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, 2010
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 Stock Market, LLC |
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 £ | Non-accelerated filer £ | Smaller reporting company þ |
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, 2010 based on the closing sales price as reported on The Nasdaq Stock Market on such date was approximately $62.1 million. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the registrant as of June 30, 2010 have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.
Number of shares of common stock outstanding as of March 4, 2011: 23,659,563 (excluding 1,073,957 shares of treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement to be filed for the 2011 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 to be filed for the 2011 Annual Meeting of Stockholders is not deemed to be filed as part hereof.
Item 1. Business.
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 United States. As of December 31, 2010, we served approximately 329,000 commercial, industrial and residential collection customers and 6,000 landfill and transfer station customers in Alabama, Arkansas, Colorado, Florida, Kansas, Massachusetts, Missouri, New Mexico, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee and Texas. As of December 31, 2010, we owned and/or operated 25 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 operate but do not own three of the transfer stations.
WCA Waste Corporation was incorporated as a Delaware corporation in 2004 and is the parent of WCA Waste Systems, Inc., its principal operating subsidiary. 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
The non-hazardous 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 four decades, our industry has experienced periods of substantial consolidation activity, though we believe it remains extremely fragmented. We believe that there are two primary 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. |
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, 2010, we owned 25 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, 2010 and 2009, we internalized approximately 72% and 68% 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 have contributed significantly to our overall growth and continue to have a material effect on our operating results. We strive to integrate all of our completed acquisitions into our existing operations as soon as feasible; however, it may take up to a year to fully realize operating synergies for the acquisitions that we completed in 2010. 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 2010, 2009 and 2008 on our reported financial results for such periods, please read note 3 to our consolidated financial statements.
Due to weakening market conditions, particularly in the housing and construction sectors, we reduced our acquisition efforts in 2008. While our acquisition activity was relatively dormant for most of 2009, on December 31, 2009 we consummated the acquisition of the operating subsidiaries of Live Earth, LLC (collectively, the “Live Earth Companies”), which included certain assets and related liabilities held by Live Earth, LLC that relate to the Live Earth Companies. The acquisition of the Live Earth Companies represented our largest acquisition to date and included the Sunny Farms Landfill, a 457-acre site permitted to accept municipal solid waste, industrial waste and construction and demolition debris located in Seneca County, Ohio; Champion City Recovery, a transfer station permitted to accept 1,000 tons a day located south of Boston, Massachusetts; and a rail haul operation over a Class 1 rail line transporting waste from the east coast to Sunny Farms Landfill. In 2010, we acquired Washita Disposal, Five JAB Environmental Services, Sprint Waste Services and DINA Industries, all of which are tuck-in acquisitions. In 2011, we intend to continue seeking and pursuing attractive acquisition opportunities that enable us to internalize waste into our existing landfills and that offer new markets where: (i) we are able to acquire disposal facilities; (ii) we can secure long-term disposal contracts; or (iii) the landfills are municipally owned. On December 15, 2010, we entered into an equity interest purchase agreement to acquire certain assets of Emerald Waste Services, including two landfills in Mississippi, one transfer station and three collection operations in Central Florida. On February 28, 2011, we closed the acquisition pursuant to an amended equity interest purchase agreement to acquire one transfer station and three collection operations located in Central Florida. The acquired operations consist of 117 residential, commercial and roll-off routes servicing seven counties and 113,500 customers in the Gainesville, Orange City and Daytona Beach market areas. Effective January 1, 2011, we acquired all of the outstanding capital stock of IESI OK Corporation, which is now known as WCA of Chickasha. The acquired operations include nine commercial and residential routes around Chickasha, Oklahoma, which is approximately 40 miles southwest of Oklahoma City, and a transfer station, which is approximately 50 miles from our Pauls Valley Landfill. The transfer station is fully permitted but is not currently in operation. On February 15, 2011, we entered into an operating agreement with and an option to purchase Stoughton Recycling Technologies, LLC (SRT). SRT is a commercial and demolition recycling facility and transfer station in Stoughton, Massachusetts. This facility is located three miles from the WCA-owned Champion City Recovery transfer station and approximately 25 miles south of Boston, Massachusetts. Although we have not established a specific capital investment target for 2011 acquisitions, we have sufficient capacity under our senior credit facility and through available authorized shares of our capital stock to pursue and consummate opportunistic acquisitions that enable us to effectively leverage our existing infrastructure and maximize the internalization of waste.
Our Operations and Customers
Our operations consist of the collection, transfer, processing and disposal of solid waste. Our revenue mix for the years ended December 31, 2010, 2009 and 2008 is shown in the table below (dollars in thousands):
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||||||||
| Collection | $ | 123,070 | 53.6 | % | $ | 125,931 | 64.9 | % | $ | 129,796 | 62.4 | % | ||||||||||||
| Disposal | 70,503 | 30.7 | 43,722 | 22.5 | 45,929 | 22.1 | ||||||||||||||||||
| Transfer and other, net | 35,911 | 15.7 | 24,485 | 12.6 | 32,284 | 15.5 | ||||||||||||||||||
| Total revenue | $ | 229,484 | 100.0 | % | $ | 194,138 | 100.0 | % | $ | 208,009 | 100.0 | % | ||||||||||||
Customers
We have a broad and diverse customer base. No single customer accounted for more than 2.5% of our revenue for the years ended December 31, 2010, 2009 or 2008. 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, 2010, we provided solid waste collection services to approximately 329,000 industrial, commercial and residential customers in 12 states through 26 collection operations. In 2010, our collection revenue consisted of approximately 35% from services provided to industrial customers, 21% from services provided to commercial customers and 44% 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 monitoring. 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 that it is preferable to internalize the waste streams.
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 that 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, 2010, 2009 and 2008.
| 2010 | 2009 | 2008 | ||||||
| Alabama | 3 | (1) | 3 | (1) | 3 | (1) | ||
| Arkansas | 2 | (1) | 2 | (1) | 2 | (1) | ||
| Florida | 4 | 4 | 4 | |||||
| Kansas | 1 | (1) | 1 | (1) | 1 | (1) | ||
| Massachusetts | 1 | 1 | — | |||||
| Missouri | 7 | 7 | 8 | (1) | ||||
| North Carolina | 3 | 3 | 3 | |||||
| South Carolina | 1 | 1 | 1 | |||||
| Texas | 2 | 2 | 2 | |||||
| Total | 24 | 24 | 24 |
| (1) | Indicates a transfer station that we operated but did not own as of December 31 of the year presented. |
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, 2010, we owned 25 non-hazardous solid waste landfills in 12 states, two of which, though fully permitted, have not yet commenced operations. The following table sets forth certain information as of December 31, 2010 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 | 5,817,013 | 14,301,602 | 20,118,615 | 26.2 | 90.7 | ||||||||||||||
| Black Oak | Hartville, MO | MSW | 5,780,208 | 7,018,000 | 12,798,208 | 17.8 | 39.5 | ||||||||||||||
| Central Missouri | Sedalia, MO | MSW | 7,991,332 | — | 7,991,332 | 37.1 | 37.1 | ||||||||||||||
| Eagle Ridge | Bowling Green, MO | MSW | 2,408,527 | 16,633,000 | 19,041,527 | 13.9 | 109.9 | ||||||||||||||
| Rolling Meadows | Hazen, AR | MSW | 3,486,442 | 9,800,000 | 13,286,442 | 8.7 | 33.1 | ||||||||||||||
| Union County | El Dorado, AR | MSW | 3,184,644 | 496,100 | 3,680,744 | 20.7 | 23.9 | ||||||||||||||
| Darrell Dickey(5) | Houston, TX | MSW | 5,239,003 | — | 5,239,003 | N/A | (5) | N/A | (5) | ||||||||||||
| Fort Bend | Houston, TX | MSW | 43,178,745 | 18,291,298 | 61,470,043 | 44.3 | 63.0 | ||||||||||||||
| Pauls Valley | Oklahoma City, OK | MSW | 6,552,181 | — | 6,552,181 | 100.8 | 100.8 | ||||||||||||||
| Sooner | Oklahoma City, OK | MSW | 1,487,897 | 4,012,190 | 5,500,087 | 18.5 | 68.4 | ||||||||||||||
| Bondad | Durango, CO | MSW | 2,341,262 | — | 2,341,262 | 43.7 | 43.7 | ||||||||||||||
| Sunny Farms | Fostoria, OH | MSW | 4,250,521 | 33,647,326 | 37,897,847 | 3.1 | 27.5 | ||||||||||||||
| Hardy Road | Houston, TX | C&D | 4,586,629 | 4,450,155 | 9,036,784 | 10.0 | 19.7 | ||||||||||||||
| Greenbelt | Houston, TX | C&D | 4,294,380 | 3,973,526 | 8,267,906 | 12.6 | 24.2 | ||||||||||||||
