 91 | 1 | 760 | — | — | 761 | ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 3,158 | — | 3,158 | ||||||||||||||||||
Net income | — | — | — | — | 5,583 | 5,583 | ||||||||||||||||||
Balance, March 31, 2010 | 46,779 | $ | 467 | $ | 504,318 | $ | 51,146 | $ | (185,568 | ) | $ | 370,363 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 5,583 | $ | 4,010 | ||||
Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||
Depreciation, depletion and amortization | 12,149 | 10,360 | ||||||
Amortization of debt issue costs and discounts | 982 | 839 | ||||||
Deferred income tax provision | 1,691 | 1,578 | ||||||
Non-cash stock-based compensation expense | 1,513 | 1,155 | ||||||
Change in fair value of warrants | (177 | ) | (1,771 | ) | ||||
Loss (gain) on sale of property and equipment and other non-cash items | 152 | (3,363 | ) | |||||
Changes in operating assets and liabilities (excluding the effects of acquisitions): | ||||||||
Accounts receivable | 2,687 | 3,745 | ||||||
Prepaid expenses and other current assets | 5,455 | 1,401 | ||||||
Accounts payable | (9,267 | ) | (3,181 | ) | ||||
Accrued expenses and other current liabilities | 446 | 2,132 | ||||||
Net cash provided by operating activities | 21,214 | 16,905 | ||||||
Cash flows from investing activities: | ||||||||
Cash used in business combinations | (7,009 | ) | (576 | ) | ||||
Capital expenditures | (6,445 | ) | (6,944 | ) | ||||
Proceeds from asset sales and business divestitures | 281 | 6,513 | ||||||
Net cash used in investing activities | (13,173 | ) | (1,007 | ) | ||||
Cash flows from financing activities: | ||||||||
Draw on revolving credit facility | 17,333 | 1,561 | ||||||
Principal repayments of debt and capital lease obligations | (24,164 | ) | (13,317 | ) | ||||
Proceeds from the exercise of stock options and warrants | 761 | — | ||||||
Fees paid for financing transactions | — | (62 | ) | |||||
Net cash used in financing activities | (6,070 | ) | (11,818 | ) | ||||
Effect of exchange rate changes on cash | 123 | 262 | ||||||
Increase in cash | 2,094 | 4,342 | ||||||
Cash at the beginning of the period | 3,699 | 7,227 | ||||||
Cash at the end of the period | $ | 5,793 | $ | 11,569 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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1. Organization of Business and Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Waste Services, Inc. (“Waste Services”) and its wholly owned subsidiaries (collectively, “we”, “us”, or “our”). We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are located in the United States and Canada. Our U.S. operations are located in Florida and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia).
These Unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All significant intercompany transactions and accounts have been eliminated. All figures are presented in thousands of U.S. dollars, except share and per share data, or except where expressly stated as being in Canadian dollars (“C$”) or in millions. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these Unaudited Condensed Consolidated Financial Statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2009, as filed on Form 10-K. In the opinion of management, these Unaudited Condensed Consolidated Financial Statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2009. Income taxes during these interim periods have been provided based on our anticipated annual effective income tax rate for each respective tax jurisdiction. Certain reclassifications have been made to the prior period financial statement amounts to conform to the current presentation. Due to the seasonal nature of our business, operating results for interim periods are not necessarily indicative of the results for full years.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, depletion of landfill development costs, carrying amounts of goodwill and other intangible assets, liabilities for landfill capping, closure and post-closure obligations, insurance reserves, restructuring reserves, revenue recognition, liabilities for potential litigation, valuation assumptions for share-based payments and stock purchase warrants, carrying amounts of long-lived assets and deferred taxes.
A portion of our operations is domiciled in Canada. For each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of our Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of our Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of our Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income or loss. Monetary assets and liabilities are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income. Currently, we do not hedge our exposure to changes in foreign exchange rates.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period, including, for the three months ended March 31, 2009, a weighted average number of exchangeable shares of Waste Services (CA) Inc. not owned by us. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding for the period, including the exchangeable shares, plus the dilutive effect of common stock purchase warrants, stock options and restricted stock units using the treasury stock method. Contingently issuable shares are included in the calculation of basic earnings per share when all contingencies surrounding the issuance of the shares are met and the shares are issued or issuable. Contingently issuable shares are included in the calculation of dilutive earnings per share as of the beginning of the reporting period if, at the end of the reporting period, all contingencies surrounding the issuance of the shares are satisfied or would be satisfied if the end of the reporting period were the end of the contingency period.
For purposes of computing net income per common share, the basic and diluted weighted average number of common shares outstanding for the three months ended March 31, 2009 includes the effect of 6,266,939 exchangeable shares of Waste Services (CA) Inc. (exchangeable for 2,088,979 shares of our common stock), as if they were shares of our outstanding common stock. During the second quarter of 2009, all remaining exchangeable shares of Waste Services (CA) Inc. not owned by affiliates were exchanged for shares of our common stock and accordingly, no exchangeable shares of Waste Services (CA) Inc. were included in basic and diluted weighted average common shares outstanding for the three months ended March 31, 2010. For the three months ended March 31, 2010 and 2009, stock options and common stock purchase warrants for the purchase of 698,150 and 4,754,839 common shares were antidilutive, respectively, as the exercise price of such options and warrants was in excess of the average market price of our common stock for the period.
2. Proposed Merger with IESI-BFC
On November 11, 2009, we entered into a merger agreement with IESI-BFC Ltd. (“IESI-BFC”), which provides for IESI-BFC to acquire us. IESI-BFC, through its subsidiaries, is one of North America’s largest full-service waste management companies, providing non-hazardous solid waste collection and landfill disposal services to commercial, industrial, municipal and residential customers in ten states and the District of the Columbia in the U.S., and five Canadian provinces.
On January 19, 2010, IESI-BFC filed a registration statement with the Securities and Exchange Commission (“SEC”) that included a preliminary proxy statement for such merger. Waste Services and IESI-BFC are working to complete the merger as quickly as practicable and we currently expect the merger to be completed during the second calendar quarter of 2010. However, neither Waste Services nor IESI-BFC can predict the effective time of the merger because it is subject to conditions beyond each company’s control, including approval of the merger by our stockholders and necessary regulatory approvals. If the merger is completed, each of our shareholders will receive 0.5833 IESI-BFC common shares (plus cash in lieu of any fractional share interests) for each share of our common stock held immediately prior to the completion of the merger, subject to adjustment under limited circumstances.
If the merger agreement is terminated under certain circumstances, including circumstances involving the acceptance of a superior acquisition proposal by us or a change in recommendation by our board of directors or an intentional breach by us, we will be required to pay IESI-BFC a termination fee of $11.0 million, plus all out-of-pocket costs up to a maximum of $3.5 million for professional and advisory services and other expenses reasonably incurred by IESI-BFC in connection with the merger. Upon termination of the merger agreement by us resulting from IESI-BFC’s intentional breach of the merger agreement, IESI-BFC will be required to pay us $11.0 million plus an amount equal to all out-of-pocket costs up to $3.5 million for professional and advisory services and other expenses reasonably incurred by us in connection with the merger. Waste Services or IESI-BFC may be required to pay the other party an expense reimbursement amount of up to $3.5 million in certain other specified circumstances.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. Recently Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”). ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. FASB Accounting Standards Codification (“ASC”) Topic 718 was amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies for equity classification. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. We do not anticipate that the adoption of this guidance will have a material impact on our financial position and results of operations.
In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which amends ASC Topic 855, “Subsequent Events.” The amendments to ASC Topic 855 do not change existing requirements to evaluate subsequent events, but: (i) defines a “SEC Filer,” which we are; (ii) removes the definition of a “Public Entity”; and (iii) for SEC Filers, reverses the requirement to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was effective for us upon issuance. This guidance did not have a material impact on our financial position and results of operations.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures for (i) transfers of assets and liabilities in and out of levels one and two fair value measurements, including a description of the reasons for such transfers and (ii) additional information in the reconciliation for fair value measurements using significant unobservable inputs (level three). This guidance also clarifies existing disclosure requirements including (i) the level of disaggregation used when providing fair value measurement disclosures for each class of assets and liabilities and (ii) the requirement to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for level two and three assets and liabilities. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in the roll forward for level three fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of this guidance has not had a material impact on our financial position and results of operations.
4. Fair Value Measurements
The book values of cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments. The fair value of the term loan facilities under our Senior Secured Credit Facilities and our 91/2% Senior Subordinated Notes at March 31, 2010 is estimated at $150.0 million and $216.3 million, respectively, based on quoted market prices. The fair value hierarchy under GAAP distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
• | Level one – Quoted market prices in active markets for identical assets or liabilities; | ||
• | Level two – Inputs other than level one inputs that are either directly or indirectly observable; and | ||
• | Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. |
Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows as of March 31, 2010 (unaudited):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Accrued closure and post-closure obligations | $ | — | $ | — | $ | 20,060 | $ | 20,060 | ||||||||
Accrued rent relative to the October 2008 restructuring | — | — | 534 | 534 | ||||||||||||
Fair value of warrants | — | 2,652 | — | 2,652 | ||||||||||||
Total | $ | — | $ | 2,652 | $ | 20,594 | $ | 23,246 | ||||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A discussion of the valuation techniques used to measure fair value for the liabilities listed above and activity for these liabilities for the three months ended March 31, 2010 is provided elsewhere in Notes 9, 12 and 14. We have no assets that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2010 other than those acquired in business combinations, which are discussed in Note 6.
5. Share-Based Payments
We have one active share-based stock award plan that provides for the grant of stock options and stock awards, such as restricted stock units, to our employees and members of our Board of Directors, as approved by our Board of Directors. Under this plan, the maximum number of shares that will be available for award will not exceed 4,500,000 shares of our common stock. As of March 31, 2010, there were 2,771,417 shares available for grant under the plan. Stock-based compensation expense was $1.5 million and $1.2 million for the three months ended March 31, 2010 and 2009, respectively.
During 2008, we granted 742,500 restricted stock units (“RSU’s”) to certain employees and directors, which are eligible to vest in three equal tranches over each of the three years following the grant, and are contingent on the achievement of specific annual performance criteria. During 2008, 55,000 of these RSU’s were forfeited. For this grant, a total of 171,875 shares with an aggregate fair value of $0.7 million vested in the first quarter of 2009 and an additional 227,492 shares with an aggregate fair value of $1.1 million vested in the first quarter of 2010. Performance criteria for the third tranche of the 2008 grant were set in the first quarter of 2010 and resulted in an aggregate fair value for the third tranche of $2.3 million, or $10.07 per unit, which is being expensed based on our estimate of achieving the specific performance criteria for 2010 on a straight-line basis over the requisite service period.
