UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-50808
WCA Waste Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 20-0829917 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
| One Riverway, Suite 1400 | |
| Houston, Texas | 77056 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 292-2400
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | | Name of Each Exchange On Which Registered |
| Common Stock | | The NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Common stock, par value $0.01 per share
Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes £ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 filer £ | Accelerated filer þ | Non-accelerated filer £ | Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2008 based on the closing sales price as reported on The Nasdaq Global Market on such date was approximately $55.3 million.
Number of shares of common stock outstanding as of March 2, 2009: 16,433,118 (excluding 1,073,957 shares of treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders are incorporated by reference into Part III of this annual report on Form 10-K. Except with respect to the information specifically incorporated by reference in this Form 10-K, the Proxy Statement for the Annual Meeting of Stockholders is not deemed to be filed as part hereof.
Introduction
We are a vertically integrated, non-hazardous solid waste management company providing non-hazardous solid waste collection, transfer, processing, and disposal services in the south and central regions of the United States. As of December 31, 2008, we served approximately 343,000 commercial, industrial and residential collection customers and 5,000 landfill and transfer station customers in Alabama, Arkansas, Colorado, Florida, Kansas, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. As of December 31, 2008, we owned and/or operated 24 landfills, 26 collection operations and 24 transfer stations/materials recovery facilities (MRFs). Of these facilities, two transfer stations and two landfills are fully permitted but not yet opened, and one transfer station is idle. Additionally, we currently operate but do not own four of the transfer stations.
WCA Waste Corporation was incorporated as a Delaware corporation in 2004 and, in connection with transactions related to its initial public offering, became the parent of WCA Waste Systems, Inc., its principal operating subsidiary. At that time, WCA Waste Systems, Inc. operated 32 solid waste operations through various subsidiaries. For a description of the transactions by which WCA Waste Corporation became the parent of WCA Waste Systems, Inc., please read note 1(b) to our consolidated financial statements included in this report. WCA Waste Corporation and its various subsidiaries have successfully integrated over 100 separate operating locations acquired in a total of 41 transactions. For information regarding acquisitions made since our initial public offering in 2004, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview—Acquisitions”.
WCA Waste Corporation is a holding company and all of our operations are conducted through our subsidiaries. Accordingly, unless the context requires otherwise, references in this annual report on Form 10-K to “WCA Waste,” “we,” “us,” or “our” refer to WCA Waste Corporation and our direct and indirect subsidiaries on a consolidated basis.
Industry Overview
Based on third party sources, we believe the non-hazardous solid waste industry in the United States generates approximately $52 billion in annual revenue. We believe that approximately $23.9 billion, or 46%, of the estimated annual industry revenue is generated by the three largest public companies in the industry with other public and privately-held companies representing approximately 28% and municipalities representing approximately 26% of the estimated annual industry revenue.
The solid waste industry can be divided among collection, transfer and disposal services. The collection and transfer operations of solid waste companies typically have lower margins than disposal service operations. By vertically integrating collection, transfer and disposal operations, operators seek to capture significant waste volumes and improve operating margins.
During the past three decades, our industry has experienced periods of substantial consolidation activity, though we believe it remains extremely fragmented. We believe that there are two factors that lead to consolidation:
| · | Stringent industry regulations have caused operating and capital costs to rise. Many local industry participants have found these costs difficult to bear and have decided to either close their operations or sell them to larger operators. |
| · | Larger operators are increasingly pursuing economies of scale by vertically integrating their operations or by utilizing their facility, asset and management infrastructure over larger volumes. Larger solid waste collection and disposal companies have become more cost-effective and competitive by controlling a larger waste stream and by gaining access to significant financial resources to make acquisitions. However, acquisitions by larger companies generally have less of an impact on their growth rates and revenues because the acquisitions tend to be small relative to the size of such companies. Accordingly, we believe that we have a greater opportunity for growth through acquisitions, when calculated as a percentage of revenue, than companies larger than us. |
Integration and Acquisitions
Vertical Integration And Internalization
Vertical integration is a core element of our operating strategy because it allows us to manage the waste stream from the point of collection through disposal, thereby maximizing the rate of waste internalization, increasing our operating margins and improving our operating cash flows. Internalization refers to the disposal of collected waste into the landfills we own. All collected waste must ultimately be processed or disposed of, with landfills being the main depository for such waste. Generally, the most cost efficient collection services occur within a 35-mile operating radius from the disposal site (up to 100 miles if a transfer station is used). Collection companies that do not own a landfill within such range from their collection routes will usually have to dispose of the waste they collect in landfills owned by third parties. Thus, owning a landfill in a market area provides substantial leverage in the waste management business.
As of December 31, 2008, we owned 24 landfills throughout the regions we serve, two of which, though fully permitted, have not yet commenced operations. We believe that our number of landfills coupled with the geographic locations of those landfills in the regions we serve positions us to maintain high levels of internalization within our existing markets. As a result of our vertical integration, for the years ended December 31, 2008 and 2007, we internalized approximately 73% and 74% of the total waste we collected, respectively.
Acquisition History and Outlook
Acquisitions have played a key role in our revenue growth and operating history. Our acquisition history has included both strategic acquisitions of landfill assets that have enabled us to enter new markets and “tuck-in” acquisitions of collection operations and transfer stations that have expanded our operations in those markets which we already serve. Collectively, the numerous acquisitions which we have completed since going public in June 2004 have contributed significantly to our overall growth and continue to have a material effect on our operating results. We have integrated all of our completed acquisitions into our existing operations; however, it may take up to a year to fully realize operating synergies for those acquisitions which we completed in 2008. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview—Acquisitions” for more information regarding our completed acquisitions. For a summary of the impact of the acquisitions during 2008, 2007 and 2006 on reported financial results for such periods, please read note 3 to our consolidated financial statements. For more information regarding our acquisition history and strategy, please see our annual reports on Form 10-K for each of the prior years.
Due to weakening market conditions, particularly in the housing and construction sectors, and mounting uncertainties in the credit and capital markets, we decided to reduce our acquisition efforts in 2008. While we intend to continue to seek and pursue attractive acquisition opportunities in the future, we do not anticipate substantial acquisition activity in 2009. Therefore, we have not established a capital investment target for 2009 acquisitions. Nevertheless, if an attractive opportunity presents itself in 2009, we have sufficient capacity under our senior credit facility and may elect to pursue one or more acquisitions which enable us to effectively leverage our existing infrastructure and maximize the internalization of waste.
Our Operations
Our operations consist of the collection, transfer, processing and disposal of solid waste. Our revenue mix for the years ended December 31, 2008, 2007 and 2006 is shown in the table below (dollars in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| | | $ | | | % | | | $ | | | % | | | $ | | | % | |
| Collection | | $ | 129,796 | | | | 62.4 | % | | $ | 114,217 | | | | 61.7 | % | | $ | 85,800 | | | | 57.4 | % |
| Disposal | | | 45,929 | | | | 22.1 | % | | | 43,803 | | | | 23.7 | % | | | 39,066 | | | | 26.1 | % |
| Transfer and other, net | | | 32,284 | | | | 15.5 | % | | | 26,920 | | | | 14.6 | % | | | 24,631 | | | | 16.5 | % |
| Total revenue | | $ | 208,009 | | | | 100.0 | % | | $ | 184,940 | | | | 100.0 | % | | $ | 149,497 | | | | 100.0 | % |
We have a broad and diverse customer base; no single customer accounted for more than 2% of our revenue for any of the years ended December 31, 2008, 2007 or 2006. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 12 to our consolidated financial statements for certain geographic information relating to our operations.
Collection Services
As of December 31, 2008, we provided solid waste collection services to approximately 343,000 industrial, commercial and residential customers in 12 states through 26 collection operations. In 2008, our collection revenue consisted of approximately 44% from services provided to industrial customers, 17% from services provided to commercial customers and 39% from services provided to residential customers.
In our commercial collection operations, we supply our customers with waste containers of various types and sizes. These containers are designed so that they can be lifted mechanically and emptied into a collection truck to be transported to a disposal facility. By using these containers, we can service most of our commercial customers with trucks operated by a single employee. Commercial collection services are generally performed under service agreements with a duration of one to five years with possible renewal options. Fees are generally determined by such considerations as individual market factors, collection frequency, the type of equipment we furnish, the type and volume or weight of the waste to be collected, the distance to the disposal facility and the cost of disposal.
Residential solid waste collection services often are performed under contracts with municipalities, which we generally secure by competitive bid and which give us exclusive rights to service all or a portion of the homes in these municipalities. These contracts usually range in duration from one to five years with possible renewal options. Residential solid waste collection services may also be performed on a subscription basis, in which individual households or homeowners’ or similar associations contract directly with us. The fees received for residential collection are based primarily on market factors, frequency and type of service, the distance to the disposal facility and the cost of disposal.
Additionally, we rent waste containers and provide collection services to construction, demolition and industrial sites. We load the containers onto our vehicles and transport them with the waste to either a landfill or a transfer station for disposal. We refer to this as “roll-off” collection. Roll-off collection services are generally performed on a contractual basis. Contract terms tend to be shorter in length and may vary according to the customers’ underlying projects.
Transfer and Disposal Services
Landfills are the main depository for solid waste in the United States. Solid waste landfills are built, operated, and tied to a state permit under stringent federal, state and local regulations. Currently, solid waste landfills in the United States must be designed, permitted, operated, closed and maintained after closure in compliance with federal, state and local regulations pursuant to Subtitle D of the Resource Conservation and Recovery Act of 1976, as amended. We do not operate hazardous waste landfills, which are subject to even greater regulations. Operating a solid waste landfill includes excavating, constructing liners, continually spreading and compacting waste and covering waste with earth or other inert material as required, final capping, closure and post-closure. The objectives of these operations are to maintain sanitary conditions, to ensure the best possible use of the airspace and to prepare the site so that it can ultimately be used for other end use purposes.
Access to a disposal facility is a necessity for all solid waste management companies. While access to disposal facilities owned or operated by third parties can be obtained, we believe it is preferable to internalize the waste streams. When we internalize waste we collect, we pay ourselves instead of a third party landfill operator and generally are able to realize higher operating margins and stronger operating cash flows.
In areas where we conduct collection operations remote from one of our landfills, we often pursue the acquisition or development of transfer stations. Transfer stations allow us to consolidate waste for subsequent transfer in larger loads, thereby making disposal in our otherwise remote landfills economically feasible. A transfer station is a facility located near residential and commercial collection routes where collection trucks take the solid waste that has been collected. The waste is unloaded from the collection trucks and reloaded onto larger transfer trucks for transportation to a landfill for final disposal. In addition to increasing our ability to internalize the waste our collection operations collect, using transfer stations reduces the costs associated with transporting waste to final disposal sites because the trucks we use for transfer have a larger capacity than collection trucks, thus allowing more waste to be transported to the disposal facility on each trip. It also increases the efficiency of our collection personnel and equipment because it allows them to focus more on collection. The following table reflects the number of transfer stations/MRFs we owned and operated by state as of December 31, 2008, 2007 and 2006.
| | 2008 | | | 2007 | | | 2006 | |
| Alabama | 3 | (1) | | 3 | (1) | | 3 | (1) |
| Arkansas | 2 | (1) | | 2 | (1) | | 2 | (1) |
| Florida | 4 | | | 4 | | | 5 | |
| Kansas | 1 | (1) | | 1 | (1) | | — | (1) |
| Missouri | 8 | (1) | | 7 | (1) | | 8 | (1) |
| North Carolina | 3 | | | 3 | | | 3 | |
| South Carolina | 1 | | | 1 | | | 1 | |
| Texas | 2 | | | 2 | | | 2 | |
| Total | 24 | | | 23 | | | 24 | |
(1) Includes four transfer stations we operated but did not own, one in Alabama, one in Arkansas, one in Kansas and one in Missouri.
The fees charged at disposal facilities are based on market factors, as well as the type and weight or volume of solid waste deposited and the type and size of the vehicles used in the transportation of the waste. The fees charged to third parties who deposit waste at our transfer stations are generally based on the type and volume or weight of the waste transferred and the distance to the disposal site.
Landfills
As of December 31, 2008, we owned 24 non-hazardous solid waste landfills in 11 states, two of which, though fully permitted, have not yet commenced operations. The following table sets forth certain information as of December 31, 2008 for each of our landfills. For information concerning accounting principles we use for landfill accounting and a description of our use of estimates, please refer to notes 1(f) and 2 to our consolidated financial statements.
| Landfill | | Location | | Permitted Waste | | Permitted Capacity (1) (Cu. Yds) | | Probable Expansion Capacity (2) (Cu. Yds) | | Total Capacity (3) (Cu. Yds) | | Remaining Permitted Life (4) (Years) | | | Total Remaining Life (3)(4) (Years) | |
| Oak Grove | | Arcadia, KS | | MSW | | | 6,414,574 | | | 24,524,000 | | | 30,938,574 | | | 27.0 | | | | 130.0 | |
| Black Oak | | Hartville, MO | | MSW | | | 6,403,032 | | | — | | | 6,403,032 | | | 14.0 | | | | 14.0 | |
| Central Missouri | | Sedalia, MO | | MSW | | | 5,725,528 | | | 3,452,341 | | | 9,177,869 | | | 23.9 | | | | 38.3 | |
| Eagle Ridge | | Bowling Green, MO | | MSW | | | 2,651,891 | | | 16,335,000 | | | 18,986,891 | | | 16.3 | | | | 116.8 | |
| Rolling Meadows | | Hazen, AR | | MSW | | | 4,298,339 | | | 9,800,000 | | | 14,098,339 | | | 23.6 | | | | 77.3 | |
| Union County | | El Dorado, AR | | MSW | | | 3,696,692 | | | 496,100 | | | 4,192,792 | | | 21.7 | | | | 24.6 | |
| Darrell Dickey(5) | | Houston, TX | | MSW | | | 5,239,003 | | | — | | | 5,239,003 | | | N/A | (5) | | | N/A | (5) |
| Fort Bend | | Houston, TX | | MSW | | | 46,025,506 | | | 15,861,754 | | | 61,887,260 | | | 56.9 | | | | 76.4 | |
| Pauls Valley | | Oklahoma City, OK | | MSW | | | 6,423,775 | | | — | | | 6,423,775 | | | 115.3 | | | | 115.3 | |
| Sooner | | Oklahoma City, OK | | MSW | | | 1,487,953 | | | 3,649,284 | | | 5,137,237 | | | 19.0 | | | | 65.6 | |
| Bondad | | Durango, CO | | MSW | | | 2,501,499 | | | — | | | 2,501,499 | | | 34.9 | | | | 34.9 | |
| Hardy Road | | Houston, TX | | C&D | | | 5,590,469 | | | — | | | 5,590,469 | | | 8.5 | | | | 8.5 | |
| Greenbelt | | Houston, TX | | C&D | | | 5,024,043 | | | 1,411,428 | | | 6,435,471 | | | 13.5 | | | | 17.3 | |
| Ralston Road | | Houston, TX | | C&D | | | 647,372 | | | 1,325,087 | | | 1,972,459 | | | 1.7 | | | | 5.1 | |
| Applerock(5) | | Houston, TX | | C&D | | | 8,750,000 | | | — | | | 8,750,000 | | | N/A | (5) | | | N/A | (5) |
| Shiloh | | Travelers Rest, SC | | C&D | | | 1,239,160 | | | 3,380,905 | | | 4,620,065 | | | 10.3 | | | | 38.4 | |
| Yarnell | | Knoxville, TN | | C&D | | | 1,159,644 | | | — | | | 1,159,644 | | | 13.4 | | | | 13.4 | |
| Blount | | Trafford, AL | | C&D | | | 4,471,118 | | | 21,663,205 | | | 26,134,323 | | | 24.2 | | | | 141.5 | |
| Fines | | Alpine, AL | | C&D/Industrial | | | 807,348 | | | 6,952,256 | | | 7,759,604 | | | 6.7 | | | | 64.8 | |
| High Point | | High Point, NC | | C&D | | | 4,024,887 | | | — | | | 4,024,887 | | | 31.6 | | | | 31.6 | |
| Raleigh | | Raleigh, NC | | C&D | | | 7,258,170 | | | 6,612,722 | | | 13,870,892 | | | 29.0 | | | | 55.5 | |
| DeSoto | | Arcadia, FL | | C&D | | | 5,136,797 | | | 20,024,569 | | | 25,161,366 | | | 17.9 | | | | 87.7 | |
| Fort Meade | | Ft Meade, FL | | C&D | | | 4,449,820 | | | 3,635,910 | | | 8,085,730 | | | 27.6 | | | | 50.1 | |
| Northeast | | Oklahoma City, OK | | C&D | | | 4,630,135 | | | — | | | 4,630,135 | | | 16.3 | | | | 16.3 | |
| Total | | | | | | | 144,056,755 | | | 139,124,561 | | | 283,181,316 | | | 25.1 | | | | 55.6 | |
| (1) | Permitted capacity includes the total available airspace approved by local regulatory agencies for our use. Additional approvals may be required for construction and use of specific cells within the permitted area. At any given time, certain landfills may be nearing the full capacity of existing approved cells. The failure to obtain a consent or approval for construction or use of additional cells could have a material effect. If the consent or approval is not obtained, we will evaluate alternative actions, such as diverting waste streams and pursuing legal recourse to challenge rulings. See “Risk Factors—Risks Relating to Our Business—We may not be successful in expanding the permitted capacity of our current or future landfills, which could restrict our growth, increase our disposal costs, and reduce our operating margins.” |
| (2) | Probable expansion capacity includes possible expansion capacity that we believe, based on industry practice and our experience, is likely to be permitted. The criteria we use to determine if permit expansion is probable include, but are not limited to whether: (i) we believe that the project has fatal flaws; (ii) the land is owned or controlled by us, or under option agreement; (iii) we have committed to the expansion; (iv) financial analysis has been completed, and the results indicate that the expansion has the prospect of a positive financial and operational impact; (v) personnel are actively working to obtain land use, local, and state approvals for an expansion of an existing landfill; (vi) we believe the permit is likely to be received; and (vii) we believe that the timeframe to complete the permitting is reasonable. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and notes 1 and 2 to our consolidated financial statements for information regarding our landfill accounting and use of estimates. |
| (3) | Includes expansions that we classify as “probable.” Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and notes 1 and 2 to our consolidated financial statements for information regarding our landfill accounting and use of estimates. |
| (4) | Based on current and estimated future disposal volumes. |
| (5) | Fully permitted but has not yet commenced operations, and therefore remaining permitted life and total remaining life cannot be calculated. |
As indicated in the table above, as of December 31, 2008, 11 of our landfills were permitted to accept municipal solid waste. The remaining 13 landfills were permitted to accept non-hazardous dry construction and demolition debris, which generally includes bricks, boards, metal, concrete, wall board and similar materials. All of our landfills accept waste from municipalities, private sector waste collection companies and the general public.
Based on remaining permitted capacity (including probable expansions) as of December 31, 2008 and projected annual disposal volumes, the average remaining landfill life of our 22 operating landfills at December 31, 2008 was approximately 55.6 years. Some of our landfills have the potential for expanded disposal capacity beyond their currently permitted limits. We monitor the availability of permitted disposal capacity at each of our landfills on an ongoing basis and evaluate whether to pursue an expansion at a given landfill. In making this determination with respect to a particular landfill, we consider a number of factors, including the estimated future volume of waste to be disposed of at the landfill, the estimated future prices for disposal of waste at the landfill, the amount of unpermitted acreage included in the landfill, the likelihood that we will be able to obtain the required approvals and permits for expansion and the costs of developing the additional capacity. Please read notes 1 and 2 to our consolidated financial statements for information regarding our landfill accounting and use of estimates. We also regularly consider whether it is advisable, in light of changing market conditions and/or regulatory requirements, to seek to expand or change the permitted waste streams or to seek other permit modifications.
We are currently seeking to expand permitted capacity at several of our landfills. The table above includes a column reflecting expansions that we believe to be “probable” based on various estimates and assumptions. For a description of how we make determinations whether permit expansion is probable, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Assumptions—Landfill Accounting” and note 1(f) to our consolidated financial statements. However, we note that we may not be able to obtain permits for expansions, including expansions that we considered to be probable. Therefore, the average remaining landfill life of our 22 operating landfills as of December 31, 2008 may not be 55.6 years when considering remaining permitted capacity, probable expansion capacity and projected annual disposal volume. Please read “Risk Factors—Risks Relating to Our Business—We may not be successful in expanding the permitted capacity of our current or future landfills, which could restrict our growth, increase our disposal costs, and reduce our operating margins.”
Available Airspace
The following table reflects airspace activity for landfills owned or operated by us for the years ended December 31, 2008, 2007 and 2006.
| | | Balance as of December 31, 2007 | | | New Expansions Undertaken | | | Landfills Acquired, Net of Divestiture | | | Permits Granted | | | Airspace Consumed | | | Changes in Engineering Estimates and Design | | | Balance as of December 31, 2008 | |
| Permitted airspace: | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 149,967 | | | | — | | | | — | | | | — | | | | (5,730 | ) | | | (180 | ) | | | 144,057 | |
| Number of sites | | | 24 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 24 | |
| Expansion airspace: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 155,524 | | | | 1,805 | | | | — | | | | — | | | | — | | | | (18,205 | ) | | | 139,124 | |
| Number of sites | | | 15 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 15 | |
| Total available airspace: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 305,491 | | | | 1,805 | | | | — | | | | — | | | | (5,730 | ) | | | (18,385 | ) | | | 283,181 | |
| Number of sites | | | 24 | | | | | | | | — | | | | | | | | | | | | | | | | 24 | |
| | | Balance as of December 31, 2006 | | | New Expansions Undertaken | | | Landfills Acquired, Net of Divestiture | | | Permits Granted | | | Airspace Consumed | | | Changes in Engineering Estimates and Design | | | Balance as of December 31, 2007 | |
| Permitted airspace: | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 95,676 | | | | — | | | | 53,222 | | | | 7,036 | | | | (5,456 | ) | | | (511 | ) | | | 149,967 | |
| Number of sites | | | 20 | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | 24 | |
| Expansion airspace: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 127,409 | | | | 8,604 | | | | 26,547 | | | | (7,036 | ) | | | — | | | | — | | | | 155,524 | |
| Number of sites | | | 12 | | | | 1 | | | | 3 | | | | (1 | ) | | | — | | | | — | | | | 15 | |
| Total available airspace: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 223,085 | | | | 8,604 | | | | 79,769 | | | | — | | | | (5,456 | ) | | | (511 | ) | | | 305,491 | |
| Number of sites | | | 20 | | | | | | | | 4 | | | | | | | | | | | | | | | | 24 | |
| | | Balance as of December 31, 2005 | | | New Expansions Undertaken | | | Landfills Acquired, Net of Divestiture | | | Permits Granted | | | Airspace Consumed | | | Changes in Engineering Estimates and Design | | | Balance as of December 31, 2006 | |
| Permitted airspace: | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 92,583 | | | | — | | | | 3,171 | | | | 5,204 | | | | (4,806 | ) | | | (476 | ) | | | 95,676 | |
| Number of sites | | | 19 | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 20 | |
| Expansion airspace: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 86,266 | | | | 46,262 | | | | — | | | | (5,204 | ) | | | — | | | | 85 | | | | 127,409 | |
| Number of sites | | | 12 | | | | 3 | | | | — | | | | (3 | ) | | | — | | | | — | | | | 12 | |
| Total available airspace: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cubic yards (in thousands) | | | 178,849 | | | | 46,262 | | | | 3,171 | | | | — | | | | (4,806 | ) | | | (391 | ) | | | 223,085 | |
| Number of sites | | | 19 | | | | | | | | 1 | | | | | | | | | | | | | | | | 20 | |
We perform periodic engineering reviews of our landfill capacity. Based on these reviews, there may be changes in the estimated available remaining capacity of a landfill or changes in the utilization of such landfill capacity, affecting the amount of waste that can be placed in the future. Estimates of the amount of waste that can be placed in the future are reviewed annually and are based on a number of factors, including site-specific factors such as current and projected mix of waste type; initial and projected waste density; estimated number of years of life remaining; and depth of underlying waste. We continually focus on improving the utilization of airspace through efforts that include recirculating landfill leachate where allowed by permit; optimizing the placement and utilization of alternative daily cover; and increasing initial compaction through improved landfill equipment, operations and training.
Risk Management, Insurance and Financial Assurances
Our environmental risk management program includes evaluating existing facilities and potential acquisitions for environmental compliance. We do not presently expect environmental compliance costs to increase materially above current levels, but we cannot predict whether recent and future acquisitions will cause such costs to increase. We also maintain a worker safety program that encourages safe practices in the workplace. Operating practices at all of our facilities emphasize minimizing the possibility of environmental contamination and liability.
The nature of our business exposes us to the risk of liabilities arising out of our operations, including possible damage to the environment. Such potential liabilities could involve, for example: (i) claims for remediation costs, personal injury, property damage and damage to the environment in cases where we may be held responsible for the escape of harmful materials; (ii) claims of employees, customers or third parties for personal injury or property damage occurring in the course of our operations; or (iii) claims alleging negligence in the planning or performance of work. We could also be subject to fines and civil and criminal penalties in connection with alleged violations of regulatory requirements. Because of the nature and scope of the possible environmental damages, liabilities imposed in environmental litigation can be significant. Our solid waste operations have third party environmental liability insurance with limits in excess of those required by permit regulations, subject to certain limitations and exclusions, which we believe are customary in the industry. However, the limits of such environmental liability insurance may be inadequate in the event of a major loss. Further, we may be unable to continue to carry excess environmental liability insurance should market conditions in the insurance industry make such coverage prohibitively expensive or otherwise unavailable.
We have property insurance, general liability, automobile physical damage and liability, employment practices liability, pollution liability, directors and officers liability, fiduciary liability, workers’ compensation and employer’s liability coverage, as well as umbrella liability policies to provide excess coverage over the underlying limits contained in our primary general liability, automobile liability and employer’s liability policies. Each of our insurance policies contains a per occurrence or per loss deductible for which we are responsible. Our deductibles range from $1,000 per loss under our employee practices to $100,000 for general liability and $250,000 per occurrence or loss under our automobile liability and workers’ compensation and employer’s liability coverages. In addition, we have a $500,000 per loss deductible under our pollution liability coverage. Accordingly, we are effectively self-insured for these amounts with respect to claims covered by our insurance policies, as well as with respect to amounts that exceed our policy limits (including our umbrella policy limits, where applicable). In the future, we may be exposed to uninsured liabilities which could have a material adverse effect on our financial condition, results of operations or cash flows. Please read note 13(e) to our consolidated financial statements.
In the normal course of business, we are required to post performance bonds, insurance policies, letters of credit and/or cash deposits in connection with the performance of municipal residential collection contracts, the operation, closure or post-closure of landfills, certain environmental permits and certain business licenses and permits. Bonds issued by surety companies operate as a financial guarantee of our performance. We have satisfied financial responsibility requirements by obtaining bank letters of credit, insurance policies, performance bonds or making cash deposits.
As of December 31, 2008, we obtained performance bonds in an aggregate amount of approximately $60.1 million and letters of credit in an aggregate amount of approximately $11.3 million, supporting performance of landfill closure and post-closure requirements, insurance contracts, municipal contracts and other financial assurance obligations. For a description of the surety bonds and letter of credit commitments we had in place as of December 31, 2008, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Other Commitments.” If in the future we are unable to obtain such instruments in sufficient amounts or at acceptable rates, we could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill or transfer station operating permits. Please read “—Risk Factors—Risks Relating To Our Business—We may be unable to obtain financial assurances necessary for our operations, which could result in the closure of landfills or the termination of collection contracts.”
Competition
The solid waste collection and disposal industry is highly competitive and fragmented and requires substantial labor and capital resources. The industry presently includes three large, publicly-held, national waste companies, Waste Management, Inc., Republic Services, Inc. (including Allied Waste Industries, Inc.) and Waste Connections, Inc., as well as numerous other public and privately-held waste companies. As indicated above in “Business—Industry Overview,” we believe that these three companies account for approximately 46% of the estimated $52 billion of annual revenue generated by the industry. Certain of the markets in which we compete or will likely compete are served by one or more of these companies, as well as by numerous privately-held regional and local solid waste companies of varying sizes and resources, some of which have accumulated substantial goodwill in their markets. We also compete with operators of alternative disposal facilities and with counties, municipalities and solid waste districts that maintain their own waste collection and disposal operations. Public sector operations may have financial advantages over us because of their access to user fees and similar charges, tax revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on geographic location and the price and quality of our services. From time to time, our competitors may reduce the price of their services in an effort to expand their market shares or service areas or to win competitively bid municipal contracts. These practices may cause us to reduce the price of our services or, if we elect not to do so, to lose business.
The solid waste collection and disposal industry has undergone significant consolidation, and we encounter competition in our efforts to acquire landfills, transfer stations and collection operations. Competition exists not only for collection, transfer and disposal volume but also for acquisition candidates. We generally compete for acquisition candidates with large, publicly-held waste management companies, private equity backed firms as well as numerous privately-held regional and local solid waste companies of varying sizes and resources. Competition in the disposal industry may also be affected by the increasing national emphasis on recycling and other waste reduction programs, which may reduce the volume of waste deposited in landfills. Accordingly, it may become uneconomical for us to make further acquisitions or we may be unable to locate or acquire suitable acquisition candidates at price levels and on terms and conditions that we consider appropriate, particularly in markets we do not already serve.
Non-Competition Agreements
We were a party to a mutual non-competition agreement with Waste Corporation of America, LLC, a company owned by management and shareholders that were shareholders of our predecessor and former parent. In 2005 and 2006, we acquired Waste Corporation of Central Florida, Inc., Transit Waste, LLC, Fort Myers transfer station and WCA of St. Lucie, LLC from Waste Corporation of America, LLC and, in connection with such acquisitions, we were released from the non-competition agreement in favor of Waste Corporation of America, LLC. However, Waste Corporation of America, LLC (which does not currently have any operations), remains subject to a non-competition agreement in favor of us, which precludes it and its subsidiaries from acquiring or operating any waste operations within 50 miles of any of our or our subsidiaries’ operations in Alabama, Arkansas, Kansas, Missouri, South Carolina, Tennessee or Texas through June 2009.
Sales and Marketing
We focus our marketing efforts on continuing and expanding business with existing customers, as well as attracting new customers. Our sales and marketing strategy is to provide prompt, high quality, comprehensive solid waste collection, transfer and disposal services to our customers at competitive prices. We target potential customers of all sizes, from small quantity generators to large companies and municipalities. Because the waste collection and disposal business is a very localized business, most of our marketing activity is local in nature. However, we do have a vice president of sales who is responsible for overseeing our sales and marketing efforts, including assisting in hiring and setting compensation programs.
Government Contracts
We are parties to contracts with municipalities and other associations and agencies. Many of these contracts are or will be subject to competitive bidding. We may not be the successful bidder, or we may have to substantially lower prices in order to be the successful bidder. In addition, some of our customers may terminate their contracts with us before the end of the contract term.
Municipalities may annex unincorporated areas within counties where we provide collection services, and as a result, our customers in annexed areas may be required to obtain service from competitors who have been franchised or contracted by the annexing municipalities to provide those services. Some of the local jurisdictions in which we currently operate grant exclusive franchises to collection and disposal companies, others may do so in the future, and we may enter markets where franchises are granted by certain municipalities.
Regulation
Our business is subject to extensive and evolving federal, state and local environmental, health, safety and transportation laws and regulations. These laws and regulations are administered by the U.S. Environmental Protection Agency, or EPA, and various other federal, state and local environmental, zoning, air, water, transportation, land use, health and safety agencies. Many of these agencies regularly inspect our operations to monitor compliance with these laws and regulations. Governmental agencies have the authority to enforce compliance with these laws and regulations and to obtain injunctions or impose civil or criminal penalties in cases of violations. We believe that regulation of the waste industry will continue to evolve, and we will adapt to future legal and regulatory requirements to ensure compliance.
Our operation of landfills subjects us to certain operational, monitoring, site maintenance, closure, post-closure and other obligations which could give rise to increased costs for compliance and corrective measures. In connection with our acquisition of landfills and continued operation or expansion of our landfills, we must often spend considerable time to increase the capacity of these landfills. We may be unable to obtain or maintain necessary governmental approvals. Once obtained, operating permits are subject to modification and revocation by the issuing agency. Compliance with these and any future regulatory requirements could require us to make significant capital and operating expenditures. However, most of these expenditures are made in the normal course of business and do not place us at any competitive disadvantage.
Our operations are subject to extensive regulation, principally under the federal statutes described below.