| Ralston Road | Houston, TX | C&D | 333,145 | 1,126,741 | 1,459,886 | 2.3 | 10.2 | ||||||||||||||
| Applerock(5) | Houston, TX | C&D | 8,750,000 | — | 8,750,000 | N/A | (5) | N/A | (5) | ||||||||||||
| Shiloh | Travelers Rest, SC | C&D | 1,084,210 | 3,380,905 | 4,465,115 | 12.6 | 52.0 | ||||||||||||||
| Yarnell | Knoxville, TN | C&D | 870,217 | — | 870,217 | 15.0 | 15.0 | ||||||||||||||
| Blount | Trafford, AL | C&D | 14,809,675 | 11,180,143 | 25,989,818 | 94.7 | 166.2 | ||||||||||||||
| Fines | Alpine, AL | C&D/Industrial | 7,559,925 | — | 7,559,925 | 65.4 | 65.4 | ||||||||||||||
| High Point | High Point, NC | C&D | 3,882,549 | — | 3,882,549 | 52.6 | 52.6 | ||||||||||||||
| Raleigh | Raleigh, NC | C&D | 6,976,667 | 6,612,722 | 13,589,389 | 46.3 | 90.1 | ||||||||||||||
| DeSoto | Arcadia, FL | C&D | 6,298,367 | 1,894,068 | 8,192,435 | 45.1 | 58.6 | ||||||||||||||
| Fort Meade | Ft Meade, FL | C&D | 4,175,565 | 3,635,910 | 7,811,475 | 33.7 | 63.0 | ||||||||||||||
| Northeast | Oklahoma City, OK | C&D | 4,140,630 | 3,347,911 | 7,488,541 | 13.9 | 25.1 | ||||||||||||||
| Total | 159,479,734 | 143,801,597 | 303,281,331 | 32.1 | 55.6 | ||||||||||||||||
| (1) | Permitted capacity includes the total available airspace approved by state and, if required, 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 on our operations. If the consent or approval is not obtained, we will evaluate alternative actions, such as diverting waste streams and pursuing legal recourse to challenge adverse regulatory 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, 2010, 12 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, 2010 and projected annual disposal volumes, the average remaining landfill life of our 23 operating landfills at December 31, 2010 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(f) 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 23 operating landfills as of December 31, 2010 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, 2010, 2009 and 2008.
| Balance as of December 31, 2009 | New Expansions Undertaken | Landfills Acquired, Net of Divestiture | Permits Granted | Airspace Consumed | Changes in Engineering Estimates and Design | Balance as of December 31, 2010 | ||||||||||||||||||||||
| Permitted airspace: | ||||||||||||||||||||||||||||
| Cubic yards (in thousands) | 164,885 | — | — | 3,625 | (6,186 | ) | (2,844 | ) | 159,480 | |||||||||||||||||||
| Number of sites | 25 | — | — | — | — | — | 25 | |||||||||||||||||||||
| Expansion airspace: | ||||||||||||||||||||||||||||
| Cubic yards (in thousands) | 134,707 | 14,356 | — | (3,625 | ) | — | (1,637 | ) | 143,801 | |||||||||||||||||||
| Number of sites | 15 | 3 | — | (1 | ) | — | — | 17 | ||||||||||||||||||||
| Total available airspace: | ||||||||||||||||||||||||||||
| Cubic yards (in thousands) | 299,592 | 14,356 | — | — | (6,186 | ) | (4,481 | ) | 303,281 | |||||||||||||||||||
| Number of sites | 25 | — | 25 | |||||||||||||||||||||||||
| Balance as of December 31, 2008 | New Expansions Undertaken | Landfills Acquired, Net of Divestiture | Permits Granted | Airspace Consumed | Changes in Engineering Estimates and Design | Balance as of December 31, 2009 | ||||||||||||||||||||||
| Permitted airspace: | ||||||||||||||||||||||||||||
| Cubic yards (in thousands) | 144,057 | — | 6,200 | 18,668 | (4,933 | ) | 893 | 164,885 | ||||||||||||||||||||
| Number of sites | 24 | — | 1 | — | — | — | 25 | |||||||||||||||||||||
| Expansion airspace: | ||||||||||||||||||||||||||||
| Cubic yards (in thousands) | 139,124 | — | 31,200 | (18,668 | ) | — | (16,949 | ) | 134,707 | |||||||||||||||||||
| Number of sites | 15 | — | 1 | (1 | ) | — | — | 15 | ||||||||||||||||||||
| Total available airspace: | ||||||||||||||||||||||||||||
| Cubic yards (in thousands) | 283,181 | — | 37,400 | — | (4,933 | ) | (16,056 | ) | 299,592 | |||||||||||||||||||
| Number of sites | 24 | 1 | 25 | |||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||
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 our 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. Please read “Risk Factors—Risks Relating To Our Business—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.”
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. For more information on our insurance coverage, 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 our financial responsibility requirements by obtaining bank letters of credit, insurance policies, performance bonds or making cash deposits.
As of December 31, 2010, we obtained performance bonds in an aggregate amount of approximately $82.0 million. We had letters of credit in an aggregate amount of approximately $12.1 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, 2010, 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 retaining existing municipal solid waste collection contracts, entering into additional municipal 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 large, publicly-held, national waste companies such as Republic Services, Inc. and Waste Management, Inc., as well as numerous other public and privately-held waste companies. 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 share 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, as a result of this consolidation, 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.
Sales and Marketing
We focus our marketing efforts on increasing and extending business with existing customers, as well as increasing our new customer base. 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 and formulating our sales and marketing efforts on a company-wide basis, including assisting in hiring and setting compensation programs for our field operations.
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 have the right to 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, thereby reducing the potential market opportunity for us.
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 and in some states even more stringent requirements.
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.
Climate Change. A variety of regulatory developments, proposals or requirements have been introduced that are focused on restricting the emission of carbon dioxide, methane and other gases known as greenhouse gases. Congress has considered legislation directed at reducing greenhouse gas emissions. There has been support in various regions of the country for legislation that requires reductions in greenhouse gas emissions, and some states have already adopted legislation addressing greenhouse gas emissions from various sources. In 2007, the U.S. Supreme Court held in Massachusetts, et al. v. EPA that greenhouse gases are an “air pollutant” under the federal Clean Air Act and, thus, subject to future regulation. In a move toward regulating greenhouse gases, on December 15, 2009, the EPA published its findings that emission of carbon dioxide, methane and other greenhouse gases present an endangerment to human health and the environment because greenhouse gases are, according to EPA, contributing to climate change. On October 30, 2009, the EPA published the greenhouse gas reporting final rule, effective December 29, 2009, which establishes a new comprehensive scheme requiring certain specified industries as well as operators of stationary sources emitting more than established annual thresholds of carbon dioxide-equivalent greenhouse gases to inventory and report their greenhouse gas emissions annually. Municipal solid waste landfills are subject to the rule. EPA proposed regulations that would require a reduction in emissions of greenhouse gases from motor vehicles. Finally, according to the EPA, the final motor vehicle greenhouse gas standards will trigger construction and operating permit requirements for stationary sources. As a result, the EPA has proposed to tailor these programs such that only large stationary sources will be required to have air permits that authorize greenhouse gas 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. These seasonal variations result in fluctuations in waste volumes due to weather conditions and general economic activity. 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 Business—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, 2010, we had approximately 1,058 full-time employees. A group of 16 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 are currently negotiating a new collective bargaining agreement with the union representation at this location. We have not experienced any work stoppages and we believe that our relations with our employees are good.
Available Information
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 free of charge 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.
Item 1A. Risk Factors.
Our business, financial condition, and financial results are subject to various risks, including the following:
Risks Relating To Our Business
Prevailing U.S. economic conditions over the last two years and the related decline in construction activity, as well as any future downturns, has reduced and may continue to 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 economic activity, 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, particularly construction related waste, which decreases our revenues. In 2010, we believe that weakened economic conditions negatively 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 periods 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. 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.
Our failure to remain competitive with our competitors, some of whom have substantially 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 includes large national, publicly-traded waste management companies; regional, publicly-held and privately-owned companies; and numerous small, local, privately-owned 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 our 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.