During 2009, we granted 628,500 RSU’s to certain employees and directors, which are eligible to vest in three equal tranches over each of the three years following the grant, and are also contingent on the achievement of specific annual performance criteria. For this grant, a total of 207,830 shares with an aggregate fair value of $0.9 million vested in the first quarter of 2010. Performance criteria for the second tranche of the 2009 grant were set in the first quarter of 2010 and resulted in an aggregate fair value for the second tranche of $2.1 million, or $10.07 per unit, which is being expensed based on our estimate of achieving the specific performance criteria for 2010 on a straight-line basis over the requisite service period.
Activity for the three months ended March 31, 2010 for our RSU’s for which performance based vesting criteria have been specified is as follows (aggregate intrinsic value in thousands):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number | Grant | Contractual | Intrinsic | |||||||||||||
of Shares | Value | Term (Years) | Value | |||||||||||||
Nonvested restricted stock units - | ||||||||||||||||
Beginning of the period | 492,201 | $ | 5.07 | 0.2 | $ | 4,484 | ||||||||||
Granted | 435,341 | 10.07 | ||||||||||||||
Vested | (435,322 | ) | 4.55 | |||||||||||||
Forfeited | — | — | ||||||||||||||
End of the period | 492,220 | 9.95 | — | 4,868 | ||||||||||||
As of March 31, 2010, 207,835 RSU’s granted in 2009 have been excluded from the above table as the performance based vesting criteria for these RSU’s had not yet been set at that time.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the three months ended March 31, 2009, we granted options to purchase 282,500 shares of our common stock to certain employees. These options have an exercise price of $4.33 per share, a weighted-average grant-date fair value of $2.40 per share and vest one-third over each of the next three years following the grant. The fair value of options granted for the three months ended March 31, 2009 is estimated using the Black-Scholes option pricing model using the following assumptions:
Three Months | ||||
Ended March | ||||
31, 2009 | ||||
Annual dividend yield | — | |||
Weighted average expected life (years) | 7.0 | |||
Risk-free interest rate | 2.6 | % | ||
Expected volatility | 52 | % |
Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected life of the grant. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of our options. We currently have no reason to believe future volatility over the expected life of these options is likely to differ materially from historical volatility. The weighted-average expected life is based on share option exercises, pre and post vesting terminations and share option term expiration. The risk-free interest rate is based on the U.S. Treasury security rate for the expected life of the options at the date of grant.
We estimate forfeitures when recognizing compensation expense and adjust this estimate over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment, which is recognized in the period of change and which impacts the amount of unamortized compensation expense to be recognized in future periods.
Stock option activity for the three months ended March 31, 2010 for employee options covered by our stock option plans is as follows (unaudited):
Weighted | ||||||||
Number of Shares | Average | |||||||
Issuable | Exercise Price | |||||||
Options outstanding at the beginning of the period | 1,119,483 | $ | 8.59 | |||||
Granted | — | — | ||||||
Exercised | (2,500 | ) | 4.33 | |||||
Forfeited | (3,500 | ) | 4.33 | |||||
Expired | — | — | ||||||
Options outstanding at the end of the period | 1,113,483 | 8.61 | ||||||
Options vested or expected to vest at the end of the period | 1,054,280 | 8.78 | ||||||
Options exercisable at the end of the period | 885,434 | 9.42 | ||||||
The intrinsic value of options outstanding at March 31, 2010 was $1.5 million. As of March 31, 2010, $0.6 million and $3.4 million of total unrecognized compensation cost related to employee stock options and RSU’s is expected to be recognized over a weighted average period of approximately 1.5 years and 1.0 years, respectively.
Should the merger with IESI-BFC be completed, our outstanding stock options and RSU’s will be treated as follows:
Options. Immediately prior to the effective time of the merger, each option to purchase shares of our common stock that is outstanding, whether or not then vested or exercisable, will become fully vested and exercisable. Upon completion of the merger, each option to purchase shares of our common stock outstanding under any of our stock incentive plans will be assumed by IESI-BFC and will automatically convert into an option to purchase IESI-BFC common shares, on the same terms and conditions as were applicable to the Waste Services stock options prior to the merger, equal to the product of (a) the number of shares of our common stock subject to the Waste Services stock option and (b) 0.5833, rounded up to the nearest whole IESI-BFC common share, at an exercise price per share equal to the quotient obtained by dividing (x) the exercise price per share of the Waste Services stock option, by (y) 0.5833, rounded up to the nearest one-hundredth of one cent.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
RSU’s. Each outstanding restricted stock unit, or RSU, granted by us under our stock incentive plans will become fully vested immediately prior to the merger, and the holder of such vested RSU will be issued shares of Waste Services common stock. Those shares of our common stock will be treated at the effective time of the merger in the same way as all other shares of our common stock.
6. Business Combinations
We believe the primary value of an acquisition is the opportunity made available to vertically integrate operations or increase our presence within a geographic market. We expect goodwill generated from the U.S. acquisitions described below to be deductible for income tax purposes.
In January 2010, we acquired a permitted construction and demolition transfer station in Miami-Dade County, Florida from County Recycling and Waste Transfer (“County Recycling”) for approximately $4.4 million in cash. We intend to use this facility as a platform to build our roll-off business in Miami-Dade County, Florida and to internalize the waste volume into our existing landfill facilities.
In January 2010, we acquired three material recovery facilities located on Vancouver Island, British Columbia from Vancouver Island Recycling Centres (“Vancouver Island Recycling”) for C$3.1 million. This acquisition allows us to have more control over the marketing, sales and disposal of recyclables collected in our Vancouver Island operations.
In October 2009, we acquired Republic Services’ operations in Miami-Dade County, Florida for $32.0 million in cash plus an adjustment for working capital. We are internalizing waste volumes from this acquisition into our existing transfer station and landfill facilities.
In September 2009, we acquired the Miami-Dade County, Florida hauling operations of DisposAll of South Florida, Inc. (“DisposAll”) for approximately $15.6 million, of which $1.3 million was paid by way of a disposal credit for future fees charged to DisposAll for waste disposed at certain of our transfer station and landfill facilities. We are internalizing the waste flow from this acquisition into our existing transfer station and landfill facilities.
During 2009, we also acquired five separate “tuck-in” hauling operations in Florida for an aggregate purchase price of $3.6 million. We are internalizing construction and demolition waste volumes associated with these acquisitions into certain of our existing transfer station and landfill facilities.
Details of the net assets acquired and the purchase price paid for acquisitions that occurred during the three months ended March 31, 2010 are as follows:
Vancouver | ||||||||||||
County | Island | |||||||||||
Recycling | Recycling | Total | ||||||||||
Purchase price | $ | 4,415 | $ | 2,941 | $ | 7,356 | ||||||
Allocated as follows: | ||||||||||||
Prepaid expenses and other current assets | $ | — | $ | 18 | $ | 18 | ||||||
Accrued expenses and other current liabilities | (85 | ) | (208 | ) | (293 | ) | ||||||
Property and equipment | 3,131 | 3,039 | 6,170 | |||||||||
Non-competition intangible assets | 33 | 92 | 125 | |||||||||
Fair value of assets acquired | $ | 3,079 | $ | 2,941 | $ | 6,020 | ||||||
Goodwill allocation | $ | 1,336 | $ | — | $ | 1,336 | ||||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The purchase price in the above table was paid in cash, with the exception of $0.3 million for Vancouver Island Recycling, which was paid through the utilization of a receivable due us from Vancouver Island Recycling at the time the acquisition was consummated. The amounts allocated to assets acquired and liabilities assumed in the above table were determined using level three inputs and are complete. Fair value for property and equipment was based on other observable transactions for similar property and equipment. Fair value for non-competition agreements is based on a discounted cash flow model that compares the present value of cash flows with and without the non-competition agreement in place, with the fair value of the agreement equal to the difference between the two scenarios. The non-competition agreements in the above table have a weighted average amortization period of approximately five years.
Acquisitions completed during 2009 and 2010 primarily relate to hauling operations that have been integrated into our Florida reporting unit, with the exception of Vancouver Island Recycling in Canada. We have internalized the majority of waste volumes associated with these Florida acquisitions into our existing transfer station and landfill facilities. Accordingly, we believe it to be impracticable to determine the amount of earnings related to these acquisitions that are included in our condensed consolidated statements of operations. Revenue from acquisitions completed in 2010 and 2009 included in our consolidated revenue was $7.0 million and less than $0.1 million for the three months ended March 31, 2010 and 2009, respectively.
The following unaudited pro forma information shows the results of our operations for the three months ended March 31, 2010 and 2009 as if acquisitions completed prior to March 31, 2010 had occurred as of the beginning of the respective period (in thousands except per share amounts):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue | $ | 120,048 | $ | 104,352 | ||||
Net income | $ | 5,282 | $ | 3,470 | ||||
Basic and diluted earnings per share | $ | 0.11 | $ | 0.08 | ||||
Pro forma weighted average common shares outstanding: | ||||||||
Basic | 46,346 | 46,110 | ||||||
Diluted | 46,991 | 46,136 | ||||||
These unaudited pro forma condensed consolidated results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of the beginning of 2010 or 2009, or of the results of our future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of these acquisitions.
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Prepaid expenses | $ | 8,717 | $ | 10,934 | ||||
Parts and supplies | 1,933 | 1,896 | ||||||
Other current assets | 4,033 | 6,986 | ||||||
$ | 14,683 | $ | 19,816 | |||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. Property and Equipment
Property and equipment consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Land and buildings | $ | 89,497 | $ | 84,594 | ||||
Vehicles | 165,087 | 159,788 | ||||||
Containers, compactors and landfill and recycling equipment | 116,464 | 108,932 | ||||||
Furniture, fixtures, other office equipment and leasehold improvements | 13,677 | 13,565 | ||||||
Total property and equipment | 384,725 | 366,879 | ||||||
Less: Accumulated depreciation | (172,225 | ) | (162,374 | ) | ||||
Property and equipment, net | $ | 212,500 | $ | 204,505 | ||||
During the first quarter of 2009, we sold certain land and buildings in our Florida operations for $6.0 million, resulting in a gain of $3.3 million.
9. Landfill Sites, Accrued Closure, Post-Closure and Other Obligations
Landfill Sites
Landfill sites consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Landfill sites | $ | 278,575 | $ | 277,115 | ||||
Less: Accumulated depletion | (84,568 | ) | (80,773 | ) | ||||
Landfill sites, net | $ | 194,007 | $ | 196,342 | ||||
The changes in landfill sites for the three months ended March 31, 2010 and 2009 are as follows (unaudited):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Balance at the beginning of the period | $ | 196,342 | $ | 196,632 | ||||
Landfill site construction costs | 777 | 446 | ||||||
Additional asset retirement obligations | 459 | 316 | ||||||
Depletion | (2,505 | ) | (2,076 | ) | ||||
Reclassification to property and equipment | (1,689 | ) | — | |||||
Effect of foreign exchange rate fluctuations | 623 | (495 | ) | |||||
Balance at the end of the period | $ | 194,007 | $ | 194,823 | ||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accrued Closure, Post-Closure and Other Obligations
Accrued closure, post-closure and other obligations consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Accrued closure and post-closure obligations | $ | 16,563 | $ | 14,698 | ||||
Accrued restructuring and severance costs | 1,307 | 1,596 | ||||||
Other obligations | 3,045 | 3,140 | ||||||
$ | 20,915 | $ | 19,434 | |||||
Accrued closure and post-closure obligations include costs associated with obligations for closure and post-closure of our landfills. Landfill closure and post-closure liabilities are calculated by estimating the total obligation of capping and closure events in current dollars, inflating the obligation based on the expected date of the expenditure using an inflation rate of approximately 2.5% and discounting the inflated total to its present value using a credit-adjusted risk-free discount rate of approximately 8.5%. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill as well as the duration of the post-closure monitoring period. Accretion of discounted cash flows associated with the closure and post closure obligations is accrued over the life of the landfill, as a charge to cost of operations.