The Resource Conservation and Recovery Act of 1976, as amended, or RCRA. RCRA regulates the handling, transportation and disposal of hazardous and non-hazardous wastes and delegates authority to states to develop programs to ensure the safe disposal of solid wastes. On October 9, 1991, the EPA promulgated Solid Waste Disposal Facility Criteria for non-hazardous solid waste landfills under Subtitle D of RCRA. Subtitle D includes location standards, facility design and operating criteria, closure and post-closure requirements, financial assurance standards and groundwater monitoring, as well as corrective action standards, many of which had not commonly been in place or enforced at landfills. Subtitle D applies to all solid waste landfill cells that received waste after October 9, 1991, and, with limited exceptions, required all landfills to meet these requirements by October 9, 1993. All states in which we operate have EPA-approved programs which implemented at least the minimum requirements of Subtitle D.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CERCLA. CERCLA, which is also known as Superfund, addresses problems created by the release or threatened release of hazardous substances (as defined in CERCLA) into the environment. CERCLA’s primary mechanism for achieving remediation of such problems is to impose strict, joint and several liability for cleanup of disposal sites on current owners and operators of the site, former site owners and operators at the time of disposal and parties who arranged for disposal at the facility (i.e., generators of the waste and transporters who select the disposal site). The costs of a CERCLA cleanup can be substantial. Liability under CERCLA is not dependent on the existence or intentional disposal of “hazardous wastes” (as defined under RCRA), but can also be based upon the release or threatened release, even as a result of lawful, unintentional and non-negligent action, of any one of the more than 700 “hazardous substances” listed by the EPA, even in minute amounts.
The Federal Water Pollution Control Act of 1972, as amended, or the Clean Water Act. This act establishes rules regulating the discharge of pollutants into streams and other waters of the United States (as defined in the Clean Water Act) from a variety of sources, including solid waste disposal sites. If runoff from our landfills or transfer stations may be discharged into surface waters, the Clean Water Act requires us to apply for and obtain discharge permits, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in those discharges. In 1990, the EPA issued additional rules under the Clean Water Act, which establish standards for management of storm water runoff from landfills and which require landfills that receive, or in the past received, industrial waste to obtain storm water discharge permits. In addition, if a landfill or transfer station discharges wastewater through a sewage system to a publicly-owned treatment works, the facility must comply with discharge limits imposed by the treatment works. Also, if development of a landfill may alter or affect “wetlands,” the owner may have to obtain a permit and undertake certain mitigation measures before development may begin. This requirement is likely to affect the construction or expansion of many solid waste disposal sites.
The Clean Air Act of 1970, as amended, or the Clean Air Act. The Clean Air Act provides for increased federal, state and local regulation of the emission of air pollutants. The EPA has applied the Clean Air Act to solid waste landfills and vehicles with heavy duty engines, such as waste collection vehicles. Additionally, in March 1996, the EPA adopted New Source Performance Standards and Emission Guidelines (the “Emission Guidelines”) for municipal solid waste landfills to control emissions of landfill gases. These regulations impose limits on air emissions from solid waste landfills. The Emission Guidelines impose two sets of emissions standards, one of which is applicable to all solid waste landfills for which construction, reconstruction or modification was commenced before May 30, 1991. The other applies to all municipal solid waste landfills for which construction, reconstruction or modification was commenced on or after May 30, 1991. The Emission Guidelines are being implemented by the states after the EPA approves the individual state’s program. These guidelines, combined with the new permitting programs established under the Clean Air Act, subject solid waste landfills to significant permitting requirements and, in some instances, require installation of gas recovery systems to reduce emissions to allowable limits. The EPA also regulates the emission of hazardous air pollutants from municipal landfills and has promulgated regulations that require measures to monitor and reduce such emissions.
The Occupational Safety and Health Act of 1970, as amended, or OSHA. OSHA establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Safety and Health Administration and various record keeping, disclosure and procedural requirements. Various standards, including standards for notices of hazards, safety in excavation and demolition work and the handling of asbestos, may apply to our operations.
Flow Control/Interstate Waste Restrictions. Certain permits and approvals, as well as certain state and local regulations, may limit a landfill or transfer station to accepting waste that originates from specified geographic areas, restrict the importation of out-of-state waste or wastes originating outside the local jurisdiction or otherwise discriminate against non-local waste. These restrictions, generally known as flow control restrictions, are controversial, and some courts have held that some flow control schemes violate constitutional limits on state or local regulation of interstate commerce. From time to time, federal legislation is proposed that would allow some local flow control restrictions. Although no such federal legislation has been enacted to date, if such federal legislation should be enacted in the future, states in which we own landfills could limit or prohibit the importation of out-of-state waste or direct that wastes be handled at specified facilities. Such state actions could adversely affect our landfills. These restrictions could also result in higher disposal costs for our collection operations. If we were unable to pass such higher costs through to our customers, our business, financial condition and operating results could be adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control restrictions through local legislation or contractually. In certain cases, we may elect not to challenge such restrictions. These restrictions could reduce the volume of waste going to landfills in certain areas, which may adversely affect our ability to operate our landfills at their full capacity and/or reduce the prices that we can charge for landfill disposal services. These restrictions may also result in higher disposal costs for our collection operations. If we were unable to pass such higher costs through to our customers, our business, financial condition and operating results could be adversely affected.
State and Local Regulation. Each state in which we now operate or may operate in the future has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, occupational safety and health, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of landfills and transfer stations. State and local permits and approval for these operations may be required and may be subject to periodic renewal, modification or revocation by the issuing agencies. In addition, many states have adopted statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup of contaminated sites and liability for costs and damages associated with such sites, and some provide for the imposition of liens on property owned by responsible parties. Furthermore, many municipalities also have ordinances, local laws and regulations affecting our operations. These include zoning and health measures that limit solid waste management activities to specified sites or activities, flow control provisions that direct or restrict the delivery of solid wastes to specific facilities, laws that grant the right to establish franchises for collection services and then put such franchises out for bid and bans or other restrictions on the movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as state or local laws and regulations, may specify the quantity of waste that may be accepted at the landfill during a given time period and/or specify the types of waste that may be accepted at the landfill. Once an operating permit for a landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate and encourage waste reduction and recycling and to prohibit or restrict the disposal in landfills of certain types of solid wastes, such as yard wastes, beverage containers, unshredded tires, lead-acid batteries, paper, cardboard and household appliances. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could prevent us from operating our facilities at their full capacity.
Many states and local jurisdictions have enacted “bad boy” laws that allow the agencies that have jurisdiction over waste services contracts or permits to deny or revoke these contracts or permits based on the applicant’s or permit holder’s compliance history. Some states and local jurisdictions go further and consider the compliance history of the parent, subsidiaries or affiliated companies, in addition to that of the applicant or permit holder. These laws authorize the agencies to make determinations of an applicant’s or permit holder’s fitness to be awarded a contract to operate and to deny or revoke a contract or permit because of unfitness unless there is a showing that the applicant or permit holder has been rehabilitated through the adoption of various operating policies and procedures put in place to assure future compliance with applicable laws and regulations.
Some state and local authorities enforce certain federal laws in addition to state and local laws and regulations. For example, in some states, RCRA, OSHA, parts of the Clean Air Act and parts of the Clean Water Act are enforced by local or state authorities instead of the EPA, and in some states those laws are enforced jointly by state or local and federal authorities.
Public Utility Regulation. In many states, public authorities regulate the rates that landfill operators may charge. The adoption of rate regulation or the reduction of current rates in states in which we own landfills could adversely affect our business, financial condition and operating results.
Seasonality
Based on our industry and our historic trends, we expect our operations to vary seasonally. Typically, revenue will be highest in the second and third calendar quarters and lowest in the first and fourth calendar quarters. The fluctuation is primarily due to lower volumes of waste. We also expect that our operating expenses may be higher during the winter months due to periodic adverse weather conditions that can slow the collection of waste, resulting in higher labor and operational costs. Please read “—Risk Factors—Risks Relating To Our Operations and Corporate Organization—Seasonal fluctuations will cause our business and results of operations to vary among quarters, which could adversely affect our stock price.”
Employees
As of December 31, 2008, we had approximately 1,098 full-time employees. A group of 13 employees at one of our locations is represented by a union. In 2006, we negotiated with the union for a new collective bargaining agreement which has a term extending until March 2011. We have not experienced a significant work stoppage, and we believe our relations with our employees are good.
Available Information
As an accelerated filer, we electronically file certain documents with the Securities and Exchange Commission (the SEC). We file annual reports on Form 10-K; quarterly reports on Form 10-Q; and current reports on Form 8-K (as appropriate); along with any related amendments and supplements thereto. From time-to-time, we may also file registration statements and related documents in connection with equity or debt offerings. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC.
Our internet website is www.wcawaste.com. We make available through the “Investor Relations-SEC Filings” section of our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Our business, financial condition, and financial results are subject to various risks, including the following:
Risks Relating To Our Business
The current weakening of U.S. economic conditions and the related decline in construction activity, as well as any future downturns, may reduce our volume and/or pricing on our services, resulting in decreases in our revenue, profitability and cash flows.
Our business is affected by changes in national and general economic factors that are outside of our control, including consumer confidence, interest rates and access to capital markets. Although our services are of an essential nature, a weak economy generally results in decreases in volumes of waste generated, which decreases our revenues. During the past several months, we believe that weakening economic conditions have impacted the volume of waste we have collected and disposed of.
Additionally, consumer uncertainty and the loss of consumer confidence may limit the number or amount of services requested by customers and our ability to increase customers’ pricing. During weak economic conditions we may also be adversely impacted by customers’ inability to pay us in a timely manner, if at all, due to their financial difficulties, which could include bankruptcies.
Increases in the costs of fuel may reduce our operating margins.
The price and supply of fuel needed to run our collection and transfer trucks and our landfill equipment is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns and environmental concerns. During 2008, we experienced increases in the cost of diesel fuel to 9.0% of revenue from 7.0% in 2007. Any significant price escalations or reductions in the supply could increase our operating expenses or interrupt or curtail our operations. Failure to offset all or a portion of any increased fuel costs through increased fees or charges would reduce our operating margins.
Changes in interest rates may affect our profitability.
Our acquisitions could require us to incur substantial additional indebtedness in the future, which will increase our interest expense. Further, to the extent that these borrowings are subject to variable rates of interest, increases in interest rates will increase our interest expense, which will affect our profitability. In connection with the restructuring of our long-term debt in July 2006, we entered into a swap agreement effective July 11, 2006, where we agreed to pay a fixed-rate of 5.64% in exchange for three-month floating rate LIBOR. With the placement of this swap agreement, we bear exposure to, and are primarily affected by, changes in LIBOR rates on the unused portion of up to $150 million of our credit facility. As of December 31, 2008, $101.4 million was subject to the effect of the swap agreement. A 100 basis point increase in LIBOR interest rates would result in swap income of approximately $1.0 million annually while a 100 basis point decrease in interest rates would result in $1.0 million in swap expense, in addition to any mark to market effect on the fair value of the swap. As a result of the swap, the decrease in interest rates that began in September 2007 reduced our cash flow and negatively impacted our pre-tax earnings by $3.2 million and $0.5 million in 2008 and 2007, respectively. Considering the rates in effect at December 31, 2008, the impact of the swap agreement is estimated to result in a pre-tax cash cost of $6.3 million in 2009.
We may not be successful in expanding the permitted capacity of our current or future landfills, which could restrict our growth, increase our disposal costs, and reduce our operating margins.
Our ability to meet our growth objectives depends in part on our ability to expand landfill capacity, whether by acquisition or expansion. Exhausting permitted capacity at a landfill would restrict our growth, and reduce our financial performance in the market served by the landfill since we would be forced to dispose of collected waste at more distant landfills or at landfills operated by our competitors, thereby increasing our waste disposal expenses. Although we have received final permits on expansions at our existing landfills, there may be challenges, comments,
or delays regarding the construction of specific cells that could have an adverse effect on our operations in these markets. Obtaining required permits and approvals to expand landfills has become increasingly difficult and expensive, requiring numerous hearings and compliance with various zoning, environmental and regulatory laws and drawing resistance from citizens, environmental or other groups. Even if permits are granted, they may contain burdensome terms and conditions or the timing required may be extensive and could affect the remaining capacity at the landfill. We may choose to delay or forego tuck-in acquisitions in markets where the remaining lives of our landfills are relatively short because increased volumes would further shorten the lives of these landfills.
We are subject to environmental and safety laws, which restrict our operations and increase our costs.
We are subject to extensive federal, state and local laws and regulations relating to environmental protection and occupational safety and health. These include, among other things, laws and regulations governing the use, treatment, storage and disposal of wastes and materials, air quality, water quality and the remediation of contamination associated with the release of hazardous substances. Our compliance with existing regulatory requirements is costly, and continued changes in these regulations could increase our compliance costs. Government laws and regulations often require us to enhance or replace our equipment and to modify landfill operations and may, in the future, require us to initiate final closure of a landfill. We are required to obtain and maintain permits that are subject to strict regulatory requirements and are difficult and costly to obtain and maintain. We may be unable to implement price increases sufficient to offset the cost of complying with these laws and regulations. In addition, regulatory changes could accelerate or increase expenditures for closure and post-closure monitoring at solid waste facilities and obligate us to spend sums over the amounts that we have accrued.
We may become subject to environmental clean-up costs or litigation that could curtail our business operations and materially decrease our earnings.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or CERCLA, and analogous state laws provide for the remediation of contaminated facilities and impose strict joint and several liability for remediation costs on current and former owners or operators of a facility at which there has been a release or a threatened release of a hazardous substance. This liability is also imposed on persons who arrange for the disposal of and who transport such substances to the facility. Hundreds of substances are defined as hazardous under CERCLA and their presence, even in small amounts, can result in substantial liability. The expense of conducting a cleanup can be significant. Notwithstanding our efforts to comply with applicable regulations and to avoid transporting and receiving hazardous substances, we may have liability because these substances may be present in waste collected by us or disposed of in our landfills, or in waste collected, transported or disposed of in the past by companies that we acquire even if we did not collect or dispose of the waste while we owned the landfill. The actual costs for these liabilities could be significantly greater than the amounts that we might be required to accrue on our financial statements from time to time.
In addition to the costs of complying with environmental regulations, we may incur costs to defend against litigation brought by government agencies and private parties. As a result, we may be required to pay fines or our permits and licenses may be modified or revoked. We may in the future be a defendant in lawsuits brought by governmental agencies and private parties who assert claims alleging environmental damage, personal injury, property damage and/or violations of permits and licenses by us. A significant judgment against us, the loss of a significant permit or license or the imposition of a significant fine could curtail our business operations and may decrease our earnings.
Our accruals for landfill closure and post-closure costs may be inadequate, and our earnings would be lower if we are required to pay or accrue additional amounts.
We are required to pay closure and post-closure costs of any disposal facilities that we own or operate. We accrue for future closure and post-closure costs of our owned landfills, generally for a term of up to 30 years, based on engineering estimates of future requirements associated with the final landfill design and closure and post-closure process. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Assumptions.” Our obligations to pay closure and post-closure costs, including for monitoring, may exceed the amount we accrued, which would adversely affect our earnings. Expenditures for these costs may increase as a result of any federal, state or local government regulatory action, including changes in
closing or monitoring activities, types and quantities of materials used or the period of required post-closure monitoring. These factors could substantially increase our operating costs and therefore impair our ability to invest in our existing facilities or new facilities. The amount of our accruals is based upon estimates by management and engineers and accountants. We review at least annually our estimates for closure and post-closure costs, and any change in our estimates could require us to accrue additional amounts.
We may be unable to obtain financial assurances necessary for our operations, which could result in the closure of landfills or the termination of collection contracts.
We are required to provide financial assurances to governmental agencies under applicable environmental regulations relating to landfill closure and post-closure obligations, our landfill operations, and other collection and disposal contracts. We satisfy these financial assurances requirements by providing performance bonds, letters of credit, insurance policies or trust deposits. During the past several years, the costs associated with bonding and insurance have risen dramatically, the financial capacity and other requirements imposed by bonding and insurance companies have become more difficult to comply with than in prior years, and the number of these bonding and insurance companies has decreased.
Our business is capital intensive, requiring ongoing cash outlays that may strain or consume our available capital and force us to sell assets, incur debt, or sell equity on unfavorable terms.
Our ability to remain competitive, grow and maintain operations largely depends on our cash flow from operations and access to capital. Maintaining our existing operations and expanding them through internal growth or acquisitions requires large capital expenditures. As we undertake more acquisitions and further expand our operations, the amount we expend on capital, closure and post-closure and remediation expenditures will increase. These increases in expenditures may result in lower levels of working capital or require us to finance working capital deficits. We intend to continue to fund our cash needs through cash flow from operations and borrowings under our credit facility, if necessary. However, we may require additional equity or debt financing to fund our growth.
We do not have complete control over our future performance because it is subject to general economic, political, financial, competitive, legislative, regulatory and other factors. It is possible that our business may not generate sufficient cash flow from operations, and we may not otherwise have the capital resources, to allow us to make necessary capital expenditures. If this occurs, we may have to sell assets, restructure our debt or obtain additional equity capital, which could be dilutive to our stockholders. We may not be able to take any of the foregoing actions, and we may not be able to do so on terms favorable to us or our stockholders.
Governmental authorities may enact climate change regulations that could increase our costs to operate.
Environmental advocacy groups and regulatory agencies in the United States have been focusing considerable attention on the emissions of greenhouse gases and their potential role in climate change. The adoption of laws and regulations to implement controls of greenhouse gases, including the imposition of fees or taxes, could adversely affect our collection and disposal operations. Additionally, certain of the states in which we operate are contemplating air pollution control regulations that are more stringent than existing and proposed federal regulations. Changing environmental regulations could require us to take any number of actions, including the purchase of emission allowances or installation of additional pollution control technology, and could make some operations less profitable, which could adversely affect our results of operations.
Increases in the costs of disposal may reduce our operating margins.
We dispose of approximately one-fourth of the waste that we collect in landfills operated by others, but that rate may increase in the future. We may incur increases in disposal fees paid to third parties or in the costs of operating our own landfills. Failure to pass these costs on to our customers may reduce our operating margins.
Increases in the costs of labor may reduce our operating margins.
We compete with other businesses in our markets for qualified employees. The labor market is currently tight in many of the areas in which we operate. A shortage of qualified employees would require us to enhance our wage and benefits packages to compete more effectively for employees or to hire more expensive temporary employees. Labor is our second largest operating cost, and even relatively small increases in labor costs per employee could materially affect our cost structure. Failure to attract and retain qualified employees, to control our labor costs, or to recover any increased labor costs through increased prices we charge for our services or otherwise offset such increases with cost savings in other areas may reduce our operating margins.
Increases in costs of insurance would reduce our operating margins.
One of our largest operating costs is for insurance coverage, including general liability, automobile physical damage and liability, property, employment practices, pollution, directors and officers, fiduciary, workers’ compensation and employer’s liability coverage, as well as umbrella liability policies to provide excess coverage over the underlying limits contained in our primary general liability, automobile liability and employer’s liability policies. Changes in our operating experience, such as an increase in accidents or lawsuits or a catastrophic loss, could cause our insurance costs to increase significantly or could cause us to be unable to obtain certain insurance. Increases in insurance costs would reduce our operating margins. Changes in our industry and perceived risks in our business could have a similar effect.
We may not be able to maintain sufficient insurance coverage to cover the risks associated with our operations, which could result in uninsured losses that would adversely affect our financial condition.
Integrated non-hazardous waste companies are exposed to a variety of risks that are typically covered by insurance arrangements. However, we may not be able to maintain sufficient insurance coverage to cover the risks associated with our operations for a variety of reasons. Increases in insurance costs and changes in the insurance markets may, given our resources, limit the coverage that we are able to maintain or prevent us from insuring against certain risks. Large or unexpected losses may exceed our policy limits, adversely affecting our results of operations, and may result in the termination or limitation of coverage, exposing us to uninsured losses, thereby adversely affecting our financial condition.
Our failure to remain competitive with our numerous competitors, some of which have greater resources, could adversely affect our ability to retain existing customers and obtain future business.
Our industry is highly competitive. We compete with large companies and municipalities, many of which have greater financial and operational resources. The non-hazardous solid waste collection and disposal industry is led by three large national, publicly-traded waste management companies that we believe account for approximately 46% of the estimated $52 billion of annual industry revenue. The industry also includes numerous regional and local companies. Additionally, many counties and municipalities operate their own waste collection and disposal facilities and have competitive advantages not available to private enterprises. We also encounter competition from alternatives to landfill disposal, such as recycling and incineration, that benefit from state requirements to reduce landfill disposal. If we are unable to successfully compete against our competitors, our ability to retain existing customers and obtain future business could be adversely affected.
We may lose contracts through competitive bidding, early termination or governmental action, or we may have to substantially lower prices in order to retain certain contracts, any of which would cause our revenue to decline.
We are parties to contracts with municipalities and other associations and agencies. Many of these contracts are or will be subject to competitive bidding. We may not be the successful bidder, or we may have to substantially lower prices in order to be the successful bidder. In addition, some of our customers may terminate their contracts with us before the end of the contract term. If we were not able to replace revenue from contracts lost through competitive bidding or early termination or from lowering prices or from the renegotiation of existing contracts with other revenue within a reasonable time period, our revenue could decline.
Municipalities may annex unincorporated areas within counties where we provide collection services, and as a result, our customers in annexed areas may be required to obtain service from competitors who have been franchised or contracted by the annexing municipalities to provide those services. Some of the local jurisdictions in which we currently operate grant exclusive franchises to collection and disposal companies, others may do so in the future, and we may enter markets where franchises are granted by certain municipalities. Unless we are awarded a franchise by these municipalities, we will lose customers which will cause our revenue to decline.
Comprehensive waste planning programs and initiatives required by state and local governments may reduce demand for our services, which could adversely affect our waste volumes and the price of our landfill disposal services.
Many of the states in which we operate landfills require counties and municipalities to formulate comprehensive plans to reduce the volume of solid waste disposed of in landfills through waste planning, recycling, composting or other programs. Some state and local governments mandate waste reduction at the source and prohibit the disposal of certain types of wastes, such as yard wastes, at landfills. These actions may reduce the volume of waste going to landfills in certain areas, and therefore our landfills may not continue to operate at currently estimated volumes or they may be unable to charge current prices for landfill disposal services.
Efforts by labor unions to organize our employees could divert management attention and increase our operating expenses.
In 2006, we negotiated with the union for a new collective bargaining agreement which has a term extending until March 2011. As of December 31, 2008, there were 13 employees in that group. Additional groups of employees may seek union representation in the future, and the negotiation of collective bargaining agreements could divert management attention and result in increased operating expenses and lower net income. If we are unable to negotiate acceptable collective bargaining agreements, we might have to wait through “cooling off” periods, which are often followed by union-initiated work stoppages, including strikes. Depending on the type and duration of these work stoppages, our operating expenses could increase significantly.
Current and proposed laws may restrict our ability to operate across local borders which could affect our manner, cost and feasibility of doing business.
For the year ended December 31, 2008, approximately $2.7 million, or 1.3%, of our revenue was earned from the disposal of waste that is generated in a state other than the state where it is disposed. These operations could increase in the future. Some states have imposed restrictions on collection routes and disposal locations. Our collection, transfer and landfill operations may also be affected in the future by proposed “flow control” legislation that would allow state and local governments to direct waste generated within their jurisdictions to a specific facility for disposal or processing. Moreover, in the future, our operations may be affected by proposed federal legislation authorizing states to regulate, limit or perhaps even prohibit interstate shipments of waste. If this or similar legislation is enacted, state or local governments with jurisdiction over our landfills could act to limit or prohibit disposal or processing of out-of-state waste in our landfills, whether collected by us or by third parties which could affect our manner, cost and feasibility of doing business.
Poor decisions by our regional and local managers could result in the loss of customers or an increase in costs, or adversely affect our ability to obtain future business.
We manage our operations on a decentralized basis. Therefore, regional and local managers have the authority to make many decisions concerning their operations without obtaining prior approval from executive officers. Poor decisions by regional or local managers could result in the loss of customers or an increase in costs, or adversely affect our ability to obtain future business.
We are vulnerable to factors affecting our local markets, which could adversely affect our stock price relative to our competitors.
The non-hazardous waste business is local in nature. Accordingly, our business in one or more regions or local markets may be adversely affected by events and economic conditions relating to those regions or markets even if the other regions of the country are not affected. As a result, our financial performance may not compare favorably to our competitors with operations in other regions, and our stock price could be adversely affected.
Seasonal fluctuations will cause our business and results of operations to vary among quarters, which could adversely affect our stock price.
Based on historic trends experienced by the businesses we have acquired, we expect our operating results to vary seasonally, with revenue typically lowest in the first quarter, higher in the second and third quarters, and again lower in the fourth quarter. This seasonality generally reflects the lower volume of waste during the winter months. Adverse weather conditions negatively affect waste collection productivity, resulting in higher labor and operational costs. The general increase in precipitation during the winter months increases the weight of collected waste, resulting in higher disposal costs, as costs are often calculated on a per ton basis. Because of these factors, we expect operating income to be generally lower in the winter months. As a result, our operating results may be negatively affected by these variations. Additionally, severe weather during any time of the year can negatively affect the costs of collection and disposal and may cause temporary suspensions of our collection and disposal services. Long periods of inclement weather may interfere with collection and landfill operations, delay the construction of landfill capacity and reduce the volume of waste generated by our customers. Any of these conditions can adversely affect our business and results of operations, which could negatively affect our stock price.
Risks Relating to Our Acquisitions
We may be unable to identify, complete or integrate future acquisitions, which may harm our prospects.
We may be unable to identify appropriate acquisition candidates. If we do identify an appropriate acquisition candidate, we may not be able to negotiate acceptable terms or finance the acquisition or, if the acquisition occurs, effectively integrate the acquired business into our existing business. Negotiations of potential acquisitions and the integration of acquired business operations require a disproportionate amount of management’s attention and our resources. Even if we complete additional acquisitions, continued financing may not be available or available on reasonable terms, any new businesses may not generate revenues comparable to our existing businesses, the anticipated cost efficiencies or synergies may not be realized and these businesses may not be integrated successfully or operated profitably or accretive to our earnings.
We compete for acquisition candidates with other purchasers, some of which have greater financial resources and may be able to offer more favorable terms, thus limiting our ability to grow through acquisitions.
Other companies in the solid waste services industry also have a strategy of acquiring and consolidating regional and local businesses. We expect that as the consolidation trend in our industry continues, the competition for acquisitions will increase. Competition for acquisition candidates may make fewer acquisition opportunities available to us or make those opportunities more expensive.
In connection with financing acquisitions, we may incur additional indebtedness, or may issue additional equity including common stock or preferred stock which would dilute the ownership percentage of existing stockholders.
We intend to finance acquisitions with available cash, borrowings under our credit facility, our equity including common stock or preferred stock, or a combination of these means. As a result, we may incur additional indebtedness or issue additional equity which would dilute the ownership percentage of existing stockholders. Our credit facility contains covenants restricting, among other things, the amount of additional indebtedness. We may offer equity as some or all of the consideration for certain acquisitions. Our ability to do so will depend in part on the attractiveness of our equity. This attractiveness may depend largely on the capital appreciation prospects of our equity compared to the equity of our competitors.
Businesses that we acquire may have unknown liabilities and require unforeseen capital expenditures, which would adversely affect our financial results.
We may acquire businesses with liabilities that we fail to discover, including liabilities arising from non-compliance with environmental laws by prior owners for which we may be responsible as the successor owner. Moreover, as we integrate a new business, we may discover that required expenses and capital expenditures are greater than anticipated, which would adversely affect our financial results.
Rapid growth may strain our management, operational, financial and other resources, which would adversely affect our financial results.
Pursuing acquisitions will require significant time from our senior management. We may also be required to expand our operational and financial systems and controls and our management information systems capabilities. We may also need to attract and train additional senior managers, technical professionals and other employees. Failure to do any of these could restrict our ability to maintain and improve our profitability while continuing to grow.
Our acquisitions have resulted and future acquisitions we make may continue to result in significant goodwill and other intangible assets, which may need to be written down if performance is not as expected.
As of December 31, 2008, we had approximately $64.6 million of goodwill and other intangible assets, representing approximately 16.6% of our total assets. The value of goodwill and other intangible assets as of December 31, 2008 reflects a $41.7 million impairment adjustment. If we complete acquisitions at prices greater than the fair value of the assets acquired, we would generate additional goodwill. We are required to test our goodwill at least annually for impairment, which would require us to incur a charge if we determine there is a reduction in value. Any such charge would reduce our assets and earnings.
We may incur charges related to acquisitions, which could lower our earnings.
In the past, we capitalized some expenditures and advances relating to acquisitions and pending acquisitions, but expense indirect acquisition costs, including general corporate overhead, as they are incurred. We charged against earnings any unamortized capitalized expenditures and advances (net of any amount that we estimated we would recover, through sale or otherwise) that related to any pending acquisition that was not consummated. As of December 31, 2008, we expensed $0.1 million of such costs. Starting in 2009, all acquisition-related transaction and restructuring costs will be expensed as incurred rather than capitalized as part of the acquisition costs. We, therefore, may incur more charges related to acquisitions in future periods, which could lower our earnings.
Risks Relating to Our Operations and Corporate Organization
Our success depends on key members of our senior management, the loss of any of whom could disrupt our customer and business relationships and our operations.
We believe that our continued success depends in large part on the sustained contributions of our chairman of the board and chief executive officer, Mr. Tom J. Fatjo, Jr., our president and chief operating officer, Mr. Jerome M. Kruszka, and other members of our senior management. We rely on them to identify and pursue new business opportunities and acquisitions and to execute operational strategies. The loss of services of Messrs. Fatjo, Jr. or Kruszka or any other senior management member could significantly impair our ability to identify and secure new contracts and otherwise disrupt our operations. We do not maintain key person life insurance on any of our senior executives. We have entered into employment agreements with our executive officers that contain non-compete and confidentiality covenants. Despite these agreements, we may not be able to retain these officers and may not be able to enforce the non-compete and confidentiality covenants in their employment agreements.
A controlling interest in our voting stock is held by one fund and a small number of individuals (including management), which when combined with various agreements and rights of the fund, may discourage a change of control transaction and may exert control over our strategic direction.
As of March 1, 2009,
| · | Ares Corporate Opportunities Fund II L.P (Ares) held preferred shares convertible into our common stock at a price of $9.60 per share. The preferred shares were issued on July 27, 2006 and carry a 5% payment-in-kind (PIK) dividend payable semi-annually. As of March 1, 2009, the preferred shares were immediately convertible into 8,880,754 shares of our common stock (representing approximately 35.1% of the outstanding common stock on a post-conversion basis). Dividends are solely PIK for the first five years — that is, they are payable solely by adding the amount of dividends to the stated value of each share. At the end of five years the preferred shares would be convertible into approximately 10,000,661 shares of common stock, which based on the currently outstanding shares would represent approximately 37.8% of the post-conversion shares outstanding. If the preferred shares are not converted after five years, we have the option to PIK or pay a cash dividend at the rate of 5% per annum. The preferred shares have no stated maturity. In the event that one of the “acceleration events,” including a change of control transaction, were to occur prior to the end of the fifth year, dividends would accelerate so that a total of five years of dividends will have been paid. Ares is entitled to vote its preferred shares as if converted (subject to contractual restrictions with us), is entitled to elect two directors, and is entitled to other contractual rights. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Preferred Stock” for a description of the various arrangements with Ares. |
| · | Our executive officers, directors and their related entities owned or controlled approximately 15.8% of the outstanding shares of our common stock. |
| · | The Esping Family and other related entities beneficially owned approximately 13.0% of our outstanding common stock. Additionally, these entities continue to own approximately 60.2% of the equity interests of Waste Corporation of America, LLC, our former parent and a privately-held solid waste company with which we have had various arrangements and from which we have acquired operations in Florida and Colorado. Mr. Ballard O. Castleman, who is a member of our board of directors, has an ownership position in and is employed by such entities. |
Accordingly, these parties collectively held a controlling vote and will have the ability to significantly influence our management and affairs. This concentration of ownership and the potential ability to significantly influence our management and affairs may have the effect of preventing or discouraging transactions involving a potential change of control or otherwise adversely affect us.
Provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law could prohibit a change of control that our stockholders may favor and which could negatively affect our stock price.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. Our amended and restated certificate of incorporation and our amended and restated bylaws:
| · | authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt; |
| · | prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors; |
| · | require super-majority voting to effect amendments to provisions of our amended and restated bylaws concerning the number of directors; |
| · | limit who may call special meetings; |
| · | prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; |
| · | establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholders meeting; and |
| · | require that vacancies on the board of directors, including newly-created directorships, be filled only by a majority vote of directors then in office. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder.
We do not anticipate paying cash dividends on our common stock in the foreseeable future, so you can only realize a return on your investment by selling your shares of our common stock.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors and are prohibited by the terms of our credit facility. Please read “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy.” Accordingly, for the foreseeable future you can only realize a return on your investment by selling your shares of our common stock.
We may issue preferred stock that has a liquidation or other preference over our common stock without the approval of the holders of our common stock, which may affect those holders rights or the market price of our common stock.
Our board of directors is authorized to issue series of shares of preferred stock without any action on the part of our stockholders. Our board of directors also has the power, without stockholder approval, to set the terms of any such series of shares of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.
On July 13, 2006, our stockholders approved the issuance of 750,000 shares of convertible preferred stock at $100.00 per share in the private placement with Ares. The shares were issued on July 27, 2006 and a portion of the net proceeds were used to completely repay the amounts outstanding under our credit facility. Issuance costs, including a 1% discount to Ares and other transaction costs, totaled approximately $3.1 million. The preferred stock is convertible into shares of our common stock at a price of $9.60 per share and carries a 5% PIK dividend payable semi-annually.