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 broad range of 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.
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.
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, if necessary, borrowings under our credit facility. 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.
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. Borrowings under our revolving credit agreement became subject to changes in LIBOR rates. As of December 31, 2010, we had $81.0 million outstanding under the credit facility. A 100 basis point increase in LIBOR interest rates would increase our annual interest expense by approximately $0.8 million annually.
Increases in the costs of disposal in landfills owned by third parties may reduce our operating margins.
We dispose of approximately one-third of the waste that we collect in landfills operated by others. We may incur increases in disposal fees paid to third parties or in the costs of operating our own landfills. If we are unable to pass these costs on to our customers, our operating margins may be reduced.
Increases in the costs of labor may reduce our operating margins.
We compete with other businesses in our markets for qualified employees. 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.
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 that 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.
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. Congress has considered proposed legislation directed at reducing greenhouse gas emissions. EPA has proposed rules to regulate greenhouse gases, regional initiatives have formed to control greenhouse gases and certain of the states in which we operate are contemplating air pollution control regulations that are more stringent than existing and proposed federal regulations, in particular the regulation of emissions of greenhouse gases. 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. 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.
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.
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 a new collective bargaining agreement with the union representation at our transfer station in Rolla, Missouri (the “Rolla Contract”). As of December 31, 2010, there were 16 employees in the group covered by the Rolla Contract. The Rolla Contract expires in March, 2011. We are currently negotiating a new collective bargaining agreement with the union representation at our Rolla Transfer Station. 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, 2010, approximately $2.7 million, or 1.4%, of our revenue was earned from the disposal of waste that is generated in a state other than the state where it is disposed. This excludes our Ohio and Massachusetts operations, where 78.9% of revenue was earned from a rail haul operation over a Class 1 rail line transporting waste from the east coast to our Sunny Farms Landfill in Ohio. Some states have imposed restrictions on collection routes and disposal locations. Other states, like Ohio, impose certain fees on out-of-state waste that is disposed of in Ohio, which may reduce operating margins to the extent such fees cannot be passed on to our customers. Furthermore, 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 by our inability to compete effectively with our competitors.
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, 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 general economic activity, particularly in the construction industry, as well as 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, operating income is 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 Associated with Our Indebtedness
We have a substantial amount of debt which could adversely affect our operations and financial performance.
As of March 1, 2011, we had approximately $268.6 million of consolidated total indebtedness outstanding and approximately $73.9 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, acquisitions 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 with 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 on less than favorable terms.
The provisions in our debt instruments impose restrictions on us that may limit the discretion of management in operating our business.
Our senior credit agreement and the indenture governing our senior notes contain various restrictive covenants that limit management’s discretion in operating our business. In particular, these covenants 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; |
| · | incur liens; |
| · | 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 substantially all of our 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 directly 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 repay any debt we may incur, to meet our other obligations, or to make any future distributions. 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 our senior notes.
The inability or failure of any syndicate bank to meet its obligations under our senior credit facility could adversely impact our short-term and/or long-term capital or cash needs by limiting our access to swing-line loans, increasing the cost of issuing letters of credit, or reducing the total capacity available under the revolving credit facility.
While we are not aware of any issues affecting the participant banks under our senior credit facility, if a participant bank were to fail or otherwise become unable to fund its lending commitment to us, and we were unable to replace any lending commitments, we may not be able to access funds from our credit facility as needed to fully fund our operations and/or our cost of obtaining working capital, letters of credit and other forms of funding could increase significantly and materially impact our operations and earnings.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.
Although market conditions appear to be more stabilized, the capital and credit markets experienced extreme disruption in recent years. If similar conditions arise in the future, it is likely to exert 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.
Risks Relating to Our Acquisitions
On February 28, 2011, we completed the acquisition of certain assets of Emerald Waste Services, including one transfer station and three collection operations in Central Florida. The consideration for the acquisition consisted of $33.0 million in cash and 2,409,639 shares of our common stock pursuant to an amended equity interest purchase agreement. This acquisition is subject to various risks, including the following:
| · | At March 1, 2011, EWS Holdings, LLC beneficially own approximately 10.2% of our common stock. Accordingly, subject to certain contractual voting restrictions EWS Holdings has significant voting power and potential influence and control over our company. 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 may otherwise adversely affect us. |
| · | Cash expenditures and capital commitments associated with our acquisition of Emerald Waste may create significant liquidity and cash flow risks for us, and we may incur substantial debt in order to satisfy our obligations. |
| · | The integration of WCA and Emerald Waste may not be completed successfully, cost-effectively or on a timely basis. |
| · | If we are unable to identify and successfully acquire and integrate additional waste collection operations in Florida markets we acquired from Emerald Waste that enable us to leverage the acquisition of the collection operations and the transfer station, the long-term benefits of the acquisition could be diminished. |
| · | As shares of our common stock issued in the acquisition of Emerald Waste become eligible for resale (which is generally not earlier than six months from the closing date), our stock price may suffer a significant decline as a result of the dilution caused by the increase in the number of our shares sold in the public market or market perception that the increased number of our shares available for sale will exceed the demand for our common stock. |
On December 31, 2009, we consummated the acquisition of the Live Earth Companies, which included certain assets and related liabilities held by Live Earth, LLC that relate to the Live Earth Companies. The consideration for the Live Earth Companies consisted of $19.7 million in cash and 5,555,556 shares of our common stock, which includes 3,555,556 shares that were issued at closing and up to 2,000,000 shares of our common stock that may be issued pursuant to certain earn-out provisions (the “Earn-Out Shares”). The acquisition of the Live Earth Companies is subject to various risks, including the following:
| · | At March 1, 2011, individuals affiliated with Live Earth beneficially own approximately 14.2% of our common stock and could beneficially own up to 16.9% of our common stock if the Earn-out Shares are issued. In addition, Dan Clark, an affiliate of Live Earth, serves on our Board of Directors. Accordingly, subject to certain contractual voting restrictions these individuals have significant voting power and potential influence and control over our company. 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 may otherwise adversely affect us. |
| · | Cash expenditures and capital commitments associated with the operations we acquired from Live Earth may create significant liquidity and cash flow risks for us, and we may incur substantial debt in order to satisfy our obligations. |
| · | If railway access to the Sunny Farms Landfill were limited or prohibited due to the termination of the current contract with a Class 1 railroad operator or otherwise disrupted for any significant period of time, the operations of the landfill would suffer. |
| · | If material disposed of at the Sunny Farms Landfill is reclassified by the Ohio Attorney General or another regulatory authority, we could face higher fees or civil money penalties that could negatively affect the profitability of our operations at the Sunny Farms Landfill. |
| · | If we are unable to identify and successfully acquire and integrate additional waste collection operations in the eastern United States that permit us to leverage the acquisition of the Live Earth Companies, the long-term benefits of the acquisition could be diminished. |
| · | As shares of our common stock issued in the acquisition of the Live Earth Companies become eligible for resale (which in most instances is not earlier than 18 months from the closing date), our stock price may suffer a significant decline as a result of the dilution caused by the increase in the number of our shares sold in the public market or market perception that the increased number of our shares available for sale will exceed the demand for our common stock. |
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 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 or accurately quantify, 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 requires 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, 2010, we had approximately $79.5 million of goodwill and other intangible assets, representing approximately 18.1% of our total assets. 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 and other unforeseen expenses 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. Starting in 2009, all acquisition-related transaction and restructuring costs are expensed as incurred rather than capitalized as part of the acquisition costs. During the year ended December 31, 2010, we expensed $0.5 million of such costs. We 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 acquisitions 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 if any of them chose to join one of our competitors.
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, 2011,
| · | Joseph E. LoConti, Daniel J. Clark and certain of their affiliates beneficially owned approximately 14.2% of the outstanding shares of our common stock. |
| · | 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, 2011, the preferred shares were immediately convertible into 9,800,633 shares of our common stock (representing approximately 29.3% 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 29.7% of the post-conversion shares outstanding. After the fifth anniversary of issuance, 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 and no mandatory redemption requirements. 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. |
| · | EWS Holdings, LLC owned approximately 10.2% of the outstanding shares of our common stock. |
| · | Our executive officers, directors and their related entities owned or controlled approximately 18.8% of the outstanding shares of our common stock. |
Accordingly, these parties collectively hold 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 preclude 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. 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. After the fifth anniversary of issuance, 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 and no mandatory redemption requirements.