The changes in accrued closure and post-closure obligations for the three months ended March 31, 2010 and 2009 are as follows (unaudited):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Current portion at the beginning of the period | $ | 4,834 | $ | 7,589 | ||||
Long-term portion at the beginning of the period | 14,698 | 12,749 | ||||||
Balance at the beginning of the period | 19,532 | 20,338 | ||||||
Additional asset retirement obligations | 459 | 316 | ||||||
Accretion | 89 | 158 | ||||||
Payments | (462 | ) | (578 | ) | ||||
Other additions | 118 | 150 | ||||||
Effect of foreign exchange rate fluctuations | 324 | (261 | ) | |||||
Balance at the end of the period | 20,060 | 20,123 | ||||||
Less: Current portion | (3,497 | ) | (5,647 | ) | ||||
Long-term portion | $ | 16,563 | $ | 14,476 | ||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Other intangible assets subject to amortization: | ||||||||
Customer relationships and contracts | $ | 58,925 | $ | 58,899 | ||||
Non-competition agreements and other | 6,711 | 6,600 | ||||||
65,636 | 65,499 | |||||||
Less: Accumulated amortization: | ||||||||
Customer relationships and contracts | (32,907 | ) | (31,484 | ) | ||||
Non-competition agreements and other | (3,791 | ) | (3,472 | ) | ||||
Other intangible assets subject to amortization, net | 28,938 | 30,543 | ||||||
Goodwill | 393,578 | 388,896 | ||||||
Goodwill and other intangible assets, net | $ | 422,516 | $ | 419,439 | ||||
The changes in goodwill for the three months ended March 31, 2010 and 2009 are as follows (unaudited):
Three Months Ended March 31, 2010 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the period | $ | 292,121 | $ | 96,775 | $ | 388,896 | ||||||
Acquisitions | 1,336 | — | 1,336 | |||||||||
Effect of foreign exchange rate fluctuations | — | 3,346 | 3,346 | |||||||||
Balance at the end of the period | $ | 293,457 | $ | 100,121 | $ | 393,578 | ||||||
Three Months Ended March 31, 2009 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the period | $ | 263,428 | $ | 83,501 | $ | 346,929 | ||||||
Acquisitions | 302 | — | 302 | |||||||||
Effect of foreign exchange rate fluctuations | — | (2,868 | ) | (2,868 | ) | |||||||
Balance at the end of the period | $ | 263,730 | $ | 80,633 | $ | 344,363 | ||||||
As discussed more fully in our annual consolidated financial statements for the year ended December 31, 2009, as filed on Form 10-K, we test goodwill for impairment annually at December 31 using the two-step process. We evaluate a reporting unit for impairment if events or circumstances change between annual tests, indicating a possible impairment. We have defined our reporting units to be consistent with our operating segments: Eastern Canada, Western Canada and Florida. In determining fair value, we utilize discounted future cash flows. However, we may test the results of fair value under discounted cash flows using (i) operating results based on a comparative multiple of earnings or revenues; (ii) offers from interested investors, if any; or (iii) appraisals. Significant estimates used in the fair value calculation utilizing discounted future cash flows include, but are not limited to: (i) estimates of future revenue and expense growth by reporting unit; (ii) future estimated effective tax rates; (iii) future estimated capital expenditures as well as future required investments in working capital; (iv) estimated discount rate; and (v) the future terminal value of the reporting unit, which is based on its ability to exist into perpetuity.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair values of our reporting units, as calculated for the annual impairment test as of December 31, 2009, exceeded the carrying values of the reporting units by approximately 10% to 75%. The Florida reporting unit represented the low end of this range due in part to the severity of the recent economic downturn experienced in the Florida market. We did not conduct an interim impairment test during the three months ended March 31, 2010 as we do not believe indicators of possible impairment were present during such period. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of acquired businesses. Future events, including but not limited to continued declines in economic activity, loss of contracts or a significant number of customers or a rapid increase in costs or capital expenditures, could cause us to conclude that impairment indicators exist and that goodwill associated with the affected reporting units is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates and judgment about future performance, cash flows and fair value, our future results could be affected if these current estimates of future performance and fair value change. Any resulting goodwill impairment loss could have a material adverse impact on our financial condition and results of operations.
11. Other Assets
Other assets consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Debt issue costs, net of accumulated amortization of $5,664 and $5,062 as of March 31, 2010 and December 31, 2009, respectively | $ | 8,210 | $ | 8,681 | ||||
Acquisition deposits | 1,193 | 1,177 | ||||||
Other assets | 529 | 525 | ||||||
$ | 9,932 | $ | 10,383 | |||||
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Deferred revenue | $ | 13,893 | $ | 14,055 | ||||
Accrued interest | 9,645 | 4,737 | ||||||
Accrued compensation, benefits and subcontractor costs | 6,902 | 9,849 | ||||||
Insurance reserves | 5,948 | 5,855 | ||||||
Accrued waste disposal costs | 5,859 | 5,358 | ||||||
Accrued closure and post-closure obligations | 3,497 | 4,834 | ||||||
Accrued insurance premiums | 4,839 | 6,559 | ||||||
Fair value of warrants | 2,652 | 2,829 | ||||||
Accrued royalties and franchise fees | 2,226 | 2,131 | ||||||
Accrued restructuring and severance costs | 1,827 | 2,009 | ||||||
Accrued acquisition costs | 823 | 260 | ||||||
Accrued professional fees | 752 | 894 | ||||||
Accrued capital expenditures | 368 | 969 | ||||||
Current portion of capital lease obligations | 521 | 570 | ||||||
Other accrued expenses and current liabilities | 3,719 | 2,898 | ||||||
$ | 63,471 | $ | 63,807 | |||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We have outstanding warrants for the purchase of 2,383,333 common shares that are accounted for as liabilities. These warrants, which have exercise price reset features, have a strike price of $8.96 per share, expire in May 2010 and are recorded at fair value with any changes in fair value reflected in earnings. The fair value of these common stock purchase warrants decreased to $2.7 million as of March 31, 2010. We recognized a benefit of $0.2 million and $1.8 million for the change in fair value of these warrants for the three months ended March 31, 2010 and 2009, respectively. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Annual dividend yield | — | — | ||||||
Expected life (years) | 0.1 | 0.4 | ||||||
Risk-free interest rate | 1.8 | % | 0.2 | % | ||||
Expected volatility | 43 | % | 53 | % |
Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the last twelve months. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate approximates the one-year U.S. Treasury security rate.
13. Debt
Debt consists of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Credit Facilities: | ||||||||
U.S. dollar denominated revolving credit facility, floating rate at 3.7% as of March 31, 2010 and December 31, 2009 | $ | 25,000 | $ | 30,000 | ||||
Canadian dollar denominated revolving credit facility, floating rate at 4.8% as of March 31, 2010 and December 31, 2009 | 8,860 | 5,709 | ||||||
U.S. dollar denominated term loan facility, floating interest rate at 3.8% and 3.7% as of March 31, 2010 and December 31, 2009, respecitvley, net of discount of $817 and $904 as of March 31, 2010 and December 31, 2009, respectively | 35,084 | 35,994 | ||||||
Canadian dollar denominated term loan facility, floating interest rate at 4.0% as of March 31, 2010 and December 31, 2009, net of discount of $2,948 and $3,117 as of March 31, 2010 and December 31, 2009, respectively | 114,166 | 113,228 | ||||||
Senior Subordinated Notes, fixed interest rate at 9.5%, due 2014, net of discount of $1,373 and $1,426 as of March 31, 2010 and December 31, 2009, respectively | 208,627 | 208,574 | ||||||
Other secured notes payable, interest at 4.5% to 7.8%, due through 2025 (net of discount of $966 and $1,075 as of March 31, 2010 and December 31, 2009, respectively) | 5,475 | 5,769 | ||||||
Other subordinated notes payable, interest at 6.7%, due through 2017 | 2,122 | 2,178 | ||||||
399,334 | 401,452 | |||||||
Less: Current portion | (22,671 | ) | (20,059 | ) | ||||
Long-term portion | $ | 376,663 | $ | 381,393 | ||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Senior Secured Credit Facilities
On October 8, 2008 we refinanced our Senior Secured Credit Facilities with new Senior Secured Credit Facilities (the “Credit Facilities”) with a consortium of new lenders. The Credit Facilities provide for a revolving credit facility of $124.8 million, which is available to either our U.S. operations or our Canadian operations, in U.S. or Canadian dollars, and C$16.3 million, which is available to our Canadian operations. The new Credit Facilities also provide for term loans with initial principal balances of $39.9 million to our U.S. operations and C$132.2 million to our Canadian operations. The revolver commitments terminate on October 8, 2013 and the term loans mature in specified quarterly installments through October 8, 2013. The Credit Facilities are available to us as base rate loans, Eurodollar loans or Bankers Acceptance loans, plus an applicable margin, as defined, at our option in the respective lending jurisdiction. The Credit Facilities are secured by all of our assets, including those of our domestic and foreign subsidiaries, and are guaranteed by all of our domestic and foreign subsidiaries. As of March 31, 2010, there was $25.0 million and C$9.0 million outstanding on the U.S. and Canadian dollar denominated revolving credit facility, respectively, and $11.6 million and C$11.2 million of revolver capacity was used to support outstanding letters of credit in the U.S. and Canada, respectively. As of March 31, 2010, we had unused availability of $84.4 million under our revolving credit facilities, subject to certain conditions.
Our Credit Facilities contain certain financial and other covenants that restrict our ability to, among other things, make capital expenditures, incur indebtedness, incur liens, dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions. Our financial covenants include: (i) maximum total leverage; (ii) maximum senior secured leverage; and (iii) minimum interest coverage. The covenants and restrictions limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital. As of March 31, 2010, we were in compliance with the financial covenants.
Other Secured Notes Payable
Included in our other secured notes payable is a $10.5 million non-interest bearing promissory note with payments of $125,000 per month until June 2014. The net present value of the remaining payments due under the note as of March 31, 2010 approximates $5.4 million and accretes at 7.8%. The note is secured by a transfer station and related permit.