The preferred shares were convertible into 7,812,500 shares of our common stock on the issuance date and with the effect of the cumulative PIK dividends at the end of five years would be convertible into 10,000,661 shares of common stock. Under the terms of the preferred agreement, under certain circumstances, all five years’ worth of cumulative PIK dividends would accelerate and become payable to the preferred holder. The preferred shareholder holds certain preferential rights, including the appointment of two directors.
Risks Associated with Our Indebtedness
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.
The capital and credit markets have been experiencing extreme volatility and disruption for more than 12 months. In many cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers.
We need liquidity to pay our operating expenses and interest on our debt and to fund our acquisitions. The lack of sufficient liquidity may have a materially adverse effect on our operations and financial results. The principal sources of our liquidity are cash on hand, cash flow from our operations, and access to borrowings under our credit facility. Sources of liquidity in normal markets also include a variety of short- and long-term instruments, including repurchase agreements, commercial paper, medium- and long-term debt, junior subordinated debt securities, capital securities and stockholders’ equity.
In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects if the level of our business activity decreased due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
We have a substantial amount of debt which could adversely affect our operations and financial performance.
As of March 1, 2009, we had approximately $201.1 million of consolidated total indebtedness outstanding and approximately $115.4 million of additional borrowing capacity available under our credit agreement.
Our substantial debt could have important consequences. For example, it could:
| · | make it more difficult for us to satisfy our obligations with respect to our debt; |
| · | increase our vulnerability to general adverse economic and industry conditions; |
| · | limit our ability to obtain additional financing for future working capital, capital expenditures, mergers and other general corporate purposes; |
| · | require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes; |
| · | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| · | make us more vulnerable to increases in interest rates; and |
| · | place us at a competitive disadvantage compared to our competitors that have less debt. |
In addition, we may incur substantial additional debt in the future. If new debt is added to our current debt levels, these related risks could increase. We may not maintain sufficient revenue and cash flow to meet our capital expenditure requirements and our financial obligations, including our debt service obligations.
Our ability to make scheduled payments or to refinance our obligations with respect to our debt will depend on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and to certain financial, business, and other factors beyond our control. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay scheduled expansion and capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt.
The provisions in our debt instruments impose restrictions on us that may limit the discretion of management in operating our business.
The indenture governing the senior notes and our new credit agreement contains various restrictive covenants that limit management’s discretion in operating our business. In particular, these covenants will limit our ability to, among other things:
| · | incur additional debt or issue additional preferred stock; |
| · | make certain investments or pay dividends or distributions on our capital stock or subordinated indebtedness or purchase or redeem or retire capital stock; |
| · | sell or transfer assets, including capital stock of our restricted subsidiaries; |
| · | restrict dividends or other payments by restricted subsidiaries; |
| · | enter into transactions with affiliates; and |
| · | consolidate, merge, sell or lease all or substantially all of our assets. |
The credit agreement also requires us to maintain specified financial ratios and satisfy certain financial tests. Our ability to maintain or meet such financial ratios and tests may be affected by events beyond our control, including changes in general economic and business conditions, and we cannot assure you that we will maintain or meet such ratios and tests or that the lenders under the credit agreement will waive any failure to meet such ratios or tests.
These covenants could materially and adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand, to pursue our business strategies and otherwise to conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations. A breach of these covenants could result in a default under the indenture governing the senior notes and/or the credit agreement. If there were an event of default under the indenture governing the senior notes and/or the credit agreement, the affected creditors could cause all amounts borrowed under these instruments to be due and payable immediately. Additionally, if we fail to repay indebtedness under our credit agreement when it becomes due, the lenders under the credit agreement could proceed against the assets which we have pledged to them as security. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Bank Credit Facility.”
We are a holding company and do not conduct any business operations of our own. Our principal assets are the equity interests we own in our operating subsidiaries, either directly or indirectly. As a result, we are dependent upon cash dividends, distributions or other transfers we receive from our subsidiaries in order to make dividend payments to our stockholders, to repay any debt we may incur, and to meet our other obligations. The ability of our subsidiaries to pay dividends and make payments to us will depend on their operating results and may be restricted by, among other things, applicable corporate, tax and other laws and regulations and agreements of those subsidiaries, as well as by the terms of the credit agreement and the indenture governing the notes.
Item 1B. Unresolved Staff Comments.
None.
Our principal executive offices are located at One Riverway, Suite 1400, Houston, Texas 77056, where we currently lease 14,360 square feet of office space. Currently, we also own or lease field-based administrative offices in Alabama, Arkansas, Colorado, Florida, Kansas, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas.
Our principal property and equipment consist of land (primarily landfills, transfer stations and bases for collection operations), buildings, and vehicles and equipment, including waste collection and transportation vehicles, related support vehicles, carts, containers and heavy equipment used in landfill operations, all of which are encumbered by liens in favor of our lenders. As of December 31, 2008, we owned and/or operated 24 landfills, 26 collection operations and 24 transfer stations/MRFs. Of these facilities, two transfer stations and two landfills are fully permitted but not yet opened, and one transfer station is idle. We also operated but did not own four of the transfer stations as of December 31, 2008. For a description of our landfills, please read “Business—Our Operations—Landfills.” We believe that our office space, operating properties, vehicles and equipment are adequately maintained and sufficient for our current operations. However, we expect to continue to make investments in additional equipment and property for expansion, for replacement of assets, and in connection with future acquisitions.
Information regarding our legal proceedings can be found in note 13(d) to our consolidated financial statements included elsewhere in this report.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2008.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Common Stock
Our common stock is traded on the NASDAQ Global Market under the symbol “WCAA.” As of March 1, 2009, there were approximately 107 holders of record of our common stock. This number does not include any beneficial owners for whom shares of common stock may be held in “nominee” or “street” name. The following table sets forth the range of high and low closing sales prices per share for our common stock as reported by NASDAQ for the periods indicated.
| | | High | | | Low | |
| 2007 | | | | | | |
| First Quarter | | $ | 8.29 | | | $ | 6.33 | |
| Second Quarter | | $ | 9.30 | | | $ | 7.50 | |
| Third Quarter | | $ | 9.00 | | | $ | 7.06 | |
| Fourth Quarter | | $ | 8.17 | | | $ | 5.58 | |
| | | | | | | | | |
| 2008 | | | | | | | | |
| First Quarter | | $ | 7.95 | | | $ | 5.27 | |
| Second Quarter | | $ | 6.72 | | | $ | 4.57 | |
| Third Quarter | | $ | 6.44 | | | $ | 4.40 | |
| Fourth Quarter | | $ | 5.25 | | | $ | 2.29 | |
| | | | | | | | | |
| 2009 | | | | | | | | |
| First Quarter (through March 2, 2009) | | $ | 3.06 | | | $ | 1.98 | |
On March 2, 2009, the closing sales price of our common stock was $2.17.
Performance Graph
The following performance graph compares the performance of our common stock to the S&P 500 Index and the Dow Jones Waste & Disposal Services Index. The graph covers the period commencing on June 23, 2004, our first day of trading on the NASDAQ Global Market, and ending on December 31, 2008 and assumes that a $100 investment was made on June 23, 2004 and that all dividends were reinvested.
| | | June 23, 2004 | | | December 31, 2004 | | | December 31, 2005 | | | December 31, 2006 | | | December 31, 2007 | | | December 31, 2008 | |
| WCA Waste Corporation | | $ | 100.00 | | | $ | 121.65 | | | $ | 91.97 | | | $ | 93.48 | | | $ | 75.20 | | | $ | 29.22 | |
| S&P 500 Index | | $ | 100.00 | | | $ | 105.93 | | | $ | 109.11 | | | $ | 123.97 | | | $ | 128.35 | | | $ | 78.95 | |
| Dow Jones Waste & Disposal Services Index | | $ | 100.00 | | | $ | 101.19 | | | $ | 105.32 | | | $ | 127.22 | | | $ | 130.89 | | | $ | 120.60 | |
Our stock performance may not continue into the future with the same or similar trends depicted in the performance graph above. We will not make or endorse any predictions as to future stock performance.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. We currently intend to retain our earnings, if any, to finance the development and expansion of our business and for general corporate purposes. Furthermore, our debt agreements prohibit payment of cash dividends or other payments or advances by our primary operating subsidiary to us (or any intermediary) under all circumstances, meaning we have very limited sources of cash. Our only source of cash to pay dividends to our stockholders would be distributions or other payments or advances from our subsidiaries, which, as discussed above, is prohibited by the terms of our debt agreements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Bank Credit Facility.” Any future dividends declared would be subject to a relaxation of this prohibition, would be at the discretion of our board of directors and would depend on our financial condition, results of operations, capital requirements, contractual obligations, the other terms of our credit facility and other financing agreements at the time a dividend is considered, and other relevant factors. For a discussion of the PIK dividends accrued under our preferred stock, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources— Preferred Stock.”
Purchases of Equity Securities by Company and Affiliates
| Period | | (a) Total number of shares (or units) purchased | | | (b) Average price paid per share (or unit) | | | (c) Total number of shares (or units) purchased as part of publicly announced plans or programs (2) | | | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | |
| October 1 - October 31, 2008 | | | 337,871 | (1) | | $ | 4.49 | | | | 337,871 | | | $ | 5,394,814 | |
| November 1 - November 30, 2008 | | | 113,760 | (1) | | $ | 4.20 | | | | 113,669 | | | $ | 4,916,986 | |
| December 1 - December 31, 2008 | | | 20,498 | (1) | | $ | 3.16 | | | | 20,498 | | | $ | 4,852,129 | |
| Total | | | 472,129 | (1) | | $ | 4.36 | | | | 472,038 | | | $ | 4,852,129 | |
| Represents shares of our common stock surrendered to satisfy tax withholding obligations on the vesting of restricted stock and shares of our common stock purchased under the common stock repurchase program. |
| (2) | We terminated our common stock repurchase program on December 18, 2009. |
Item 6. Selected Financial Data.
The following tables set forth certain selected historical consolidated financial data derived from our consolidated financial statements included elsewhere in this report except 2004 and 2005 (in thousands except per share data). The information set forth below should be read in connection with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this report. The following information may not be indicative of our future operating results.
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | |
| Revenue | | $ | 208,009 | | | $ | 184,940 | | | $ | 149,497 | | | $ | 114,143 | | | $ | 73,461 | |
| Expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of services (1),(2) | | | 142,129 | | | | 121,853 | | | | 95,991 | | | | 73,933 | | | | 50,387 | |
| Depreciation and amortization | | | 27,151 | | | | 24,234 | | | | 19,070 | | | | 14,795 | | | | 8,828 | |
| Impairment of goodwill | | | 41,725 | | | | — | | | | — | | | | — | | | | — | |
| General and administrative (3) | | | 12,335 | | | | 12,768 | | | | 11,010 | | | | 8,311 | | | | 16,283 | |
| Total expenses | | | 223,340 | | | | 158,855 | | | | 126,071 | | | | 97,039 | | | | 75,498 | |
| Operating income (loss) | | | (15,331 | ) | | | 26,085 | | | | 23,426 | | | | 17,104 | | | | (2,037 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest expense, net | | | (18,560 | ) | | | (16,765 | ) | | | (15,385 | ) | | | (10,201 | ) | | | (4,449 | ) |
| Write-off of deferred financing costs and debt discount (4) | | | — | | | | — | | | | (3,240 | ) | | | (1,308 | ) | | | (618 | ) |
| Impact of interest rate swap | | | (7,547 | ) | | | (4,442 | ) | | | 340 | | | | (165 | ) | | | (4 | ) |
| Other income (expense), net | | | (62 | ) | | | 387 | | | | 192 | | | | 286 | | | | 268 | |
| Other income (expense) | | | (26,169 | ) | | | (20,820 | ) | | | (18,093 | ) | | | (11,388 | ) | | | (4,803 | ) |
| Income (loss) before income taxes | | | (41,500 | ) | | | 5,265 | | | | 5,333 | | | | 5,716 | | | | (6,840 | ) |
| Income tax (provision) benefit | | | 13,737 | | | | (2,343 | ) | | | (2,313 | ) | | | (2,248 | ) | | | 2,476 | |
| Net income (loss) | | | (27,763 | ) | | | 2,922 | | | | 3,020 | | | | 3,468 | | | | (4,364 | ) |
| Accrued payment-in-kind dividend on preferred stock | | | (4,076 | ) | | | (3,876 | ) | | | (1,603 | ) | | | — | | | | — | |
| Net income (loss) available to common stockholders | | $ | (31,839 | ) | | $ | (954 | ) | | $ | 1,417 | | | $ | 3,468 | | | $ | (4,364 | ) |
| Per Share Data — basic and diluted: | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | (1.71 | ) | | | 0.18 | | | | 0.19 | | | | 0.22 | | | | (0.38 | ) |
| Accrued payment-in-kind dividend on preferred stock | | | (0.25 | ) | | | (0.24 | ) | | | (0.10 | ) | | | — | | | | — | |
| Net income (loss) available to common stockholders | | $ | (1.96 | ) | | $ | (0.06 | ) | | $ | 0.09 | | | $ | 0.22 | | | $ | (0.38 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding — basic | | | 16,257 | | | | 16,460 | | | | 16,360 | | | | 15,579 | | | | 11,599 | |
| Weighted average shares outstanding — diluted | | | 16,257 | | | | 16,460 | | | | 16,385 | | | | 15,641 | | | | 11,599 | |
| Other Financial Data: | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 29,301 | | | $ | 29,158 | | | $ | 29,110 | | | $ | 18,003 | | | $ | 14,589 | |
| | | As of December 31, | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | |
| Property and equipment, net | | $ | 276,483 | | | $ | 270,384 | | | $ | 207,441 | | | $ | 186,299 | | | $ | 90,521 | |
| Total assets | | | 387,958 | | | | 426,723 | | | | 371,249 | | | | 291,538 | | | | 163,767 | |
| Current maturities of long-term debt | | | 64 | | | | 699 | | | | 916 | | | | 1,910 | | | | 1,429 | |
| Long-term debt, less current maturities and discount | | | 200,295 | | | | 198,149 | | | | 165,958 | | | | 174,353 | | | | 71,814 | |
| Total stockholders’ equity | | | 139,503 | | | | 170,364 | | | | 167,779 | | | | 91,707 | | | | 74,573 | |
| (1) | We acquired prepaid disposal rights in connection with our acquisition of assets from Waste Management, Inc. (WMI) in 2000. All remaining prepaid disposal rights with WMI were fully utilized in 2007. Additionally in each of the years 2007, 2006 and 2005, we paid $1,000 to acquire prepaid disposal rights at a Texas landfill from Waste Services, Inc. (WSI). At the time we acquired the landfill from WSI in 2007, the remaining prepaid disposal rights of $1,270 were utilized as part of the consideration given. During the years ended December 31, 2007, 2006, 2005 and 2004, we recorded $1,037, $2,383, $1,834 and $377, respectively, for the use of such disposal rights as a component of cost of services. Please read note 3 to our consolidated financial statements. |
| (2) | We have material financial commitments for the costs associated with our future obligations for final closure and post-closure maintenance of the landfills we own and operate. During the years ended December 31, 2008, 2007, 2006, 2005 and 2004, we have recorded $558, $483, $284, $159 and $257, respectively, as a non-cash component of cost of services for the provision and accretion expense relating to these future obligations. Although these are non-cash expenses for the periods presented, the ultimate liability will be settled in cash. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Assumptions—Landfill Accounting” for further discussion of landfill accounting and the adoption of SFAS No. 143 “Accounting for Asset Retirement Obligations.” |
| (3) | General and administrative expenses include stock-based compensation expense of $2,212, $1,977, $1,118, $509 and $11,532 during the years ended December 31, 2008, 2007, 2006, 2005 and 2004. The stock-based compensation expense during the years ended December 31, 2008, 2007, 2006 and 2005 includes earned compensation of $2,182, $1,765, $1,118 and $509, respectively, under the Third Amended and Restated 2004 WCA Waste Corporation Incentive Plan and predecessor plans. In addition, the compensation expense of $30 and $212 during the years ended December 31, 2008 and 2007, respectively, relates to the stock portion of the executive bonus plan. The stock-based compensation expense during the year ended December 31, 2004 represents a compensation charge in connection with stock options outstanding as of December 31, 2003. Prior to an internal reorganization in 2004 described in note 1 to our consolidated financial statements, our predecessor and former parent had options and warrants outstanding. As part of an internal reorganization with us and our predecessor and former parent, we assumed the obligation to issue shares upon the exercise of such options and warrants. Subsequently, we extinguished approximately 90% of such outstanding stock options and warrants by issuing 1,330,056 shares (after giving effect to a merger and reverse stock split prior to our initial public offering in June 2004) of our common stock. We recognized a compensation charge of $11.5 million in connection with the cancellation of these options and warrants and subsequent issuance of common stock in 2004. |
| (4) | The $3,240 write-off of deferred financing costs and debt discount in 2006 reflects the write-off of costs associated with our first and second lien credit agreements that were repaid and retired in connection with our financing transactions in July 2006. The $1,308 write-off of deferred financing costs and debt discount in 2005 is associated with the restructuring of our credit facility in April 2005 as well as the repayment of the Environmental Facilities Revenue Bonds in June 2005. In December 2004, we wrote off $618 of deferred financing costs related to the amendment of our credit facility. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read together with the historical consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate, please read “Risk Factors” included elsewhere in this report and “—Cautionary Statement About Forward-Looking Statements” below.
Executive Overview
General Overview of Our Business
Our operations consist of the collection, transfer, processing and disposal of non-hazardous solid waste. Our revenue is generated primarily from our landfill disposal services and our collection operations provided to residential, commercial and roll-off customers. Roll-off service is the hauling and disposal of large waste containers (typically between 10 and 50 cubic yards) that are loaded on to and off of the collection vehicle. The following table reflects our total revenue by source for the previous three years (dollars in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| | | $ | | | % | | | $ | | | % | | | $ | | | % | |
| Collection: | | | | | | | | | | | | | | | | | | |
| Residential | | $ | 50,433 | | | | 24.2 | % | | $ | 41,647 | | | | 22.5 | % | | $ | 25,385 | | | | 17.0 | % |
| Commercial | | | 21,607 | | | | 10.4 | % | | | 19,069 | | | | 10.3 | % | | | 15,876 | | | | 10.6 | % |
| Roll-off | | | 57,756 | | | | 27.8 | % | | | 53,501 | | | | 28.9 | % | | | 44,539 | | | | 29.8 | % |
| Total collection | | | 129,796 | | | | 62.4 | % | | | 114,217 | | | | 61.7 | % | | | 85,800 | | | | 57.4 | % |
| Disposal | | | 75,456 | | | | | | | | 70,797 | | | | | | | | 60,767 | | | | | |
| Less intercompany | | | 29,527 | | | | | | | | 26,994 | | | | | | | | 21,701 | | | | | |
| Disposal, net | | | 45,929 | | | | 22.1 | % | | | 43,803 | | | | 23.7 | % | | | 39,066 | | | | 26.1 | % |
| Transfer and other | | | 46,413 | | | | | | | | 40,986 | | | | | | | | 37,872 | | | | | |
| Less intercompany | | | 14,129 | | | | | | | | 14,066 | | | | | | | | 13,241 | | | | | |
| Transfer and other, net | | | 32,284 | | | | 15.5 | % | | | 26,920 | | | | 14.6 | % | | | 24,631 | | | | 16.5 | % |
| Total revenue | | $ | 208,009 | | | | 100.0 | % | | $ | 184,940 | | | | 100.0 | % | | $ | 149,497 | | | | 100.0 | % |
2008 Financial Objectives
Before the impact of potential acquisitions, we anticipated 2008 to be a year with improving operating results which included moderate increases in revenue resulting from a balance of price increases and organic volume growth and corresponding EBITDA growth. Earnings per share prior to the effect of potential acquisitions were expected to increase as well. We also expected to selectively invest at least $60 million on acquisitions and other growth opportunities during 2008.
2008 Business Performance
During 2008, our revenue was $208.0 million, which represents a 12.5% increase over 2007. Our operating income (loss) was $(15.3) million in 2008, compared to $26.1 million in 2007. Net loss available to common stockholders for 2008 was $31.8 million, or $1.96 per share, compared to $1.0 million, or $0.06 per share, for 2007. EBITDA for the year was $53.7 million, an increase of 5.9% over 2007. We recorded charges of $4.7 million and $2.7 million (net of tax) due to the impact of interest rate swap agreements in 2008 and 2007, respectively. Our net loss in 2008 also included an expense of $27.0 million (net of tax) related to the impairment of goodwill and a net loss of $0.1 million (net of tax) associated with the early disposition of notes receivable/payable.
Our earnings in 2008 was impacted by the existence of our interest rate swap arrangement with Comerica. Our swap agreement resulted in limiting the underlying base interest rate for $150 million of our debt to 5.64% plus any applicable margin. However, with the reduction in interest rates that began in September 2007, we were obligated to fund the difference between 5.64% and the market rate for three-month floating rate LIBOR. This reduced our cash flow and negatively impacted our pre-tax earnings by $3.2 million in 2008. Considering the rates in effect at December 31, 2008, the impact of the swap agreement is estimated to result in a pre-tax cash cost of $6.3 million in 2009.
During 2008, the total PIK dividend on preferred stock was $4.1 million. In 2009, the PIK preferred dividend will be $4.3 million. For more information regarding the PIK dividend associated with the private placement of our preferred stock, please read “—Liquidity and Capital Resources—Preferred Stock.”
We invested approximately $12.5 million on a combination of newly acquired companies and similar expansion and growth expenditures, including $8.1 million of cash and $0.2 million of accrued future payments in the three acquisitions in 2008. The accrued future payments were made in February 2009. The remaining $4.2 million was related to initial capital expenditures associated with acquisitions. As of December 31, 2008, we had approximately $115.1 million available under our existing credit facility. We believe that our available capacity will enable us to remain opportunistic in potential acquisitions, including the acquisition of distressed companies at lower valuations if such opportunities present themselves. These opportunities may or may not present themselves, and, as such, we do not have a 2009 acquisition goal.
Non-GAAP Measures
Our management evaluates our performance based on non-GAAP measures, of which the primary performance measure is EBITDA. EBITDA consists of earnings (net income or loss) available to common stockholders before preferred stock dividend, interest expense (including write-off of deferred financing costs and debt discount), impact of interest rate swap agreements, income tax expense, depreciation and amortization, impairment of goodwill, and net loss on early disposition of notes receivable/payable. We also use these same measures when evaluating potential acquisition candidates.
We believe EBITDA is useful to an investor in evaluating our operating performance because:
| · | it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired; |
| · | it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest charges from our outstanding debt and the impact of our interest rate swap agreements and payment-in-kind (PIK) dividend) and asset base (primarily depreciation and amortization of our landfills and vehicles) from our operating results; and |
| · | it helps investors identify items that are within our operational control. Depreciation charges, while a component of operating income, are fixed at the time of the asset purchase in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge. |
Our management uses EBITDA:
| · | as a measure of operating performance because it assists us in comparing our performance on a consistent basis as it removes the impact of our capital structure and asset base from our operating results; |
| · | as one method to estimate a purchase price (often expressed as a multiple of EBITDA) for solid waste companies we intend to acquire. The appropriate EBITDA multiple will vary from acquisition to acquisition depending on factors such as the size of the operation, the type of operation, the anticipated growth in the market, the strategic location of the operation in its market as well as other considerations; |
| · | in presentations to our board of directors to enable them to have the same consistent measurement basis of operating performance used by management; |
| · | as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; |
| · | in evaluations of field operations since it represents operational performance and takes into account financial measures within the control of the field operating units; |
| · | as a component of incentive cash bonuses paid to our executive officers and other employees; |
| · | to assess compliance with financial ratios and covenants included in our credit agreements; and |
| · | in communications with investors, lenders, and others, concerning our financial performance. |
The following presents a reconciliation of our total EBITDA to net income (loss) available to common stockholders (in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| Total EBITDA | | $ | 53,704 | | | $ | 50,706 | | | $ | 42,688 | |
| Depreciation and amortization | | | (27,151 | ) | | | (24,234 | ) | | | (19,070 | ) |
| Impairment of goodwill | | | (41,725 | ) | | | — | | | | — | |
| Interest expense, net | | | (18,560 | ) | | | (16,765 | ) | | | (15,385 | ) |
| Write-off of deferred financing costs and debt discount | | | — | | | | — | | | | (3,240 | ) |
| Impact of interest rate swap | | | (7,547 | ) | | | (4,442 | ) | | | 340 | |
| Net loss on early disposition of notes receivable/payable | | | (221 | ) | | | — | | | | — | |
| Income tax (provision) benefit | | | 13,737 | | | | (2,343 | ) | | | (2,313 | ) |
| Accrued payment-in-kind dividend on preferred stock | | | (4,076 | ) | | | (3,876 | ) | | | (1,603 | ) |
| Net income (loss) available to common stockholders | | $ | (31,839 | ) | | $ | (954 | ) | | $ | 1,417 | |
Our EBITDA, as we define it, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation or as substitutes for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.
Other Considerations
Costs of services include, but are not limited to, labor, fuel and other operating expenses, equipment maintenance, disposal fees paid to third-party disposal facilities, insurance premiums and claims expense, selling expenses, wages and salaries of field personnel located at operating facilities, third-party transportation expense and state and local waste taxes. We are self-insured for up to $100,000, $250,000 and $250,000 of our general liability, workers’ compensation and automobile liability per claim, respectively. The frequency and amount of claims or incidents could vary significantly from quarter-to-quarter and/or year-to-year, resulting in increased volatility of our costs of services.
General and administrative expenses include the salaries and benefits of our corporate management, certain centralized reporting, information technology and cash management costs and other overhead costs associated with our corporate office.
Depreciation and amortization expense includes depreciation of fixed assets over their estimated useful lives using the straight-line method and amortization of landfill costs and asset retirement costs based on the consumption of airspace.
In the past, we capitalized third-party expenditures related to pending acquisitions, such as legal, engineering, and accounting expenses, and certain direct expenditures such as travel costs. We expensed indirect acquisition costs, such as salaries, commissions and other corporate services, as we incurred them. We routinely evaluated all capitalized costs, and expensed those related to projects that we believed were not likely to succeed. Starting in 2009, all acquisition-related transaction and restructuring costs will be expensed as incurred rather than capitalized as part of the acquisition costs.
After an acquisition is completed, we incur integration expenses related to (i) incorporating newly-acquired truck fleets into our preventative maintenance program, (ii) testing new employees to comply with Department of Transportation regulations, (iii) implementing our safety program, (iv) re-routing trucks and equipment to assure maximization of routing efficiencies and disposal internalization, and (v) converting customers to our billing system. We generally expect that the costs of acquiring and integrating an acquired business will be incurred primarily during the first 12 months after acquisition. Synergies from tuck-in acquisitions can also take as long as 12 months to be realized.
Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired entities. In allocating the purchase price of an acquired company among its assets, we first assign value to the tangible assets, followed by intangible assets such as covenants not-to-compete and any remaining amounts are then allocated to goodwill.
Acquisitions
As we discussed in “Business—Integration and Acquisitions,” any acquisitions that we may make will target operations that will benefit from our core operating strategy of maximizing the internalization of waste. In markets where we already own a landfill, we intend to focus on expanding our presence by tuck-in acquisitions. Tuck-in acquisitions are sought to provide growth in revenue and increase market share and enable disposal internalization and consolidation of duplicative facilities and functions to maximize cost efficiencies and economies of scale. If we find an attractive new market, we seek to enter that market by acquiring a permitted landfill, followed by acquiring collection and/or transfer operations and internalizing waste into the landfill.
Any acquisition we make would be financed by cash on hand and available capacity under our revolving credit facility, and through additional debt, and/or additional equity, including common stock or preferred stock.
Since completing our initial public offering in June 2004 through the year ended December 31, 2008, we have completed 34 acquisitions. The purchase price for these acquisitions consisted of approximately $233.7 million of cash and accrued future payments, $1.3 million of prepaid airspace, $6.1 million of convertible debt, $11.9 million of assumed debt (net of $0.5 million of debt discount), $4.4 million of assumed deferred tax liabilities and 1,726,336 shares of our common stock, less a note receivable valued at $7.2 million. The note receivable was a $10.5 million non-interest bearing promissory note with payments to us in the amount of $125,000 per month for 84 months through June 2014. In May 2008, we sold the note receivable with the carrying value of approximately $6.5 million for approximately $6.2 million.
We completed three acquisitions during the year ended December 31, 2008, which was less than originally anticipated due to weakening economic and market conditions. Total consideration for these acquisitions included $8.1 million of cash and $0.2 million of accrued future payments. The accrued future payments were made in February 2009. Information concerning our acquisitions may be found in the table below and in our previously filed periodic and current reports and in note 3 to our consolidated financial statements.
The following sets forth additional information regarding the acquisitions since our initial public offering through December 31, 2008:
| Company | | Location | | Region | | Completion Date | | Operations |
| Texas Environmental Waste | | Houston, TX | | II | | July 13, 2004 | | Collection |
| Ashley Trash Service | | Springfield, MO | | I | | August 17, 2004 | | Collection |
| Power Waste | | Birmingham, AL | | III | | August 31, 2004 | | Collection |
| Blount Recycling | | Birmingham, AL | | III | | September 3, 2004 | | Collection, Landfill & Transfer Station |
| Translift, Inc. | | Little Rock, AR | | III | | September 17, 2004 | | Collection |
| Rural Disposal, Inc. | | Willow Springs, MO | | I | | November 12, 2004 | | Collection |
| Trash Away, Inc. | | Piedmont, SC | | III | | November 30, 2004 | | Collection & Transfer Station |
| Gecko Investments (Eagle Ridge) | | St. Louis, MO | | I | | January 11, 2005 | | Collection & Landfill |
| MRR Southern, LLC | | High Point/Raleigh, NC | | III | | April 1, 2005 | | Landfill, Transfer Station & MRF |
| Triangle Environmental | | Raleigh, NC | | III | | May 16, 2005 | | Collection |
| Foster Ferguson | | El Dorado Springs, MO | | I | | May 16, 2005 | | Collection |
| Triad Waste | | High Point, NC | | III | | May 31, 2005 | | Collection |
| Proper Disposal | | Chanute, KS | | I | | May 31, 2005 | | Collection |
| Fort Meade Landfill | | Fort Meade, FL | | II | | October 3, 2005 | | Landfill |
| Meyer & Gabbert | | Sarasota/Arcadia, FL | | II | | October 3, 2005 | | Collection, Landfill & Transfer Station |
| Pendergrass Refuse | | Springfield, MO | | I | | October 4, 2005 | | Collection |
| Andy’s Hauling | | Sarasota, FL | | II | | October 21, 2005 | | Collection |
| Transit Waste | | Durango, CO/Bloomfield, NM | | II | | February 10, 2006 | | Collection & Landfill |
| Fort Myers Transfer Station (*) | | Fort Myers, FL | | II | | August 10, 2006 | | Transfer Station |
| WCA of St. Lucie, LLC | | St. Lucie, FL | | II | | October 2, 2006 | | Transfer Station |
| Sunrise Disposal, LLC | | Springfield, MO | | I | | December 28, 2006 | | Collection |
| Southwest Dumpster, Inc. (*) | | Fort Myers, FL | | II | | January 3, 2007 | | Collection |
| American Waste, Inc. | | Oklahoma City, OK | | II | | February 21, 2007 | | Collection & Landfill |
| Klean Way Disposal, Inc. | | Springfield, MO | | I | | March 30, 2007 | | Collection |
| Carpenter Waste Systems, LLC | | Oklahoma City, OK | | II | | May 31, 2007 | | Collection |
| Fort Bend Regional Landfill | | Houston, TX | | II | | June 29, 2007 | | Collection, Landfill & Transfer Station |
| Big Red Containers, Inc. | | Ardmore, OK | | II | | August 14, 2007 | | Collection |
| Roll-Off Rentals | | Huntsville, AL | | III | | September 4, 2007 | | Collection |
| Waste Pro Services, LLC | | Houston, TX | | II | | October 1, 2007 | | Collection |
| DH Griffin Container Services, LLC | | Greensboro, NC | | III | | October 1, 2007 | | Collection |
| DH Griffin Container of Raleigh, LLC | | Raleigh, NC | | III | | October 1, 2007 | | Collection |
| Maguire Disposal, Inc. | | Oklahoma City, OK | | II | | January 2, 2008 | | Collection |
| Advantage Waste Services | | Springfield/Verona, MO | | I | | October 1, 2008 | | Collection & Transfer Station |
| Advanced Waste Services | | Houston, TX | | II | | October 31, 2008 | | Collection |
(*) These assets were exchanged as part of the consideration for the acquisition of Fort Bend Regional Landfill.
At December 31, 2008, we owned and/or operated a total of 24 landfills, 26 collection operations and 24 transfer stations/MRFs, had approximately 375 routes and handled approximately 13,500 landfill tons per day at our landfills.
On January 15, 2009, we consummated the purchase of a transfer station permit and a 6.2 acre tract of land in Greensboro, North Carolina for the future construction and operation of a transfer station from MRR Southern, LLC and its affiliate. The purchase consisted of $1.0 million in cash at closing and two future payments of $0.5 million. The two remaining installments of $0.5 million are due on January 15, 2010 and 2011, respectively.