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 in 2011 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 Ares. Ares holds certain preferential rights, including the appointment of two directors.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive offices are located at One Riverway, Suite 1400, Houston, Texas 77056, where we lease 14,360 square feet of office space. We also own or lease field-based administrative offices in Alabama, Arkansas, Colorado, Florida, Kansas, Massachusetts, Missouri, New Mexico, North Carolina, Ohio, 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, 2010, we owned and/or operated 25 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 three of the transfer stations as of December 31, 2010. 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.
Item 3. Legal Proceedings.
Information regarding our legal proceedings can be found in note 13(d) to our consolidated financial statements included elsewhere in this report.
Item 4. [Reserved].
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 Stock Market under the symbol “WCAA.” As of March 1, 2011, there were approximately 147 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 prices per share for our common stock as reported by NASDAQ for the periods indicated.
| High | Low | |||||||
| 2011 | ||||||||
| First Quarter (through March 4, 2011) | $ | 5.52 | $ | 4.79 | ||||
| 2010 | ||||||||
| First Quarter | $ | 5.09 | $ | 4.01 | ||||
| Second Quarter | $ | 5.10 | $ | 3.95 | ||||
| Third Quarter | $ | 5.05 | $ | 4.09 | ||||
| Fourth Quarter | $ | 5.77 | $ | 4.54 | ||||
| 2009 | ||||||||
| First Quarter | $ | 3.06 | $ | 1.42 | ||||
| Second Quarter | $ | 4.21 | $ | 1.46 | ||||
| Third Quarter | $ | 5.10 | $ | 3.29 | ||||
| Fourth Quarter | $ | 4.70 | $ | 3.67 | ||||
On March 4, 2011, the closing sales price of our common stock was $5.52.
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 five-year period ended December 31, 2010 and assumes that a $100 investment was made on December 31, 2005 and that all dividends were reinvested.
| December 31, | ||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
| WCA Waste Corporation | $ | 100.00 | $ | 101.65 | $ | 81.77 | $ | 31.77 | $ | 54.43 | $ | 61.14 | ||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 113.62 | $ | 117.63 | $ | 72.36 | $ | 89.33 | $ | 100.75 | ||||||||||||
| Dow Jones Waste & Disposal Services Index | $ | 100.00 | $ | 120.79 | $ | 124.27 | $ | 114.51 | $ | 127.18 | $ | 147.90 | ||||||||||||
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
| 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 | (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, 2010 | 434 | (1) | $ | 4.72 | — | — | ||||||||||
| November 1 - November 30, 2010 | — | — | — | — | ||||||||||||
| December 1 - December 31, 2010 | 396 | (1) | $ | 5.13 | — | — | ||||||||||
| Total | 830 | (1) | $ | 4.92 | — | — | ||||||||||
| (1) | Represents shares of our common stock surrendered to satisfy minimum tax withholding obligations on the vesting of restricted stock. |
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 for the information for 2006 and 2007 (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, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||||||||||
| Revenue | $ | 229,484 | $ | 194,138 | $ | 208,009 | $ | 184,940 | $ | 149,497 | ||||||||||
| Expenses: | ||||||||||||||||||||
| Cost of services (1),(2) | 165,110 | 130,287 | 142,129 | 121,853 | 95,991 | |||||||||||||||
| Depreciation and amortization | 30,058 | 26,357 | 27,151 | 24,234 | 19,070 | |||||||||||||||
| Impairment of goodwill | — | — | 41,725 | — | — | |||||||||||||||
| General and administrative (3) | 11,999 | 13,496 | 12,335 | 12,768 | 11,010 | |||||||||||||||
| (Gain) loss on sale of assets (5) | (938 | ) | (86 | ) | (178 | ) | (387 | ) | (192 | ) | ||||||||||
| 206,229 | 170,054 | 223,162 | 158,468 | 125,879 | ||||||||||||||||
| Operating income (loss) | 23,255 | 24,084 | (15,153 | ) | 26,472 | 23,618 | ||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense, net | (19,028 | ) | (18,052 | ) | (18,560 | ) | (16,765 | ) | (15,385 | ) | ||||||||||
| Write-off of deferred financing costs and debt discount (4) | (184 | ) | — | — | — | (3,240 | ) | |||||||||||||
| Impact of interest rate swap | (236 | ) | (2,063 | ) | (7,547 | ) | (4,442 | ) | 340 | |||||||||||
| Other income (expense), net (5) | (3 | ) | (3 | ) | (240 | ) | — | — | ||||||||||||
| Other income (expense) | (19,451 | ) | (20,118 | ) | (26,347 | ) | (21,207 | ) | (18,285 | ) | ||||||||||
| Income (loss) before income taxes | 3,804 | 3,966 | (41,500 | ) | 5,265 | 5,333 | ||||||||||||||
| Income tax (provision) benefit | (1,915 | ) | (2,958 | ) | 13,737 | (2,343 | ) | (2,313 | ) | |||||||||||
| Net income (loss) | 1,889 | 1,008 | (27,763 | ) | 2,922 | 3,020 | ||||||||||||||
| Accrued payment-in-kind dividend on preferred stock | (4,501 | ) | (4,278 | ) | (4,076 | ) | (3,876 | ) | (1,603 | ) | ||||||||||
| Net income (loss) available to common stockholders | $ | (2,612 | ) | $ | (3,270 | ) | $ | (31,839 | ) | $ | (954 | ) | $ | 1,417 | ||||||
| Per Share Data — basic and diluted: | ||||||||||||||||||||
| Net income (loss) | 0.10 | 0.06 | (1.71 | ) | 0.18 | 0.19 | ||||||||||||||
| Accrued payment-in-kind dividend on preferred stock | (0.23 | ) | (0.27 | ) | (0.25 | ) | (0.24 | ) | (0.10 | ) | ||||||||||
| Net income (loss) available to common stockholders | $ | (0.13 | ) | $ | (0.21 | ) | $ | (1.96 | ) | $ | (0.06 | ) | $ | 0.09 | ||||||
| Weighted average shares outstanding — basic | 19,598 | 15,824 | 16,257 | 16,460 | 16,360 | |||||||||||||||
| Weighted average shares outstanding — diluted | 19,598 | 15,824 | 16,257 | 16,460 | 16,385 | |||||||||||||||
| Other Financial Data: | ||||||||||||||||||||
| Capital expenditures | $ | 31,282 | $ | 23,827 | $ | 29,301 | $ | 29,158 | $ | 29,110 | ||||||||||
| As of December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Property and equipment, net (6) | $ | 320,564 | $ | 320,923 | $ | 276,483 | $ | 270,384 | $ | 207,441 | ||||||||||
| Total assets (6) | 439,862 | 431,573 | 387,958 | 426,723 | 371,249 | |||||||||||||||
| Current maturities of long-term debt | 500 | 500 | 64 | 699 | 916 | |||||||||||||||
| Long-term debt, less current maturities and discount | 232,571 | 219,516 | 200,295 | 198,149 | 165,958 | |||||||||||||||
| Total stockholders’ equity | 163,729 | 160,529 | 139,503 | 170,364 | 167,779 | |||||||||||||||
| (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 and 2006, 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 and 2006, we recorded $1,037 and $2,383, respectively, for the use of such disposal rights as a component of cost of services. |
| (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, 2010, 2009, 2008, 2007 and 2006, we recorded $1,095, $628, $558, $483 and $284, 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. |
| (3) | General and administrative expenses include stock-based compensation expense of $1,564, $1,737, $2,212, $1,977 and $1,118 during the years ended December 31, 2010, 2009, 2008, 2007 and 2006. The stock-based compensation expense during these years includes earned compensation of $1,543, $1,653, $2,182, $1,765 and $1,118, respectively, under the 2004 WCA Waste Corporation Incentive Plan, as amended and restated. In addition, the compensation expense of $21, $84, $30 and $212 during the years ended December 31, 2010, 2009, 2008 and 2007, respectively, relates to the stock portion of the executive bonus plan. |
| (4) | The $184 write-off of deferred financing costs reflects the partial write-off of deferred financing costs associated with our revolving credit facility as a result of an amendment on June 30, 2010, which extended the term of the credit agreement from July 5, 2011 to January 31, 2014 and increased our borrowing capacity from $175 million to $200 million under the agreement. 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. |
| (5) | Starting in 2010, (gain) loss on sale of assets is categorized as a component of operating expenses. As a result, we have made such reclassification in previous years’ consolidated financial statements. |
| (6) | Property and equipment, net and total assets as of December 31, 2009 have been increased by $199 due to an additional purchase price adjustment on December 31, 2009, the date of the Live Earth acquisition. This adjustment retrospectively increased the fair value of Sunny Farms Landfill to reflect new information obtained during 2010 about certain contingency that existed as of the acquisition date. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains 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. Any statements contained herein regarding our future financial performance or operations (including, without limitation, statements to the effect that we “believe,” “expect,” “plan,” “may,” “will,” “project,” “continue,” or “estimate” or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors including those set forth under the heading “Risk Factors” beginning on page 14, and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.