Senior Subordinated Notes
On April 30, 2004, we completed a private offering of 91/2% Senior Subordinated Notes (“Senior Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. On September 21, 2009 we completed an additional private placement of $50.0 million aggregate principal of our Senior Subordinated Notes, with terms identical to the initial offering. This additional private placement resulted in gross proceeds of $49.5 million with an additional $2.1 million received from the purchasers for accrued interest. The Senior Subordinated Notes mature on April 15, 2014. Interest on the Senior Subordinated Notes is payable semiannually on October 15 and April 15. The Senior Subordinated Notes are redeemable, in whole or in part, at our option, on or after April 15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in annual increments to par on or after April 15, 2012, together with accrued interest to the redemption date. Upon a change of control, as such term is defined in the Indenture, we are required to offer to repurchase all the Senior Subordinated Notes at 101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay indebtedness under our Credit Facilities.
The Senior Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Credit Facilities, rank equally with any unsecured senior subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our obligations with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of our existing and future domestic and foreign restricted subsidiaries.
Waste Services is the primary obligor under the Senior Subordinated Notes. Waste Services has no independent operating assets or operations, and the guarantees of our domestic and Canadian subsidiaries, which are all wholly owned subsidiaries, are full and unconditional and joint and several with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any. In October 2008 and pursuant to certain amendments to the Indenture to the Senior Subordinated Notes, our Canadian subsidiaries became guarantors under the Senior Subordinated Notes. Prior to these amendments, our Canadian subsidiaries did not guarantee the Senior Subordinated Notes.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Senior Subordinated Notes contain certain covenants that, in certain circumstances and subject to certain limitations and qualifications, restrict, among other things: (i) the incurrence of additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) transactions with affiliates; and (vi) certain sales of assets.
The indenture relating to our Senior Subordinated Notes contains cross default provisions (i) should we fail to pay the principal amount of other indebtedness when due (after applicable grace periods) or the maturity date of that indebtedness is accelerated and the amount in question is $10.0 million or more or (ii) should we fail to pay judgments in excess of $10.0 million in the aggregate for more than 60 days.
14. Commitments and Contingencies
Environmental Risks
We are subject to liability for environmental damage that our solid waste facilities may cause, including damage to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, including damage resulting from conditions existing prior to the acquisition of such facilities. Pollutants or hazardous substances whose transportation, treatment or disposal was arranged by us or our predecessors, may also subject us to liability for any off-site environmental contamination caused by these pollutants or hazardous substances.
Any substantial liability for environmental damage incurred by us could have a material adverse effect on our financial condition, results of operations or cash flows. As of the date of these Condensed Consolidated Financial Statements, we estimate the range of reasonably possible losses related to environmental matters to be insignificant, and we are not aware of any such environmental liabilities that would be material to our operations or financial condition.
Legal Proceedings
In the normal course of our business and as a result of the extensive governmental regulation of the solid waste industry, we may periodically become subject to various judicial and administrative proceedings involving federal, provincial, state or local agencies. In these proceedings, an agency may seek to impose fines on us or revoke or deny renewal of an operating permit or license that is required for our operations. From time to time, we may also be subject to actions brought by citizens’ groups, adjacent landowners or residents in connection with the permitting and licensing of transfer stations and landfills or allegations related to environmental damage or violations of the permits and licenses pursuant to which we operate. In addition, we may become party to various claims and suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of a waste management business.
No provision has been made in these Condensed Consolidated Financial Statements for the above matters. We do not currently believe that the possible losses in respect of outstanding litigation matters would have a material adverse impact on our business, financial condition, results of operations or cash flows.
Surety Bonds, Letters of Credit and Insurance
Municipal solid waste service contracts, permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. To collateralize our obligations we have provided customers, various regulatory authorities and our insurer with such bonds and letters of credit amounting to approximately $81.5 million and $80.9 million as of March 31, 2010 and December 31, 2009, respectively. The majority of these obligations are renewed on an annual basis.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our domestic based workers’ compensation, automobile and general liability insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of March 31, 2010, and included in the $81.5 million of bonds and letters of credit previously discussed, we have posted a letter of credit with our U.S. insurer of approximately $10.9 million to secure the liability for losses within the deductible limit. Provisions for retained claims are made by charges to expense based on periodic evaluations by management of the estimated ultimate liabilities on both reported and incurred but not reported claims. Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments become known.
The changes in insurance reserves for our U.S. operations for the three months ended March 31, 2010 and 2009 are as follows (unaudited):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Balance at the beginning of the period | $ | 5,855 | $ | 6,505 | ||||
Provisions | 571 | 948 | ||||||
Payments | (830 | ) | (899 | ) | ||||
Unfavorable claim development for prior periods | 352 | 411 | ||||||
Balance at the end of the period | $ | 5,948 | $ | 6,965 | ||||
Purchase Agreement
During July 2009, we entered into an agreement to acquire 875 acres of agricultural land in Hardee County, Florida, subject to the land being permitted for the operation of a Class I landfill. The purchase price, at the seller’s option, will be either (i) a lump sum payment of $10.0 million to $11.6 million depending on the timing of the closing of the transaction and payable on closing or (ii) a portion of the lump sum payment at closing, ranging from $1.0 million to $7.0 million, plus a future stream of annual payments calculated as the greater of a specified annual minimum, ranging from $0.2 million to $0.5 million, or a percentage of revenues from the operation of the landfill, until the property ceases to be used for landfill related operations, but not less than twenty years.
Office Lease
We lease office premises in an office tower in Burlington, Ontario owned by Westbury International (1991) Corporation, a property development company controlled by Michael H. DeGroote, one of our directors, the son of Michael G. DeGroote, our Chairman and brother of Gary W. DeGroote, one of our directors. The leased premises consist of approximately 9,255 square feet. The term of the lease is 101/2 years commencing in 2004, with a right to extend for a further five years. Rent expense recognized under the terms of this lease was less than $0.1 million for the three months ended March 31, 2010 and 2009.
Restructuring and Severance Related Commitments
During the fourth quarter of 2008, we completed a restructuring of corporate overhead and other administrative and operational functions. The plan included the closing of our U.S. corporate offices and the consolidation of corporate administrative functions to our headquarters in Burlington, Ontario, reductions in staffing levels in both overhead and operational positions and the termination of certain consulting arrangements. In connection with the execution of the plan, in the fourth quarter of 2008 we recognized a charge of $6.9 million for selling, general and administrative expense, which consists of (i) $3.6 million for severance and related costs, (ii) $0.9 million for rent, net of estimated sub-let income of $0.7 million, due to the closure of our U.S. corporate office and (iii) $2.4 million for the termination of certain consulting arrangements, the majority of which relate to agreements we had entered into with previous owners of businesses that were acquired. As of March 31, 2010, $2.4 million remains accrued relative to this plan.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the activity for these accrued restructuring costs for the three months ended March 31, 2010 (unaudited):
Severance | ||||||||||||||||
and Related | ||||||||||||||||
Costs | Rent | Consulting | Total | |||||||||||||
Balance at December 31, 2009 | $ | 1,492 | $ | 574 | $ | 562 | $ | 2,628 | ||||||||
Changes in estimates and other provisions | — | 17 | — | 17 | ||||||||||||
Payments | (241 | ) | (57 | ) | (62 | ) | (360 | ) | ||||||||
Foreign exchange and other | 95 | — | — | 95 | ||||||||||||
Balance at March 31, 2010 | $ | 1,346 | $ | 534 | $ | 500 | $ | 2,380 | ||||||||
We have made assumptions relative to the amount and timing of the remaining accrued restructuring costs in the above table, including estimates relative to the sub-lease of our former U.S. corporate office, which is for an initial term of three years commencing November 1, 2009 and includes a three year extension term at the discretion of the tenant, which we have assumed will occur. Should our assumptions require future revision as additional information becomes available, we may have additional charges in future periods.
Registration Payment Arrangement
In connection with the additional private placement of Senior Subordinated Notes completed on September 21, 2009, we entered into a Registration Rights Agreement with the initial purchasers of these notes in which we agreed to (i) file a registration statement with respect to the Senior Subordinated Notes within 120 days of the closing date of the issuance of the notes, or the issuance date, pursuant to which we will exchange the Senior Subordinated Notes for registered notes with terms identical to the Senior Subordinated Notes; (ii) have such registration statement declared effective within 210 days of the closing date; (iii) maintain the effectiveness of such registration statement for minimum periods specified in the agreement; and (iv) file a shelf registration statement in the circumstances and within the time periods specified in the agreement. If we do not comply with these obligations, we will be required to pay liquidated damages, in cash, in an amount equal to $0.05 per week per $1,000 in principal amount of the unregistered Senior Subordinated Notes for each week that the default continues, for the first 90-days following default. Thereafter, the amount of liquidated damages will increase by an additional $0.05 per week per $1,000 in principal amount of unregistered Senior Subordinated Notes for each subsequent 90-day period until all defaults have been cured, to a maximum of $0.50 per week per $1,000 in principal amount of unregistered Senior Subordinated Notes outstanding. Liquidated damages, if any, are payable at the same time as interest payments due under the Senior Subordinated Notes. As of the date of this filing, we expect to be subject to penalty payments under this Registration Rights Agreement, and have accrued $0.1 million for such penalties as of March 31, 2010.
15. Authorized Capital Stock and Migration Transaction
Total Shares
As of March 31, 2010, we were authorized to issue a total of 171,666,666 shares of capital stock consisting of:
• | 166,666,666 shares of common stock, par value 0.01 per share; and | ||
• | 5,000,000 shares of preferred stock, par value 0.01 per share, of which 100,000 shares have been designated as Series A Preferred Stock. |
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Preferred Stock
The Series A Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $1,000.00 per share, have the powers, preferences and other special rights and the qualifications, limitations and restrictions that are set forth in the Certificate of Designations of Series A Preferred Stock as amended. As of March 31, 2010 and December 31, 2009, no shares of Series A Preferred Stock were outstanding. The Special Voting Preferred Stock has the rights, preference, and limitations set forth in the Amended Certificate of Designation of Special Voting Preferred Stock. Upon the completion of the exchange of all the exchangeable shares of Waste Services (CA) Inc. in the second quarter of 2009, the one share that was designated as Special Voting Preferred Stock was automatically redeemed for $1.00 and is now deemed retired and cancelled, and may not be reissued.
Migration Transaction
Effective July 31, 2004, we entered into a migration transaction by which our corporate structure was reorganized so that Waste Services became the ultimate parent company of our corporate group. Prior to the migration transaction, we were a subsidiary of Waste Services (CA) Inc. After the migration transaction, Waste Services (CA) Inc. became our subsidiary.
The migration transaction occurred by way of a plan of arrangement under the Business Corporations Act (Ontario) and consisted primarily of: (i) the exchange of 29,219,011 common shares of Waste Services (CA) Inc. for 29,219,011 shares of our common stock; and (ii) the conversion of the remaining 3,076,558 common shares of Waste Services (CA) Inc. held by non-U.S. residents and who elected to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA) Inc., which are exchangeable into 3,076,558 shares of our common stock. The transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our shareholders at a special meeting held on July 27, 2004.