Although we have reduced our acquisition efforts due to current market conditions, we intend to pursue selective acquisitions by focusing on those opportunities that most effectively leverage our existing infrastructure and maximize the internalization of waste.
For a description of our accounting for acquisitions and acquisition-related expenses, please read “—Executive Overview—Other Considerations” above and notes 1 and 3 to the consolidated financial statements.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following table sets forth the components of operating income (loss) by major operating segments (Region I: Kansas, Missouri; Region II: Colorado, Florida, New Mexico, Oklahoma, Texas; Region III: Alabama, Arkansas, North Carolina, South Carolina, Tennessee) for the years ended December 31, 2008 and 2007 and the changes between the segments for each category (dollars in thousands):
| | | Region I | | | Region II | | | Region III | | | Corporate | | | Total | | | % of Revenue | |
| Year ended December 31, 2008: | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 53,773 | | | $ | 104,550 | | | $ | 49,686 | | | $ | — | | | $ | 208,009 | | | | 100.0 | |
| Cost of services | | | 38,676 | | | | 68,256 | | | | 35,197 | | | | — | | | | 142,129 | | | | 68.3 | |
| Depreciation and amortization | | | 5,415 | | | | 13,195 | | | | 8,041 | | | | 500 | | | | 27,151 | | | | 13.1 | |
| Impairment of goodwill | | | — | | | | 25,944 | | | | 15,781 | | | | — | | | | 41,725 | | | | 20.1 | |
| General and administrative | | | 3,375 | | | | 7,262 | | | | 3,816 | | | | (2,118 | ) | | | 12,335 | | | | 5.9 | |
| Operating income (loss) | | $ | 6,307 | | | $ | (10,107 | ) | | $ | (13,149 | ) | | $ | 1,618 | | | $ | (15,331 | ) | | | (7.4 | ) |
| Year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 52,543 | | | $ | 84,917 | | | $ | 47,480 | | | $ | — | | | $ | 184,940 | | | | 100.0 | |
| Cost of services | | | 35,040 | | | | 54,757 | | | | 32,056 | | | | — | | | | 121,853 | | | | 65.9 | |
| Depreciation and amortization | | | 5,261 | | | | 11,079 | | | | 7,460 | | | | 434 | | | | 24,234 | | | | 13.1 | |
| General and administrative | | | 3,945 | | | | 4,756 | | | | 3,379 | | | | 688 | | | | 12,768 | | | | 6.9 | |
| Operating income (loss) | | $ | 8,297 | | | $ | 14,325 | | | $ | 4,585 | | | $ | (1,122 | ) | | $ | 26,085 | | | | 14.1 | |
| Increase/(decrease) in 2008 compared to 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 1,230 | | | $ | 19,633 | | | $ | 2,206 | | | $ | — | | | $ | 23,069 | | | | | |
| Cost of services | | | 3,636 | | | | 13,499 | | | | 3,141 | | | | — | | | | 20,276 | | | | | |
| Depreciation and amortization | | | 154 | | | | 2,116 | | | | 581 | | | | 66 | | | | 2,917 | | | | | |
| Impairment of goodwill | | | — | | | | 25,944 | | | | 15,781 | | | | — | | | | 41,725 | | | | | |
| General and administrative | | | (570 | ) | | | 2,506 | | | | 437 | | | | (2,806 | ) | | | (433 | ) | | | | |
| Operating income (loss) | | $ | (1,990 | ) | | $ | (24,432 | ) | | $ | (17,734 | ) | | $ | 2,740 | | | $ | (41,416 | ) | | | | |
Revenue. Total revenue for the year ended December 31, 2008 increased $23.1 million, or 12.5%, to $208.0 million from $184.9 million for the year ended December 31, 2007. Our growth in revenue between the years has been primarily driven by acquisitions. We estimate that acquisitions contributed $15.1 million of the revenue increase in 2008 while internal volume decreased $5.3 million, operational price increases contributed $7.9 million, and pricing from fuel surcharges contributed $5.4 million. The above table reflects the change in revenue in each operating region. The financial results of completed acquisitions are generally blended with existing operations and do not have separate financial information available with the exception of new regions acquired which can be analyzed individually. The revenue increase of $19.6 million in Region II was primarily attributable to the revenue increase in Texas of $23.3 million. Such revenue increase was driven by volume and price increases associated with new collection and hauling contracts in our Texas residential operations as well as the acquisition of a landfill and a transfer station in late June of 2007. We acquired a majority of our Oklahoma operations in Region II in February 2007. Those operations were not fully integrated until the second quarter of 2007. We estimate that the Oklahoma acquisition contributed $4.6 million of the increase in revenue. There was also a $8.3 million revenue decrease in Region II as a result of weakening general economic conditions in Florida and our divestiture of a transfer station and collection operations in Fort Myers, Florida. The revenue increase of $2.2 million in Region III was mainly due to the two North Carolina acquisitions completed in October 2007. Future changes in revenue and cost of services (discussed below) may be impacted by volume changes as a result of market conditions. For more information on the factors affecting our estimates, please see “—Executive Overview—Acquisitions” above.
Cost of services. Total cost of services for the year ended December 31, 2008 increased by 16.6% to $142.1 million from $121.9 million for the year ended December 31, 2007. We believe that our acquisition program accounted for most of the increase in cost of services. Fuel prices, which increased 32.1% nationally from the year ended December 31, 2007 to the year ended December 31, 2008, was the largest non-acquisition related component of the increase in cost of services. Other factors that led to the increase included labor and disposal costs. For
acquisitions within our existing markets, the acquired entities are merged into our existing operations and those results are indistinguishable from the remainder of the operations. As indicated above, Region II and Region III experienced growth through either acquisition or expanded volumes and they each reflected a corresponding increase in their cost of services. An estimated $14.1 million increase in cost of services in Region II was due to the rapid growth of our Texas residential collection operations as we expanded our utilization of Fort Bend Regional Landfill acquired at the end of June 2007. More employees and vehicles were added in this region, which caused the increase in labor, insurance, fuel and vehicle-related costs. In addition, third party disposal and hauling costs increased sharply as we disposed of more residential waste to a third party landfill and contracted third party hauling operations to transport waste from our transfer station to the landfill acquired in 2007. The acquisitions of Oklahoma operations during 2007 contributed to an estimated $3.2 million increase in cost of services in Region II. There was also a $3.8 million decrease in cost of services in Region II as a result of the decrease in revenue in Florida. Cost of services in Region I went up by $3.6 million due to the rising fuel costs and the increase in third party disposal costs. The increase in third party disposal was due to the temporary redirection of waste from one of our landfills and increased disposal at a third party landfill. The increase of $3.1 million in cost of services in Region III was mainly attributable to a combination of rising fuel costs and the North Carolina acquisitions in 2007. For more information on the factors affecting our estimates, please see “—Executive Overview—Acquisitions” above.
Overall cost of services increased to 68.3% of revenue for the year ended December 31, 2008 from 65.9% during the same period last year. Increases in operating costs as a percentage of revenue were primarily attributable to higher payroll-related costs, fuel, outside repairs, landfill site maintenance and disposal costs. Diesel fuel costs as a percentage of revenue increased from 7.0% for the year ended December 31, 2007 to 9.0% for the year ended December 31, 2008. Since a majority of our fuel cost increase was experienced from March to July 2008, there is a lag between the actual increase in fuel costs and the recovery through fuel surcharges. Other than periodic volatility in fuel prices, inflation has not materially affected our operations.
Depreciation and amortization. Depreciation and amortization expenses for the year ended December 31, 2008 increased by 12.0% to $27.2 million from $24.2 million for the year ended December 31, 2007. These increases can be attributed to acquisitions, capital expenditures, and increased amortization corresponding with increased landfill volume usage.
Impairment of goodwill. During the performance of the annual impairment test in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we determined that there was impairment of goodwill due to a decline in our market capitalization and the recent market turmoil driven by the economic recession. Specifically, we concluded that the fair market value of our assets was less than book value in the following reporting units: Florida, North Carolina, Oklahoma and Tennessee. Accordingly, we recognized a non-cash impairment charge of $41.7 million as of December 31, 2008. Please see “—Critical Accounting Estimates and Assumptions—Goodwill, Intangible Assets and Other Long-Lived Assets” for more information.
General and administrative. Total general and administrative expense decreased by 3.4% to $12.3 million for the year ended December 31, 2008 from $12.8 million for the year ended December 31, 2007. The decrease in general and administrative expense was primarily attributable to decreases in payroll-related expenses. Such decrease also resulted in the decrease of overall general and administrative expenses from 6.9% of revenue during the year ended December 31, 2007 to 5.9% of revenue during the year ended December 31, 2008.
The following table sets forth items below operating income (loss) in our condensed consolidated statement of operations and as a percentage of revenue for the years ended December 31, 2008 and 2007 (dollars in thousands):
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | |
| Operating income (loss) | | $ | (15,331 | ) | | | (7.4 | )% | | $ | 26,085 | | | | 14.1 | % |
| Interest expense, net | | | (18,560 | ) | | | (8.9 | ) | | | (16,765 | ) | | | (9.0 | ) |
| Impact of interest rate swap | | | (7,547 | ) | | | (3.6 | ) | | | (4,442 | ) | | | (2.4 | ) |
| Other income (expense), net | | | (62 | ) | | | — | | | | 387 | | | | 0.2 | |
| Income tax (provision) benefit | | | 13,737 | | | | 6.6 | | | | (2,343 | ) | | | (1.3 | ) |
| Accrued payment-in-kind dividend on preferred stock | | | (4,076 | ) | | | (2.0 | ) | | | (3,876 | ) | | | (2.1 | ) |
| Net loss available to common stockholders | | $ | (31,839 | ) | | | (15.3 | )% | | $ | (954 | ) | | | (0.5 | )% |
Interest expense, net. Interest expense, net for the year ended December 31, 2008 increased $1.8 million, or 10.7%, to $18.6 million from $16.8 million for the year ended December 31, 2007. The increase was mainly caused by higher debt balances due to borrowings to finance acquisitions. The increase was also attributed to a $0.7 million decrease in interest income and a $0.4 million amortization of remaining debt discount associated with the early repayment of Environmental Facilities Revenue Bonds.
Impact of interest rate swap. The impact of interest rate swap for the year ended December 31, 2008 was attributable to a $3.2 million loss related to the realized portion of the interest rate swap we entered into in July 2006 and a $4.3 million loss related to the unrealized portion in the mark to market of the swap. The impact of interest rate swap for the year ended December 31, 2007 consisted of a $0.5 million loss related to the realized portion of the interest rate swap and a $3.9 million loss related to the unrealized portion in the mark to market of the swap. At the time we entered into the swap, we had no floating rate debt and therefore no floating rate interest payments were anticipated. As a result, the swap transaction can not be designated as a hedging transaction and any changes in the unrealized fair value of the new swap will be recognized in the statement of operations. Please read note 1(p) to the financial statements included in Item 8 and “Quantitative and Qualitative Disclosures About Market Risk” elsewhere in this report for more information.
Income tax (provision) benefit. Income tax (provision) benefit for the year ended December 31, 2008 as a percentage of pre-tax income (loss) was 33.1% as compared to 44.5% for the year ended December 31, 2007. The decrease in our annual effective tax rate is attributable to the decrease in our pre-tax financial reporting income (loss) for the year ended December 31, 2008 as compared to that for the year ended December 31, 2007. The impairment of goodwill (discussed above) resulted in an income tax benefit of $14.7 million, reducing income tax expense for the year ended December 31, 2008.
Accrued payment-in-kind dividend on preferred stock. The $4.1 million and $3.9 million in accrued PIK dividend on preferred stock relates to the accretion of the 5% PIK dividend on our Series A Convertible Preferred Stock during the years ended December 31, 2008 and 2007, respectively. Please read “—Liquidity and Capital Resources—Preferred Stock.”
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following table sets forth the components of operating income (loss) by major operating segments (Region I: Kansas, Missouri; Region II: Colorado, Florida, New Mexico, Oklahoma, Texas; Region III: Alabama, Arkansas, North Carolina, South Carolina, Tennessee) for the years ended December 31, 2007 and 2006 and the changes between the segments for each category (dollars in thousands):
| | | Region I | | | Region II | | | Region III | | | Corporate | | | Total | | | % of Revenue | |
| Year ended December 31, 2007: | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 52,543 | | | $ | 84,917 | | | $ | 47,480 | | | $ | — | | | $ | 184,940 | | | | 100.0 | |
| Cost of services | | | 35,040 | | | | 54,757 | | | | 32,056 | | | | — | | | | 121,853 | | | | 65.9 | |
| Depreciation and amortization | | | 5,261 | | | | 11,079 | | | | 7,460 | | | | 434 | | | | 24,234 | | | | 13.1 | |
| General and administrative | | | 3,945 | | | | 4,756 | | | | 3,379 | | | | 688 | | | | 12,768 | | | | 6.9 | |
| Operating income (loss) | | $ | 8,297 | | | $ | 14,325 | | | $ | 4,585 | | | $ | (1,122 | ) | | $ | 26,085 | | | | 14.1 | |
| Year ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 48,849 | | | $ | 55,807 | | | $ | 44,841 | | | $ | — | | | $ | 149,497 | | | | 100.0 | |
| Cost of services | | | 35,260 | | | | 30,756 | | | | 29,975 | | | | — | | | | 95,991 | | | | 64.2 | |
| Depreciation and amortization | | | 4,837 | | | | 6,818 | | | | 7,068 | | | | 347 | | | | 19,070 | | | | 12.7 | |
| General and administrative | | | 3,490 | | | | 2,873 | | | | 3,104 | | | | 1,543 | | | | 11,010 | | | | 7.4 | |
| Operating income (loss) | | $ | 5,262 | | | $ | 15,360 | | | $ | 4,694 | | | $ | (1,890 | ) | | $ | 23,426 | | | | 15.7 | |
| Increase/(decrease) in 2007 compared to 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 3,694 | | | $ | 29,110 | | | $ | 2,639 | | | $ | — | | | $ | 35,443 | | | | | |
| Cost of services | | | (220 | ) | | | 24,001 | | | | 2,081 | | | | — | | | | 25,862 | | | | | |
| Depreciation and amortization | | | 424 | | | | 4,261 | | | | 392 | | | | 87 | | | | 5,164 | | | | | |
| General and administrative | | | 455 | | | | 1,883 | | | | 275 | | | | (855 | ) | | | 1,758 | | | | | |
| Operating income (loss) | | $ | 3,035 | | | $ | (1,035 | ) | | $ | (109 | ) | | $ | 768 | | | $ | 2,659 | | | | | |
Revenue. Total revenue for the year ended December 31, 2007 increased $35.4 million, or 23.7%, to $184.9 million from $149.5 million for the year ended December 31, 2006. Our growth in revenue between the years was primarily driven by acquisitions. We estimate that acquisitions contributed $25.1 million of the revenue increase in 2007 while internal volume growth contributed $5.2 million, operational price increases contributed $3.8 million, and pricing from fuel surcharges added $1.3 million. The above table reflects the change in revenue in each operating region. The financial results of completed acquisitions are generally blended with existing operations and do not have separate financial information available with the exception of new regions acquired which can be analyzed individually. The revenue increase of $29.1 million in Region II was primarily attributed to the volume and price increases totaling $18.4 million associated with new collection and hauling contracts in our Texas residential operations as well as the acquisition of a landfill and a transfer station during 2007. We estimate that the acquisition of a majority of our Oklahoma operations in Region II contributed $13.9 million of the increase in revenue during the year ended December 31, 2007. There was also a $4.0 million revenue decrease in Region II as a result of general market conditions in Florida and the divestitures of a transfer station and collection operations in Fort Myers, Florida. The $3.7 million increase in estimated revenue in Region I was caused by price increases, and volume growth from the two tuck-in acquisitions completed in late 2006 and early 2007. Revenue increases in Region III and Colorado/New Mexico in Region II were mainly related to price increases in order to compensate higher operating costs. For more information on the factors affecting our estimates, please see “—Executive Overview—Acquisitions” above.
Cost of services. Total cost of services for the year ended December 31, 2007 increased $25.9 million, or 26.9%, to $121.9 million from $96.0 million for the year ended December 31, 2006. We believe that our acquisition program accounted for most of the increase in cost of services, followed by costs associated with internal volume growth including labor, fuel and disposal costs. For acquisitions within our existing markets, the acquired entities are merged into our existing operations and those results are indistinguishable from the remainder of the operations. As indicated above, Region II experienced growth through either acquisition or expanded volumes and they each reflected a corresponding increase in their cost of services. Region II had an estimated $13.0 million increase in cost of services due to the rapid growth of our Texas residential collection operations and the acquisition at the end of June 2007. More employees and vehicles were added, which caused the increase in labor, insurance, fuel and vehicle-related costs. In addition, third party disposal and hauling costs increased sharply as we disposed of more residential waste to a third party landfill and contracted third party hauling operations to transport waste from our transfer station to our recently-acquired landfill. The acquisition of Oklahoma operations during 2007 contributed to an estimated $11.5 million increase in cost of services in Region II. Region I decreased while revenue increased mainly due to the reduction in fleet maintenance costs and the partial recovery of charges incurred last year related to damage caused by a third party blasting rock near one of our landfills. The increase in cost of services in Region III was consistent with the increase in revenue. For more information on the factors affecting our estimates, please see “—Executive Overview —Acquisitions” above.
Overall cost of services increased to 65.9% of revenue for the year ended December 31, 2007 from 64.2% during the same period in 2006. Increases in operating costs as a percentage of revenue were primarily attributable to higher payroll-related costs, fuel and vehicle-related costs, and disposal costs. Diesel fuel costs as a percentage of revenue increased from 6.5% for the year ended December 31, 2006 to 7.0% for the year ended December 31, 2007.
Depreciation and amortization. Depreciation and amortization expenses for the year ended December 31, 2007 increased by 27.1% to $24.2 million from $19.1 million for the year ended December 31, 2006. These increases can be attributed to acquisitions, capital expenditures, and increased amortization corresponding with increased landfill volume usage.
General and administrative. Total general and administrative expense increased $1.8 million, or 16.0%, to $12.8 million for the year ended December 31, 2007 from $11.0 million for the year ended December 31, 2006. The increase was primarily attributable to payroll-related costs, legal expenses and franchise taxes. The general and administrative expense also included a $0.9 million increase in stock-based compensation expense related to the stock portion of the executive bonus plan and earned compensation from restricted stock grants under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan and the successor plan. Overall, general and administrative expenses remained round 7% of revenue in each of the years presented.
The following table sets forth items below operating income in our condensed consolidated statement of operations and as a percentage of revenue for the years ended December 31, 2007 and 2006 (dollars in thousands):
| | | Years Ended December 31, | |
| | | 2007 | | | 2006 | |
| Operating income | | $ | 26,085 | | | | 14.1 | % | | $ | 23,426 | | | | 15.7 | % |
| Interest expense, net | | | (16,765 | ) | | | (9.0 | ) | | | (15,385 | ) | | | (10.3 | ) |
| Write-off of deferred financing costs and debt discount | | | — | | | | — | | | | (3,240 | ) | | | (2.2 | ) |
| Impact of interest rate swap | | | (4,442 | ) | | | (2.4 | ) | | | 340 | | | | 0.2 | |
| Other income, net | | | 387 | | | | 0.2 | | | | 192 | | | | 0.1 | |
| Income tax provision | | | (2,343 | ) | | | (1.3 | ) | | | (2,313 | ) | | | (1.5 | ) |
| Accrued payment-in-kind dividend on preferred stock | | | (3,876 | ) | | | (2.1 | ) | | | (1,603 | ) | | | (1.1 | ) |
| Net income (loss) available to common stockholders | | $ | (954 | ) | | | (0.5 | )% | | $ | 1,417 | | | | 0.9 | % |
Interest expense, net. Interest expense, net for the year ended December 31, 2007 increased by 10.4%, to $17.3 million from $15.6 million for the year ended December 31, 2006. The increase was mainly caused by higher debt balances due to borrowings to finance acquisitions. In addition, the average interest rate was higher in 2007 as we had our 9.25% senior notes for the entire year of 2007 compared to less than six months in 2006. The average interest rate prior to the issuance of our senior notes was between 8.0% and 8.5%.
Write-off of deferred financing costs and debt discount. The $3.2 million write-off of deferred financing costs and debt discount in 2006 reflects the write-off of costs associated with our first and second lien credit agreements that were repaid and retired in connection with our financing transactions in July 2006.
Impact of interest rate swap. The impact of interest rate swap for the year ended December 31, 2007 was attributable to a $0.5 million loss related to the realized portion of the interest rate swap we entered into in July 2006 and a $3.9 million loss related to the unrealized portion in the mark to market of the swap. The impact of interest rate swap for the year ended December 31, 2006 consisted of a $4.0 million gain we realized from the swap counter-party of the terminated interest rate swap agreement in association with the restructuring of our long-term debt in July 2006, a $3.4 million loss related to the unrealized portion in the mark to market of the interest rate swap agreement we entered into in July 2006, and a $0.3 million loss related to the realized portion of both interest rate swap agreements. At the time we entered into the swap in July 2006, we had no floating rate debt and therefore no floating rate interest payments were anticipated. As a result, the swap transaction can not be designated as a hedging transaction and any changes in the unrealized fair value of the new swap will be recognized in the statement of operations. Please read note 1(p) to the financial statements included in Item 8 and “Quantitative and Qualitative Disclosures About Market Risk” elsewhere in this report for more information.
Income tax provision. Income tax provision for the year ended December 31, 2007 as a percentage of pre-tax income was 44.5% as compared to 43.4% for the year ended December 31, 2006. The increase in tax rate primarily relates to the impact of certain non-deductible permanent items in 2007.
Accrued payment-in-kind dividend on preferred stock. The $3.9 million and $1.6 million in accrued PIK dividend on preferred stock relates to the accretion of the 5% PIK dividend on our Series A Convertible Preferred Stock from January 1, 2007 to December 31, 2007 and from its date of issuance (July 27, 2006) to December 31, 2006, respectively. Please read “—Liquidity and Capital Resources—Preferred Stock.”
Liquidity and Capital Resources
Our business and industry is capital intensive, requiring capital for equipment purchases, landfill construction and development, and landfill closure activities in the future. Any acquisitions that we make will also require significant capital. We plan to meet our future capital needs primarily through cash on hand, cash flow from operations and borrowing capacity under our credit facility. Additionally, our acquisitions may use seller notes, equity issuances and debt financings. ��The availability and level of our financing sources cannot be assured, particularly in light of the current market conditions. Recent disruptions in the credit markets have resulted in greater volatility, less liquidity, widening of credit spreads and more limited availability of financing. In addition, the availability under our credit facility is limited by compliance with certain covenants and ratios. Our inability to obtain funding necessary for our business on acceptable terms would have a material adverse impact on us.
To address potential credit and liquidity issues, we considered several items. In spite of slowdowns in volume at many of our locations as a result of current economic conditions, we continue to maintain strong operating cash flows. Our customer base is broad and diverse with no single customer making up any significant portion of our business. We are not dependent on individual vendors to meet the needs of our operations. Furthermore, we had approximately $115.1 million in available capacity under our current revolving credit agreement as of December 31, 2008 subject to customary covenant compliance. The revolving credit facility is in effect until mid 2011. We have considered the financial stability of the syndicate banks making up that facility and believe that the bank group has the ability to satisfy its obligations to us under the facility. A portion of our capital additions is discretionary, giving us the ability to modify the timing of such expenditures to preserve cash if the need arises in the future. We have evaluated our insurance carriers and bond providers and have not seen any indication that such providers would be unable to continue to meet their obligations to us or provide coverage to us in the future.
On April 16, 2008, our Board of Directors authorized the repurchase of up to $10 million of our common shares from time to time in open market or private transactions. The timing and actual number of shares purchased depended on a variety of factors including the stock price, corporate and regulatory requirements and other market and economic conditions. The stock repurchase program was terminated on December 18, 2008. During the year ended December 31, 2008, we repurchased 1,056,014 shares of our common stock for approximately $5.1 million.
As of December 31, 2008, we had total outstanding long-term debt of approximately $200.4 million, consisting of $150 million of senior notes, $48.6 million outstanding under our credit facilities, approximately $1.7 million of various seller notes, and approximately $0.1 million of equipment notes. This represented an increase of $1.1 million over our total debt outstanding as of December 31, 2007. The increase in outstanding debt since December 31, 2007 was primarily due to $17.3 million additional borrowings under the credit facility, partially offset by repayments of $7.0 million seller notes, $8.8 million Environmental Facilities Revenue Bonds and various equipment notes. As of December 31, 2008, we had $47.0 million outstanding under the revolving credit facility, approximately $1.6 million in the swing-line feature under our credit facility and approximately $11.3 million in letters of credit that serve as collateral for insurance claims and bonding, leaving $115.1 million in available capacity under the facility. With $1.0 million of cash on hand at December 31, 2008, our total capacity was approximately $116.1 million.
9.25% Senior Notes Due 2014
On July 5, 2006, we issued $150 million aggregate principal amount of 9.25% senior notes due 2014. The net proceeds of the offering were $145.7 million after deducting $3.75 million in initial purchasers’ discounts and other issuance costs. The proceeds were applied to certain debt outstanding under our first and second lien credit agreements as well as outstanding borrowings on the revolving note payable. The senior notes pay interest semi-annually on June 15 and December 15, commencing December 15, 2006 with the following redemption provisions:
| · | At any time before June 15, 2009, we may redeem up to 35% of the notes with net cash proceeds of certain equity offerings at a redemption price of 109.25% of the par value of the notes redeemed, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date, as long as we redeem the notes within 180 days of the offering and at least 65% of the aggregate principal amount of the notes issued pursuant to the indenture remains outstanding after the redemption; |
| · | Prior to June 15, 2010, we may redeem all or part of the notes by paying a make-whole premium, plus accrued and unpaid interest, and, if any, liquidated damages; and |
| · | The notes may be callable beginning on June 15, 2010, 2011, and 2012 and thereafter at redemption prices of 104.625%, 102.313% and 100% of the principal amount plus accrued interest. |
The senior notes are senior unsecured obligations and rank equally with our existing and future senior unsecured indebtedness and senior to any of our existing and future subordinated indebtedness. The senior notes will be effectively subordinated to any existing or future secured indebtedness, to the extent of the assets securing such indebtedness. The senior notes are guaranteed by all of our subsidiaries. The guarantees are senior unsecured obligations of the guarantors. The guarantees rank equally with all existing and future senior unsecured indebtedness of the guarantors and senior to any existing and future subordinated indebtedness of the guarantors. The guarantees are effectively subordinated to any existing or future secured indebtedness of the guarantors to the extent of the assets securing such indebtedness.
The senior notes were issued under an indenture between WCA Waste and The Bank of New York Trust Company, N.A., as Trustee. The indenture contains covenants including, among other provisions, limitations on our ability to incur additional indebtedness, make capital expenditures, create liens, sell assets and make dividend and other payments. As of December 31, 2008, we were in compliance with all covenants under the senior notes indenture.
Bank Credit Facility
Additionally, on July 5, 2006, we entered into a $100 million revolving secured credit facility with Comerica Bank maturing July 5, 2011 (as amended, the “Credit Agreement”). On July 28, 2006, Comerica syndicated the credit facility to a group of banks and we agreed to increase the capacity of the revolving credit facility to $175 million. The credit commitment available under the credit facility includes sub-facilities for standby letters of credit in the aggregate principal amount of up to $50.0 million and a swing-line feature for up to $10.0 million for same day advances. This credit facility replaced the previous $100 million revolving credit facility with Wells Fargo Bank National Association as administrative agent. At the time that the credit facility was entered into, it included covenants similar to the expiring facility with reduced interest margins associated with various leverage ratios. These interest margins were amended in October 2008 and again on February 19, 2009. Applicable fees and margins are determined based on our leverage ratio for the trailing 12-month reporting period on each quarterly reporting date. The following table highlights the revised margins included in the October 2008 (Commitment Fee) and February 2009 (LIBOR Margin and Prime Margin) amendments:
| | | LIBOR | | Prime | | Commitment | |
| Leverage Ratio | | Margin | | Margin | | Fee | |
| Less than 3.0x | | 2.500 | | 2.250 | | 0.500 | |
| Equal to or greater than 3.0 and less than 3.5x | | 2.750 | | 2.500 | | 0.500 | |
| Equal to or greater than 3.5 and less than 4.0x | | 3.000 | | 2.750 | | 0.500 | |
| Equal to or greater than 4.0 and less than 4.5x | | 3.250 | | 3.000 | | 0.750 | |
| Equal to or greater than 4.5x | | 3.500 | | 3.250 | | 1.000 | |
Our obligations under the credit facility are secured by the capital stock of our subsidiaries and all tangible (including real estate) and intangible assets belonging to us and our subsidiaries. The obligations are also guaranteed by certain material subsidiaries. Obligations under the credit facility are recourse obligations and are subject to cancellation and/or acceleration upon the occurrence of certain events, including, among other things, a change of control (as defined in the credit facility), nonpayment, breaches of representations, warranties and covenants (subject to cure periods in certain instances), bankruptcy or insolvency, defaults under other debt arrangements, failure to pay certain judgments and the occurrence of events creating material adverse effects.
The credit facility is subject to customary financial and other covenants including, but not limited to, limitations on debt, consolidations, mergers, and sales of assets. In the February 2009 amendment, the requirement that we maintain an Adjusted EBIT Debt Service Ratio (as defined in the Credit Agreement), until maturity, of not less than
1.25 to 1.00, was eliminated in favor of a requirement that we maintain a Pro Forma Adjusted EBITDA Debt Service Ratio (as defined in the Credit Agreement) of not less than 2.25 to 1.00 until maturity. The Pro Forma Adjusted EBITDA Debt Service Ratio is determined on a trailing 12 month basis. In addition, the February 2009 amendment (i) reduced the maximum Senior Secured Funded Debt Leverage Ratio (as defined in the Credit Agreement) from 3.00 to 1.00 to 2.50 to 1.00, (ii) imposed a restriction that we cannot make any maintenance capital expenditures exceeding 15% of our consolidated total revenue as calculated at the end of a fiscal year and (iii) replaced the prior minimum net worth covenant with a minimum tangible net worth covenant. We are required to maintain minimum tangible net worth of not less than $30.0 million as of December 31, 2008, plus, as of the end of each fiscal quarter thereafter, 50% of our after-tax consolidated net income (but excluding any quarterly losses), plus 100% of any increase in our net worth resulting from the net cash proceeds of any future equity offerings.
Other covenants in the credit agreement limit our ability and certain of our subsidiaries to, among other things, create, incur, assume or permit to exist certain liens; make certain investments, loans and advances; enter into any sale-leaseback transactions; materially change the nature of their businesses; create, incur, assume or permit to exist certain leases; merge into or with or consolidate with any other person; sell, lease or otherwise dispose of all or substantially all of their properties or assets; discount or sell any of their notes or accounts receivable; transact business with affiliates unless in the ordinary course of business and on arm’s length basis; make certain negative pledges; or amend, supplement or otherwise modify the terms of any debt or prepay, redeem or repurchase any subordinated debt. Please read “Risk Factors—Risks Associated with Our Indebtedness.” As of December 31, 2008, we were in compliance with all covenants under the credit facility agreement.
Preferred Stock
On June 12, 2006, we entered into a privately negotiated Preferred Stock Purchase Agreement with Ares Corporate Opportunities Fund II L.P., which provided for us to issue and sell 750,000 shares of Series A Convertible Preferred Stock, par value $0.01 per share, to Ares. The purchase price per preferred share was $100.00, for an aggregate purchase price of $75 million. The preferred stock is convertible into our common stock, par value $0.01 per share, at a price of $9.60 per share and carries a 5% PIK dividend payable semi-annually. The closing of the sale and issuance of the full amount of preferred shares pursuant to the purchase agreement was completed on July 27, 2006. The original issuance date for the preferred stock is the commitment date for both the preferred stock and the initial five years’ worth of dividends as the payment of the dividends through in-kind payments is non-discretionary for that initial five-year period. Based on the fair value of our underlying common stock on the issuance date and the stated conversion date, there is no beneficial conversion feature associated with the issuance of the preferred stock.
The preferred shares are immediately convertible at Ares’ discretion into 8,880,754 shares of our common stock, which would represent approximately 35.1% of our outstanding common stock on a post-conversion basis as of March 1, 2009. Dividends are solely PIK for the first five years — that is, they are payable solely by adding the amount of dividends to the stated value of each share. At the end of five years, the preferred shares would be convertible into approximately 10,000,661 shares of common stock, which, based on the currently outstanding shares, would represent approximately 37.8% of the post-conversion shares outstanding. If the preferred shares are not converted after five years, we have the option to PIK or pay a cash dividend at the rate of 5% per annum. The preferred shares have no stated maturity.