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):
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||||||||
| Collection: | ||||||||||||||||||||||||
| Residential | $ | 53,619 | 23.3 | % | $ | 55,086 | 28.4 | % | $ | 50,433 | 24.2 | % | ||||||||||||
| Commercial | 25,917 | 11.3 | 25,082 | 12.9 | 21,607 | 10.4 | ||||||||||||||||||
| Roll-off | 43,534 | 19.0 | 45,763 | 23.6 | 57,756 | 27.8 | ||||||||||||||||||
| Total collection | 123,070 | 53.6 | 125,931 | 64.9 | 129,796 | 62.4 | ||||||||||||||||||
| Disposal | 98,841 | 68,831 | 75,456 | |||||||||||||||||||||
| Less intercompany | 28,338 | 25,109 | 29,527 | |||||||||||||||||||||
| Disposal, net | 70,503 | 30.7 | 43,722 | 22.5 | 45,929 | 22.1 | ||||||||||||||||||
| Transfer and other | 47,493 | 35,924 | 46,413 | |||||||||||||||||||||
| Less intercompany | 11,582 | 11,439 | 14,129 | |||||||||||||||||||||
| Transfer and other, net | 35,911 | 15.7 | 24,485 | 12.6 | 32,284 | 15.5 | ||||||||||||||||||
| Total revenue | $ | 229,484 | 100.0 | % | $ | 194,138 | 100.0 | % | $ | 208,009 | 100.0 | % | ||||||||||||
2011 Financial Objectives
Prior to taking into account the impact of potential acquisitions, we anticipate 2011 to be a year with improving operating results, which includes moderate increases in revenue resulting from a balance of price increases and stabilized volume in our construction and demolition (C&D) business. We expect that earnings per share prior to the effect of potential acquisitions will also improve. We believe that our available capacity under our revolving credit facility should enable us to remain opportunistic in pursuing potential acquisitions, including acquisitions that would enable us to internalize waste into our existing landfills and that offer new markets where: (i) we are able to acquire disposal facilities; (ii) we can secure long-term disposal contracts; or (iii) the landfills are municipally owned. Although we have identified potential acquisition targets, these opportunities may or may not materialize.
2010 Business Performance
During 2010, our revenue was $229.5 million, which represents an 18.2% increase over 2009. Our operating income was $23.3 million in 2010, compared to $24.1 million in 2009. Net loss available to common stockholders for 2010 was $2.6 million, or $0.13 per share, compared to $3.3 million, or $0.21 per share, for 2009. Adjusted EBITDA for 2010 was $53.8 million, an increase of 4.5% over $51.5 million in 2009. We recorded charges of $0.2 million and $1.3 million (net of tax) due to the impact of interest rate swap agreements, $0.3 million and $0.7 million (net of tax) related to merger and acquisition related expenses, and $0.1 million and $0.4 million due to the tax impact of vested restricted shares in 2010 and 2009, respectively. Additionally, our net loss in 2010 included $0.1 million (net of tax) write-off of deferred financing costs associated with an amendment of our revolving credit facility on June 30, 2010.
Factors that impacted our 2010 performance include, but are not limited to, the following:
| · | increased revenue and operating costs brought by the Live Earth acquisition on December 31, 2009 and other smaller acquisitions in 2010; |
| · | decreased revenue and operating costs due to the asset sale of our Jonesboro operations in April 2010, offset by the gain from the sale of those assets; |
| · | decrease in C&D revenue in Texas as a result of the delayed impact of general economic conditions on Texas C&D markets; |
| · | severe weather during January and February of 2010 which significantly affected our collection and disposal revenues in several markets; |
| · | increase in special waste volume in Arkansas which improved operating margins; |
| · | higher cost of services as a percentage of revenue, primarily due to integration costs as well as higher transportation costs and waste taxes at our Ohio and Massachusetts operations, which significantly lowered operating margins; and |
| · | higher depreciation and amortization expenses due to more acquisition and growth capital expenditures. |
Except for the reduction in C&D revenue in Texas and the increase in special waste revenue in Arkansas, revenues in our other locations have stayed relatively flat or are slightly improving. We are actively seeking growth opportunities through acquisitions and we expect that our existing operations in 2011 will remain stable, with slight improvements due to pricing increases. Significant improvement in general economic activity and/or construction activity would be likely to have a significant favorable/positive impact on our operations.
In 2010, we invested approximately $12.7 million on a combination of newly acquired companies and similar expansion and growth expenditures, including $9.9 million of cash, 20,492 shares of our common stock valued at $0.1 million and $0.3 million of net working capital. The remaining $2.4 million was related to initial capital expenditures associated with acquisitions. As of December 31, 2010, we had approximately $106.9 million available under our existing credit facility.
During 2010, the total PIK dividend on preferred stock was $4.5 million. In 2011, the PIK preferred dividend will be $4.7 million. For more information regarding the PIK dividend associated with the outstanding shares of our preferred stock, please read “—Liquidity and Capital Resources—Preferred Stock.”
Non-GAAP Measures
Our management evaluates our performance based on non-GAAP measures, of which the primary performance measure is adjusted EBITDA. EBITDA, as commonly defined, refers to earnings before interest, taxes, depreciation and amortization. Our adjusted 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, net loss on early disposition of notes receivable/payable, and merger and acquisition related expenses. We also use these same measures when evaluating potential acquisition candidates.
We believe that adjusted 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 adjusted 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 or adjusted EBITDA) for solid waste companies we intend to acquire. The appropriate EBITDA or adjusted 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 and stock 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 adjusted EBITDA to net loss available to common stockholders (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Adjusted EBITDA | $ | 53,767 | $ | 51,468 | $ | 53,819 | ||||||
| Depreciation and amortization | (30,058 | ) | (26,357 | ) | (27,151 | ) | ||||||
| Impairment of goodwill | — | — | (41,725 | ) | ||||||||
| Merger and acquisition related expenses | (457 | ) | (1,030 | ) | (115 | ) | ||||||
| Interest expense, net | (19,028 | ) | (18,052 | ) | (18,560 | ) | ||||||
| Write-off of deferred financing costs | (184 | ) | — | — | ||||||||
| Impact of interest rate swap | (236 | ) | (2,063 | ) | (7,547 | ) | ||||||
| Net loss on early disposition of notes receivable/payable | — | — | (221 | ) | ||||||||
| Income tax (provision) benefit | (1,915 | ) | (2,958 | ) | 13,737 | |||||||
| Accrued payment-in-kind dividend on preferred stock | (4,501 | ) | (4,278 | ) | (4,076 | ) | ||||||
| Net loss available to common stockholders | $ | (2,612 | ) | $ | (3,270 | ) | $ | (31,839 | ) | |||
Our adjusted 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. Adjusted 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 are 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 operations. 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 disclosed in “Business—Integration and Acquisitions,” we may target acquisition opportunities that enable us to internalize waste into our existing landfills and that offer new markets where: (i) we are able to acquire disposal facilities; (ii) we can secure long-term disposal contracts; or (iii) the landfills are municipally owned. In markets where we already own a landfill, we intend to focus on expanding our presence through tuck-in acquisitions. Tuck-in acquisitions are sought to provide growth in revenue and increase in market share, to enable disposal internalization and consolidation of duplicative facilities and functions to improve 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.
We completed four acquisitions during the year ended December 31, 2010. Total consideration for these acquisitions included $9.9 million of cash and 20,492 shares of our common stock valued at $0.1 million. 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 from January 1, 2008 to December 31, 2010:
| Company | Location | Region | Completion Date | Operations | ||||
| 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 | ||||
| MRR Southern, LLC | Greensboro, NC | III | January 15, 2009 | Transfer Station | ||||
| Disposal Doctor, Inc. | Houston, TX | II | August 21, 2009 | Collection | ||||
| Live Earth, LLC | Fostoria, OH/Brockton, MA | IV | December 31, 2009 | Landfill & Transfer Station | ||||
| Washita Disposal | Oklahoma City, OK | II | August 1, 2010 | Collection | ||||
| Five JAB Environmental Services, LLC | Houston, TX | II | September 1, 2010 | Collection | ||||
| Sprint Waste Services, L.P. | Houston, TX | II | October 1, 2010 | Collection | ||||
| DINA Industries, Inc. | Houston, TX | II | October 1, 2010 | Collection |
At December 31, 2010, we owned and/or operated a total of 25 landfills, 26 collection operations and 24 transfer stations/MRFs, had approximately 389 routes and handled approximately 15,000 landfill tons per day at our landfills.