The terms of the exchangeable shares of Waste Services (CA) Inc. were the economic and functional equivalent of our common stock. Holders of exchangeable shares (i) were entitled to receive the same dividends as holders of shares of our common stock and (ii) were entitled to vote on the same matters as holders of shares of our common stock. Such voting was accomplished through the one share of Special Voting Preferred Stock held by Computershare Trust Company of Canada as trustee, who voted on the instructions of the holders of the exchangeable shares (one-third of one vote for each exchangeable share). Holders of exchangeable shares also had the right to exchange their exchangeable shares for shares of our common stock on the basis of one-third of a share of our common stock for each one exchangeable share. Upon the occurrence of certain events, such as the liquidation of Waste Services (CA) Inc., or after the redemption date, our Canadian holding company, Capital Environmental Holdings Company had the right to purchase each exchangeable share for one-third of one share of our common stock, plus all declared and unpaid dividends on the exchangeable share and payment for any fractional shares.
During the second quarter of 2009, all remaining exchangeable shares of Waste Services (CA) Inc. not owned by affiliates were exchanged for shares of our common stock.
Warrants
We have outstanding warrants to purchase shares of our common stock. As of March 31, 2010, all of these warrants were exercisable. Activity for the three months ended March 31, 2010 for shares issuable upon exercise of these warrants, which expire at various dates through September 2011, is summarized as follows (unaudited):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number | Average | Remaining | Aggregate | |||||||||||||
of Shares | Exercise | Contractual | Intrinsic | |||||||||||||
Issuable | Price | Term (Years) | Value | |||||||||||||
Outstanding at the beginning of the period | 2,804,695 | $ | 8.88 | 0.5 | $ | 651 | ||||||||||
Exercised during the period | (88,028 | ) | 8.52 | |||||||||||||
Outstanding at the end of the period | 2,716,667 | 8.86 | 0.3 | $ | 2,789 | |||||||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Should the merger with IESI-BFC be completed, in general, at the effective time of the merger, each warrant to purchase shares of Waste Services common stock that is outstanding and unexercised immediately prior to the merger will be assumed by IESI-BFC, subject to the same terms and conditions as were applicable to the Waste Services warrants prior to the merger, and automatically converted into a warrant to purchase a number of IESI-BFC common shares equal to the product obtained by multiplying (a) the number of shares of our common stock subject to the Waste Services warrant and (b) 0.5833, rounded up to the nearest whole IESI-BFC common share, at an exercise price per share equal to the quotient obtained by dividing (i) the per share exercise price of our common stock subject to the Waste Services warrant by (ii) 0.5833, rounded up to the nearest one-hundredth of one cent.
16. Comprehensive Income
Comprehensive income includes the effects of foreign currency translation. Comprehensive income for the three months ended March 31, 2010 and 2009 is as follows (unaudited):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income | $ | 5,583 | $ | 4,010 | ||||
Foreign currency translation adjustment | 3,158 | (1,369 | ) | |||||
Comprehensive income | $ | 8,741 | $ | 2,641 | ||||
17. Segment Information
In making the determination of our operating and reporting segments, we consider our organization and reporting structure and the information used by our chief operating decision maker to make decisions about resource allocation and performance assessment. We are organized along geographic locations or regions within the U.S. and Canada. Our Canadian operations are organized between two regions, Eastern and Western Canada, while in the U.S. we operate exclusively in Florida. For segment reporting, we define “Corporate” as overhead expenses, not specifically attributable to our Florida or Canadian operations, incurred both domestically and in Canada.
We believe our Canadian operating segments may be aggregated for segment reporting purposes for the following reasons: (i) these segments are economically similar; (ii) the nature of the service, waste collection and disposal, is the same and transferable across locations; (iii) the type and class of customer is consistent among our regions and districts; (iv) the methods used to deliver services are essentially the same (e.g. containers collect waste at market locations and trucks collect and transfer waste to landfills); and (v) the regulatory environment is consistent within Canada.
We do not have significant (in volume or dollars) inter-segment operation-related transactions. Summarized financial information concerning our reportable segments for the three months ended March 31, 2010 and 2009 is as follows (unaudited):
Three Months Ended March 31, 2010 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 58,567 | $ | 60,826 | $ | — | $ | 119,393 | ||||||||
Depreciation, depletion and amortization | 6,485 | 5,389 | 275 | 12,149 | ||||||||||||
Income (loss) from operations | 12,453 | 13,199 | (8,373 | ) | 17,279 | |||||||||||
Capital expenditures | 2,711 | 3,678 | 56 | 6,445 |
Three Months Ended March 31, 2009 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 50,243 | $ | 45,549 | $ | — | $ | 95,792 | ||||||||
Depreciation, depletion and amortization | 6,344 | 3,778 | 238 | 10,360 | ||||||||||||
Income (loss) from operations | 11,366 | 6,725 | (5,766 | ) | 12,325 | |||||||||||
Capital expenditures | 2,646 | 4,187 | 111 | 6,944 |
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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 Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this report as well as our annual report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission, including the factors set forth in the section titled “Cautionary Statement Regarding Forward-Looking Statements” and factors affecting future results as well as our other filings made with the Securities and Exchange Commission.
Overview
We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are located in the United States and Canada. Our U.S. operations are located in Florida and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia).
Sources of Revenue
Our revenue consists primarily of fees charged to customers for solid waste collection, landfill disposal, transfer and recycling services.
We derive our collection revenue from services provided to commercial, industrial and residential customers. Collection services are generally performed under service agreements or pursuant to contracts with municipalities. We recognize revenue when services are rendered. Amounts billed to customers prior to providing the related services are reflected as deferred revenue and reported as revenue in the periods in which the services are rendered.
We provide collection services for commercial and industrial customers generally under one to five year service agreements. We determine the fees we charge our customers based on a variety of factors, including collection frequency, level of service, route density, the type, volume and weight of the 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. Our contracts with commercial and industrial customers typically allow us to pass on increased costs resulting from variable items such as disposal and fuel costs and surcharges. Our ability to pass on cost increases is however, sometimes limited by the terms of our contracts.
We provide residential waste collection services through a variety of contractual arrangements, including contracts with municipalities, owners and operators of large residential complexes, mobile home parks and homeowner associations or through subscription arrangements with individual homeowners. Our contracts with municipalities are typically for a term of three to ten years and contain a formula, generally based on a predetermined published price index, for adjustments to fees to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities contain renewal provisions. The fees we charge for residential solid waste collection services provided on a subscription basis are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices we charge in the market for similar services.
We charge our landfill and transfer station customers a tipping fee on a per ton or per cubic yard basis for disposing of their solid waste at our transfer stations and landfills. We generally base our landfill tipping fees on market factors and the type and weight of, or volume of the waste deposited. We generally base our transfer station tipping fees on market factors and the cost of processing the waste deposited at the transfer station, the cost of transporting the waste to a disposal facility and the cost of disposal.
Material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers. However, sustained declines in the price of recycled commodities, including but not limited to, aluminum, used corrugated cardboard or news print would lower our revenue from such commodities and adversely affect our margins and profitability.
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Expense Structure
Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle, liability and workers’ compensation insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of our waste volume. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to third party landfill or transfer station operators. We believe that internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. We expect that our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of collection volumes to our landfill sites.
In markets where we do not have our own landfills, we seek to secure disposal arrangements with municipalities or private owners of landfills or transfer stations. In these markets, our ability to maintain competitive prices for our collection services is generally dependent upon our ability to secure competitive disposal pricing. If owners of third party disposal sites discontinue our arrangements, we would have to seek alternative disposal sites, which could impact our profitability and cash flow. In addition, if third party disposal sites increase their tipping fees and we are unable to pass these increases on to our collection customers, our profitability and cash flow would be negatively impacted.
We believe that the age and condition of our vehicle fleet has a significant impact on operating costs, including, but not limited to, repairs and maintenance, insurance and driver training and retention costs. Through capital investment, we seek to maintain an average fleet age of approximately six to seven years. We believe that this enables us to best control our repair and maintenance costs, safety and insurance costs and employee turnover related costs.
Selling, general and administrative expenses include managerial costs, information systems, sales force, administrative expenses and professional fees.
Depreciation, depletion and amortization includes depreciation of fixed assets over their estimated useful lives using the straight-line method, depletion of landfill costs, including capping, closure and post-closure obligations using the units-of-consumption method, and amortization of intangible assets including customer relationships and contracts and covenants not-to-compete, which are amortized over the expected life of the benefit to be received from such intangibles.
Costs associated with acquisitions are expensed as they are incurred. These costs may include transaction related costs and internal costs, including executive salaries, overhead and travel costs.
Recent Developments
Proposed Merger with IESI-BFC
On November 11, 2009, we entered into a merger agreement with IESI-BFC Ltd. (“IESI-BFC”), which provides for IESI-BFC to acquire us. IESI-BFC, through its subsidiaries, is one of North America’s largest full-service waste management companies, providing non-hazardous solid waste collection and landfill disposal services to commercial, industrial, municipal and residential customers in ten states and the District of the Columbia in the U.S., and five Canadian provinces.
On January 19, 2010, IESI-BFC filed a registration statement with the SEC that included a preliminary proxy statement for such merger. Waste Services and IESI-BFC are working to complete the merger as quickly as practicable and we currently expect the merger to be completed during the second calendar quarter of 2010. However, neither Waste Services nor IESI-BFC can predict the effective time of the merger because it is subject to conditions beyond each company’s control, including approval of the merger by our stockholders and necessary regulatory approvals. If the merger is completed, each of our shareholders will receive 0.5833 IESI-BFC common shares (plus cash in lieu of any fractional share interests) for each share of our common stock held immediately prior to the completion of the merger, subject to adjustment under limited circumstances.
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If the merger agreement is terminated under certain circumstances, including circumstances involving the acceptance of a superior acquisition proposal by us or a change in recommendation by our board of directors or an intentional breach by us, we will be required to pay IESI-BFC a termination fee of $11.0 million, plus all out-of-pocket costs up to a maximum of $3.5 million for professional and advisory services and other expenses reasonably incurred by IESI-BFC in connection with the merger. Upon termination of the merger agreement by us resulting from IESI-BFC’s intentional breach of the merger agreement, IESI-BFC will be required to pay us $11.0 million plus an amount equal to all out-of-pocket costs up to $3.5 million for professional and advisory services and other expenses reasonably incurred by us in connection with the merger. Waste Services or IESI-BFC may be required to pay the other party an expense reimbursement amount of up to $3.5 million in certain other specified circumstances.
Acquisitions
In January 2010, we acquired a permitted construction and demolition transfer station in Miami-Dade County, Florida from County Recycling and Waste Transfer for approximately $4.4 million in cash. We intend to use this facility as a platform to build our roll-off business in Miami-Dade County, Florida and to internalize the waste volume into our existing landfill facilities.