Other material terms of the preferred stock are as follows:
| · | all dividends that would otherwise be payable through the fifth anniversary of issuance shall automatically be accelerated and paid in kind immediately prior to the occurrence of any of the following acceleration events: |
| · | closing of a public offering of common stock pursuant to an effective registration statement (except for Form S-4, solely for sales by third parties, or pursuant to Ares’ own registration rights agreement) |
| · | the average of the closing price of our common stock for each of 20 consecutive trading days exceeds $14.40 per share |
| · | upon a “fundamental transaction,” including a “group” (defined in the Securities Exchange Act of 1934, as amended) acquiring more than 35% of outstanding voting rights; replacement of more than one-half of the directors without approval of the existing board of directors; a merger, consolidation, sale of substantially all assets, going-private transaction, tender offer, reclassification, or other transaction that results in the transfer of a majority of voting rights; |
| · | Ares can convert the preferred stock into common stock at any time at a conversion price of $9.60 per share, with conversion being calculated by taking the stated value (initially $100.00 per share) plus any amount added to stated value by way of dividends, then dividing by $9.60 to produce the number of shares of common stock issuable; |
| · | we can force a conversion into common stock following either (i) the average of the closing price of our common stock for each of 20 consecutive trading days exceeding $14.40 per share or (ii) a fundamental transaction that Ares does not treat as a liquidation; |
| · | after the fifth anniversary of issuance, we can redeem for cash equal to the liquidation preference; |
| · | after the fifth anniversary of issuance, we can pay dividend in cash at our discretion; |
| · | upon our liquidation, prior to any holder of common stock or other junior securities, Ares shall receive in cash the greater of (i) the stated value plus any amount added by way of dividends (accelerated to include a full five years) or (ii) the amount it would receive if all shares of preferred stock were converted into common stock (calculated to include dividends accelerated to include a full five years); |
| · | Ares can elect to treat any fundamental transaction as a liquidation event, which will entitle Ares to their liquidation preferences. Following such election, in the event that we elect to make any payment such as a dividend or stock repurchase payment to a common shareholder, we will be required to repay Ares the full amount of the liquidation preference associated with the preferred stock. However, if securities of another company are issued as consideration in a fundamental transaction, we have the option of requiring Ares to accept such common shares to satisfy the liquidation preference if shares are then quoted on the Nasdaq Global Market or listed on the New York Stock Exchange. The value of such shares is determined at 98% of the closing price on the trading day preceding the transaction and the shares are freely transferable without legal or contractual restrictions; |
| · | the preferred stock voting as a separate class elects (i) two directors to our board of directors for so long as Ares continues to hold preferred stock representing at least 20% of our “post-conversion equity” (outstanding common stock assuming conversions into common shares of all securities, including the preferred stock and assuming preferred stock dividends accelerated to include a full five years), (ii) one director for so long as it continues to hold at least 10% of post-conversion equity, and (iii) no directors below 10%; |
| · | the preferred stock voting as a separate class must approve (i) any alteration in its powers, preferences or rights, or in the certificate of designation, (ii) creation of any class of stock senior or pari passu with it, (iii) any increase in the authorized shares of preferred stock, and (iv) any dividends or distribution to common stock or any junior securities, except for pro rata dividends on common stock paid in common stock. These protective rights terminate on the first date on which there are outstanding less than 20% of the number of shares of preferred stock outstanding on the date the preferred stock was first issued; and |
| · | except for the election of directors and special approvals described above, the preferred stock votes on all matters and with the common stock on an as-converted basis. |
In connection with the issuance and sale of the preferred shares, we also entered into other agreements as contemplated by the purchase agreement, including a stockholder’s agreement, a registration rights agreement, and a management rights letter. The purchase agreement, the stockholder’s agreement, the registration rights agreement, the management rights letter and the certificate of designation pursuant to which the preferred shares were created, are described in our current report on Form 8-K filed on June 16, 2006.
Tax-Exempt Bonds
During the year ended December 31, 2008, we repaid $8.8 million of Environmental Facilities Revenue Bonds. As of December 31, 2008, there were no tax-exempt bonds outstanding.
Contractual Obligations
As of December 31, 2008, we had the following contractual obligations (in thousands). The contractual obligations do not include interest payments on long-term debt due to the variable interest rates under our credit facility and the varying amounts outstanding under our credit facility during the year. The contractual interest rate for our credit facility is the LIBOR base rate plus a stipulated margin, which also fluctuates based on our leverage ratio. For the year ended December 31, 2008, our cash paid for interest expense was $17.8 million. Please read note 7 to our consolidated financial statements for balances and terms of our credit facility at December 31, 2008.
| | | Payments Due By Period | |
| Contractual Obligations | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More Than 5 Years | |
| Long-term debt principal amount outstanding (1) | | $ | 200,359 | | | $ | 64 | | | $ | 48,720 | | | $ | 1,575 | | | $ | 150,000 | |
| Closure and post-closure costs (2) | | | 173,588 | | | | — | | | | 1,344 | | | | 181 | | | | 172,063 | |
| Operating lease | | | 4,838 | | | | 926 | | | | 1,575 | | | | 745 | | | | 1,592 | |
| Note payable | | | 123 | | | | 123 | | | | — | | | | — | | | | — | |
| Total | | $ | 378,908 | | | $ | 1,113 | | | $ | 51,639 | | | $ | 2,501 | | | $ | 323,655 | |
| (1) | Related interest obligations have been excluded from this maturity schedule. |
| (2) | The closure and post-closure costs amounts included reflect the amounts recorded in our consolidated balance sheet as of December 31, 2008, without the impact of discounting and inflation. We believe the amount and timing of these activities are reasonably estimable. The cost in current dollars is inflated (2.5% at December 31, 2008) until the expected time of payment, and then discounted to present value (8.5% at December 31, 2008). Accretion expense is then applied to the closure and post-closure liability based on the effective interest method and is included in cost of services. Our recorded closure and post-closure liabilities will increase as we continue to place additional volumes within the permitted airspace at our landfills. |
Other Commitments
As of December 31, 2008, we had the following other commitments (in thousands):
| | | Commitment Expiration By Period | |
| Other Commitments | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More Than 5 Years | |
| Financial surety bonds (1) | | $ | 60,108 | | | $ | 60,108 | | | $ | — | | | $ | — | | | $ | — | |
| Standby letters of credit (2) | | | 11,291 | | | | 11,291 | | | | — | | | | — | | | | — | |
| Total | | $ | 71,399 | | | $ | 71,399 | | | $ | — | | | $ | — | | | $ | — | |
| (1) | We use financial surety bonds for landfill closure and post-closure financial assurance required under certain environmental regulations and may use other mechanisms including insurance, letters of credit and restricted cash deposits. These surety bonds are renewed on an annual basis. We have experienced less availability of surety bonds for landfill closure and post-closure requirements and increased costs including the direct fees associated with the bonds, increased levels of standby letters of credit or personal guarantees provided to the surety bond underwriters. Our commitments for financial surety bonds are not recorded in our financial statements. Our surety bonds relate to closure and post-closure obligations relating to our landfills and would not create debt unless and until we closed such landfills and were unable to satisfy closure and post-closure obligations. |
| (2) | We provide standby letters of credit to the surety bond underwriters as discussed in note (1) above. As of December 31, 2008, $4.7 million had been provided to the surety bond underwriters. We also provide standby letters of credit and restricted cash deposits to our insurance underwriters for the self insured portion of outstanding claims. As of December 31, 2008, we had provided $6.6 million in standby letters of credit. All of these standby letters of credit are renewed on an annual basis. Our commitments for standby letters of credit are not recorded in our financial statements. The standby letters of credit relate to the portion of claims covered by insurance policies as to which we had retained responsibility and would not create debt unless we were unable to satisfy such claims from our operating income. However, we currently satisfy such claims from our cash flows from operations. |
If our current surety bond underwriters are unwilling to renew existing bonds upon expiration, or are unwilling to issue additional bonds as needed, or if we are unable to obtain surety bonds through new underwriters as such needs arise, we would need to arrange other means of financial assurance, such as restricted cash deposits or a letter of credit. While such alternate assurance has been available, it may result in additional expense or capital outlays.
We accrue claims related to our self-insurance programs based on claims filed, estimated open claims and claims incurred but not reported based on actuarial-based loss development factors. As of December 31, 2008, we had accrued approximately $2.5 million for these claims. If we experience insurance claims or costs above or below our limited history, our estimates could be materially affected.
Cash Flows
The following is a summary of our cash balances and cash flows for the years ended December 31, 2008, 2007 and 2006 (in thousands):
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Cash and cash equivalents at the end of the period | | $ | 955 | | | $ | 1,138 | | | $ | 52,207 | |
| Net cash provided by operating activities | | $ | 34,294 | | | $ | 39,606 | | | $ | 36,876 | |
| Net cash used in investing activities | | $ | (30,943 | ) | | $ | (121,013 | ) | | $ | (36,537 | ) |
| Net cash provided by (used in) financing activities | | $ | (3,534 | ) | | $ | 30,338 | | | $ | 51,190 | |
Net cash provided by operating activities for the years ended December 31, 2008, 2007 and 2006 was $34.3 million, $39.6 million and $36.9 million, respectively. The changes in cash flows from operating activities are primarily due to the changes in net income (loss), deferred taxes and the components of working capital from year to year as well as the impairment of goodwill in 2008. Other items impacting operating cash flows include depreciation and amortization, write-off of deferred financing costs and debt discount, interest rate swap, prepaid disposal usage as well as stock-based compensation, all of which were non-cash expenses. Additionally in 2006, we realized $4.0 million from the termination of an interest rate swap agreement.
Net cash used in investing activities consists primarily of cash used for capital expenditures and the acquisition of businesses. Cash used for capital expenditures, including acquisitions, was $37.9 million, $121.3 million and $36.7 million for the years ended December 31, 2008, 2007 and 2006, respectively. The fluctuation is mainly caused by acquisitions over the years. In 2008, we reduced our acquisition activity in response to weakening market conditions. We spent substantially more on acquisitions in 2007. During 2006 we reduced our pace for acquisitions and focused on implementing a new capital plan to provide us with more funds to pursue future acquisitions. On the other hand, capital expenditures related to our existing operations remained steady as our revenue grows.
Net cash provided by (used in) financing activities during the years ended December 31, 2008, 2007 and 2006 was $(3.5) million, $30.3 million and $51.2 million, respectively. Net cash provided by (used in) financing activities during the years ended December 31, 2008, 2007 and 2006 mainly includes a combination of the issuance of equity including common stock and preferred stock, the issuance of our senior notes, borrowings under our credit facilities, repayments of debt, payments under the common stock repurchase program, changes in restricted cash, and financing costs associated with our credit facilities. Proceeds from financing during 2008 and 2007 included the borrowings under our revolving credit facility. Proceeds from financing during 2006 included the net proceeds from the issuance of preferred stock and our senior notes.
Critical Accounting Estimates and Assumptions
We make several estimates and assumptions during the course of preparing our financial statements. Since some of the information that we must present depends on future events, it cannot be readily computed based on generally accepted methodologies, or may not be appropriately calculated from available data. Some estimates require us to exercise substantial judgment in making complex estimates and assumptions and, therefore, have the greatest degree of uncertainty. This is especially true with respect to estimates made in accounting for landfills, environmental remediation liabilities and asset impairments. We describe the process of making such estimates and other significant accounting policies in notes 1 and 2 to our consolidated financial statements.
Landfill Accounting
Capitalized Landfill Costs
At December 31, 2008, we owned 24 landfills. Two of these landfills are fully permitted but not constructed and had not commenced operations as of December 31, 2008.
Capitalized landfill costs include expenditures for the acquisition of land and airspace, engineering and permitting costs, cell construction costs and direct site improvement costs. As of December 31, 2008, no capitalized interest was included in capitalized landfill costs. However, in the future interest could be capitalized on landfill construction projects but only during the period the assets are undergoing activities to prepare them for their intended use. Capitalized landfill costs are amortized ratably using the units-of- production method over the estimated useful life of the site as airspace of the landfill is consumed. Landfill amortization rates are determined periodically (not less than annually) based on aerial and ground surveys and other density measures and estimates made by our internal and/or third-party engineers.
Total available airspace includes the total of estimated permitted airspace plus an estimate of probable expansion airspace that we believe is likely to be permitted. Where we believe permit expansions are probable, the expansion airspace, and the projected costs related to developing the expansion airspace are included in the airspace amortization rate calculation. The criteria we use to determine if permit expansion is probable include but, are not limited to, whether:
| · | we believe that the project has fatal flaws; |
| · | the land is owned or controlled by us, or under option agreement; |
| · | we have committed to the expansion; |
| · | financial analysis has been completed, and the results indicate that the expansion has the prospect of a positive financial and operational impact; |
| · | personnel are actively working to obtain land use, local, and state approvals for an expansion of an existing landfill; |
| · | we believe the permit is likely to be received; and |
| · | we believe that the timeframe to complete the permitting is reasonable. |
We may be unsuccessful in obtaining expansion permits for airspace that has been considered probable. If unsuccessful in obtaining these permits, the previously capitalized costs will be charged to expense. As of December 31, 2008, we have included 139 million cubic yards of expansion airspace with estimated development costs of approximately $91.4 million in our calculation of the rates used for the amortization of landfill costs.
Closure and Post-Closure Obligations
We have material financial commitments for the costs associated with our future obligations for final closure, which is the closure of the landfill, the capping of the final uncapped areas of a landfill and post-closure maintenance of those facilities, which is generally expected to be for a period of up to 30 years depending on type and location.
On January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), which provides standards for accounting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. Generally, the requirements for recording closure and post-closure obligations under SFAS No. 143 are as follows:
| · | Landfill closure and post-closure liabilities are calculated by estimating the total obligation in current dollars. Cost estimates equate the costs of third parties performing the work. Any portion of the estimates which are based on activities being performed internally are increased to reflect a profit margin a third party would receive to perform the same activity. This profit margin will be taken to income once the work is performed internally. |
| · | The total obligation is carried at the net present value of future cash flows, which is calculated by inflating the obligation based upon the expected date of the expenditure using an inflation rate and discounting the inflated total to its present value using a discount rate. The discount rate represents our credit-adjusted risk-free rate. The resulting closure and post-closure obligation is recorded as an increase in this liability as airspace is consumed. |
| · | Accretion expense is calculated based on the discount rate and is charged to cost of services and increases the related closure and post-closure obligation. This expense will generally be less during the early portion of a landfill’s operating life and increase thereafter. |
The following table sets forth the rates we used for the amortization of landfill costs and the accrual of closure and post-closure costs for 2008, 2007, and 2006:
| | | 2008 | | | 2007 | | | 2006 | |
| Number of landfills owned | | | 24 | | | | 24 | | | | 20 | |
| Landfill depletion and amortization expense (in thousands) | | $ | 11,058 | | | $ | 10,483 | | | $ | 8,784 | |
| Accretion expense (in thousands) | | | 558 | | | | 483 | | | | 284 | |
| Closure and post-closure cost (in thousands) | | | — | | | | 513 | | | | 286 | |
| | | $ | 11,616 | | | $ | 11,479 | | | | 9,354 | |
| Airspace consumed (in thousands of cubic yards) | | | 5,730 | | | | 5,456 | | | | 4,806 | |
| Depletion, amortization, accretion, closure and post-closure costs per cubic yard of airspace consumed | | $ | 2.03 | | | $ | 2.10 | | | $ | 1.95 | |
The impact of changes determined to be changes in estimates, based on an annual update, is accounted for on a prospective basis. Our ultimate liability for such costs may increase in the future as a result of changes in estimates, legislation, or regulations.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their residual values, and reviewed for impairment. Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
We assess potential impairment of our goodwill, intangible assets and other long-lived assets annually on October 31 and more frequently if there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying less likely. If indicators of impairment were present for intangible assets used in operations and future undiscounted cash flows were not expected to be sufficient to recover the asset’s carrying amount, an impairment loss would be charged to expense in the period identified. The amount of an impairment loss would be recognized as the excess of the asset’s carrying value over its fair value. Factors we consider important, which may cause impairment include: significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” a two-step impairment test is required to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized. In the first step, the fair value of each reporting unit is compared to its carrying value to determine if the goodwill is impaired. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit were to exceed its fair value, then the second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and an impairment loss is recorded for an amount equal to the difference between the implied fair value and the carrying value of the goodwill.
For the purpose of goodwill analysis, we use the following reporting units: Alabama, Arkansas, Colorado/New Mexico, Florida, Kansas/Missouri, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. Each reporting unit is a component of an operating segment and was chosen because management regularly reviews the operating results of that component. Management believes that these reporting units allow for a more thorough impairment analysis. To determine the fair value of each reporting unit, we used discounted cash flows of projected unleveraged free cash flows over the anticipated life of the underlying assets. We consider the current year cash flow and our anticipated forecast for the life of the sites. Our forecasted revenues and related cash flows are estimated based on a combination factors. These factors included:
| · | forecasted inflationary factors |
| · | the timing of operating permits for new or expanded landfills |
| · | general growth expectations within the market |
| · | historical operating results |
| · | average capital expenditures for the previous four-year period |
The discount rates used for the analysis reflected a weighted average cost of capital based on industry and capital structure adjusted for equity risk premiums. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. During the fourth quarter of 2008, as we performed the annual impairment assessment of goodwill, there was a significant adverse change in the economic and business climate as financial markets reacted to the credit crisis facing major lending institutions, as well as, worsening conditions in the overall economy. Based on the first step analysis under SFAS No. 142, we determined that the fair market value was less than the book value in the following reporting units: Florida, North Carolina, Oklahoma and Tennessee. After performing the second step, we concluded that an impairment adjustment of $41.7 million was appropriate.
Additionally we considered the market valuation approach. We compared our market capitalization relative to our book value at both the October 31, 2008 measurement date and December 31, 2008. While market capitalization generally reflects investors’ expectations of future performance, the fair value of a reporting unit is not represented by our market capitalization alone. The fair value of a reporting unit refers to the price that would be
received to sell the unit as a whole in an orderly transaction between market participants at the measurement date which indicates a willing buyer and seller of a reporting unit. Fair value recognizes the existence of expected synergies related to an acquisition as well as a control premium that a third party would be willing to pay to obtain a controlling interest in the reporting unit. We applied a reasonable control premium based on comparable industry averages. We believe there is a reasonable basis for the excess of estimated fair value of our reporting units over our market capitalization.
In an effort to bridge the difference between the market value of our stock and the fair value of the reporting units we considered several factors. These factors are as follows:
| · | Lack of liquidity in our stock. On average during 2008, fewer than 25,000 non-block shares were traded daily in the open market with a median daily volume of 18,500 shares. This limited liquidity restricts the number of potential investors in our common stock as many funds are prohibited from taking equity positions with limited ability to sell without adversely affecting the market. |
| · | Reporting units are valued as if the acquirer would not incur substantial additional overhead in order to integrate our reporting unit with their operations. Our market capitalization reflects the impact of overhead pertaining to our combined operation. |
| · | Market capitalization reflects the impact of the liquidation preference associated with our preferred stock. We cannot force the preferred shareholders to convert to common unless our common stock is trading above $9.60 per share; however, in the event of liquidation or other buyout of all of our outstanding common stock, the preferred shareholders would be entitled to a full $9.60 per share. |
| · | Our outstanding senior notes contain early termination provisions entitling the note holders to receive approximately $27.5 million more than the carrying value of our notes. This difference results in a dilution of value to be received by the common shareholders which we believe is priced into the common market value. |
The estimated fair value of our reporting units requires judgment and the use of estimates by management. Potential factors requiring assessment include trends in our stock price, variance in results of operations from our projections, and additional acquisition transactions in our industry that reflect a control premium. Any of these potential factors may cause us to re-evaluate goodwill during any quarter throughout the year. If an impairment charge were to be taken for goodwill it would be a non-cash charge and would not impact our cash position or cash flows, however, such charge could have a material impact to our equity and statement of operations.
Allocation of Acquisition Purchase Price
A summary of our accounting policies for acquisitions is as follows:
| · | Acquisition purchase price is allocated to identified tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. We accrue the payment of contingent purchase price if the events surrounding the contingency are deemed probable. |
| · | We often consummate single acquisitions that include a combination of collection operations and landfills. For each separately identified collection operation and landfill acquired in a single acquisition, we perform an initial allocation of total purchase price to the identified collection operations and landfills based on their relative fair values. Following this initial allocation of total purchase price to the identified collection operations and landfills, we further allocate the identified intangible assets and tangible assets acquired and liabilities assumed for each collection operation and landfill based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to either goodwill or landfill site costs, as discussed above. |
Recently Adopted and New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It applies under other accounting pronouncements that require or permit fair value measurements, and does not require any new fair value measurements. The application of SFAS No. 157, however, may change current practice within an organization. SFAS No. 157 was effective January 1, 2008 and is applied prospectively. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” which provided a one year deferral for the implementation of SFAS No. 157 for certain nonfinancial assets and liabilities. We adopted SFAS No. 157 for financial assets and liabilities as of January 1, 2008. We are currently evaluating the impact of SFAS No. 157 for nonfinancial assets and liabilities on our financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” which permits an entity to choose to measure financial instruments and certain other items similar to financial instruments at fair value. All subsequent changes in fair value for the financial instrument would be reported in earnings. SFAS No. 159 is effective January 1, 2008. We did not adopt the fair value option permitted under this statement.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) establishes principles and requirements on how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the entity acquired. In addition, SFAS No. 141(R) provides guidance on the recognition and measurement of goodwill acquired in the business combination or a gain from a bargain purchase as well as what information to disclose to enable users of the financial statements to evaluate the nature and financial impact of the business combination. SFAS No. 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled. SFAS No. 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. The provisions of SFAS 141(R) apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the impact SFAS No. 141(R) will have on our financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51.” SFAS No. 160 establishes principles and requirements on how to treat the portion of equity in a subsidiary that is not attributable directly or indirectly to a parent. This is commonly known as a minority interest. The objective of SFAS No. 160 is to improve relevance, comparability, and transparency concerning ownership interests in subsidiaries held by parties other than the parent by providing disclosures that clearly identify between interests of the parent and interest of the noncontrolling owners and the related impacts on the consolidated statement of income and the consolidated statement of financial position. SFAS No. 160 also provides guidance on disclosures related to changes in the parent’s ownership interest and deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating the impact of SFAS No. 160 on our financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of SFAS No. 161 on our financial position, results of operations or cash flows.
In May 2008, the FASB issued Staff Position APB No. 14-1 (FSP APB No. 14-1), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB No. 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate, unless the embedded conversion option is
required to be separately accounted for as a derivative under SFAS No. 133. FSP APB No. 14-1 is effective for fiscal years and interim periods beginning after December 15, 2008. Though early adoption is not permitted, the Staff Position must be applied retrospectively to all periods presented. We are currently evaluating the impact of APB No. 14-1 on our financial position, results of operations or cash flows.
Cautionary Statement About Forward-Looking Statements
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. From time to time, our public filings, press releases and other communications (such as conference calls and presentations) will contain forward-looking statements. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “should,” “outlook,” “project,” “intend,” “seek,” “plan,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “continue,” or “opportunity,” the negatives of these words, or similar words or expressions. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. This is true of our description of our acquisitions for example. It is also true of our “run rate” definitions which are estimates based upon a mixture of historical and projected results.
We caution that forward-looking statements are not guarantees and are subject to known and unknown risks and uncertainties. Since our business, operations and strategies are subject to a number of risks, uncertainties and other factors, actual results may differ materially from those described in the forward-looking statements.
Our business is subject to a number of operational risks and uncertainties that could cause our actual results of operations or our financial condition to differ from any forward-looking statements. These include, but are not limited to, the following:
| · | The current weakening of U.S. economic conditions and the related decline in construction activity, as well as any future downturns, may reduce our volume and/or pricing on our services, resulting in decreases in our revenue, profitability and cash flows; |
| · | increases in the costs of fuel may reduce our operating margins; |
| · | changes in interest rates may affect our profitability; |
| · | we may not be successful in expanding the permitted capacity of our current or future landfills, which could restrict our growth, increase our disposal costs, and reduce our operating margins; |
| · | we are subject to environmental and safety laws, which restrict our operations and increase our costs; |
| · | we may become subject to environmental clean-up costs or litigation that could curtail our business operations and materially decrease our earnings; |
| · | our accruals for landfill closure and post-closure costs may be inadequate, and our earnings would be lower if we are required to pay or accrue additional amounts; |
| · | we may be unable to obtain financial assurances necessary for our operations, which could result in the closure of landfills or the termination of collection contracts; |
| · | our business is capital intensive, requiring ongoing cash outlays that may strain or consume our available capital and force us to sell assets, incur debt, or sell equity on unfavorable terms; |
| · | increases in the costs of disposal, labor and insurance could reduce our operating margins; |
| · | we may not be able to maintain sufficient insurance coverage to cover the risks associated with our operations, which could result in uninsured losses that would adversely affect our financial condition; |
| · | our failure to remain competitive with our numerous competitors, some of which have greater resources, could adversely affect our ability to retain existing customers and obtain future business; |
| · | we may lose contracts through competitive bidding, early termination or governmental action, or we may have to substantially lower prices in order to retain certain contracts, any of which would cause our revenue to decline; |
| · | comprehensive waste planning programs and initiatives required by state and local governments may reduce demand for our services, which could adversely affect our waste volumes and the price of our landfill disposal services; |
| · | efforts by labor unions to organize our employees could divert management attention and increase our operating expenses; |
| · | current and proposed laws may restrict our ability to operate across local borders which could affect our manner, cost and feasibility of doing business; |
| · | poor decisions by our regional and local managers could result in the loss of customers or an increase in costs, or adversely affect our ability to obtain future business; |
| · | we are vulnerable to factors affecting our local markets, which could adversely affect our stock price relative to our competitors; and |
| · | seasonal fluctuations will cause our business and results of operations to vary among quarters, which could adversely affect our stock price. |
Our future financial performance may also depend on our ability to pursue acquisitions, which will be subject to many risks and uncertainties including, but not limited to, the following:
| · | we may be unable to identify, complete or integrate future acquisitions, which may harm our prospects; |
| · | we compete for acquisition candidates with other purchasers, some of which have greater financial resources and may be able to offer more favorable terms, thus limiting our ability to grow through acquisitions; |
| · | in connection with financing acquisitions, we may incur additional indebtedness, or may issue additional equity including common stock or preferred stock which would dilute the ownership percentage of existing stockholders; |
| · | businesses that we acquire may have unknown liabilities and require unforeseen capital expenditures, which would adversely affect our financial results; |
| · | rapid growth may strain our management, operational, financial and other resources, which would adversely affect our financial results; |
| · | our acquisitions have resulted and future acquisitions we make may continue to result in significant goodwill and other intangible assets, which may need to be written down if performance is not as expected; and |
| · | we may incur charges related to acquisitions, which could lower our earnings. |
Our business and the performance of our stock price are subject to risks related to our management, governance and capital structure. They include, but are not limited to, the following:
| · | failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price; |
| · | our success depends on key members of our senior management, the loss of any of whom could disrupt our customer and business relationships and our operations; |
| · | a controlling interest in our voting stock is held by one fund and a small number of individuals (including management), which when combined with various agreements and rights of the fund, may discourage a change of control transaction and may exert control over our strategic direction; |
| · | provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law could prohibit a change of control that our stockholders may favor and which could negatively affect our stock price; |
| · | we do not anticipate paying cash dividends on our common stock in the foreseeable future, so you can only realize a return on your investment by selling your shares of our common stock; and |
| · | we may issue preferred stock that has a liquidation or other preference over our common stock without the approval of the holders of our common stock, which may affect those holders rights or the market price of our common stock. |
Our business is capital intensive and depends on our ability to generate sufficient cash flow from operations and, from time to time, to access our credit facility or other capital sources, each of which are subject to various risks and uncertainties including, but not limited to, the following:
| · | we have a substantial amount of debt which could adversely affect our operations and financial performance; |
| · | the provisions in our debt instruments impose restrictions on us that may limit the discretion of management in operating our business; |
| · | we may encounter the need to make substantial capital outlays that exceed our cash flow from operations, in which event we would need to borrow additional funds under our credit facility or obtain other sources of capital or financing; |
| · | we are subject to certain financial and other covenants under our credit agreement which may, in the future, limit our ability to borrow under such facility; |
| · | our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us or any of the lenders under our credit facility; |
| · | in light of the recent deterioration in the capital and credit markets, our ability to access and borrow under the credit facility is subject to liquidity and market risk factors that are beyond our control; and |
| · | if our current sources of liquidity were insufficient, we may have to seek additional financing, which may not be available and, if available, may be on terms that are unfavorable. |
We describe these and other risks in greater detail in the section entitled “Business—Risk Factors” included elsewhere in this report. We refer you to that section for additional information.
The forward-looking statements included in this report are only made as of the date of this report and we undertake no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, we are exposed to market risk, including changes in interest rates. We use interest rate swap agreements to manage a portion of our risks related to interest rates. We entered into a swap agreement effective July 11, 2006, where we agreed to pay a fixed-rate of 5.64% in exchange for three-month floating rate LIBOR which was 5.51% at the time the swap was entered. At December 31, 2008, the related floating rate was 1.46%. The intention of this swap agreement is to limit our exposure to a rising rate interest environment. For the year ended December 31, 2008, the net difference between the fixed amount we paid and the floating amount we received was $3.2 million. Considering the rates in effect at December 31, 2008, the impact of the swap agreement is estimated to result in a pre-tax cash cost of $6.3 million in 2009. At the time we entered into the swap, we had no floating rate LIBOR debt and therefore no floating rate interest payments were anticipated. As a result, the swap transaction can not be designated as a hedging transaction. Accordingly, any changes in the unrealized fair value of the new swap will be recognized in the statement of operations. We did not enter into the interest rate swap agreements for trading purposes.
As of December 31, 2008 and 2007, we had no debt outstanding that bears interest at variable or floating rates. With the placement of the swap agreement, we bear exposure to, and are primarily affected by, changes in LIBOR rates on $101.4 million. A 100 basis point increase in LIBOR interest rates would result in swap income of approximately $1.0 million annually while a 100 basis point decrease in interest rates would result in $1.0 million in swap expense, in addition to any mark-to-market effect on the fair value of the swap. Please read “Business—Risk Factors—Risks Relating To Our Business—Changes in interest rates may affect our profitability.” The table below provides scheduled principal payments and fair value information about our market-risk sensitive financial instruments as of December 31, 2008 (dollars in thousands):
| | | Expected Maturity Dates | |
| | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | | | Total | |
| Debt: | | | | | | | | | | | | | | | | | | | | | |
| Senior notes | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 150,000 | | | $ | 150,000 | |
| Average interest rate (a) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revolving credit agreement | | $ | — | | | $ | — | | | $ | 48,617 | | | $ | — | | | $ | — | | | $ | — | | | $ | 48,617 | |
| Average interest rate (b) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other borrowings | | $ | 64 | | | $ | 103 | | | $ | — | | | $ | 1,575 | | | $ | — | | | $ | — | | | $ | 1,742 | |
| Average interest rate | | | 6.1 | % | | | 5.0 | % | | | — | | | | 5.5 | % | | | — | | | | — | | | | 5.5 | % |
| Note payable | | $ | 123 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 123 | |
| Average interest rate | | | 3.7 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3.7 | % |
| (a) | The interest rate of our senior notes is 9.25% as stipulated by the note agreement. |
| (b) | Borrowings under the revolving credit agreement bear interest at a floating rate, at our option, of either (i) the base rate loans plus the applicable margin or (ii) the LIBOR loans plus the applicable margin. The base rate is equal to the higher of the federal funds rate plus 1/2 of 1% or the prime rate. The applicable margin is determined based on our leverage ratio for the trailing 12-month reporting period on each quarterly reporting date. As of December 31, 2008, the interest rate in effect for the revolving credit agreement was 3.3%. |
Our financial instruments that are potentially sensitive to changes in interest rates also include our 9.25% senior notes. As of December 31, 2008, the fair value of these notes, based on quoted market prices, was approximately $115.5 million compared to a carrying amount of $150 million.
Item 8. Financial Statements and Supplementary Data.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.
There are inherent limitations in the effectiveness of any system of internal controls over financial reporting. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
WCA Waste Corporation:
We have audited the accompanying consolidated balance sheets of WCA Waste Corporation as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WCA Waste Corporation as of December 31, 2008 and 2007 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with U.S. generally accepted accounting principles.
As discussed in note 1(m) to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), WCA Waste Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2009 expressed an unqualified opinion on the effectiveness of internal control over financial reporting.