On December 15, 2010, we entered into an agreement to purchase certain assets of Emerald Waste Services, including one transfer station and three collection operations in Central Florida. We closed this acquisition on February 28, 2011. The consideration for this acquisition consisted of $33.0 million in cash and 2,409,639 shares of our common stock.
On January 3, 2011, effective January 1, 2011, we completed the acquisition of IESI OK Corporation (now known as WCA of Chickasha) for cash consideration of $1.875 million. The acquired assets consist of various collection routes in the area of Chickasha, Oklahoma and a fully permitted transfer station which is not currently in operation.
On February 15, 2011, we entered into an operating agreement and an option to purchase Stoughton Recycling Technologies, LLC, a commercial and demolition recycling facility and transfer station in Stoughton, Massachusetts. In consideration for the purchase option and the operating agreement, we paid $3.0 million in cash and issued 406,669 shares of our common stock.
We continue to seek acquisition opportunities that enable us to effectively leverage our existing infrastructure and maximize the internalization of waste. We are also evaluating opportunistic potential acquisitions both within and outside our existing footprint.
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
Certain reclassifications have been made to prior years’ presentation to conform to the current year presentation.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
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; Region IV: Massachusetts, Ohio) for the years ended December 31, 2010 and 2009 and the changes between the segments for each category (dollars in thousands).
Region I | Region II | Region III | Region IV | Corporate | Total | % of Revenue | ||||||||||||||||||||||
| Year ended December 31, 2010: | ||||||||||||||||||||||||||||
| Revenue | $ | 50,316 | $ | 96,750 | $ | 44,369 | $ | 38,049 | $ | — | $ | 229,484 | 100.0 | |||||||||||||||
| Cost of services | 34,999 | 68,422 | 28,263 | 33,426 | — | 165,110 | 72.0 | |||||||||||||||||||||
| Depreciation and amortization | 5,357 | 13,133 | 6,586 | 4,540 | 442 | 30,058 | 13.1 | |||||||||||||||||||||
| General and administrative | 3,496 | 6,855 | 2,512 | — | (864 | ) | 11,999 | 5.2 | ||||||||||||||||||||
| (Gain) loss on sale of assets | 133 | (23 | ) | (1,049 | ) | — | 1 | (938 | ) | (0.4 | ) | |||||||||||||||||
| Operating income | $ | 6,331 | $ | 8,363 | $ | 8,057 | $ | 83 | $ | 421 | $ | 23,255 | 10.1 | |||||||||||||||
| Year ended December 31, 2009: | ||||||||||||||||||||||||||||
| Revenue | $ | 50,846 | $ | 101,749 | $ | 41,543 | $ | — | $ | — | $ | 194,138 | 100.0 | |||||||||||||||
| Cost of services | 36,092 | 66,239 | 27,956 | — | — | 130,287 | 67.1 | |||||||||||||||||||||
| Depreciation and amortization | 5,783 | 12,811 | 7,276 | — | 487 | 26,357 | 13.6 | |||||||||||||||||||||
| General and administrative | 3,205 | 5,925 | 2,712 | — | 1,654 | 13,496 | 6.9 | |||||||||||||||||||||
| (Gain) loss on sale of assets | (29 | ) | 3 | (60 | ) | — | — | (86 | ) | — | ||||||||||||||||||
| Operating income (loss) | $ | 5,795 | $ | 16,771 | $ | 3,659 | $ | — | $ | (2,141 | ) | $ | 24,084 | 12.4 | ||||||||||||||
| Increase/(decrease) in 2010 compared to 2009: | ||||||||||||||||||||||||||||
| Revenue | $ | (530 | ) | $ | (4,999 | ) | $ | 2,826 | $ | 38,049 | $ | — | $ | 35,346 | ||||||||||||||
| Cost of services | (1,093 | ) | 2,183 | 307 | 33,426 | — | 34,823 | |||||||||||||||||||||
| Depreciation and amortization | (426 | ) | 322 | (690 | ) | 4,540 | (45 | ) | 3,701 | |||||||||||||||||||
| General and administrative | 291 | 930 | (200 | ) | — | (2,518 | ) | (1,497 | ) | |||||||||||||||||||
| (Gain) loss on sale of assets | 162 | (26 | ) | (989 | ) | — | 1 | (852 | ) | |||||||||||||||||||
| Operating income (loss) | $ | 536 | $ | (8,408 | ) | $ | 4,398 | $ | 83 | $ | 2,562 | $ | (829 | ) | ||||||||||||||
Revenue. Total revenue for the year ended December 31, 2010 increased by 18.2% to $229.5 million from $194.1 million for the year ended December 31, 2009. Our revenue growth was primarily driven by acquisitions. Acquisitions contributed $40.5 million of the revenue growth while internal volume decreased $2.6 million, operational price decreases contributed $1.9 million, and pricing from fuel surcharges increased $1.4 million. In addition, our revenue was negatively impacted by $2.0 million due to the asset sale of our Jonesboro operations in April 2010 as well as severe weather during January and February of 2010, both of which significantly affected our collection and disposal revenues in several markets.
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 newly acquired regions which can be analyzed individually. Region IV was acquired on December 31, 2009 and accounted for $38.0 million of the revenue increase. The revenue decrease of $5.0 million in Region II was primarily attributed to volume decreases of $5.1 million and price decreases of $2.6 million, partially offset by acquisition growth of $2.5 million and increases in fuel surcharges of $0.2 million. The revenue increase of $2.8 million in Region III was primarily attributed to volume increases of $4.6 million and increases in fuel surcharges of $0.5 million, partially offset by price decreases of $0.3 million and Jonesboro divestiture of $2.0 million. In some instances we have lowered pricing in municipal residential contracts in response to increased competition. We have seen the majority of the revenue decrease in Texas where C&D waste volume dropped significantly compared to 2009, primarily due to the delayed impact of the overall economic conditions on the Texas C&D markets. In addition, C&D volumes in 2009 increased as a result of the rebuilding efforts after Hurricane Ike. The revenue in Region III was largely boosted by special waste volumes in Arkansas. Revenues in our other locations have stayed relatively flat or are moderately improving. 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, 2010 increased $34.8 million, or 26.7%, to $165.1 million from $130.3 million for the year ended December 31, 2009. The increase in cost of services was primarily a result of acquisitions. Another factor that led to the increase was higher fuel 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. Region IV was acquired on December 31, 2009 and accounted for $33.4 million of the increase in cost of services. Cost of services in Region II increased despite the decrease in revenue primarily due to rising fuel costs in the region, higher labor costs in Texas that were primarily related to acquisitions, and higher insurance costs in Oklahoma.
Overall cost of services increased to 72.0% of revenue for the year ended December 31, 2010 from 67.1% during the same period last year. Increases in operating costs as a percentage of revenue were mainly attributable to our acquisition of Region IV. Cost of services in this region accounted for 87.8% of its revenue, primarily due to integration costs as well as higher transportation costs and waste taxes. Other than the impact of the acquisition of Region IV, higher fuel costs resulted in the increase in cost of services as a percentage of revenue. Diesel fuel costs as a percentage of revenue increased from 5.5% for the year ended December 31, 2009 to 6.2% for the year ended December 31, 2010. 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, 2010 increased $3.7 million, or 14.0%, to $30.1 million from $26.4 million for the year ended December 31, 2009. The increase in depreciation and amortization expenses can primarily be attributed to our acquisition of Region IV on December 31, 2009 and other acquisitions during 2010. Factors that may influence the change in depreciation and amortization expenses also include amortization corresponding with landfill volume usage, capital expenditures for existing operations, and assets that become fully depreciated during the year.
General and administrative. Total general and administrative expenses decreased $1.5 million, or 11.1%, to $12.0 million for the year ended December 31, 2010 from $13.5 million for the year ended December 31, 2009. The decrease in general and administrative expense was mainly attributable to decreases in payroll-related expenses, legal fees, merger and acquisition related expenses, and stock based compensation expenses. Such decreases also resulted in the decrease of overall general and administrative expenses from 6.9% of revenue during the year ended December 31, 2009 to 5.2% of revenue during the year ended December 31, 2010.