In January 2010, we acquired three material recovery facilities located on Vancouver Island, British Columbia from Vancouver Island Recycling Centres for C$3.1 million. This acquisition allows us to have more control over the marketing, sales and disposal of recyclables collected in our Vancouver Island operations.
In October 2009, we acquired Republic Services’ operations in Miami-Dade County, Florida for $32.0 million in cash plus an adjustment for working capital. We are internalizing waste volumes from this acquisition into our existing transfer station and landfill facilities.
In September 2009, we acquired the Miami-Dade County, Florida hauling operations of DisposAll of South Florida, Inc. (“DisposAll”) for approximately $15.6 million, of which $1.3 million was paid by way of a disposal credit for future fees charged to DisposAll for waste disposed at certain of our transfer station and landfill facilities. We are internalizing the waste flow from this acquisition into our existing transfer station and landfill facilities.
During July 2009, we entered into an agreement to acquire 875 acres of agricultural land in Hardee County, Florida, subject to the land being permitted for the operation of a Class I landfill. The purchase price, at the seller’s option, will be either (i) a lump sum payment of $10.0 million to $11.6 million depending on the timing of the closing of the transaction and payable on closing or (ii) a portion of the lump sum payment at closing, ranging from $1.0 million to $7.0 million, plus a future stream of annual payments calculated as the greater of a specified annual minimum, ranging from $0.2 million to $0.5 million, or a percentage of revenues from the operation of the landfill, until the property ceases to be used for landfill related operations, but not less than twenty years.
During 2009, we also acquired five separate “tuck-in” hauling operations in Florida for an aggregate purchase price of $3.6 million. We are internalizing construction and demolition waste volumes associated with these acquisitions into certain of our existing transfer station and landfill facilities.
Goodwill
As discussed more fully in our annual consolidated financial statements for the year ended December 31, 2009, as filed on Form 10-K, we test goodwill for impairment annually at December 31 using the two-step process. We evaluate a reporting unit for impairment if events or circumstances change between annual tests, indicating a possible impairment. We have defined our reporting units to be consistent with our operating segments: Eastern Canada, Western Canada and Florida. In determining fair value, we utilize discounted future cash flows. However, we may test the results of fair value under discounted cash flows using (i) operating results based on a comparative multiple of earnings or revenues; (ii) offers from interested investors, if any; or (iii) appraisals. Significant estimates used in the fair value calculation utilizing discounted future cash flows include, but are not limited to: (i) estimates of future revenue and expense growth by reporting unit; (ii) future estimated effective tax rates; (iii) future estimated capital expenditures as well as future required investments in working capital; (iv) estimated discount rate; and (v) the future terminal value of the reporting unit, which is based on its ability to exist into perpetuity.
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The estimated fair values of our reporting units, as calculated for the annual impairment test as of December 31, 2009, exceeded the carrying values of the reporting units by approximately 10% to 75%. The Florida reporting unit represented the low end of this range due in part to the severity of the recent economic downturn experienced in the Florida market. We did not conduct an interim impairment test during the three months ended March 31, 2010 as we do not believe indicators of possible impairment were present during such period. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of acquired businesses. Future events, including but not limited to continued declines in economic activity, loss of contracts or a significant number of customers or a rapid increase in costs or capital expenditures, could cause us to conclude that impairment indicators exist and that goodwill associated with the affected reporting units is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates and judgment about future performance, cash flows and fair value, our future results could be affected if these current estimates of future performance and fair value change. Any resulting goodwill impairment loss could have a material adverse impact on our financial condition and results of operations.
Results of Operations for the Three Months Ended March 31, 2010 and 2009
A portion of our operations is domiciled in Canada. For each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of our Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of our Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of our Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income or loss. Monetary assets and liabilities are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income. Currently, we do not hedge our exposure to changes in foreign exchange rates.
Exchange rates for the Canadian dollar to U.S. dollar that are applicable for the periods covered by the accompanying Unaudited Condensed Consolidated Financial Statements are summarized as follows:
As of: | ||||
March 31, 2010 | $ | 0.9844 | ||
December 31, 2009 | 0.9515 | |||
For the three months ended: | ||||
March 31, 2010 | 0.9615 | |||
March 31, 2009 | 0.8035 |
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Our consolidated results of operations for the three months ended March 31, 2010 and 2009 are as follows (in thousands):
Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
Florida | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 58,567 | 100.0 | % | $ | 60,826 | 100.0 | % | $ | 119,393 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 34,952 | 59.7 | % | 37,788 | 62.1 | % | 72,740 | 60.9 | % | |||||||||||||||
Selling, general and administrative expense | 9,083 | 15.5 | % | 8,175 | 13.4 | % | 17,258 | 14.5 | % | |||||||||||||||
Depreciation, depletion and amortization | 6,510 | 11.1 | % | 5,639 | 9.3 | % | 12,149 | 10.2 | % | |||||||||||||||
Loss (gain) on sale of property and equipment, foreign exchange and other | 25 | 0.0 | % | (58 | ) | -0.1 | % | (33 | ) | -0.1 | % | |||||||||||||
Income from operations | $ | 7,997 | 13.7 | % | $ | 9,282 | 15.3 | % | $ | 17,279 | 14.5 | % | ||||||||||||
Three Months Ended March 31, 2009 | ||||||||||||||||||||||||
Florida | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 50,243 | 100.0 | % | $ | 45,549 | 100.0 | % | $ | 95,792 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 31,975 | 63.6 | % | 31,233 | 68.6 | % | 63,208 | 66.0 | % | |||||||||||||||
Selling, general and administrative expense | 6,446 | 12.8 | % | 6,763 | 14.8 | % | 13,209 | 13.8 | % | |||||||||||||||
Depreciation, depletion and amortization | 6,364 | 12.7 | % | 3,996 | 8.8 | % | 10,360 | 10.8 | % | |||||||||||||||
Loss (gain) on sale of property and equipment, foreign exchange and other | (3,474 | ) | -6.9 | % | 164 | 0.4 | % | (3,310 | ) | -3.5 | % | |||||||||||||
Income from operations | $ | 8,932 | 17.8 | % | $ | 3,393 | 7.4 | % | $ | 12,325 | 12.9 | % | ||||||||||||
Revenue
A summary of our revenue is as follows (in thousands):
Three Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Collection | $ | 96,843 | 71.8 | % | $ | 82,261 | 77.2 | % | ||||||||
Landfill disposal | 15,171 | 11.3 | % | 9,574 | 9.0 | % | ||||||||||
Transfer station | 17,799 | 13.2 | % | 12,974 | 12.2 | % | ||||||||||
Material recovery facilities | 4,767 | 3.5 | % | 1,572 | 1.5 | % | ||||||||||
Other specialized services | 214 | 0.2 | % | 201 | 0.1 | % | ||||||||||
134,794 | 100.0 | % | 106,582 | 100.0 | % | |||||||||||
Intercompany elimination | (15,401 | ) | (10,790 | ) | ||||||||||||
$ | 119,393 | $ | 95,792 | |||||||||||||
Revenue was $119.4 million and $95.8 million for the three months ended March 31, 2010 and 2009, respectively, an increase of $23.6 million or 24.6%. The increase in revenue from our Florida operations for the three months ended March 31, 2010 of $8.3 million or 16.6% was driven by increased landfill, recycling and transfer station waste volumes of $2.3 million, price increases of $2.0 million, which were affected by improved commodity prices of $0.7 million, increased fuel surcharges of $0.7 million and acquisitions of $5.6 million. Offsetting these increases was a decrease in collection volumes of $2.0 million and other decreases of $0.3 million.
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The increase in revenue from our Canadian operations for the three months ended March 31, 2010 of $15.3 million or 33.5% was due to increased landfill, recycling and transfer station waste volumes of $3.3 million, price increases of $2.8 million, which were affected by improved commodity prices of $0.4 million, and acquisitions of $0.4 million. Offsetting these increases was a decrease in collection volumes of $1.2 million. The favorable effect of foreign exchange movements was $10.0 million.
Cost of Operations
Cost of operations was $72.7 million and $63.2 million for the three months ended March 31, 2010 and 2009, respectively, an increase of $9.5 million or 15.1%. As a percentage of revenue, cost of operations was 60.9% and 66.0% for the three months ended March 31, 2010 and 2009, respectively.
The increase in cost of operations from our Florida operations for the three months ended March 31, 2010 of $3.0 million or 9.3% was due to increased third-party disposal costs of $1.1 million and higher labor costs of $0.5 million, primarily related to recently completed acquisitions, increased fuel costs of $1.0 million and other net operating cost increases of $0.4 million. As a percentage of revenue, cost of operations for our Florida operations was 59.7% and 63.6% for the three months ended March 31, 2010 and 2009, respectively. The improvement in our domestic gross margin is primarily due to higher margin landfill and transfer station waste volumes, increased commodity pricing and cost controls related to route reductions and consolidations.
The increase in cost of operations from our Canadian operations for the three months ended March 31, 2010 of $6.5 million or 21.0% was primarily due to the unfavorable effect of foreign exchange movements of $6.2 million. After considering foreign exchange rate changes, cost of operations from our Canadian operations increased $0.3 million or 1.1%, which primarily relates to increased labor costs of $0.4 million, increased fuel costs of $0.3 million and other cost increases of $0.1 million, offset by lower third-party disposal costs of $0.5 million, primarily related to increased internalization in Western Canada. As a percentage of revenue, cost of operations for our Canadian operations was 62.1% and 68.6% for the three months ended March 31, 2010 and 2009, respectively. The improvement in our Canadian gross margin is primarily due to higher margin landfill and transfer station waste volumes and increased commodity pricing.
Selling, General and Administrative Expense
Selling, general and administrative expense was $17.3 million and $13.2 million for the three months ended March 31, 2010 and 2009, respectively, an increase of $4.1 million or 30.7%. As a percentage of revenue, selling, general and administrative expense was 14.5% and 13.8% for the three months ended March 31, 2010 and 2009, respectively. The overall increase in selling, general and administrative expense primarily relates to $1.3 million of costs incurred during the first quarter of 2010 relative to our proposed merger with IESI-BFC, which is discussed more fully above, increased costs for our bonus program of $0.5 million, increased stock-based compensation of $0.2 million and other net cost increases of $0.8 million. The unfavorable effect of foreign exchange movements was $1.3 million.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization was $12.1 million and $10.4 million for the three months ended March 31, 2010 and 2009, respectively, an increase of $1.7 million or 17.3%. As a percentage of revenue, depreciation, depletion and amortization was 10.2% and 10.8% for the three months ended March 31, 2010 and 2009, respectively. Amortization of intangible assets increased $0.4 million primarily due to acquisitions completed in the latter part of 2009 to March 31, 2010. Foreign exchange rate movements had an unfavorable effect of $0.9 million. Landfill depletion increased $0.2 million due to increased waste volumes, which were offset by lower overall depletion rates. Landfill depletion rates for our U.S. landfills ranged from $2.74 to $6.38 per ton and $5.67 to $6.09 per ton during the three months ended March 31, 2010 and 2009, respectively. Landfill depletion rates for our Canadian landfills ranged from C$3.24 to C$9.41 per tonne and C$0.66 to C$8.01 per tonne during the three months ended March 31, 2010 and 2009, respectively.