/s/ KPMG LLP
Houston, Texas
March 12, 2009
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
WCA Waste Corporation:
We have audited WCA Waste Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). WCA Waste Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, WCA Waste Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of WCA Waste Corporation as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2008 and our report dated March 12, 2009 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Houston, Texas
March 12, 2009
WCA WASTE CORPORATION
Consolidated Balance Sheets
(in thousands, except per share data)
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 955 | | | $ | 1,138 | |
| Restricted cash | | | — | | | | 351 | |
| Accounts receivable, net of allowance for doubtful accounts of $1,173 and $1,498 | | | 24,956 | | | | 22,946 | |
| Deferred tax assets | | | 3,354 | | | | 3,627 | |
| Prepaid expenses and other | | | 2,108 | | | | 6,937 | |
| Total current assets | | | 31,373 | | | | 34,999 | |
| | | | | | | | | |
| Property and equipment, net | | | 276,483 | | | | 270,384 | |
| Goodwill, net | | | 64,580 | | | | 102,112 | |
| Intangible assets, net | | | 7,486 | | | | 7,271 | |
| Deferred financing costs, net | | | 4,654 | | | | 4,610 | |
| Restricted cash — debt service reserve fund | | | — | | | | 988 | |
| Long-term note receivable, less current maturities | | | — | | | | 6,101 | |
| Deferred tax assets | | | 2,992 | | | | — | |
| Other assets | | | 390 | | | | 258 | |
| Total assets | | $ | 387,958 | | | $ | 426,723 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 9,830 | | | $ | 9,856 | |
| Accrued liabilities and other | | | 23,654 | | | | 18,269 | |
| Note payable | | | 123 | | | | 4,716 | |
| Current maturities of long-term debt | | | 64 | | | | 699 | |
| Total current liabilities | | | 33,671 | | | | 33,540 | |
| | | | | | | | | |
| Long-term debt, less current maturities and discount | | | 200,295 | | | | 198,149 | |
| Interest rate swap | | | 5,278 | | | | 4,677 | |
| Accrued closure and post-closure liabilities | | | 7,398 | | | | 6,560 | |
| Deferred tax liabilities | | | — | | | | 11,620 | |
| Other long-term liabilities | | | 1,813 | | | | 1,813 | |
| Total liabilities | | | 248,455 | | | | 256,359 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Series A convertible preferred stock, $0.01 par value per share. Authorized 828 shares; issued and outstanding 828 shares and 805 shares, respectively (liquidation preference $96,006) | | | 8 | | | | 8 | |
| Common stock, $0.01 par value per share. Authorized 50,000 shares; issued 17,399 shares and 17,083 shares | | | 174 | | | | 171 | |
| Treasury stock | | | (5,322 | ) | | | (174 | ) |
| Additional paid-in capital | | | 172,788 | | | | 166,665 | |
| Retained earnings (deficit) | | | (28,145 | ) | | | 3,694 | |
| Total stockholders’ equity | | | 139,503 | | | | 170,364 | |
| Total liabilities and stockholders’ equity | | $ | 387,958 | | | $ | 426,723 | |
See accompanying notes to consolidated financial statements.
WCA WASTE CORPORATION
Consolidated Statements of Operations
(in thousands, except per share data)
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Revenue | | $ | 208,009 | | | $ | 184,940 | | | $ | 149,497 | |
| Expenses: | | | | | | | | | | | | |
| Cost of services | | | 142,129 | | | | 121,853 | | | | 95,991 | |
| Depreciation and amortization | | | 27,151 | | | | 24,234 | | | | 19,070 | |
| Impairment of goodwill | | | 41,725 | | | | — | | | | — | |
| General and administrative (including stock-based compensation of $2,212, $1,977 and $1,118, respectively) | | | 12,335 | | | | 12,768 | | | | 11,010 | |
| | | | 223,340 | | | | 158,855 | | | | 126,071 | |
| Operating income (loss) | | | (15,331 | ) | | | 26,085 | | | | 23,426 | |
| | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | |
| Interest expense, net | | | (18,560 | ) | | | (16,765 | ) | | | (15,385 | ) |
| Write-off of deferred financing costs and debt discount | | | — | | | | — | | | | (3,240 | ) |
| Impact of interest rate swap | | | (7,547 | ) | | | (4,442 | ) | | | 340 | |
| Other income (expense), net | | | (62 | ) | | | 387 | | | | 192 | |
| | | | (26,169 | ) | | | (20,820 | ) | | | (18,093 | ) |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | | | (41,500 | ) | | | 5,265 | | | | 5,333 | |
| Income tax (provision) benefit | | | 13,737 | | | | (2,343 | ) | | | (2,313 | ) |
| Net income (loss) | | | (27,763 | ) | | | 2,922 | | | | 3,020 | |
| Accrued payment-in-kind dividend on preferred stock | | | (4,076 | ) | | | (3,876 | ) | | | (1,603 | ) |
| Net income (loss) available to common stockholders | | $ | (31,839 | ) | | $ | (954 | ) | | $ | 1,417 | |
| | | | | | | | | | | | | |
| Net income (loss) available to common stockholders: | | | | | | | | | | | | |
| Earnings per share – basic | | $ | (1.96 | ) | | $ | (0.06 | ) | | $ | 0.09 | |
| | | | | | | | | | | | | |
| Earnings per share – diluted | | $ | (1.96 | ) | | $ | (0.06 | ) | | $ | 0.09 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding — basic | | | 16,257 | | | | 16,460 | | | | 16,360 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding — diluted | | | 16,257 | | | | 16,460 | | | | 16,385 | |
See accompanying notes to consolidated financial statements.
WCA WASTE CORPORATION
Consolidated Statements of Stockholders’ Equity
(in thousands)
| | | | | | | | | | | | | | | | | | | | | Additional Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Loss | | | Total Stockholders’ Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock | | | Common Stock | | | Treasury Stock | | | | | | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | | | | | | | |
| Balance, December 31, 2005 | | | — | | | $ | — | | | | 16,532 | | | $ | 165 | | | | — | | | $ | — | | | $ | 86,930 | | | $ | 5,043 | | | $ | (431 | ) | | $ | 91,707 | |
| Reclassification of accumulated loss on interest rate swap, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 431 | | | | 431 | |
| Issuance of preferred stock, net of issuance costs of $3,107 | | | 750 | | | | 8 | | | | — | | | | — | | | | — | | | | — | | | | 71,885 | | | | — | | | | — | | | | 71,893 | |
| Accrued payment-in-kind dividend on preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,603 | | | | (1,603 | ) | | | — | | | | — | |
| Issuance of common stock | | | — | | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | 52 | | | | — | | | | — | | | | 52 | |
| Restricted shares withheld | | | — | | | | — | | | | (16 | ) | | | — | | | | — | | | | — | | | | (124 | ) | | | — | | | | — | | | | (124 | ) |
| Equity transaction costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (144 | ) | | | — | | | | — | | | | (144 | ) |
| Gecko holdback settlement | | | — | | | | — | | | | (18 | ) | | | — | | | | 18 | | | | (174 | ) | | | — | | | | — | | | | — | | | | (174 | ) |
| Issuance of restricted shares to employees and directors, net of unearned compensation | | | — | | | | — | | | | 355 | | | | 4 | | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | — | |
| Accretion of unearned compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,118 | | | | — | | | | — | | | | 1,118 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,020 | | | | — | | | | 3,020 | |
| Balance, December 31, 2006 | | | 750 | | | $ | 8 | | | | 16,859 | | | $ | 169 | | | | 18 | | | $ | (174 | ) | | $ | 161,316 | | | $ | 6,460 | | | $ | — | | | $ | 167,779 | |
| Cumulative effect of change in accounting principle (FIN 48) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,812 | ) | | | — | | | | (1,812 | ) |
| Accrued payment-in-kind dividend on preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,876 | | | | (3,876 | ) | | | — | | | | — | |
| Issuance of Preferred stock | | | 55 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Restricted shares withheld | | | — | | | | — | | | | (37 | ) | | | — | | | | — | | | | — | | | | (285 | ) | | | — | | | | — | | | | (285 | ) |
| Equity transaction costs | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5 | ) | | | — | | | | — | | | | (5 | ) |
| Issuance of restricted shares to employees and directors, net of unearned compensation | | | — | | | | — | | | | 261 | | | | 2 | | | | — | | | | — | | | | (2 | ) | | | — | | | | — | | | | — | |
| Accretion of unearned compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,765 | | | | — | | | | — | | | | 1,765 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,922 | | | | — | | | | 2,922 | |
| Balance, December 31, 2007 | | | 805 | | | $ | 8 | | | | 17,083 | | | $ | 171 | | | | 18 | | | $ | (174 | ) | | $ | 166,665 | | | $ | 3,694 | | | $ | — | | | $ | 170,364 | |
| Accrued payment-in-kind dividend on preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,076 | | | | (4,076 | ) | | | — | | | | — | |
| Issuance of Preferred stock | | | 23 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Restricted shares withheld | | | — | | | | — | | | | (53 | ) | | | (1 | ) | | | — | | | | — | | | | (345 | ) | | | — | | | | — | | | | (346 | ) |
| Issuance of restricted shares to employees and directors, net of unearned compensation | | | — | | | | — | | | | 351 | | | | 4 | | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | — | |
| Accretion of unearned compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,396 | | | | — | | | | — | | | | 2,396 | |
| Common stock repurchased under repurchase program | | | — | | | | — | | | | (1,056 | ) | | | — | | | | 1,056 | | | | (5,148 | ) | | | — | | | | — | | | | — | | | | (5,148 | ) |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (27,763 | ) | | | — | | | | (27,763 | ) |
| Balance, December 31, 2008 | | | 828 | | | $ | 8 | | | | 16,325 | | | $ | 174 | | | | 1,074 | | | $ | (5,322 | ) | | $ | 172,788 | | | $ | (28,145 | ) | | $ | — | | | $ | 139,503 | |
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Net income (loss) | | $ | (27,763 | ) | | $ | 2,922 | | | $ | 3,020 | |
| Unrealized gain on interest rate swap, net of tax | | | — | | | | — | | | | 431 | |
| Total comprehensive income (loss) | | $ | (27,763 | ) | | $ | 2,922 | | | $ | 3,451 | |
See accompanying notes to consolidated financial statements.
WCA WASTE CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | |
| Net income (loss) | | $ | (27,763 | ) | | $ | 2,922 | | | $ | 3,020 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 27,151 | | | | 24,234 | | | | 19,070 | |
| Impairment of goodwill | | | 41,725 | | | | — | | | | — | |
| Non-cash compensation charge | | | 2,212 | | | | 1,977 | | | | 1,118 | |
| Amortization of deferred financing costs and debt discount | | | 1,303 | | | | 897 | | | | 728 | |
| Write-off of deferred financing costs and debt discount | | | — | | | | — | | | | 3,240 | |
| Deferred tax provision (benefit) | | | (14,339 | ) | | | 1,749 | | | | 2,271 | |
| Accretion expense for closure and post-closure obligations | | | 558 | | | | 483 | | | | 284 | |
| Gain on sale of assets | | | (178 | ) | | | (387 | ) | | | (192 | ) |
| Net loss on early disposition of notes receivable/payable | | | 221 | | | | — | | | | — | |
| Unrealized loss on interest rate swap | | | 4,316 | | | | 3,948 | | | | 3,393 | |
| Prepaid disposal usage | | | — | | | | 1,037 | | | | 2,383 | |
| Changes in assets and liabilities, net of effects of acquisitions: | | | | | | | | | | | | |
| Accounts receivable, net | | | (2,196 | ) | | | (3,302 | ) | | | (946 | ) |
| Prepaid expenses and other | | | (287 | ) | | | (1,851 | ) | | | (1,308 | ) |
| Accounts payable and other liabilities | | | 1,571 | | | | 7,899 | | | | 3,815 | |
| Net cash provided by operating activities | | | 34,294 | | | | 39,606 | | | | 36,876 | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Acquisitions of businesses, net of cash acquired | | | (8,144 | ) | | | (92,835 | ) | | | (7,600 | ) |
| Proceeds from sale of fixed assets | | | 477 | | | | 376 | | | | 258 | |
| Principal of note receivable | | | 304 | | | | — | | | | — | |
| Proceeds from disposition of note receivable | | | 6,225 | | | | — | | | | — | |
| Cost incurred on possible acquisitions | | | — | | | | (71 | ) | | | (85 | ) |
| Capital expenditures | | | (29,805 | ) | | | (28,483 | ) | | | (29,110 | ) |
| Net cash used in investing activities | | | (30,943 | ) | | | (121,013 | ) | | | (36,537 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from issuance of preferred stock, net of issuance costs | | | — | | | | — | | | | 71,893 | |
| Proceeds from issuance of long-term debt, net of original purchase discount | | | — | | | | — | | | | 145,669 | |
| Principal payments on long-term debt | | | (16,130 | ) | | | (931 | ) | | | (126,969 | ) |
| Net change in revolving line of credit | | | 17,340 | | | | 31,277 | | | | (37,723 | ) |
| Payments under common stock repurchase program | | | (5,148 | ) | | | — | | | | — | |
| Decrease in restricted cash | | | 1,339 | | | | 9 | | | | 14 | |
| Equity transaction costs | | | — | | | | (5 | ) | | | (144 | ) |
| Deferred financing costs | | | (935 | ) | | | (12 | ) | | | (1,550 | ) |
| Net cash provided by (used in) financing activities | | | (3,534 | ) | | | 30,338 | | | | 51,190 | |
| Net change in cash and cash equivalents | | | (183 | ) | | | (51,069 | ) | | | 51,529 | |
| Cash and cash equivalents at beginning of period | | | 1,138 | | | | 52,207 | | | | 678 | |
| Cash and cash equivalents at end of period | | $ | 955 | | | $ | 1,138 | | | $ | 52,207 | |
See accompanying notes to consolidated financial statements.
WCA WASTE CORPORATION
Consolidated Statements of Cash Flows — Continued
(in thousands)
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | |
| Interest | | $ | 17,797 | | | $ | 16,903 | | | $ | 15,511 | |
| Taxes | | | 355 | | | | 105 | | | | 315 | |
| | | | | | | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | | | | | | |
| Insurance premiums financed by direct debt | | | 305 | | | | 4,721 | | | | 7,570 | |
| Acquisitions of operations, net of divestitures: | | | | | | | | | | | | |
| Restricted cash | | | — | | | | — | | | | 417 | |
| Accounts receivable | | | (186 | ) | | | 2,479 | | | | 92 | |
| Prepaid expenses and other | | | (25 | ) | | | (1,265 | ) | | | 88 | |
| Long-term note receivable, including current maturities | | | — | | | | 7,200 | | | | — | |
| Property and equipment, net | | | 3,405 | | | | 55,201 | | | | 10,739 | |
| Goodwill | | | 4,193 | | | | 28,566 | | | | 1,091 | |
| Intangible assets | | | 948 | | | | 2,944 | | | | 157 | |
| Debt and liabilities issued or assumed, net of debt discount | | | 191 | | | | 665 | | | | 6,254 | |
| Long-term debt | | | — | | | | 1,575 | | | | — | |
| Accrued closure post-closure liabilities | | | — | | | | 50 | | | | 12 | |
| Deferred tax liabilities | | | — | | | | — | | | | (1,160 | ) |
| Treasury stock | | | — | | | | — | | | | (174 | ) |
| Additional paid-in capital | | | — | | | | — | | | | 52 | |
See accompanying notes to consolidated financial statements.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements
(dollars in thousands unless otherwise indicated)
(1) Organization and Summary of Significant Accounting
(a) Business
WCA Waste Corporation (WCA or the Company) was formed effective October 1, 2000 for the purpose of acquiring certain solid waste operations in the Central and Southern United States of America. WCA currently provides integrated non-hazardous solid waste collection, transfer, processing and disposal services to customers in Alabama, Arkansas, Colorado, Florida, Kansas, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Texas, and Tennessee. See note 1(b) “Internal Reorganization and Basis of Presentation” for additional discussion on the formation of WCA.
(b) Internal Reorganization and Basis of Presentation
WCA Waste Corporation (Newco) was formed in February 2004 as a subsidiary of Waste Corporation of America, Inc. (Old WCA). In June 2004, Old WCA completed an internal reorganization between Old WCA, Newco and WCA Waste Systems, Inc. (WSI), which was a wholly-owned subsidiary of Old WCA. Through the internal reorganization, the ownership of WSI was transferred to Newco and Old WCA and certain other operating subsidiaries of Old WCA were spun off from the operations of Newco and WSI. This resulted in Old WCA and Newco being separate entities, each owned by the former shareholders of Old WCA, and WSI being a wholly-owned subsidiary of Newco.
In connection with the reorganization and subsequent stock split, Newco issued 6,670,260 shares of common stock to the shareholders of Old WCA. In addition, certain previously outstanding options and warrants of Old WCA were exchanged for 1,330,056 shares (after giving effect to a merger and reverse stock split) of Newco, resulting in a charge of $11.5 million from this issuance. Following these transactions, there were 8,000,316 shares of Newco common stock outstanding. Following this reorganization, WCA Waste Corporation filed a registration statement with the Securities and Exchange Commission to effect an initial public offering of the common shares of WCA Waste Corporation and completed the offering of 6,587,947 shares of common stock on June 28, 2004.
The formation of Newco and the transfer of the operations of WSI to Newco represent a combination of entities under common control. Accordingly, the accompanying consolidated financial statements reflect the operations of WSI as if such reorganization had occurred as of the beginning of all periods presented.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of WCA Waste Corporation and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated.
(d) Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Restricted cash relates to the Environmental Facilities Revenue Bonds assumed as part of acquisitions in October 2005 and February 2006.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(e) Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized while minor replacements, maintenance, and repairs are charged to expense as incurred.
When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the results of operations as increases or offsets to operating expense for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for significant property and equipment categories are as follows (in years):
| Vehicles and equipment | 3 to 10 |
| Containers | 5 to 12 |
| Buildings and improvements | 15 to 25 |
| Computers and software | 3 to 5 |
| Furniture and fixtures | 3 to 10 |
(f) Landfill Accounting
Capitalized Landfill Costs
At December 31, 2008, the Company owned 24 landfills. Two of these landfills are fully permitted but not constructed and have not yet commenced operations as of December 31, 2008.
Capitalized landfill costs include expenditures for the acquisition of land and related airspace, engineering and permitting costs, cell construction costs and direct site improvement costs. At December 31, 2008, no capitalized interest had been included in capitalized landfill costs, however, in the future interest could be capitalized on landfill construction projects but only during the period the assets are undergoing activities to ready them for their intended use. Capitalized landfill costs are amortized ratably using the units-of-production method over the estimated useful life of the site as airspace of the landfill is consumed. Landfill amortization rates are determined periodically (not less than annually) based on ground surveys and other density measures and estimates made by the Company’s engineers, outside engineers, management and financial personnel.
Total available airspace includes the total of estimated permitted airspace plus an estimate of probable expansion airspace that the Company believes is likely to be permitted. Where the Company believes permit expansions are probable, the expansion airspace, and the projected costs related to developing the expansion airspace are included in the airspace amortization rate calculation. The criteria the Company uses to determine if permit expansion is probable include but are not limited to whether: (i) the Company believes the project has fatal flaws; (ii) the land is owned or controlled by the Company, or under option agreement; (iii) the Company has committed to the expansion; (iv) financial analysis has been completed and the results indicate that the expansion has the prospect of a positive financial and operational impact; (v) personnel are actively working to obtain land use, local and state approvals for an expansion; (vi) the Company believes that the permit is likely to be received; and (vii) the Company believes that the timeframe to complete the permitting is reasonable.
The Company may be unsuccessful in obtaining expansion permits for airspace that has been considered probable. If unsuccessful in obtaining these permits, certain previously capitalized costs will be charged to expense.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Closure and Post-Closure Obligations
The Company has material financial commitments for the costs associated with its future obligations for final closure, which is the closure of the landfill and the capping of the final uncapped areas of a landfill and post-closure maintenance of those facilities, which is generally expected to be for a period of up to 30 years depending on type and location.
The impact of changes determined to be changes in estimates, based on an annual update, is accounted for on a prospective basis. The Company’s ultimate liability for such costs may increase in the future as a result of changes in estimates, legislation, or regulations.
The changes to landfill assets and closure and post-closure liabilities for the years ended December 31, 2008, 2007 and 2006 are as follows (in thousands):
| | | Landfill Assets, Net | | | Closure and Post-closure Liabilities | |
| December 31, 2005 | | $ | 127,758 | | | $ | 3,618 | |
| Capital expenditures | | | 12,107 | | | | — | |
| Acquisition of landfill and other adjustments | | | 1,578 | | | | (291 | ) |
| Amortization expense | | | (8,784 | ) | | | — | |
| Obligations incurred and capitalized | | | 446 | | | | 446 | |
| Revisions to estimates of closure and post-closure activities | | | (306 | ) | | | (306 | ) |
| Interest accretion | | | — | | | | 284 | |
| December 31, 2006 | | $ | 132,799 | | | $ | 3,751 | |
| Capital expenditures | | | 9,198 | | | | — | |
| Acquisition of landfill and other adjustments | | | 43,393 | | | | (466 | ) |
| Amortization expense | | | (10,483 | ) | | | — | |
| Obligations incurred and capitalized | | | 453 | | | | 453 | |
| Revisions to estimates of closure and post-closure activities | | | 2,339 | | | | 2,339 | |
| Interest accretion | | | — | | | | 483 | |
| December 31, 2007 | | $ | 177,699 | | | $ | 6,560 | |
| Capital expenditures | | | 12,657 | | | | — | |
| Acquisition of landfill and other adjustments | | | 10 | | | | — | |
| Amortization expense | | | (11,058 | ) | | | — | |
| Obligations incurred and capitalized | | | 516 | | | | 516 | |
| Revisions to estimates of closure and post-closure activities | | | (236 | ) | | | (236 | ) |
| Interest accretion | | | — | | | | 558 | |
| December 31, 2008 | | $ | 179,588 | | | $ | 7,398 | |
The Company’s liabilities for closure and post-closure costs for the years ended December 31, 2008, 2007 and 2006 are as follows (in thousands):
| | | December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Recorded amounts: | | | | | | | | | |
| Current portion | | $ | — | | | $ | — | | | $ | — | |
| Noncurrent portion | | | 7,398 | | | | 6,560 | | | | 3,751 | |
| Total recorded | | $ | 7,398 | | | $ | 6,560 | | | $ | 3,751 | |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
The Company’s total anticipated cost for closure and post-closure activities is $173.6 million, as measured in current dollars. The recorded liabilities as of December 31, 2008 include the impact of inflating these costs through the date the costs are estimated to be incurred and the discounting of these costs to present value. The Company believes the amount and timing of these activities are reasonably estimable. Anticipated payments of currently identified closure and post-closure liabilities for the next five years and thereafter are reflected below (in thousands):
| 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | |
| $ | — | | | $ | — | | | $ | 1,344 | | | $ | — | | | $ | 181 | | | $ | 172,063 | |
Where the Company believes that both the amount of a particular closure and post-closure liability and the timing of the payments are reliably determinable, the cost in current dollars is inflated (2.5% for each of the years ended December 31, 2008, 2007 and 2006) until expected time of payment and then discounted to present value (8.5% for each of the years ended December 31, 2008, 2007 and 2006). Accretion expense is applied to the closure and post-closure liability based on the effective interest method and is included in cost of services. Had the Company not discounted any portion of its liability, the amount recorded would have been $29.6 million, $26.9 million and $16.8 million at December 31, 2008, 2007 and 2006, respectively.
The table below presents the Company’s methodology of accounting for landfill closure and post-closure activities.
| Description | | Methodology |
| | | |
| Definitions: | | |
| Closure | | Includes final capping event, final portion of methane gas collection system to be constructed, demobilization, and the routine maintenance costs incurred after site ceases to accept waste, but prior to being certified as closed. |
| Post-closure | | Includes routine monitoring and maintenance of a landfill after it has closed, ceased to accept waste and been certified as closed by the applicable state regulatory agency. |
| Discount Rate: | | Obligations discounted at a credit- adjusted, risk-free rate (8.5% for 2008, 2007 and 2006). |
| Cost Estimates: | | Costs were estimated based on performance, by either third parties or the Company, except that the cost of any activities expected to be performed internally must be increased to represent an estimate of the amount a third party would charge to perform such activity. |
| Inflation: | | Inflation rate of 2.5% for 2008, 2007 and 2006. |
| Recognition of Assets and Liabilities: | | |
| Asset Retirement Cost | | An amount equal to the discounted cash flow associated with the fair value of closure and post-closure obligation is recorded as an addition to capitalized landfill costs as airspace is consumed. |
| Closure and Post-Closure | | The discounted cash flow associated with the fair value of the liability is recorded with a corresponding increase in capitalized landfill costs as airspace is consumed. Accretion expense is recorded to cost of services and the corresponding liability until the liability is paid. |
| Statement of Operations Expense: | | |
| Landfill asset amortization | | Landfill asset is amortized to depreciation and amortization expense as airspace is consumed over life of landfill. |
| Accretion | | Expense, charged to cost of services, is accreted at credit-adjusted, risk-free rate (8.5% for 2008, 2007 and 2006). |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(g) Allocation of Acquisition Purchase Price
A summary of the Company’s accounting for acquisitions is as follows:
Acquisition purchase price is allocated to identified intangible assets and tangible assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill.
The Company deems the total remaining airspace of an acquired landfill to be a tangible asset. Therefore, for acquired landfills, it initially allocates the purchase price to identified intangible and tangible assets acquired, including landfill airspace, and liabilities assumed based on their estimated fair values at the date of acquisition.
The Company may consummate single acquisitions that include a combination of collection operations and landfills. For each separately identified collection operation and landfill acquired in a single acquisition, the Company performs an initial allocation of total purchase price to the identified collection operations and landfills based on their relative fair values. Following this initial allocation of total purchase price to the identified collection operations and landfills, the Company further allocates the identified intangible assets and tangible assets acquired and liabilities assumed for each collection operation and landfill based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to either goodwill or landfill site costs, as discussed above.
The Company accrues the payment of contingent purchase price if the events surrounding the contingency are deemed probable. Contingent purchase price related to landfills is allocated to landfill site costs and contingent purchase price for acquisitions other than landfills is allocated to goodwill. There are currently no pending contingent amounts due relating to any prior acquisitions.
(h) Goodwill and Other Intangible Assets
Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their residual values, and reviewed for impairment.
The Company’s intangible assets consist primarily of customer contracts, customer lists, and covenants not-to-compete. Customer contracts and customer lists are generally amortized over 7 to 20 years. Covenants not-to-compete are amortized over the term of the non-compete covenant, which is generally five years.
(i) Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
(j) Costs Incurred on Possible Acquisitions
In the past, costs incurred on possible acquisitions were capitalized as incurred and consisted primarily of third-party accounting, legal and other consulting fees as well as travel costs incurred in the negotiation and due
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
diligence process, and nonrefundable down payments. Upon consummation of an acquisition accounted for as a purchase, deferred costs were capitalized as part of the purchase price. Capitalized costs were reviewed for reasonableness on a periodic basis, and costs that management believed related to transactions that would not be consummated were charged to expense. During 2008, 2007 and 2006, the Company expensed $115, $44 and $286, respectively, of such costs, which are included in general and administrative cost in WCA’s consolidated statements of operations. At December 31, 2008 and 2007, $0 and $140 of such capitalized costs are reflected in other assets on WCA’s consolidated balance sheets. Starting in 2009, all acquisition-related transaction and restructuring costs will be expensed as incurred rather than capitalized as part of the acquisition costs according to SFAS No. 141(R).
(k) Deferred Financing Costs
Deferred financing costs are amortized as a component of interest expense using the effective interest method. During 2008, 2007 and 2006, the Company expensed $896, $844 and $696, respectively, of such costs, which are reflected as interest expense in WCA’s consolidated statements of operations. In addition, the Company wrote off $3,240 of deferred financing costs and debt discount associated with the first and second lien credit agreements that were repaid and retired in connection with its financing transactions in July 2006.
(l) Interest Expense
Interest expense, net includes interest accrued on outstanding note payable and long-term debt, amortization of deferred financing costs, accretion of debt discount, offset by interest income earned on the Company’s cash balances. For the years ended December 31, 2008, 2007 and 2006, interest expense consists of the following (in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| Note payable and long-term debt | | $ | 17,616 | | | $ | 16,940 | | | $ | 15,959 | |
| Amortization of deferred financing costs | | | 896 | | | | 844 | | | | 696 | |
| Amortization of debt discount | | | 406 | | | | 53 | | | | 32 | |
| | | | 18,918 | | | | 17,837 | | | | 16,687 | |
| Less interest income | | | 358 | | | | 1,072 | | | | 1,302 | |
| Interest expense, net | | $ | 18,560 | | | $ | 16,765 | | | $ | 15,385 | |
(m) Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases based on enacted tax rates. The Company provides a valuation allowance when, based on management’s estimates, it is more likely than not that a deferred tax asset will not be realized in future periods.
Income taxes have been calculated in accordance with SFAS No. 109, “Accounting for Income Taxes.” All tax amounts have been provided to show the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements. Income taxes payable are included with accrued liabilities on the Company’s balance sheets. See note 5 “Certain Balance Sheet Accounts” for detail of accrued liabilities.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, it provides guidance on the measurement, derecognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007.
(n) Insurance
The Company has retained a portion of the risks related to its general liability, automobile and workers’ compensation insurance programs. The exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on estimates of ultimate losses on claims and actuarially-determined development factors.
(o) Revenue Recognition
The Company recognizes revenue upon the receipt and acceptance of non-hazardous industrial and municipal waste at its landfills. Revenue for collection services is recognized as the services are performed. Revenue for container rental is recognized over the rental period. In certain situations, the Company will bill for services in advance of the performance of these services. Such amounts are deferred until the services are subsequently performed.
(p) Derivative Financial Instruments
The Company accounts for derivatives and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities,” as amended, which requires that all derivative instruments be recorded on the balance sheet at their respective fair values.
Effective November 1, 2005, the Company entered into an interest rate swap agreement with a notional amount of $150 million. Under the agreement, the Company receives a floating rate of interest based on LIBOR and pays a fixed rate of 4.885% through maturity of the swap in November 2010. With the restructuring of its long-term debt and the termination of the interest rate swap in July 2006, the Company received $4.0 million from the swap counter-party and recorded the entire gain of $4.0 million in the consolidated statement of operations. In addition, the Company recorded $0.1 million of realized loss related to the interest rate swap in the consolidated statement of operations.
On July 7, 2006, the Company entered into an interest rate swap agreement effective July 11, 2006, where it agreed to pay a fixed-rate of 5.64% in exchange for three-month floating rate LIBOR which was 5.51% at the time the swap was entered. The Company did not enter into the interest rate swap agreements for trading purposes. The swap agreement was intended to limit the Company’s exposure to a rising interest rate environment. At the time the swap was entered, there was no offsetting floating rate LIBOR debt and therefore no floating rate interest payments were anticipated. As a result, the swap transaction could not be designated as a hedging transaction and any changes in the unrealized fair value of the new swap will be recognized in the statement of operations as a non-cash gain or loss. For the years ended December 31, 2008, 2007 and 2006, the Company recorded $3.2 million, $0.5 million and $0.2 million, respectively, of realized loss as well as $4.3 million, $3.9 million and $3.4 million, respectively, of unrealized loss related to the interest rate swap in the consolidated statement of operations.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(q) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, “Disclosures About Fair Value of Financial Instruments.” The carrying values of cash and cash equivalents, accounts receivable, accounts payable, derivatives, and accrued expenses approximate fair value.
As of December 31, 2008, the fair value of the Company’s 9.25% senior notes, based on quoted market prices, was approximately $115.5 million compared to a carrying amount of $150 million.
The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities (in thousands) that were accounted for at fair value on a recurring basis as of December 31, 2008. For assets and liabilities that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
| Recurring fair value measurements | | Quoted Prices in Active Markets for Identical Items (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Interest rate swap | | $ | — | | | $ | 11,657 | | | $ | — | | | $ | 11,657 | |
| Total liabilities | | $ | — | | | $ | 11,657 | | | $ | — | | | $ | 11,657 | |
(r) Earnings per Share
Basic and diluted earnings per share have been calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the year.
(s) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash with high-quality financial institutions and limits the amount of credit exposure with any one institution. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers comprise the Company’s customer base, thus spreading the trade credit risk. At December 31, 2008, 2007 and 2006, no single group or customer represents greater than 10% of total accounts receivable.
(t) Segment Information
The Company’s revenue is derived from one industry segment, which includes collection, transfer and disposal of non-hazardous solid waste primarily in the central and southern United States. Operating segments (regions) are determined by the reporting structure and the vertical integration of the related operations. The three regional managers report to the Company’s chief operating officer and the Company’s financial performance is evaluated based on the regional managers’ responsibilities . See note 12 “Segment Reporting” for geographic information relating to the Company’s operations.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(u) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. It applies under other accounting pronouncements that require or permit fair value measurements, and does not require any new fair value measurements. The application of SFAS No. 157, however, may change current practice within an organization. SFAS No. 157 was effective January 1, 2008 and is applied prospectively. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” which provided a one year deferral for the implementation of SFAS No. 157 for certain nonfinancial assets and liabilities. The Company adopted SFAS No. 157 for financial assets and liabilities as of January 1, 2008. Please read note 1(q) above for the disclosures required by SFAS No. 157. The Company is currently evaluating the impact of SFAS No. 157 for nonfinancial assets and liabilities on the Company’s financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” which permits an entity to choose to measure financial instruments and certain other items similar to financial instruments at fair value. All subsequent changes in fair value for the financial instrument would be reported in earnings. SFAS No. 159 was effective January 1, 2008. The Company did not adopt the fair value option permitted under this statement.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) establishes principles and requirements on how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the entity acquired. In addition, SFAS No. 141(R) provides guidance on the recognition and measurement of goodwill acquired in the business combination or a gain from a bargain purchase as well as what information to disclose to enable users of the financial statements to evaluate the nature and financial impact of the business combination. SFAS No. 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled. SFAS No. 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. The provisions of SFAS 141(R) apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact SFAS No. 141(R) will have on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51.” SFAS No. 160 establishes principles and requirements on how to treat the portion of equity in a subsidiary that is not attributable directly or indirectly to a parent. This is commonly known as a minority interest. The objective of SFAS No. 160 is to improve relevance, comparability, and transparency concerning ownership interests in subsidiaries held by parties other than the parent by providing disclosures that clearly identify between interests of the parent and interest of the noncontrolling owners and the related impacts on the consolidated statement of income and the consolidated statement of financial position. SFAS No. 160 also provides guidance on disclosures related to changes in the parent’s ownership interest and deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the impact of SFAS No. 160 on the Company’s financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” The new standard is intended to improve financial reporting about derivative instruments and
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS No. 161 on the Company’s financial position, results of operations or cash flows.