(Gain) loss on sale of assets. Gain sale of assets for the year ended December 31, 2010 was $0.9 million primarily due to the sale of assets related to our Jonesboro operations in April 2010.
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, 2010 and 2009 (dollars in thousands):
| Years Ended December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Operating income | $ | 23,255 | 10.1 | % | $ | 24,084 | 12.4 | % | ||||||||
| Interest expense, net | (19,028 | ) | (8.3 | ) | (18,052 | ) | (9.3 | ) | ||||||||
| Write-off of deferred financing costs | (184 | ) | (0.1 | ) | — | — | ||||||||||
| Impact of interest rate swap | (236 | ) | (0.1 | ) | (2,063 | ) | (1.1 | ) | ||||||||
| Other income (expense), net | (3 | ) | — | (3 | ) | — | ||||||||||
| Income tax provision | (1,915 | ) | (0.8 | ) | (2,958 | ) | (1.5 | ) | ||||||||
| Accrued payment-in-kind dividend on preferred stock | (4,501 | ) | (1.9 | ) | (4,278 | ) | (2.2 | ) | ||||||||
| Net loss available to common stockholders | $ | (2,612 | ) | (1.1 | )% | $ | (3,270 | ) | (1.7 | )% | ||||||
Interest expense, net. Interest expense, net for the year ended December 31, 2010 increased by 5.4% to $19.0 million from $18.1 million for the year ended December 31, 2009. The increase in interest expense was mainly caused by higher debt balances related to our borrowings to finance acquisitions.
Write-off of deferred financing costs. The $0.2 million write-off of deferred financing costs reflects the partial write-off of deferred financing costs associated with our revolving credit facility as a result of an amendment on June 30, 2010, which extended the term of the credit agreement from July 5, 2011 to January 31, 2014 and increased our borrowing capacity under the agreement from $175 million to $200 million.
Impact of interest rate swap. The impact of interest rate swap for the year ended December 31, 2010 was attributable to a $6.7 million loss related to the realized portion of the interest rate swap we entered into in July 2006 and a $6.5 million gain related to the unrealized portion in the mark to market of the swap. The impact of the interest rate swap for the year ended December 31, 2009 consisted of a $7.2 million loss related to the realized portion of the interest rate swap and a $5.2 million gain 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 was not designated as a hedging transaction and any changes in the unrealized fair value of the swap were 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, 2010 as a percentage of pre-tax income was 50.3% as compared to 74.6% for the year ended December 31, 2009. The decrease in our annual effective tax rate is primarily attributable to an increase in expected utilization of state net operating loss carryforwards as of December 31, 2010 as compared to December 31, 2009 and to the decrease in non-deductible expenses for the year ended December 31, 2010 as compared to the year ended December 31, 2009.
Accrued payment-in-kind dividend on preferred stock. The $4.5 million and $4.3 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, 2010 and 2009, respectively. Please read “—Liquidity and Capital Resources—Preferred Stock.”
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
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, 2009 and 2008 and the changes between the segments for each category (dollars in thousands). The acquisition of Region IV (Massachusetts, Ohio) was not completed until December 31, 2009. Therefore, Region IV is not included in this analysis.
| Region I | Region II | Region III | Corporate | Total | % of Revenue | |||||||||||||||||||
| Year ended December 31, 2009: | ||||||||||||||||||||||||
| Revenue | $ | 50,846 | $ | 101,749 | $ | 41,543 | $ | — | $ | 194,138 | 100.0 | |||||||||||||
| Cost of services | 36,092 | 66,239 | 27,956 | — | 130,287 | 67.1 | ||||||||||||||||||
| Depreciation and amortization | 5,783 | 12,811 | 7,276 | 487 | 26,357 | 13.6 | ||||||||||||||||||
| Impairment of goodwill | — | — | — | — | — | — | ||||||||||||||||||
| General and administrative | 3,205 | 5,925 | 2,712 | 1,654 | 13,496 | 6.9 | ||||||||||||||||||
| (Gain) loss on sale of assets | (29 | ) | 3 | (60 | ) | — | (86 | ) | — | |||||||||||||||
| Operating income (loss) | $ | 5,795 | $ | 16,771 | $ | 3,659 | $ | (2,141 | ) | $ | 24,084 | 12.4 | ||||||||||||
| 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 | |||||||||||||||||
| Gain on sale of assets | (34 | ) | (47 | ) | (97 | ) | — | (178 | ) | (0.1 | ) | |||||||||||||
| Operating income (loss) | $ | 6,341 | $ | (10,060 | ) | $ | (13,052 | ) | $ | 1,618 | $ | (15,153 | ) | (7.3 | ) | |||||||||
| Increase/(decrease) in 2009 compared to 2008: | ||||||||||||||||||||||||
| Revenue | $ | (2,927 | ) | $ | (2,801 | ) | $ | (8,143 | ) | $ | — | $ | (13,871 | ) | ||||||||||
| Cost of services | (2,584 | ) | (2,017 | ) | (7,241 | ) | — | (11,842 | ) | |||||||||||||||
| Depreciation and amortization | 368 | (384 | ) | (765 | ) | (13 | ) | (794 | ) | |||||||||||||||
| Impairment of goodwill | — | (25,944 | ) | (15,781 | ) | — | (41,725 | ) | ||||||||||||||||
| General and administrative | (170 | ) | (1,337 | ) | (1,104 | ) | 3,772 | 1,161 | ||||||||||||||||
| (Gain) loss on sale of assets | 5 | 50 | 37 | — | 92 | |||||||||||||||||||
| Operating income (loss) | $ | (546 | ) | $ | 26,831 | $ | 16,711 | $ | (3,759 | ) | $ | 39,237 | ||||||||||||
Revenue. Total revenue for the year ended December 31, 2009 decreased $13.9 million, or 6.7%, to $194.1 million from $208.0 million for the year ended December 31, 2008. This decline was primarily due to volume decreases of $15.5 million and decreases in fuel surcharges of $5.3 million, which were partially offset by operational price increases of $2.2 million and acquisition growth of $4.7 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. Revenue in Region I decreased $2.9 million due to volume decreases of $5.3 million and decreases in fuel surcharges of $1.3 million, partially offset by price increases of $0.6 million and acquisition growth of $3.1 million. The revenue decrease of $2.8 million in Region II was attributed to volume decreases of $3.4 million and fuel surcharge decreases of $1.9 million, partially offset by price increases of $0.9 million and acquisition growth of $1.6 million. The Region II volume decreases were most notable in Florida and Oklahoma. Revenue in Region III decreased $8.1 million due to volume decreases of $6.8 million and decreases in fuel surcharges of $2.1 million, partially offset by price increases of $0.8 million. The volume decreases were primarily from Alabama, North Carolina and South Carolina as a result of poor economic conditions in those markets. During 2009 we believe that the weakening economy had a significant adverse effect on our revenues, specifically the decrease in the number of active construction projects that has resulted from this downturn. Waste generated from construction projects represents a significant revenue stream especially for roll-off collection and landfill operations. We believe this to be the cause of a significant portion of our revenue decline. 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, 2009 decreased $11.8 million, or 8.3%, to $130.3 million from $142.1 million for the year ended December 31, 2008. Cost of services in all regions decreased mainly as a result of the decrease in revenue. The decrease in cost of services included a $8.0 million reduction in fuel costs, decreases of $2.0 million in third party hauling and $0.8 million in lower outside repair costs.
Overall cost of services decreased to 67.1% of revenue for the year ended December 31, 2009 from 68.3% during the same period last year. Decreases in operating costs as a percentage of revenue were primarily attributable to lower fuel prices. Diesel fuel costs as a percentage of revenue decreased from 9.0% for the year ended December 31, 2008 to 5.5% for the year ended December 31, 2009.
Depreciation and amortization. Depreciation and amortization expenses for the year ended December 31, 2009 decreased $0.8 million, or 2.9%, to $26.4 million from $27.2 million for the year ended December 31, 2008. The decrease in depreciation and amortization expenses can be attributed to decreased amortization corresponding with decreased landfill volume usage, partially offset by slight increases due to acquisitions and capital expenditures.