Gain on Sale of Property and Equipment, Foreign Exchange and Other
Gain on sale of property and equipment, foreign exchange and other was less than $0.1 million and $3.3 million for the three months ended March 31, 2010 and 2009, respectively. Foreign exchange loss or gain relates to the re-measuring of U.S. dollar denominated monetary accounts held by our Canadian operations into Canadian dollars. During the first quarter of 2009, we sold certain land and buildings in our Florida operations for $6.0 million, resulting in a gain of $3.3 million, which was the primary component of the gain for the three months ended March 31, 2009.
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Interest Expense
The components of interest expense for the three months ended March 31, 2010 and 2009 are as follows (in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Senior Secured Credit Facilities | $ | 1,891 | $ | 2,259 | ||||
Senior Subordinated Notes | 4,988 | 3,800 | ||||||
Amortization of debt issue costs and discounts | 982 | 839 | ||||||
Other interest expense | 561 | 600 | ||||||
$ | 8,422 | $ | 7,498 | |||||
Interest expense was $8.4 million and $7.5 million for the three months ended March 31, 2010 and 2009, respectively, an increase of $0.9 million or 12.3%. Interest expense on the Senior Secured Credit Facilities decreased $0.4 million for the three months ended March 31, 2010 due primarily to lower average interest rates and lower overall balances outstanding during the period. The weighted average interest rate on borrowings under the U.S. dollar denominated Senior Secured Credit Facilities was 3.8% and 4.1% for the three months ended March 31, 2010 and 2009, respectively. The weighted average interest rate on borrowings under the Canadian dollar denominated Senior Secured Credit Facilities was 4.0% and 4.7% for the three months ended March 31, 2010 and 2009, respectively. Interest expense on the Senior Subordinated Notes increased $1.2 million for the three months ended March 31, 2010 due to interest on an additional $50.0 million aggregate principal of Senior Subordinated Notes that were issued on September 21, 2009.
Change in Fair Value of Warrants
We have outstanding warrants for the purchase of 2,383,333 common shares that are accounted for as liabilities. These warrants, which have exercise price reset features, have a strike price of $8.96 per share, expire in May 2010 and are recorded at fair value with any changes in fair value reflected in earnings. The fair value of these common stock purchase warrants decreased to $2.7 million as of March 31, 2010. We recognized a benefit of $0.2 million and $1.8 million for the change in fair value of these warrants for the three months ended March 31, 2010 and 2009, respectively.
Income Tax Provision
The provision for income taxes for the three months ended March 31, 2010 was $3.5 million, which was comprised of a $2.0 million provision for our U.S. operations and parent company and a $1.5 million provision for our Canadian operations. We provide a 100% valuation allowance for our net operating loss carry-forwards generated in the United States. In recording the valuation allowance, we considered our historical operating results, a five year forecast of future operations and future reversals of our existing temporary differences. As of the date of this filing, there are no material tax planning strategies being considered that would trigger realization of the U.S. net operating losses. Given the history of operating losses in the U.S., the future reversals of temporary differences and the magnitude of the net operating loss carry-forward, we concluded as of March 31, 2010 that it is more likely than not that the U.S. deferred tax assets would not be recovered from future U.S. taxable income and accordingly, we believe a full valuation allowance against these deferred tax assets continues to be necessary. As of March 31, 2010, our valuation allowance totaled $51.7 million, of which $44.4 million relates to our U.S. operations.
In addition to the valuation allowance recorded for our net operating loss carry-forwards generated in the U.S., we also provide deferred tax liabilities generated by our tax deductible goodwill. The effect of not benefiting our domestic net operating loss carry-forwards and separately providing deferred tax liabilities for our tax deductible goodwill is to increase our domestic effective tax rate above the statutory amount that would otherwise be expected. Should we generate taxable income domestically, we expect our deferred tax liabilities generated from goodwill will offset other deferred tax assets and we will not provide for them separately. However, we currently do not foresee a decrease in our domestic effective tax rate for the remainder of 2010. We have not paid any domestic cash income taxes during the periods presented nor do we expect to pay any during the remainder of 2010.
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We recognize a provision for foreign taxes on our Canadian income including taxes for stock-based compensation, which is a non-deductible item for income tax reporting in Canada. Since stock-based compensation is a non-deductible expense and a permanent difference, our future effective tax rate in Canada is affected by the level of stock-based compensation incurred in a particular period. We expect that during the remainder of 2010, our Canadian statutory rate will approximate 32.0%. However, as a result of stock-based compensation, our effective rate is expected to approximate 32.0% to 34.0%. For the three months ended March 31, 2010, we paid C$1.5 million relative to our estimated 2010 tax liabilities in Canada. We expect our 2010 estimated tax payments to approximate C$0.8 million per quarter for the remainder of 2010.
The provision for income taxes for the three months ended March 31, 2009 was $2.6 million, which was comprised of a $1.8 million provision for our U.S. operations and parent company and a $0.8 million provision for our Canadian operations.
Liquidity and Capital Resources
Our principal capital requirements are to fund capital expenditures, and to fund debt service and asset acquisitions. Significant sources of liquidity are cash on hand, working capital, borrowings from our Senior Secured Credit Facilities and proceeds from debt and/or equity issuances. The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this report.
Senior Secured Credit Facilities
On October 8, 2008 we refinanced our Senior Secured Credit Facilities with new Senior Secured Credit Facilities (the “Credit Facilities”) with a consortium of new lenders. The Credit Facilities provide for a revolving credit facility of $124.8 million, which is available to either our U.S. operations or our Canadian operations, in U.S. or Canadian dollars, and C$16.3 million, which is available to our Canadian operations. The new Credit Facilities also provide for term loans with initial principal balances of $39.9 million to our U.S. operations and C$132.2 million to our Canadian operations. The revolver commitments terminate on October 8, 2013 and the term loans mature in specified quarterly installments through October 8, 2013. The Credit Facilities are available to us as base rate loans, Eurodollar loans or Bankers Acceptance loans, plus an applicable margin, as defined, at our option in the respective lending jurisdiction. The Credit Facilities are secured by all of our assets, including those of our domestic and foreign subsidiaries, and are guaranteed by all of our domestic and foreign subsidiaries. As of March 31, 2010, there was $25.0 million and C$9.0 million outstanding on the U.S. and Canadian dollar denominated revolving credit facility, respectively, and $11.6 million and C$11.2 million of revolver capacity was used to support outstanding letters of credit in the U.S. and Canada, respectively. As of March 31, 2010, we had unused availability of $84.4 million under our revolving credit facilities, subject to certain conditions. As of April 26, 2010, there was $28.0 million and C$9.0 million drawn on the revolving credit facility and $11.6 million and C$11.2 million of revolver capacity was used to support outstanding letters of credit in the U.S. and Canada, respectively, and we had unused availability of $81.3 million under our revolving credit facilities, subject to certain conditions.
Our Credit Facilities contain certain financial and other covenants that restrict our ability to, among other things, make capital expenditures, incur indebtedness, incur liens, dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions. Our financial covenants include: (i) maximum total leverage; (ii) maximum senior secured leverage; and (iii) minimum interest coverage. The covenants and restrictions limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital. The following table sets forth our financial covenant levels for the current and each of the following four quarters:
Maximum | Maximum | Minimum | ||||||||||
Consolidated | Consolidated | Consolidated | ||||||||||
Leverage | Senior Secured | Interest | ||||||||||
Ratio | Leverage Ratio | Coverage Ratio | ||||||||||
First quarter - 2010 | 4.25 : 1.00 | 2.75 : 1.00 | 2.75 : 1.00 | |||||||||
Second quarter - 2010 | 4.25 : 1.00 | 2.75 : 1.00 | 2.75 : 1.00 | |||||||||
Third quarter - 2010 | 4.00 : 1.00 | 2.75 : 1.00 | 2.75 : 1.00 | |||||||||
Fourth quarter - 2010 | 4.00 : 1.00 | 2.75 : 1.00 | 2.75 : 1.00 | |||||||||
First quarter - 2011 | 4.00 : 1.00 | 2.75 : 1.00 | 2.75 : 1.00 |
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As of March 31, 2010, the actual ratios achieved for the financial covenants in the above table are as follows: Maximum Consolidated Leverage Ratio – 3.33 to 1.00; Maximum Consolidated Senior Secured Leverage Ratio – 1.59 to 1.00; and Minimum Consolidated Interest Coverage Ratio – 4.49 to 1.00. As of March 31, 2010, we were in compliance with the financial covenants of our Credit Facilities and we expect to be in compliance with the financial covenants of our Credit Facilities in future periods.
Other Secured Notes Payable
Included in our other secured notes payable is a $10.5 million non-interest bearing promissory note with payments of $125,000 per month until June 2014. The net present value of the remaining payments due under the note as of March 31, 2010 approximates $5.4 million and accretes interest at 7.8%. The note is secured by a transfer station and related permit.
Senior Subordinated Notes
On April 30, 2004, we completed a private offering of 91/2% Senior Subordinated Notes (“Senior Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. On September 21, 2009 we completed an additional private placement of $50.0 million aggregate principal of our Senior Subordinated Notes, with terms identical to the initial offering. This additional private placement resulted in gross proceeds of $49.5 million with an additional $2.1 million received from the purchasers for accrued interest. The Senior Subordinated Notes mature on April 15, 2014. Interest on the Senior Subordinated Notes is payable semiannually on October 15 and April 15. The Senior Subordinated Notes are redeemable, in whole or in part, at our option, on or after April 15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in annual increments to par on or after April 15, 2012, together with accrued interest to the redemption date. Upon a change of control, as such term is defined in the Indenture, we are required to offer to repurchase all the Senior Subordinated Notes at 101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay indebtedness under our Credit Facilities.
The Senior Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Credit Facilities, rank equally with any unsecured senior subordinated indebtedness and are senior to our existing and future subordinated indebtedness. Our obligations with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of our existing domestic and foreign subsidiaries.
Waste Services is the primary obligor under the Senior Subordinated Notes. Waste Services has no independent operating assets or operations, and the guarantees of our domestic and Canadian subsidiaries, which are all wholly owned subsidiaries, are full and unconditional and joint and several with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any. In October 2008 and pursuant to certain amendments to the Indenture to the Senior Subordinated Notes, our Canadian subsidiaries became guarantors under the Senior Subordinated Notes. Prior to these amendments, our Canadian subsidiaries did not guarantee the Senior Subordinated Notes.