In May 2008, the FASB issued Staff Position APB No. 14-1 (FSP APB No. 14-1), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB No. 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate, unless the embedded conversion option is required to be separately accounted for as a derivative under SFAS No. 133. FSP APB No. 14-1 is effective for fiscal years and interim periods beginning after December 15, 2008. Though early adoption is not permitted, the Staff Position must be applied retrospectively to all periods presented. The Company is currently evaluating the impact of APB No. 14-1 on the Company’s financial position, results of operations or cash flows.
(2) Use of Estimates
In preparing the Company’s financial statements, several estimates and assumptions are made that affect the accounting for and recognition of assets, liabilities, revenues and expenses. These estimates and assumptions must be made because certain of the information that is used in the preparation of the Company’s financial statements is dependent on future events, cannot be calculated with a high degree of precision from data available or is simply not capable of being readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine and the Company must exercise significant judgment. The most difficult, subjective and complex estimates and the assumptions that deal with the greatest amount of uncertainty are related to the Company’s accounting for landfills, asset impairments, and insurance claims as described below.
Accounting for landfills. The Company utilizes the units of production method to amortize landfill construction costs over the estimated remaining capacity of a landfill. Under this method the Company includes future estimated landfill development costs, as well as costs incurred to date, in the amortization base. Additionally, the Company includes deemed permitted expansion airspace, which has not been permitted, in the calculation of the total remaining capacity of the landfill.
This accounting method requires the Company to make estimates and assumptions, as described below. Any changes in the Company’s estimates will impact the Company’s income from operations prospectively from the date changes are made.
Landfill costs. The Company estimates the total cost to develop each landfill site to its final capacity. This includes certain projected landfill site costs that are uncertain because they are dependent on future events. The total cost to develop a site to its final capacity includes amounts previously expended and capitalized, net of accumulated airspace amortization, and projections of future purchase and development costs, operating construction costs, permitting cost of expansions and capitalized interest costs.
Closure and post-closure costs. The costs for closure and post-closure obligations at landfills the Company owns or operates are generally estimated based on interpretations of current requirements and proposed or anticipated regulatory changes. The estimates for landfill closure and post-closure costs also consider when the costs would actually be paid and factor in inflation and discount rates. The possibility of changing legal and regulatory requirements and the forward-looking nature of these types of costs make any estimation or assumption less certain.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Available airspace. The Company’s engineers determine the remaining capacity at landfills by estimating the available airspace. This is done by using surveys and other methods to calculate, based on height restrictions and other factors, how much airspace is left to fill and how much waste can be disposed of at a landfill before it has reached its final capacity.
Expansion airspace. The Company will also consider currently unpermitted airspace in the estimate of remaining capacity in certain circumstances. See note 1(f) “Landfill Accounting — Capitalized Landfill Costs” for further explanation.
It is possible that the Company’s estimates or assumptions will ultimately turn out to be significantly different from actual results. In some cases the Company may be unsuccessful in obtaining an expansion permit or the Company may determine that an expansion permit that the Company previously thought was probable has become unlikely. To the extent that such estimates, or the assumptions used to make those estimates, prove to be significantly different than actual results, or the belief that the Company will receive an expansion permit changes adversely in a significant manner, the costs of the landfill, including the costs incurred in the pursuit of the expansion, may be subject to impairment testing, as described below, and lower profitability may be experienced due to higher amortization rates, and higher expenses or asset impairments related to the removal of previously included expansion airspace.
Asset Impairments. Accounting standards require that assets be written down if they become impaired. If significant events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, a test of recoverability is performed by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If the carrying values are in excess of undiscounted expected future cash flows, impairment is measured by comparing the fair value of the asset to its carrying value. Fair value is determined by either internally developed discounted projected cash flow analysis of the asset or an analysis of market value for similar assets. Cash flow projections are sometimes based on a group of assets, rather than a single asset. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether an impairment has occurred for the group of assets for which the projected cash flows can be identified. If the fair value of an asset is determined to be less than the carrying amount of the asset or asset group, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs. Several impairment indicators are beyond the Company’s control, and cannot be predicted with any certainty whether or not they will occur. Estimating future cash flows requires significant judgment and projections may vary from cash flows eventually realized. Also, there are other considerations for impairments of landfills and goodwill as discussed in note 1(f).
Allowance for Doubtful Accounts. The Company estimates losses for uncollectible accounts based on the aging of the accounts receivable and the evaluation of the likelihood of success in collecting the receivable.
Acquisition Accounting. The Company estimates the fair value of assets and liabilities when allocating the purchase price of an acquisition.
Income Taxes. The Company assumes the deductibility of certain costs in its income tax filings and estimates the future recovery of deferred tax assets.
Insurance claims reserves. The Company accrues claims related to our self-insurance programs based on claims filed, estimated open claims and claims incurred but not reported based on actuarial-based loss development factors.
Contingent Liabilities. The Company estimates the amount of potential exposure it may have with respect to litigation, claims and assessments in accordance with SFAS No. 5, “Accounting for Contingencies.”
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Actual results could differ materially from the estimates and assumptions that the Company uses in the preparation of its financial statements.
(3) Acquisitions
During 2008, the Company completed three acquisitions. Total consideration for these transactions included $8.1 million of cash and $0.2 million of accrued future payments. The accrued future payments were made in February 2009. These acquisitions resulted in the addition of one transfer station and some tuck-in operations.
During 2007, the Company completed 10 acquisitions. Total consideration for these transactions included $92.8 million of cash, $1.3 million of prepaid airspace, $1.6 million of convertible debt, a transfer station and collection operations in Fort Myers, Florida, less a note receivable valued at $7.2 million. These acquisitions resulted in the addition of four landfills and four collection operations as well as several tuck-in operations.
During 2006, the Company completed four acquisitions, including three acquisitions from Old WCA. Total consideration for these transactions was approximately $12.9 million, including $7.6 million of cash, and $5.3 million of debt assumed (net of $0.1 million of debt discount). Subsequently, the Company repaid $1.3 million of the assumed debt associated with one of these acquisitions. These acquisitions resulted in the addition of one landfill, one collection operation and two transfer stations. Also during 2006, 17,943 shares were returned as treasury shares and 6,427 shares were issued in association with final settlement of prior acquisitions.
Allocation of purchase price, including the costs incurred to complete the acquisition and any additional costs incurred relating to prior year acquisitions, net of divestitures, has been allocated as follows (in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| Restricted cash | | $ | — | | | $ | — | | | $ | 417 | |
| Accounts receivable | | | (186 | ) | | | 2,479 | | | | 92 | |
| Prepaid expenses and other | | | — | | | | 5 | | | | 88 | |
| Property and equipment, net | | | 3,406 | | | | 55,201 | | | | 10,739 | |
| Goodwill | | | 4,193 | | | | 28,566 | | | | 1,091 | |
| Intangible assets | | | 947 | | | | 2,944 | | | | 157 | |
| Accounts payable and accrued liabilities | | | (191 | ) | | | (715 | ) | | | (994 | ) |
| | | $ | 8,169 | | | $ | 88,480 | | | $ | 11,590 | |
The table above reflected $20 of purchase price adjustments in 2008 relating to the 2007 acquisitions. In 2007, $39 of purchase price adjustments were related to the 2006 acquisitions. In 2006, $1,348 of the adjustment entries were associated with the 2005 and 2004 acquisitions.
In connection with a certain prior acquisition, the Company acquired prepaid disposal rights at certain of the seller’s landfills. These rights expire at the earlier of September 2010 or the usage of two million cubic yards. The Company can utilize these rights to dispose of waste at the specified landfills. The prepaid disposal rights were fully utilized in 2007. During the years ended December 31, 2007 and 2006, the Company utilized $428 and $1,602, respectively, of prepaid disposal rights, which is included as a cost of service in the related statements of operations.
The Company also paid $1,000 to acquire prepaid disposal rights at a landfill during each of the years ended December 31, 2007 and 2006. At the time the Company acquired the landfill in 2007, the remaining prepaid disposal rights of $1,270 were utilized as part of the consideration given.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(4) Earnings per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed using the treasury stock method for options, warrants and restricted shares and the if-converted method for convertible preferred stock and convertible debt. The detail of the earnings (loss) per share calculations for net income (loss) available to common stockholders for the years ended December 31, 2008, 2007 and 2006 is as follows (in thousands, except per share data):
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Numerator: | | | | | | | | | |
| Net income (loss) | | $ | (27,763 | ) | | $ | 2,922 | | | $ | 3,020 | |
| Accrued payment-in-kind dividend on preferred stock | | | (4,076 | ) | | | (3,876 | ) | | | (1,603 | ) |
| Net income (loss) available to common stockholders | | $ | (31,839 | ) | | $ | (954 | ) | | $ | 1,417 | |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Weighted average basic shares outstanding | | | 16,257 | | | | 16,460 | | | | 16,360 | |
| Dilutive effect of restricted share issuances | | | — | | | | — | | | | 25 | |
| Weighted average diluted shares outstanding | | | 16,257 | | | | 16,460 | | | | 16,385 | |
| | | | | | | | | | | | | |
| Earnings (loss) per Share: | | | | | | | | | | | | |
| Basic | | $ | (1.96 | ) | | $ | (0.06 | ) | | $ | 0.09 | |
| Diluted | | $ | (1.96 | ) | | $ | (0.06 | ) | | $ | 0.09 | |
Due to their anti-dilutive effect, the following potential common shares have been excluded from the computation of diluted earnings (loss) per share (in thousands):
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Stock options and warrants | | | 576 | | | | 621 | | | | 634 | |
| Restricted shares | | | 687 | | | | 594 | | | | 32 | |
| Convertible preferred stock | | | 8,637 | | | | 8,221 | | | | 3,506 | |
| Convertible debt | | | 790 | | | | 674 | | | | 636 | |
| | | | 10,690 | | | | 10,110 | | | | 4,808 | |
(5) Certain Balance Sheet Accounts
Allowance for Doubtful Accounts
The following summarizes the activity in the allowance for doubtful accounts for the years ended December 31, 2008, 2007 and 2006 (in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| Balance, beginning of year | | $ | 1,498 | | | $ | 540 | | | $ | 1,190 | |
| Amounts charged to expense | | | 827 | | | | 1,213 | | | | (36 | ) |
| Amounts written off, net of amounts recovered | | | (1,152 | ) | | | (255 | ) | | | (614 | ) |
| Balance, end of year | | $ | 1,173 | | | $ | 1,498 | | | $ | 540 | |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Prepaid Expenses and Other
Prepaid expenses and other consist of the following at December 31, 2008 and 2007 (in thousands):
| | | 2008 | | | 2007 | |
| Prepaid insurance premiums | | $ | 177 | | | $ | 4,607 | |
| Prefunded insurance claims | | | 224 | | | | 261 | |
| Current maturities of long-term note receivable | | | — | | | | 754 | |
| Other | | | 1,707 | | | | 1,315 | |
| | | $ | 2,108 | | | $ | 6,937 | |
Property and Equipment
Property and equipment consist of the following at December 31, 2008 and 2007 (in thousands):
| | | 2008 | | | 2007 | |
| Land and landfills | | $ | 252,693 | | | $ | 237,964 | |
| Vehicles and equipment | | | 86,383 | | | | 75,738 | |
| Containers | | | 34,181 | | | | 29,867 | |
| Buildings and improvements | | | 11,339 | | | | 10,609 | |
| Computers and software | | | 1,602 | | | | 1,451 | |
| Furniture and fixtures | | | 989 | | | | 877 | |
| | | | 387,187 | | | | 356,506 | |
| Less accumulated depreciation and amortization | | | 110,704 | | | | 86,122 | |
| | | $ | 276,483 | | | $ | 270,384 | |
Other Assets
Other assets consist of the following at December 31, 2008 and 2007 (in thousands):
| | | 2008 | | | 2007 | |
| Costs incurred on possible acquisitions | | $ | — | | | $ | 140 | |
| Deposits | | | 390 | | | | 118 | |
| | | $ | 390 | | | $ | 258 | |
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 2008 and 2007 (in thousands):
| | | 2008 | | | 2007 | |
| Accrued insurance claims | | $ | 3,407 | | | $ | 3,546 | |
| Accrued payroll costs | | | 3,184 | | | | 3,727 | |
| Deferred revenue | | | 5,416 | | | | 4,517 | |
| Accrued taxes | | | 2,142 | | | | 944 | |
| Accrued interest | | | 1,563 | | | | 1,197 | |
| Interest rate swap | | | 6,379 | | | | 2,664 | |
| Other | | | 1,563 | | | | 1,674 | |
| | | $ | 23,654 | | | $ | 18,269 | |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(6) Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the periods indicated are as follows (in thousands):
| Balance, December 31, 2006 | | $ | 73,546 | |
| Acquisitions, net of divestitures | | | 28,566 | |
| Balance, December 31, 2007 | | $ | 102,112 | |
| Acquisitions | | | 4,193 | |
| Impairment | | | (41,725 | ) |
| Balance, December 31, 2008 | | $ | 64,580 | |
The Company assesses potential impairment of its goodwill, intangible assets and other long-lived assets annually on October 31 and more frequently if there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying less likely. If indicators of impairment were present for intangible assets used in operations and future undiscounted cash flows were not expected to be sufficient to recover the asset’s carrying amount, an impairment loss would be charged to expense in the period identified. The amount of an impairment loss would be recognized as the excess of the asset’s carrying value over its fair value. Factors the Company’s management considers important, which may cause impairment include: significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results.
In accordance with SFAS No. 142, a two-step impairment test is required to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized. In the first step, the fair value of each reporting unit is compared to its carrying value to determine if the goodwill is impaired. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit were to exceed its fair value, then the second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and an impairment loss is recorded for an amount equal to the difference between the implied fair value and the carrying value of the goodwill.
For the purpose of goodwill analysis, the Company uses the following reporting units: Alabama, Arkansas, Colorado/New Mexico, Florida, Kansas/Missouri, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. Each reporting unit is a component of an operating segment under SFAS No. 131 and was chosen because management regularly reviews the operating results of that component. Management believes that these reporting units allow for a more thorough impairment analysis. The Company estimated the fair value of each reporting unit by utilizing the anticipated discounted cash flow of projected unleveraged free cash flows over the anticipated life of the underlying assets. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, the second step is performed in order to determine the implied fair value of the reporting unit’s goodwill. The Company also considered the market valuation approach and compared its market capitalization relative to its book value at both the October 31, 2008 measurement date and December 31, 2008. While market capitalization generally reflects investors’ expectations of future performance, the fair value of a reporting unit is not represented by market capitalization alone. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date which indicates a willing buyer and seller of reporting unit. Fair value recognizes the existence of expected synergies related to an acquisition as well as a control premium that a third party would be willing to pay to obtain a controlling interest in the reporting unit. The Company applied a reasonable control premium based on comparable industry averages. The Company believes there is a reasonable basis for the excess of estimated fair value of its reporting units over its market capitalization.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
During the fourth quarter of 2008, as the Company performed the annual impairment assessment of goodwill, there was a significant adverse change in the economic and business climate as financial markets reacted to the credit crisis facing major lending institutions, as well as, worsening conditions in the overall economy. Based on the first step analysis under SFAS No. 142, the Company concluded that the fair market value was less than the book value in the following reporting units: Florida, North Carolina, Oklahoma and Tennessee. After performing the second step, the Company determined that an impairment adjustment of $41.7 million was appropriate based on the differences between the implied fair value and the carrying value of the goodwill. In connection with the annual impairment test during 2007 and 2006, the second step of the impairment test was not required for any of the Company’s reporting units and accordingly no impairment of goodwill was indicated.
The estimated fair value of the Company’s reporting units requires judgment and the use of estimates by management. Potential factors requiring assessment include trends in the Company’s stock price, variance in results of operations from management projections, and additional acquisition transactions in the waste industry that reflect a control premium. Any of these potential factors may cause the Company to re-evaluate goodwill during any quarter throughout the year. If an impairment charge were to be taken for goodwill it would be a non-cash charge and would not impact the Company’s cash position or cash flows, however, such charge could have a material impact to its equity and statement of operations.
Intangible assets, all of which are subject to amortization, consist of the following at December 31, 2008 and 2007 (in thousands):
| | | Customer Contracts and Customer Lists | | | Covenants Not-to-Compete | | | Total | |
| December 31, 2008 | | | | | | | | | |
| Intangible assets | | $ | 8,131 | | | $ | 1,218 | | | $ | 9,349 | |
| Less accumulated amortization | | | 1,454 | | | | 409 | | | | 1,863 | |
| | | $ | 6,677 | | | $ | 809 | | | $ | 7,486 | |
| December 31, 2007 | | | | | | | | | |
| Intangible assets | | $ | 7,460 | | | $ | 941 | | | $ | 8,401 | |
| Less accumulated amortization | | | 917 | | | | 213 | | | | 1,130 | |
| | | $ | 6,543 | | | $ | 728 | | | $ | 7,271 | |
Amortization expense for these intangible assets was approximately $733, $558 and $313 for 2008, 2007 and 2006, respectively. The intangible asset amortization expense estimated as of December 31, 2008, for the five years following 2008 is as follows (in thousands):
| 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | |
| $ | 831 | | | $ | 815 | | | $ | 798 | | | $ | 716 | | | $ | 797 | |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(7) Long-Term Debt
Long-term debt consists of the following at December 31, 2008 and 2007 (in thousands):
| | | 2008 | | | 2007 | |
| Senior Notes, with interest rate of 9.25%, due in June 2014 | | $ | 150,000 | | | $ | 150,000 | |
| Revolving note payable with financial institutions, variable interest rate based on LIBOR plus a margin (6.25% and 6.55% at December 31, 2008 and 2007, respectively) | | | 48,617 | | | | 31,277 | |
| Environmental Facilities Revenue Bonds, principal payable in varying annual installments, maturing in 2020, interest rate ranging from 8.5% to 9% (8.91% weighted average rate at December 31, 2007) | | | — | | | | 8,815 | |
| Notes payable to banks and financial institutions, payable monthly through August 2010, weighted average interest rate of 6.77% and 6.69% at December 31, 2008 and 2007, respectively | | | 39 | | | | 459 | |
| Note payable, with interest rate of 5%, due in January 2010 | | | 128 | | | | 128 | |
| Seller convertible note, with interest rate of 5%, due in December 2009 | | | — | | | | 3,000 | |
| Seller convertible notes, with interest rate of 8%, due in January 2010 | | | — | | | | 4,000 | |
| Seller convertible notes, with interest rate of 5.5%, due in October 2012 | | | 1,575 | | | | 1,575 | |
| | | | 200,359 | | | | 199,254 | |
| Less debt discount | | | — | | | | 406 | |
| Less current maturities | | | 64 | | | | 699 | |
| | | $ | 200,295 | | | $ | 198,149 | |
As of December 31, 2008, the Company had $175 million in total capacity under its credit facility, of which $48.6 million was outstanding under the revolving line of credit and $11.3 million in other letters of credit issued, leaving $115.1 million in availability. See further discussions under Bank Credit Facility below.
9.25% Senior Notes Due 2014
On July 5, 2006, the Company issued $150 million aggregate principal amount of 9.25% senior notes due June 15, 2014. The net proceeds of the offering were $145.7 million after deducting initial purchasers’ discounts of $3.75 million and other issuance costs. The proceeds were applied as follows: $21.4 million to outstanding borrowings on the Company’s revolving note payable, $99.0 million to debt outstanding under the Company’s Term B Loan, and $25.3 million to debt outstanding under the Company’s Second Lien Credit Agreement which included $0.3 million of prepayment premium associated with the second lien notes. The Company wrote off $3.2 million of deferred financing costs and debt discount associated with the repayment and retirement of its first and second lien credit agreements, along with the restructuring of its credit facility as discussed under Bank Credit Facility below. The senior notes pay interest semi-annually on June 15 and December 15, commencing December 15, 2006, with the following redemption provisions:
| · | At any time before June 15, 2009, the Company may redeem up to 35% of the notes with net cash proceeds of certain equity offerings, as long as it redeems the notes within 180 days of the offering and at least 65% of the aggregate principal amount of the notes issued pursuant to the indenture remains outstanding after the redemption; |
| · | Prior to June 15, 2010, the Company may redeem all or part of the notes by paying a make-whole premium, plus accrued and unpaid interest, and, if any, liquidated damages; and |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
| · | The notes may be callable beginning on June 15 of 2010, 2011, and 2012 and thereafter at redemption prices of 104.625%, 102.313% and 100% of the principal amount plus accrued interest. |
The senior notes were issued under an indenture between the Company and The Bank of New York Trust Company, N.A., as Trustee. The indenture contains covenants including, among other provisions, limitations on the Company’s ability to incur additional indebtedness, make capital expenditures, create liens, sell assets and make dividend and other payments.
The senior notes due 2014 are guaranteed by all of the Company’s current and future subsidiaries as of December 31, 2008. These guarantees are full, unconditional and joint and several. In addition, the Company has no non-guarantor subsidiaries and no independent assets or operations outside of its ownership of the subsidiaries. There are no restrictions on the subsidiaries to transfer funds through dividends or otherwise.
Bank Credit Facility
Additionally, on July 5, 2006, the Company entered into a $100 million revolving secured credit facility with Comerica Bank maturing July 5, 2011 (as amended, the “Credit Agreement”). On July 28, 2006, Comerica syndicated the credit facility to a group of banks and the Company agreed to increase the capacity of the revolving credit facility to $175 million. The credit commitment available under the credit facility includes sub-facilities for standby letters of credit in the aggregate principal amount of up to $50.0 million and a swing-line feature for up to $10.0 million for same day advances. This credit facility replaced the previous $100 million revolving credit facility with Wells Fargo Bank National Association as administrative agent. At the time that the credit facility was entered into, it included covenants similar to the expiring facility with reduced interest margins associated with various leverage ratios. These interest margins were amended in October 2008 and again on February 19, 2009. Applicable fees and margins are determined based on the Company’s leverage ratio for the trailing 12-month reporting period on each quarterly reporting date. The following table highlights the revised margins included in the October 2008 (Commitment Fee) and February 2009 (LIBOR Margin and Prime Margin) amendments:
| | | LIBOR | | Prime | | Commitment | |
| Leverage Ratio | | Margin | | Margin | | Fee | |
| Less than 3.0x | | 2.500 | | 2.250 | | 0.500 | |
| Equal to or greater than 3.0 and less than 3.5x | | 2.750 | | 2.500 | | 0.500 | |
| Equal to or greater than 3.5 and less than 4.0x | | 3.000 | | 2.750 | | 0.500 | |
| Equal to or greater than 4.0 and less than 4.5x | | 3.250 | | 3.000 | | 0.750 | |
| Equal to or greater than 4.5x | | 3.500 | | 3.250 | | 1.000 | |
The Company’s obligations under the credit facility are secured by the capital stock of its subsidiaries and all tangible (including real estate) and intangible assets belonging to the Company and its subsidiaries. The obligations are also guaranteed by certain material subsidiaries. Obligations under the credit facility are recourse obligations and are subject to cancellation and/or acceleration upon the occurrence of certain events, including, among other things, a change of control (as defined in the credit facility), nonpayment, breaches of representations, warranties and covenants (subject to cure periods in certain instances), bankruptcy or insolvency, defaults under other debt arrangements, failure to pay certain judgments and the occurrence of events creating material adverse effects.
The credit facility is subject to customary financial and other covenants including, but not limited to, limitations on debt, consolidations, mergers, and sales of assets. In the February 2009 amendment, the requirement that the Company maintain an Adjusted EBIT Debt Service Ratio (as defined in the Credit Agreement), until maturity,
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
of not less than 1.25 to 1.00, was eliminated in favor of a requirement that the Company maintain a Pro Forma Adjusted EBITDA Debt Service Ratio (as defined in the Credit Agreement) of not less than 2.25 to 1.00 until maturity. The Pro Forma Adjusted EBITDA Debt Service Ratio is determined on a trailing 12 month basis. In addition, the February 2009 amendment (i) reduced the maximum Senior Secured Funded Debt Leverage Ratio (as defined in the Credit Agreement) from 3.00 to 1.00 to 2.50 to 1.00, (ii) imposed a restriction that the Company cannot make any maintenance capital expenditures exceeding 15% of its consolidated total revenue as calculated at the end of a fiscal year and (iii) replaced the prior minimum net worth covenant with a minimum tangible net worth covenant. The Company is required to maintain minimum tangible net worth of not less than $30.0 million as of December 31, 2008, plus, as of the end of each fiscal quarter thereafter, 50% of its after-tax consolidated net income (but excluding any quarterly losses), plus 100% of any increase in its net worth resulting from the net cash proceeds of any future equity offerings.
Other covenants in the credit agreement limit the Company’s ability and certain of its subsidiaries to, among other things, create, incur, assume or permit to exist certain liens; make certain investments, loans and advances; enter into any sale-leaseback transactions; materially change the nature of their businesses; create, incur, assume or permit to exist certain leases; merge into or with or consolidate with any other person; sell, lease or otherwise dispose of all or substantially all of their properties or assets; discount or sell any of their notes or accounts receivable; transact business with affiliates unless in the ordinary course of business and on arm’s length basis; make certain negative pledges; or amend, supplement or otherwise modify the terms of any debt or prepay, redeem or repurchase any subordinated debt.
Other Debt Instruments
In conjunction with one acquisition during 2007, the Company issued convertible notes in the amount of $1.6 million. The notes and any accrued but unpaid interest are convertible into shares of common stock at the rate of $10.24 per share. Provided an event of default has not occurred, at any time after (i) the first anniversary of the date of issuance and (ii) the average closing price of the common stock of the Company on ten consecutive trading days equals or exceeds $13.31 per share, the Company may declare that all unpaid principal and accrued interest be converted into the common stock of the Company.
The Company has entered into interest rate swap agreements from time to time. On July 7, 2006, the Company entered into a $150 million swap agreement effective July 11, 2006 where the Company pays 5.64% fixed and receives three-month LIBOR floating interest. See note 1(p) “Derivative Financial Instruments” for further discussion of the accounting for and valuation of this interest rate swap agreement.
The aggregate payments of long-term debt outstanding at December 31, 2008 are as follows (in thousands):
| 2009 | | $ | 64 | |
| 2010 | | | 103 | |
| 2011 | | | 48,617 | |
| 2012 | | | 1,575 | |
| 2013 | | | — | |
| Thereafter | | | 150,000 | |
| | | $ | 200,359 | |
(8) Note Payable
In June 2008, the Company issued a note payable for $305 to a financial institution to fund the payments of general insurance premiums. The note bears interest at 3.69% and principal and interest are payable monthly through April 2009.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(9) Stockholders’ Equity
Preferred Stock
On July 13, 2006, the Company’s stockholders approved the issuance of 750,000 shares of convertible preferred stock at $100.00 per share in the private placement with Ares Corporate Opportunities Fund II L.P. (Ares). The shares were issued on July 27, 2006 and a portion of the net proceeds were used to completely repay the amounts outstanding under the credit facility. Issuance costs, including a 1% discount to Ares and other transaction costs, totaled approximately $3.1 million. The preferred stock is convertible into shares of the Company’s common stock at a price of $9.60 per share and carries a 5% payment-in-kind (PIK) dividend payable semi-annually.
The preferred shares were convertible into 7,812,500 shares of the Company’s common stock on the issuance date and with the effect of the cumulative PIK dividends at the end of five years would be convertible into 10,000,661 shares of common stock. Under the terms of the preferred agreement, under certain circumstances, including the acquisition of the Company or a public offering of the Company’s common stock, all five years’ worth of cumulative PIK dividends would accelerate. The preferred stockholder holds certain preferential rights, including the appointment of two directors. The Company can force a conversion into its common stock following either (i) the average of the closing price of the common stock for each of 20 consecutive trading days exceeding $14.40 per share or (ii) a fundamental transaction that Ares does not treat as a liquidation. After the fifth anniversary of issuance, the Company can, at its discretion, redeem for cash equal to the liquidation preference which is approximately $96.0 million. After the fifth anniversary of issuance, the Company can elect to continue to PIK the dividends or to pay dividends in cash at the rate of 5% per annum. The original issuance date for the preferred stock is the commitment date for both the preferred stock and the initial five years’ worth of dividends as the payment of the dividends through in-kind payments is non-discretionary for that initial five-year period. Based on the fair value of the Company’s underlying common stock on the issuance date and the stated conversion date, there is no beneficial conversion feature associated with the issuance of the preferred stock.
Stock-based Compensation
The Company established the 2004 WCA Waste Corporation Incentive Plan which has been amended and restated from time to time to comply with applicable federal law. The plan authorizes the issuance of up to 2,250,000 shares. As of December 31, 2008, there were approximately 608,000 remaining shares authorized for issuance.
Additionally during 2008, 2007 and 2006, approximately 388,000, 287,000 and 363,000 restricted shares of the common stock of the Company were granted to certain directors, officers and key employees with an aggregate market value of $7.4 million on the grant dates. This value was included in additional paid-in capital within the stockholders’ equity section of the accompanying consolidated balance sheet. These shares vest over periods ranging from one to ten years from the issuance date. The value of the restricted shares is being amortized to expense over that period. During the years ended December 31, 2008, 2007 and 2006, $2,182, $1,765 and $1,118 of stock compensation expense related to these restricted shares was recognized.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
The following table reflects the restricted share activity for the Company during 2008, 2007 and 2006 (in thousands):
| | | 2008 | | 2007 | | 2006 |
| | | Shares | | | Weighted Average Grant-Date Fair Value | | Weighted Average Remaining Contractual Term (years) | | Shares | | | Weighted Average Grant-Date Fair Value | | Weighted Average Remaining Contractual Term (years) | | Shares | | | Weighted Average Grant-Date Fair Value | | Weighted Average Remaining Contractual Term (years) |
| Unvested at beginning of year | | | 594 | | | $ | 7.85 | | | | | 478 | | | $ | 7.84 | | | | | 204 | | | $ | 9.50 | | |
| Granted | | | 388 | | | | 6.38 | | | | | 287 | | | | 7.97 | | | | | 363 | | | | 7.24 | | |
| Vested | | | (258 | ) | | | 8.21 | | | | | (145 | ) | | | 8.09 | | | | | (81 | ) | | | 9.37 | | |
| Forfeited | | | (37 | ) | | | 6.97 | | | | | (26 | ) | | | 7.57 | | | | | (8 | ) | | | 7.54 | | |
| Unvested at end of year | | | 687 | | | $ | 6.93 | | 2.62 | | | 594 | | | $ | 7.85 | | 3.31 | | | 478 | | | $ | 7.84 | | 4.83 |
The following table reflects the option and warrant activity for the Company during 2008, 2007 and 2006 (in thousands, except per share data):
| | | 2008 | | | 2007 | | | 2006 | |
| | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
| Outstanding at beginning of year | | | 621 | | | $ | 9.51 | | | | 634 | | | $ | 9.52 | | | | 644 | | | $ | 9.52 | |
| Grants | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Forfeitures | | | (45 | ) | | | 9.50 | | | | (13 | ) | | | 9.80 | | | | (10 | ) | | | 9.50 | |
| Outstanding at end of year | | | 576 | | | $ | 9.52 | | | | 621 | | | $ | 9.51 | | | | 634 | | | $ | 9.52 | |
The following table summarizes information about the stock options outstanding at December 31, 2008 (in thousands, except per share data):
| | | | Outstanding and Exercisable | |
| Range of Exercise Prices | | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Life | |
| | 9.50 | | | | 565 | | | $ | 9.50 | | | | 5.5 | |
| | 10.28 – 10.39 | | | | 11 | | | | 10.34 | | | | 6.0 | |
| | | | | | 576 | | | $ | 9.52 | | | | 5.5 | |
As the exercise prices of all outstanding options were greater than the Company’s common stock share price as of December 31, 2008, there was no intrinsic value as of December 31, 2008.
Other
On April 16, 2008, the Company's Board of Directors authorized the repurchase of up to $10 million of its common shares from time to time in open market or private transactions. The timing and actual number of shares purchased depended on a variety of factors including the stock price, corporate and regulatory requirements and other market and economic conditions. The stock repurchase program was terminated on December 18, 2008. During the year ended December 31, 2008, the Company repurchased 1,056,014 shares of its common stock for approximately $5.1 million.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(10) Employee Benefit Plan
Effective February 1, 2000, the Company began sponsoring a 401(k) Profit Sharing Plan for its eligible employees. Under the plan, eligible employees are permitted to make salary deferrals of amounts up to the Internal Revenue Service limitation. Salary deferrals will be matched 25% by WCA, subject to IRS limitations, and employees are 100% vested in these matching contributions after three years of service with the Company. Salary deferrals are 100% vested at all times. Matching contributions to the plan for the years ended December 31, 2008, 2007, and 2006 totaled $402, $370 and $301, respectively.
(11) Income Taxes
The Company’s (provision) benefit for income taxes is determined by applying the applicable statutory rate to the Company’s pre-tax financial reporting income (loss), adjusted for permanent book-tax differences. The Company’s federal and state income tax (provision) benefit attributable to pre-tax income (loss) for the periods reported consist of the following (in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| Current | | $ | (602 | ) | | $ | (594 | ) | | $ | (42 | ) |
| Deferred | | | 14,339 | | | | (1,749 | ) | | | (2,271 | ) |
| Income tax (provision) benefit | | $ | 13,737 | | | $ | (2,343 | ) | | $ | (2,313 | ) |
At December 31, 2008 and 2007, the individually significant components that comprise the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | 2008 | | | 2007 | |
| Deferred tax assets: | | | | | | |
| Federal net operating loss carryforward | | $ | 7,746 | | | $ | 8,613 | |
| State net operating loss carryforward | | | 5,142 | | | | 3,858 | |
| Other | | | 7,312 | | | | 5,172 | |
| Alternative minimum tax | | | 428 | | | | 320 | |
| Deferred tax assets before valuation allowance | | | 20,628 | | | | 17,963 | |
| Valuation allowance | | | (6,221 | ) | | | (3,316 | ) |
| Deferred tax assets after valuation allowance | | | 14,407 | | | | 14,647 | |
| Deferred tax liabilities: | | | | | | | | |
| Excess of book basis over tax basis of property | | | (8,553 | ) | | | (21,331 | ) |
| Prepaid expenses | | | (419 | ) | | | (391 | ) |
| Other | | | 911 | | | | (919 | ) |
| Deferred tax liabilities | | | (8,061 | ) | | | (22,641 | ) |
| Net deferred tax assets (liabilities) | | $ | 6,346 | | | $ | (7,994 | ) |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
At December 31, 2008, the Company had a federal net operating loss carryforward (NOL) of approximately $22.1 million which, if not utilized, will begin to expire in 2022. Additionally the Company has state NOLs of approximately $127.3 million which, if not utilized, will expire beginning in 2009. The amount of the NOLs that can be utilized to offset taxable income in any individual year may be severely limited. Accordingly, the Company has established valuation allowances against the deferred tax assets associated with a portion of these NOLs. The valuation allowance for deferred tax assets as of December 31, 2008 and 2007 was $6,221 and $3,316, respectively. The change in the total valuation allowance for the years ended December 31, 2008, 2007 and 2006 was a net increase of $2,905, $692 and $186, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, it provides guidance on the measurement, derecognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is required to record the impact of adopting FIN 48 as an adjustment to the January 1, 2007, beginning balance of retained earnings rather than the consolidated statement of operations.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recorded approximately $1,812 in other long-term liabilities for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Balance at January 1, 2008 | | $ | 1,813 | |
| Additions for tax positions of prior years | | | — | |
| Reductions for tax positions of prior years | | | — | |
| Additions for tax positions related to the current year | | | — | |
| Settlements | | | — | |
| Lapse of statute of limitations | | | — | |
| Balance at December 31, 2008 | | $ | 1,813 | |
Included in the balance of unrecognized tax benefits as of December 31, 2008, was $1,813 of tax benefits that, if recognized in future periods, would impact the Company’s effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. This is an accounting policy election made by the Company that is a continuation of the Company’s historical policy and will continue to be consistently applied in the future. During the year ended December 31, 2008, the Company accrued approximately $6 of gross interest and penalties.
The Company does not anticipate a significant change in the balance of unrecognized tax benefits within the next 12 months.
The Company is subject to federal income tax in the United States and to state taxes in the various states in which it operates within the United States. With few exceptions, the Company remains subject to both U.S federal income tax and to state and local income tax examinations by taxing authorities for tax years through 1998. Currently, the Company is not involved in any income tax examinations for any year.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
The table below reconciles the Company’s statutory income tax (provision) benefit attributable to pre-tax income (loss) to its effective income tax (provision) benefit at December 31, 2008, 2007 and 2006 (in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| Statutory federal tax (provision) benefit | | $ | 14,525 | | | $ | (1,843 | ) | | $ | (1,867 | ) |
| State income tax (provision) benefit, net of federal tax (provision) benefit | | | 2,592 | | | | 460 | | | | 539 | |
| Adjustment to valuation allowance | | | (2,905 | ) | | | (692 | ) | | | (700 | ) |
| Nondeductible expenses and other | | | (469 | ) | | | (267 | ) | | | (285 | ) |
| FIN 48 interest and penalties | | | (6 | ) | | | (1 | ) | | | — | |
| Effective tax (provision) benefit | | $ | 13,737 | | | $ | (2,343 | ) | | $ | (2,313 | ) |
(12) Segment Reporting
The Company’s operations consist of the collection, transfer and disposal of non-hazardous solid waste. Revenues are generated primarily from our collection operations to residential, commercial and roll-off customers and landfill disposal services. The following table reflects total revenue by source for the years ended December 31, 2008, 2007 and 2006 (in thousands):
| | | 2008 | | | 2007 | | | 2006 | |
| Collection: | | | | | | | | | |
| Residential | | $ | 50,433 | | | $ | 41,647 | | | $ | 25,385 | |
| Commercial | | | 21,607 | | | | 19,069 | | | | 15,876 | |
| Roll-off | | | 57,756 | | | | 53,501 | | | | 44,539 | |
| Total collection | | | 129,796 | | | | 114,217 | | | | 85,800 | |
| Disposal | | | 75,456 | | | | 70,797 | | | | 60,767 | |
| Less intercompany | | | 29,527 | | | | 26,994 | | | | 21,701 | |
| Disposal, net | | | 45,929 | | | | 43,803 | | | | 39,066 | |
| Transfer and other | | | 46,413 | | | | 40,986 | | | | 37,872 | |
| Less intercompany | | | 14,129 | | | | 14,066 | | | | 13,241 | |
| Transfer and other, net | | | 32,284 | | | | 26,920 | | | | 24,631 | |
| Total revenue | | $ | 208,009 | | | $ | 184,940 | | | $ | 149,497 | |
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
The table below reflects major operating segments (Region I: Kansas, Missouri; Region II: Colorado, Florida, New Mexico, Oklahoma, Texas; Region III: Alabama, Arkansas, North Carolina, South Carolina, Tennessee) for the years ended December 31, 2008, 2007 and 2006.
| | | Region I | | | Region II | | | Region III | | | Corporate | | | Total | |
| Year ended December 31, 2008: | | | | | | | | | | | | | | | |
| Revenue | | $ | 53,773 | | | $ | 104,550 | | | $ | 49,686 | | | $ | — | | | $ | 208,009 | |
| Depreciation and amortization | | | 5,415 | | | | 13,195 | | | | 8,041 | | | | 500 | | | | 27,151 | |
| Impairment of goodwill | | | — | | | | 25,944 | | | | 15,781 | | | | — | | | | 41,725 | |
| Operating income (loss) | | | 6,307 | | | | (10,107 | ) | | | (13,149 | ) | | | 1,618 | | | | (15,331 | ) |
| Total assets | | | 83,420 | | | | 173,609 | | | | 106,303 | | | | 24,626 | | | | 387,958 | |
| Goodwill | | | 25,277 | | | | 18,000 | | | | 21,303 | | | | — | | | | 64,580 | |
| Capital expenditures | | | 6,552 | | | | 16,020 | | | | 6,370 | | | | 359 | | | | 29,301 | |
| Year ended December 31, 2007: | | | | | | | | | | | | | | | |
| Revenue | | $ | 52,543 | | | $ | 84,917 | | | $ | 47,480 | | | $ | — | | | $ | 184,940 | |
| Depreciation and amortization | | | 5,261 | | | | 11,079 | | | | 7,460 | | | | 434 | | | | 24,234 | |
| Operating income (loss) | | | 8,297 | | | | 14,325 | | | | 4,585 | | | | (1,122 | ) | | | 26,085 | |
| Total assets | | | 75,799 | | | | 194,270 | | | | 123,473 | | | | 33,181 | | | | 426,723 | |
| Goodwill | | | 22,831 | | | | 42,197 | | | | 37,084 | | | | — | | | | 102,112 | |
| Capital expenditures | | | 6,891 | | | | 13,800 | | | | 7,757 | | | | 710 | | | | 29,158 | |
| Year ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 48,849 | | | $ | 55,807 | | | $ | 44,841 | | | $ | — | | | $ | 149,497 | |
| Depreciation and amortization | | | 4,837 | | | | 6,818 | | | | 7,068 | | | | 347 | | | | 19,070 | |
| Operating income (loss) | | | 5,262 | | | | 15,360 | | | | 4,694 | | | | (1,890 | ) | | | 23,426 | |
| Capital expenditures | | | 7,232 | | | | 10,316 | | | | 8,696 | | | | 2,866 | | | | 29,110 | |
Total assets for Corporate include cash, certain permitted but unopened landfills and corporate airplane.
(13) Commitments and Contingencies
(a) Operating Leases
The Company leases certain of its operating and office facilities for various terms. Lease expense aggregated $2,028, $1,265 and $1,217 during 2008, 2007 and 2006, respectively. The long-term, non-cancelable rental obligations as of December 31, 2007 are due in the following years (in thousands):
| 2009 | | $ | 926 | |
| 2010 | | | 868 | |
| 2011 | | | 707 | |
| 2012 | | | 513 | |
| 2013 | | | 232 | |
| 2014 and thereafter | | | 1,592 | |
| | | $ | 4,838 | |
(b) Financial Instruments
Letters of credit, performance bonds, and other guarantees have been provided by WCA to support tax-exempt bonds, performance of landfill final closure and post-closure requirements, insurance contracts, and other contracts. Total letters of credit, performance bonds, insurance policies, and other guarantees outstanding at December 31, 2008 aggregated approximately $71.4 million.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(c) Environmental Matters
In the normal course of business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit it holds.
From time to time, the Company may also be subject to actions brought by citizens’ groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations the Company owns or operates or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates.
The Company may also be subject to liability for any environmental damage that its solid waste facilities cause to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater, surface water, and drinking water, including damage resulting from conditions existing prior to the acquisition of such facilities by the Company.
The Company may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment, or disposal was arranged by the Company or its predecessors. Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. As of December 31, 2008, the Company was not aware of any significant environmental liabilities.
(d) Legal Proceedings
The Company is a party to various legal proceedings that have arisen in the ordinary course of business. While the results of these matters cannot be predicted with certainty, the Company believes that losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, unfavorable resolution could affect the consolidated financial position, results of operations or cash flows for the quarterly period in which they are resolved.
Except as described above, and other than routine litigation incidental to the Company’s business, which is not currently expected to have a material adverse effect upon its financial condition, results of operations or prospects, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject. While management believes a majority of the Company’s present litigation matters are covered by insurance, subject to deductibles and the self-insured portion (as described below), no assurance can be given with respect to the outcome of any such proceedings or the effect such outcomes may have on the Company, or that the Company’s insurance would be adequate to cover all liability, costs and expenses associated with such litigation matters.
(e) Other Potential Proceedings
In the normal course of business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit it holds. From time to time, the Company may also be subject to actions brought by citizens’ groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations the Company owns or operates or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Moreover, the Company may become party to various claims and suits pending 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 assurance can be given with respect to the outcome of any such proceedings or the effect such outcomes may have on the Company, or that the Company’s insurance coverage would be adequate. The Company is self-insured for a portion of its general liability, workers’ compensation and automobile liability. The Company’s excess loss limits related to its self-insured portion of general liability, workers’ compensation and automobile liability are $100, $250 and $250, respectively. The frequency and amount of claims or incidents could vary significantly from quarter-to-quarter and/or year-to-year, resulting in increased volatility of its costs of services. Although the Company is unable to estimate any possible losses, a significant judgment against the Company, the loss of significant permits or licenses or the imposition of a significant fine or other liabilities could have a material adverse effect on the Company’s financial condition, results of operations and prospects.
(14) Related-Party Transactions
The Company reimburses its outside board members for expenses incurred in connection with their service as directors. Total payments of $10, $2 and $2 were made during 2008, 2007 and 2006, respectively, for such reimbursements
(15) Unaudited Quarterly Financial Data
The following table summarizes quarterly financial information for 2008 and 2007 (in thousands, except per share data):
| | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Year Ended December 31, | |
| 2008: | | | | | | | | | | | | | | | |
| Revenue | | $ | 48,837 | | | $ | 52,746 | | | $ | 52,782 | | | $ | 53,644 | | | $ | 208,009 | |
| Operating income (loss) | | | 5,055 | | | | 6,551 | | | | 6,965 | | | | (33,902 | ) | | | (15,331 | ) |
| Net income (loss) available to common stockholders | | | (3,357 | ) | | | 1,865 | | | | (305 | ) | | | (30,042 | ) | | | (31,839 | ) |
| Basic earnings (loss) per share | | $ | (0.20 | ) | | $ | 0.11 | | | $ | (0.02 | ) | | $ | (1.91 | ) | | $ | (1.96 | ) |
| Diluted earnings (loss) per share | | $ | (0.20 | ) | | $ | 0.11 | | | $ | (0.02 | ) | | $ | (1.91 | ) | | $ | (1.96 | ) |
| 2007: | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 40,627 | | | $ | 46,200 | | | $ | 48,421 | | | $ | 49,692 | | | $ | 184,940 | |
| Operating income | | | 6,543 | | | | 6,190 | | | | 8,107 | | | | 5,245 | | | | 26,085 | |
| Net income (loss) available to common stockholders | | | 368 | | | | 1,645 | | | | (467 | ) | | | (2,500 | ) | | | (954 | ) |
| Basic earnings (loss) per share | | $ | 0.02 | | | $ | 0.10 | | | $ | (0.03 | ) | | $ | (0.15 | ) | | $ | (0.06 | ) |
| Diluted earnings (loss) per share | | $ | 0.02 | | | $ | 0.10 | | | $ | (0.03 | ) | | $ | (0.15 | ) | | $ | (0.06 | ) |
Computation of per share amounts for quarters are made independently and reflect the weighted average shares outstanding for each of these quarters. The Company’s issuances of common stock in connection with restricted stock grants and repurchases of common stock according to the stock repurchase program significantly impacted the number of shares outstanding and the computation of earnings (loss) per share. Therefore, the sum of per share amounts above do not agree with per share amounts for the year as a whole.
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(16) Subsequent Events
On January 15, 2009, the Company consummated the purchase of a transfer station permit and a 6.2 acre tract of land in Greensboro, North Carolina for the future construction and operation of a transfer station from MRR Southern, LLC and its affiliate. The purchase consisted of $1.0 million in cash at closing and two future payments of $0.5 million. The two remaining installments of $0.5 million are due on January 15, 2010 and 2011, respectively.
On February 20, 2009, all conditions of the Company’s purchase agreement with Advanced Waste Services, L.P. were met, and a holdback payment of $0.2 million was made. At December 31, 2008, this was accrued as a future payment obligation.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
There were no changes in or disagreements on any matters of accounting principles or financial statement disclosure between us and our independent registered public accounting firm during our two most recent fiscal years or any subsequent interim period.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2008 in ensuring that the information required to be disclosed by us (including our consolidated subsidiaries) in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms; and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, a report of management’s assessment of the design and effectiveness of internal controls is included as part of this annual report on Form 10-K for the fiscal year ended December 31, 2008. KPMG LLP, our independent registered public accountants, also attested to, and reported on, management’s assessment of the effectiveness of internal controls over financial reporting. Management’s report and the independent registered public accounting firm’s attestation report are included in Part II, Item 8 “Financial Statements and Supplementary Data” of this annual report on Form 10-K.
Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting that occurred during our last fiscal quarter, that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
Item 10. Directors and Executive Officers of the Registrant.
The information with respect to our directors, executive officers, audit committee and audit committee financial expert, is incorporated by reference to the sections entitled “Election of Directors,” “Executive Officers,” “Information relating to our Board of Directors and Certain Committees of our Board of Directors,” respectively, in our definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
We have adopted a code of business conduct and ethics applicable to all of our officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The code of business conduct and ethics is available on the “Investor Relations-Corporate Governance” section of our internet website at www.wcawaste.com. If we amend the code of business conduct and ethics or grant a waiver, including an implicit waiver, from the code of business conduct and ethics, we intend to disclose the information on the “Investor Relations-Corporate Governance” section of our Internet website at www.wcawaste.com within four business days of such amendment or waiver, as applicable.
The information required by Rule 10A-3(d) of the Exchange Act is incorporated by reference to the section entitled “Information relating to our Board of Directors and Certain Committees of our Board of Directors” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
The information required by Item 11 of this annual report on Form 10-K is incorporated by reference to the sections entitled “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Employment Agreements,” and “Compensation of Directors” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 of this annual report on Form 10-K is incorporated by reference to the section entitled “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 of this annual report on Form 10-K is incorporated by reference to the section entitled “Certain Relationships and Related Transactions, and Director Independence” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 of this annual report on Form 10-K is incorporated by reference to the section entitled “Independent Registered Public Accounting Firm” in our definitive proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as a part of this report:
(1) and (2) Financial Statements and Financial Statement Schedules.
Consolidated financial statements of the Company are included in Item 8 (Financial Statements and Supplementary Data). All other schedules for the Company have been omitted since the required information is not present or not present in an amount sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
(3) Exhibits.
Exhibit No. | | Description |
| 2.1† | | Closing and Asset Purchase Agreement, dated as of October 2, 2005, by and among WCA of Florida, Inc., Meyer & Gabbert Excavating Contractors, Inc., Leonard G. Meyer, Jr. and James F. Gabbert (incorporated by reference to Exhibit 2.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on October 6, 2005). |
| 3.1 | | Second Amended and Restated Certificate of Incorporation of WCA Waste Corporation (incorporated by reference to Exhibit 3.1 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on December 22, 2005). |
| 3.2 | | Second Amended and Restated Bylaws of WCA Waste Corporation (incorporated by reference to Exhibit 3.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on June 20, 2007). |
| 4.1 | | Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the registrant’s Registration Statement on Form S-1 (File No. 333-113416) filed with the SEC on May 14, 2004). |
| 4.2 | | Indenture, dated as of July 5, 2006, by and among WCA Waste Corporation, the Guarantors named therein and The Bank of New York Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 4.3 | | Form of 9.25% Senior Note due 2014 (included as Exhibit A to Exhibit 4.4 above). |
| 4.4 | | Certificate of Designation of Series A Convertible Pay-in-Kind Preferred Stock (incorporated by reference to Exhibit 4.7 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 4.5 | | Specimen of Series A Convertible Pay-in-Kind Preferred Stock Certificate (incorporated by reference to Exhibit 4.8 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.1 | | Administrative Services Agreement, dated May 20, 2004, between WCA Waste Corporation, WCA Management Company, L.P., Waste Corporation of America, LLC, Transit Waste, LLC, Waste Corporation of Central Florida, Inc. and Waste Corporation of Florida, Inc. (incorporated by reference to Exhibit 10.2 to Amendment No. 3 to the registrant’s Registration Statement on Form S-1 (File No. 333-113416) filed with the SEC on June 1, 2004). |
| 10.2+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Tom J. Fatjo, Jr. (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 12, 2008). |
Exhibit No. | | Description |
| 10.3+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Jerome Kruzka (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 12, 2008). |
| 10.4+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Charles Casalinova (incorporated by reference to Exhibit 10.3 to the registrant’s Form 8- K (File No. 000-50808) filed with the SEC on December 12, 2008). |
| 10.5+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Tom J. Fatjo, III (incorporated by reference to Exhibit 10.4 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 12, 2008). |
| 10.6 | | Registration Rights Agreement, dated June 15, 2004, by and among WCA Waste Corporation, EFO Co-Investment Partners and WCA Partners, L.P. (incorporated by reference to Exhibit 10.14 to Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (File No. 333-113416) filed with the SEC on June 17, 2004). |
| 10.7+ | | Form of WCA Waste Corporation Stock Option Agreement under the 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.4 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on November 10, 2004). |
| 10.8+ | | Form of Executive Officer Restricted Stock Grant under the 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.15 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 24, 2005). |
| 10.9+ | | WCA Waste Corporation Management Incentive Plan, as amended and restated effective January 1, 2007 (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on January 9, 2007). |
| 10.10+ | | Form of Non-Employee Director Restricted Stock Grant under the 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.21 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 24, 2005). |
| 10.11 | | Form of Resale Restriction Agreement, dated as of December 21, 2005, between WCA Waste Corporation and each of Tom J. Fatjo, Jr., Jerome M. Kruzka, Charles A. Casalinova, Tom J. Fatjo, III, Richard E. Bean, Ballard O. Castleman and Roger A. Ramsey individually (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 22, 2005). |
| 10.12 | | Third Amended and Restated 2004 WCA Waste Corporation Incentive Plan, effective as of June 1, 2005 (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 19, 2008). |
| 10.13 | | Revolving Credit Agreement, dated as of July 5, 2006, by and among WCA Waste Corporation, Comerica Bank and the Lenders named therein (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 10.14 | | Interest Rate Swap Agreement, dated July 11, 2006, between WCA Waste Corporation and Comerica Bank (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.15 | | Securities Purchase Agreement, dated as of February 10, 2006, by and among WCA Waste Corporation, Transit Waste, LLC, WCA Management Company, L.P., and Waste Corporation of America, LLC (incorporated by reference to Exhibit 10.29 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 16, 2006). |
Exhibit No. | | Description |
| 10.16 | | Preferred Stock Purchase Agreement, dated as of June 12, 2006, by and between WCA Waste Corporation and Ares Corporate Opportunities Fund II, L.P. (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on June 16, 2006). |
| 10.17 | | Purchase Agreement, dated as of June 28, 2006, by and among WCA Waste Corporation, the Guarantors named therein and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 10.18 | | Registration Rights Agreement, dated as of July 5, 2006, by and among WCA Waste Corporation, the Guarantors named therein and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.3 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 10.19 | | Stockholder’s Agreement. dated July 27. 2006, among WCA Waste Corporation and Ares Corporate Opportunity Fund II. L.P. (incorporated by reference to Exhibit 10.5 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.20 | | Registration Rights Agreement, dated July 27, 2006, among WCA Waste Corporation and Ares Corporate Opportunities Fund II, L.P. (incorporated by reference to Exhibit 10.6 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.21 | | Management Rights Letter, dated July 27, 2006, between WCA Waste Corporation and Ares Corporate Opportunities Fund II, L.P. (incorporated by reference to Exhibit 10.7 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.22+ | | Form of Stock Option Agreement under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.37 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.23+ | | Form of Executive Officer Restricted Stock Grant under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.38 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.24 | | Form of Non Employee Director Restricted Stock Grant under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.39 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.25 | | Form of Restricted Stock Grant under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.40 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.26 | | Eighth Amendment to Revolving Credit Agreement, dated October 22, 2008, among WCA Waste Corporation and Comerica Bank (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on October 27, 2008). |
| 10.27 | | Ninth Amendment to Revolving Credit Agreement, dated February 19, 2009, among WCA Waste Corporation and Comerica Bank (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K and Form 8-K/A (File No. 000-50808) filed with the SEC on February 25, 2009). |
| 12.1* | | Statement regarding computation of ratio of earnings to fixed charges for the year ended December 31, 2008. |
| 14.1 | | WCA Waste Corporation Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 24, 2005). |
Exhibit No. | | Description |
| 21.1* | | List of Subsidiaries of WCA Waste Corporation. |
| 23.1* | | Consent of Independent Registered Public Accounting Firm KPMG LLP. |
| 31.1* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| 31.2* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| 32.1* | | Section 1350 Certification of Chief Executive Officer. |
| 32.2* | | Section 1350 Certification of Chief Financial Officer. |
| + | Management contract or compensatory plan, contract or arrangement. |
| † | Confidential treatment has been requested with respect to certain information contained in this agreement. |
The registrant hereby undertakes, pursuant to Regulation S-K, Item 601(b), paragraph (4)(iii)(A), to furnish to the Securities and Exchange Commission upon request all constituent instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10% of the registrant’s total consolidated assets.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| | WCA WASTE CORPORATION |
| | | |
| | By: | /s/ TOM J. FATJO, JR. | |
| | | Tom J. Fatjo, Jr. |
| | | Chief Executive Officer |
Date: March 12, 2009
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Tom J. Fatjo, Jr. and Charles A. Casalinova, and each of them, acting individually, as his attorney-in-fact, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K and other documents in connection herewith and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | | Title | | Date |
| | | | | |
/s/ Tom J. Fatjo, Jr. | | Chairman of the Board of Directors | | March 12, 2009 |
| Tom J. Fatjo, Jr. | | and Chief Executive Officer (Principal Executive Officer) | | |
| | | | | |
/s/ Jerome M. Kruszka | | President, Chief Operating Officer | | March 12, 2009 |
| Jerome M. Kruszka | | and Director | | |
| | | | | |
/s/ Charles A. Casalinova | | Senior Vice President and Chief | | March 12, 2009 |
| Charles A. Casalinova | | Financial Officer (Principal Financial Officer) | | |
| | | | | |
/s/ joseph J. Scarano, Jr. | | Vice President and Controller | | March 12, 2009 |
| Joseph J. Scarano, Jr. | | (Principal Accounting Officer) | | |
| | | | | |
/s/ Richard E. Bean | | Director | | March 12, 2009 |
| Richard E. Bean | | | | |
| | | | | |
/s/ Ballard O. Castleman | | Director | | March 12, 2009 |
| Ballard O. Castleman | | | | |
| | | | | |
/s/ Preston Moore, Jr. | | Director | | March 12, 2009 |
| Preston Moore Jr. | | | | |
| | | | | |
/s/ Roger A. Ramsey | | Director | | March 12, 2009 |
| Roger A. Ramsey | | | | |
| | | | | |
/s/ Jeffrey b. schwartz | | Director | | March 12, 2009 |
| Jeffrey B. Schwartz | | | | |
| | | | | |
/s/ Jeffrey S. Serota | | Director | | March 12, 2009 |
| Jeffrey S. Serota | | | | |
| | | | | |
/s/ John V. Singleton | | Director | | March 12, 2009 |
| Honorable John V. Singleton | | | | |
EXHIBIT INDEX
Exhibit No. | | Description |
| 2.1† | | Closing and Asset Purchase Agreement, dated as of October 2, 2005, by and among WCA of Florida, Inc., Meyer & Gabbert Excavating Contractors, Inc., Leonard G. Meyer, Jr. and James F. Gabbert (incorporated by reference to Exhibit 2.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on October 6, 2005). |
| 3.1 | | Second Amended and Restated Certificate of Incorporation of WCA Waste Corporation (incorporated by reference to Exhibit 3.1 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on December 22, 2005). |
| 3.2 | | Second Amended and Restated Bylaws of WCA Waste Corporation (incorporated by reference to Exhibit 3.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on June 20, 2007). |
| 4.1 | | Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the registrant’s Registration Statement on Form S-1 (File No. 333-113416) filed with the SEC on May 14, 2004). |
| 4.2 | | Indenture, dated as of July 5, 2006, by and among WCA Waste Corporation, the Guarantors named therein and The Bank of New York Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 4.3 | | Form of 9.25% Senior Note due 2014 (included as Exhibit A to Exhibit 4.4 above). |
| 4.4 | | Certificate of Designation of Series A Convertible Pay-in-Kind Preferred Stock (incorporated by reference to Exhibit 4.7 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 4.5 | | Specimen of Series A Convertible Pay-in-Kind Preferred Stock Certificate (incorporated by reference to Exhibit 4.8 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.1 | | Administrative Services Agreement, dated May 20, 2004, between WCA Waste Corporation, WCA Management Company, L.P., Waste Corporation of America, LLC, Transit Waste, LLC, Waste Corporation of Central Florida, Inc. and Waste Corporation of Florida, Inc. (incorporated by reference to Exhibit 10.2 to Amendment No. 3 to the registrant’s Registration Statement on Form S-1 (File No. 333-113416) filed with the SEC on June 1, 2004). |
| 10.2+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Tom J. Fatjo, Jr. (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 12, 2008). |
| 10.3+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Jerome Kruzka (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 12, 2008). |
| 10.4+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Charles Casalinova (incorporated by reference to Exhibit 10.3 to the registrant’s Form 8- K (File No. 000-50808) filed with the SEC on December 12, 2008). |
| 10.5+ | | Amended and Restated Employment Agreement, effective as of January 1, 2007, between WCA Management Company, L.P., WCA Waste Corporation and Tom J. Fatjo, III (incorporated by reference to Exhibit 10.4 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 12, 2008). |
| 10.6 | | Registration Rights Agreement, dated June 15, 2004, by and among WCA Waste Corporation, EFO Co-Investment Partners and WCA Partners, L.P. (incorporated by reference to Exhibit 10.14 to Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (File No. 333-113416) filed with the SEC on June 17, 2004). |
| 10.7+ | | Form of WCA Waste Corporation Stock Option Agreement under the 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.4 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on November 10, 2004). |
| 10.8+ | | Form of Executive Officer Restricted Stock Grant under the 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.15 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 24, 2005). |
| 10.9+ | | WCA Waste Corporation Management Incentive Plan, as amended and restated effective January 1, 2007 (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on January 9, 2007). |
| 10.10+ | | Form of Non-Employee Director Restricted Stock Grant under the 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.21 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 24, 2005). |
| 10.11 | | Form of Resale Restriction Agreement, dated as of December 21, 2005, between WCA Waste Corporation and each of Tom J. Fatjo, Jr., Jerome M. Kruzka, Charles A. Casalinova, Tom J. Fatjo, III, Richard E. Bean, Ballard O. Castleman and Roger A. Ramsey individually (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 22, 2005). |
| 10.12 | | Third Amended and Restated 2004 WCA Waste Corporation Incentive Plan, effective as of June 1, 2005 (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 19, 2008). |
| 10.13 | | Revolving Credit Agreement, dated as of July 5, 2006, by and among WCA Waste Corporation, Comerica Bank and the Lenders named therein (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 10.14 | | Interest Rate Swap Agreement, dated July 11, 2006, between WCA Waste Corporation and Comerica Bank (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.15 | | Securities Purchase Agreement, dated as of February 10, 2006, by and among WCA Waste Corporation, Transit Waste, LLC, WCA Management Company, L.P., and Waste Corporation of America, LLC (incorporated by reference to Exhibit 10.29 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 16, 2006). |
| 10.16 | | Preferred Stock Purchase Agreement, dated as of June 12, 2006, by and between WCA Waste Corporation and Ares Corporate Opportunities Fund II, L.P. (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on June 16, 2006). |
| 10.17 | | Purchase Agreement, dated as of June 28, 2006, by and among WCA Waste Corporation, the Guarantors named therein and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 10.18 | | Registration Rights Agreement, dated as of July 5, 2006, by and among WCA Waste Corporation, the Guarantors named therein and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.3 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on July 5, 2006). |
| 10.19 | | Stockholder’s Agreement. dated July 27. 2006, among WCA Waste Corporation and Ares Corporate Opportunity Fund II. L.P. (incorporated by reference to Exhibit 10.5 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.20 | | Registration Rights Agreement, dated July 27, 2006, among WCA Waste Corporation and Ares Corporate Opportunities Fund II, L.P. (incorporated by reference to Exhibit 10.6 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.21 | | Management Rights Letter, dated July 27, 2006, between WCA Waste Corporation and Ares Corporate Opportunities Fund II, L.P. (incorporated by reference to Exhibit 10.7 to the registrant’s Form 10-Q (File No. 000-50808) filed with the SEC on August 8, 2006). |
| 10.22+ | | Form of Stock Option Agreement under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.37 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.23+ | | Form of Executive Officer Restricted Stock Grant under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.38 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.24 | | Form of Non Employee Director Restricted Stock Grant under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.39 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.25 | | Form of Restricted Stock Grant under the Second Amended and Restated 2004 WCA Waste Corporation Incentive Plan (incorporated by reference to Exhibit 10.40 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 14, 2007). |
| 10.26 | | Eighth Amendment to Revolving Credit Agreement, dated October 22, 2008, among WCA Waste Corporation and Comerica Bank (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on October 27, 2008). |
| 10.27 | | Ninth Amendment to Revolving Credit Agreement, dated February 19, 2009, among WCA Waste Corporation and Comerica Bank (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K and Form 8-K/A (File No. 000-50808) filed with the SEC on February 25, 2009). |
| 12.1* | | Statement regarding computation of ratio of earnings to fixed charges for the year ended December 31, 2008. |
| 14.1 | | WCA Waste Corporation Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the registrant’s Form 10-K (File No. 000-50808) filed with the SEC on March 24, 2005). |
| 21.1* | | List of Subsidiaries of WCA Waste Corporation. |
| 23.1* | | Consent of Independent Registered Public Accounting Firm KPMG LLP. |
| 31.1* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| 31.2* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| 32.1* | | Section 1350 Certification of Chief Executive Officer. |
| 32.2* | | Section 1350 Certification of Chief Financial Officer. |
| + | Management contract or compensatory plan, contract or arrangement. |
| † | Confidential treatment has been requested with respect to certain information contained in this agreement. |
The registrant hereby undertakes, pursuant to Regulation S-K, Item 601(b), paragraph (4)(iii)(A), to furnish to the Securities and Exchange Commission upon request all constituent instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10% of the registrant’s total consolidated assets.