The Senior Subordinated Notes contain certain covenants that, in certain circumstances and subject to certain limitations and qualifications, restrict, among other things: (i) the incurrence of additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) transactions with affiliates; and (vi) certain sales of assets.
The indenture relating to our Senior Subordinated Notes contains cross default provisions (i) should we fail to pay the principal amount of other indebtedness when due (after applicable grace periods) or the maturity date of that indebtedness is accelerated and the amount in question is $10.0 million or more or (ii) should we fail to pay judgments in excess of $10.0 million in the aggregate for more than 60 days.
Surety Bonds, Letters of Credit and Insurance
Municipal solid waste service contracts, permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. To collateralize our obligations, as of March 31, 2010, we provided customers, various regulatory authorities and our insurer with such bonds and letters of credit amounting to approximately $81.5 million, which is comprised of $45.8 million and C$13.3 million of performance and surety bonds or other means of financial assurance and $11.6 million and C$11.2 million of letters of credit. The majority of these obligations are renewed on an annual basis.
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Our domestic based workers’ compensation, automobile and general liability insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of March 31, 2010 and included in the $81.5 million of bonds and letters of credit discussed previously, we have posted a letter of credit with our U.S. insurer of approximately $10.9 million to secure the liability for losses within the deductible limit. Provisions for retained claims are made by charges to expense based on periodic evaluations by management of the estimated ultimate liabilities on both reported and incurred but not reported claims. Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments become known.
Cash Flows
The following discussion relates to the major components of the changes in cash flows for the three months ended March 31, 2010 and 2009.
Cash Flows from Operating Activities
Cash provided by operating activities was $21.2 million and $16.9 million for the three months ended March 31, 2010 and 2009, respectively. The increase in cash provided by operating activities is primarily due to increased revenues and improved operating margins for the first three months of 2010 compared to the same period in 2009, which is discussed elsewhere in this report. Offsetting the overall increase was cash used for working capital of $0.7 million for the three months ended March 31, 2010 compared to cash provided by working capital changes of $4.1 million for the same period in the previous year.
Cash Flows from Investing Activities
Cash used in investing activities was $13.2 million and $1.0 million for the three months ended March 31, 2010 and 2009, respectively. For the three months ended March 31, 2010, cash used in investing activities relates to capital expenditures of $6.4 million and cash used in business combinations of $7.0 million. For the three months ended March 31, 2009, cash used in investing activities relates to capital expenditures and cash used in business combinations of $7.5 million, offset by proceeds from the sale of property and equipment of $6.5 million.
Cash Flows from Financing Activities
Cash used in financing activities was $6.1 million and $11.8 million for the three months ended March 31, 2010 and 2009, respectively. Cash used in financing activities for the three months ended March 31, 2010 and 2009 primarily relates to principal repayments of our Credit Facilities.
Off-Balance Sheet Financing
We have no off-balance sheet debt or similar obligations, other than our letters of credit and performance and surety bonds discussed previously, which are not debt. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt.
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Landfill Sites
The following table reflects landfill capacity activity for the three months ended March 31, 2010 for permitted landfills owned by us (in thousands of cubic yards):
March 31, 2010 | ||||||||||||||||
Balance, | Changes in | Balance, | ||||||||||||||
Beginning | Engineering | Airspace | End | |||||||||||||
of Period | Estimates | Consumed | of Period | |||||||||||||
United States | ||||||||||||||||
Permitted capacity | 77,821 | (167 | ) | (527 | ) | 77,127 | ||||||||||
Probable expansion capacity | — | — | — | — | ||||||||||||
Total available airspace | 77,821 | (167 | ) | (527 | ) | 77,127 | ||||||||||
Number of sites | 4 | — | — | 4 | ||||||||||||
Canada | ||||||||||||||||
Permitted capacity | 15,406 | — | (226 | ) | 15,180 | |||||||||||
Probable expansion capacity | — | — | — | — | ||||||||||||
Total available airspace | 15,406 | — | (226 | ) | 15,180 | |||||||||||
Number of sites | 3 | — | — | 3 | ||||||||||||
Total | ||||||||||||||||
Permitted capacity | 93,227 | (167 | ) | (753 | ) | 92,307 | ||||||||||
Probable expansion capacity | — | — | — | — | ||||||||||||
Total available airspace | 93,227 | (167 | ) | (753 | ) | 92,307 | ||||||||||
Number of sites | 7 | — | — | 7 |
Trend Information
Seasonality
We expect the results of our Canadian operations to vary seasonally, with revenue typically lowest in the first quarter of the year, higher in the second and third quarters, and lower in the fourth quarter than in the third quarter. The seasonality is attributable to a number of factors including:
• | Less solid waste is generated during the late fall, winter and early spring because of decreased construction and demolition activity. | ||
• | Certain operating costs are higher in the winter months because winter weather conditions slow waste collection activities, resulting in higher labor costs, and rain and snow increase the weight of collected waste, resulting in higher disposal costs, which are calculated on a per ton basis. | ||
• | During the summer months, there are more tourists and part-time residents in some of our service areas, resulting in more residential and commercial collection. |
Consequently, we expect operating income to be generally lower during the winter. The effect of seasonality on our results of operations from our U.S. operations, which are located in warmer climates than our Canadian operations, is less significant than that of our Canadian operations.
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New Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”). ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. FASB Accounting Standards Codification (“ASC”) Topic 718 was amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies for equity classification. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. We do not anticipate that the adoption of this guidance will have a material impact on our financial position and results of operations.
In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which amends ASC Topic 855, “Subsequent Events.” The amendments to ASC Topic 855 do not change existing requirements to evaluate subsequent events, but: (i) defines a “SEC Filer,” which we are; (ii) removes the definition of a “Public Entity”; and (iii) for SEC Filers, reverses the requirement to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was effective for us upon issuance. This guidance did not have a material impact on our financial position and results of operations.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures for (i) transfers of assets and liabilities in and out of levels one and two fair value measurements, including a description of the reasons for such transfers and (ii) additional information in the reconciliation for fair value measurements using significant unobservable inputs (level three). This guidance also clarifies existing disclosure requirements including (i) the level of disaggregation used when providing fair value measurement disclosures for each class of assets and liabilities and (ii) the requirement to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for level two and three assets and liabilities. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in the roll forward for level three fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of this guidance has not had a material impact on our financial position and results of operations.
Disclosure Regarding Forward-Looking Statements and Factors Affecting Future Results
This Form 10-Q contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Some of these forward-looking statements include forward-looking phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “intends,” “may,” “should” or “will continue,” or similar expressions or the negatives thereof or other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions.
Such statements reflect our current views regarding future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that forward-looking statements may express or imply, including, among others:
• | effect on our business resulting from uncertainties surrounding the proposed merger with IESI-BFC Ltd. and costs associated with the proposed merger; | ||
• | our substantial indebtedness and the significant restrictive covenants in our various credit facilities and our ability to finance acquisitions and / or capital expenditures with cash on hand, debt or equity offerings; | ||
• | our ability to pay principal debt amounts due at maturity; | ||
• | our business is capital intensive and may consume cash in excess of cash flow from operations and borrowings; | ||
• | our ability to vertically integrate our operations; | ||
• | our ability to maintain and perform our financial assurance obligations; | ||
• | changes in regulations affecting our business and costs of compliance; |
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• | revocation of existing permits and licenses or the refusal to renew or grant new permits and licenses, which are required to enable us to operate our business or implement our growth strategy; | ||
• | our domestic operations are concentrated in Florida, which may be subject to specific economic conditions that vary from those nationally as well as weather related events that may impact our operations; | ||
• | construction, equipment delivery or permitting delays for our transfer stations or landfills; | ||
• | our ability to successfully implement our corporate strategy and integrate any acquisitions we undertake; | ||
• | our ability to negotiate renewals of existing service agreements at favorable rates; | ||
• | our ability to enhance profitability of certain aspects of our operations in markets where we are not internalized through either divestiture or asset swaps; | ||
• | costs and risks associated with litigation; and | ||
• | changes in general business and economic conditions, commodity pricing, exchange rates, the financial markets and accounting standards or pronouncements. |
Some of these factors are discussed in more detail in our annual report on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2009, included under Item 1A. of the annual report, “Risk Factors”. If one or more of these risks or uncertainties affects future events and circumstances, or if underlying assumptions do not materialize, actual results may vary materially from those described in this Form 10-Q and our annual report as anticipated, believed, estimated or expected, and this could have a material adverse effect on our business, financial condition and the results of our operations. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
A portion of our operations is domiciled in Canada. For each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of our Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of our Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of our Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income or loss. Monetary assets and liabilities are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income. Currently, we do not hedge our exposure to changes in foreign exchange rates. For the three months ended March 31, 2010, we estimate that a 10.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease operating profit from our Canadian operations by approximately $0.9 million.
A portion of the Credit Facilities is denominated and payable in Canadian dollars, which totaled $123.0 million as of March 31, 2010. We estimate that a 10.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar as of March 31, 2010 would increase or decrease the reported amount due under the Credit Facilities by approximately $12.3 million. We estimate that a 10.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease interest expense by approximately $0.1 million for the three months ended March 31, 2010.
We are exposed to variable interest rates under our Credit Facilities, which are available to us as base rate loans, Eurodollar loans or Bankers Acceptance loans, plus an applicable margin, as defined, at our option in the respective lending jurisdiction. A hypothetical 10.0% change in interest rates relative to our Credit Facilities would increase cash interest expense by approximately $0.2 million for the three months ended March 31, 2010. We determined this impact by applying the hypothetical change to the weighted average variable interest rate at March 31, 2010 and then assessing this notional rate against the borrowings outstanding as of March 31, 2010.
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Item 4.Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit Committee.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Information regarding our legal proceedings may be found under the “Legal Proceedings” section of Note 14, “Commitments and Contingencies” to our Unaudited Condensed Consolidated Financial Statements contained elsewhere in this report.
Item 1A.Risk Factors
There have been no material changes in risk factors previously disclosed in our Form 10-K for the year ended December 31, 2009.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.Defaults Upon Senior Securities
None
Item 4. (Removed and Reserved)
Item 5.Other Information
None
Item 6.Exhibits
Exhibit 31.1 | Section 302 Certification of David Sutherland-Yoest, Chief Executive Officer. | |
Exhibit 31.2 | Section 302 Certification of Edwin D. Johnson, Chief Financial Officer. | |
Exhibit 32.1 | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
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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 SERVICES, INC. | ||||
Date: April 27, 2010 | ||||
By: | /s/ DAVID SUTHERLAND-YOEST | |||
David Sutherland-Yoest | ||||
President and Chief Executive Officer | ||||
By: | /s/ EDWIN D. JOHNSON | |||
Edwin D. Johnson | ||||
Executive Vice President, Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No | Description | |
Exhibit 31.1 | Section 302 Certification of David Sutherland-Yoest, Chief Executive Officer. | |
Exhibit 31.2 | Section 302 Certification of Edwin D. Johnson, Chief Financial Officer. | |
Exhibit 32.1 | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
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