Impairment of goodwill. We did not recognize any goodwill impairment charges for the year ended December 31, 2009. We recognized a non-cash impairment charge of $41.7 million as of December 31, 2008 as a result of the annual impairment test. We determined that there was impairment of goodwill due to a decline in our market capitalization and the market turmoil driven by the economic recession that became certain in 2008. 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. We performed the annual impairment test and concluded that there was no impairment of goodwill in 2009. 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 expenses increased $1.2 million, or 9.4%, to $13.5 million for the year ended December 31, 2009 from $12.3 million for the year ended December 31, 2008. The increase in general and administrative expenses was primarily attributable to $0.9 million in increased merger and acquisition related expenses since all acquisition-related transaction and restructuring costs are expensed as incurred rather than capitalized starting in 2009. Such increase also resulted in the increase of overall general and administrative expenses from 5.9% of revenue during the year ended December 31, 2008 to 6.9% of revenue during the year ended December 31, 2009.
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, 2009 and 2008 (dollars in thousands):
| Years Ended December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Operating income (loss) | $ | 24,084 | 12.4 | % | $ | (15,153 | ) | (7.3 | )% | |||||||
| Interest expense, net | (18,052 | ) | (9.3 | ) | (18,560 | ) | (8.9 | ) | ||||||||
| Impact of interest rate swap | (2,063 | ) | (1.1 | ) | (7,547 | ) | (3.6 | ) | ||||||||
| Other income (expense), net | (3 | ) | — | (240 | ) | (0.1 | ) | |||||||||
| Income tax (provision) benefit | (2,958 | ) | (1.5 | ) | 13,737 | 6.6 | ||||||||||
| Accrued payment-in-kind dividend on preferred stock | (4,278 | ) | (2.2 | ) | (4,076 | ) | (2.0 | ) | ||||||||
| Net loss available to common stockholders | $ | (3,270 | ) | (1.7 | )% | $ | (31,839 | ) | (15.3 | )% | ||||||
Interest expense, net. Interest expense, net for the year ended December 31, 2009 decreased $0.5 million, or 2.7%, to $18.1 million from $18.6 million for the year ended December 31, 2008. The decrease was partially caused by lower LIBOR interest rate on the revolving credit facility and repayments of Environmental Facilities Revenue Bonds and various seller notes. Additionally, interest expense for the year ended December 31, 2009 included $0.4 million additional amortization of deferred financing costs related to the amendment of our revolving credit agreement while interest expense for the year ended December 31, 2008 included $0.4 million amortization of remaining debt discount associated with the early repayment of certain environmental bonds.
Impact of interest rate swap. The impact of interest rate swap for the year ended December 31, 2009 was attributable to a $7.2 million loss related to the realized portion of the interest rate swap we entered into in July 2006 and a $5.2 million gain related to the unrealized portion in the mark to market of the swap. The impact of the interest rate swap for the year ended December 31, 2008 consisted of a $3.2 million loss related to the realized portion of the interest rate swap and a $4.3 million gain 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 was not designated as a hedging transaction and any changes in the unrealized fair value of the swap were 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, 2009 as a percentage of pre-tax income (loss) was 74.6% as compared to 33.1% for the year ended December 31, 2008. The increase in our annual effective tax rate is primarily attributable to an increase in expected utilization of state net operating loss carryforwards as of December 31, 2009 as compared to December 31, 2008 and to the increase in non-deductible expenses for the year ended December 31, 2009 as compared to the year ended December 31, 2008.
Accrued payment-in-kind dividend on preferred stock. The $4.3 million and $4.1 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, 2009 and 2008, respectively. Please read “—Liquidity and Capital Resources—Preferred Stock.”
Liquidity and Capital Resources
Our business 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, while conditions appear to have stabilized, 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 consider several items. Despite the decline in the Texas C&D markets due to the delayed impact of poor economic conditions as well as severe weather during January and February of 2010 that impacted our collection and disposal revenues in several markets, our adjusted EBITDA has improved from $51.5 million for the year ended December 31, 2009 to $53.8 million for the year ended December 31, 2010. We are actively seeking growth opportunities through acquisitions and we expect our existing operations to remain relatively stable or slightly improve in 2011, mostly through pricing increases. 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 $106.9 million in available capacity under our current revolving credit agreement as of December 31, 2010, subject to customary covenant compliance.
We amended our revolving credit agreement on June 30, 2010 to extend the term from July 5, 2011 to January 31, 2014 and increase our borrowing capacity from $175 million to $200 million. We routinely evaluate the financial stability of the syndicate banks making up the credit facility. For further information about credit risks, please see Item 1A “Risk Factors” and “—Cautionary Statement About Forward-Looking Statements” in this report. For further information about our credit facility, please see “Bank Credit Facility” below.
A portion of our capital expenditures is discretionary, giving us the ability to modify the timing of such expenditures to preserve cash if appropriate in the future. In addition, 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.
As of December 31, 2010, we had total outstanding long-term debt of approximately $233.1 million, consisting of $150 million of senior notes, $81.0 million outstanding under our credit facilities, and approximately $2.1 million of various seller notes. This represented an increase of approximately $13 million over our total debt outstanding as of December 31, 2009. The increase in outstanding debt since December 31, 2009 was primarily due to $13.5 million in additional borrowings under the credit facility to finance acquisitions, partially offset by the repayment of $0.5 million on a seller note. As of December 31, 2010, we had $81.0 million outstanding under the revolving credit facility and approximately $12.1 million in letters of credit that serve as collateral for insurance claims and bonding, leaving $106.9 million in available capacity under the facility. With $2.8 million cash on hand at December 31, 2010, our total capacity was approximately $109.7 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 senior notes pay interest semi-annually on June 15 and December 15, commencing December 15, 2006, with the following redemption provisions:
| · | 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 |
| · | 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 that, among other things, limits our ability to incur additional indebtedness, make capital expenditures, create liens, sell assets and make dividend and other payments. In addition, the indenture includes financial covenants including a covenant allowing us to incur indebtedness or issue disqualified stock or preferred stock only if the Fixed Charge Coverage Ratio (as defined in the indenture) for the four full fiscal quarters most recently ended prior to issuance would have been at least 2.0 to 1, determined on a pro forma basis, as if the additional indebtedness had been incurred or the disqualified stock or preferred stock had been issued at the beginning of such four-quarter period. The defined terms are set forth in the indenture. As of December 31, 2010, we were in compliance with all covenants under the senior notes indenture.
Bank Credit Facility
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. The credit facility includes covenants related to interest margins associated with various leverage ratios. These interest margins were amended in October 2008, February 2009 and 2010, and again in June 2010. Applicable fees and margins are determined based on our leverage ratio for the trailing 12-month reporting period on each quarterly reporting date.
On June 30, 2010, we and Comerica Bank, in its capacity as Administrative Agent, together with BBVA Compass Bank as Documentation Agent, and in each of those bank’s capacities as Co-Lead Arrangers, along with Regions Bank, in its capacity as Syndication Agent, and certain other lenders, entered into the Twelfth Amendment to Revolving Credit Agreement (the “Amendment”) to amend the Credit Agreement. Regions Bank, Branch Banking and Trust Company, and CoBank have become new participating lenders under the Credit Agreement.
The Amendment extended the term of the Credit Agreement and the revolving credit facility, which would have expired on July 5, 2011, to January 31, 2014. The Amendment also increased the total revolving credit commitments available to us from the participating lenders under the Credit Agreement to $200 million from $175 million. We incurred $1.0 million of financing costs associated with the Amendment. In addition, we wrote off $0.2 million of deferred financing costs in proportion to reduced commitments from the original participating lenders.
The Amendment modified some of the pricing terms and conditions of the Credit Agreement; however, such modifications will not significantly increase our borrowing costs at current borrowing levels. In lieu of an unused commitment fee, we are required to pay, quarterly in arrears, an annual facility fee in an amount ranging from 0.375% to 0.875% of the total revolving credit commitments of $200 million available under the Credit Agreement (the “Facility Fee”). We are also obligated to pay an annual letter of credit fee in an amount ranging from 2.125% to 2.625% of the letter of credit obligations outstanding under the Credit Agreement (the “L/C Fee”). Any borrowings under the Credit Agreement will bear interest at either (x) the Eurodollar London Interbank Offered Rate (“LIBOR”) for the applicable interest period, plus a spread ranging from 2.125% to 2.625% per annum (a “LIBOR Loan”) or (y) a base rate equal to the greater of (1) the Federal Funds Rate plus 1%, (2) the Prime Rate as published by Comerica Bank from time to time, or (3) one-month LIBOR plus 1.00%, plus a spread ranging from 1.625% to 2.125% (a “Base Rate Loan”). The Facility Fee, the L/C Fee and the applicable spread on a LIBOR Loan and a Base Rate Loan depends on our Leverage Ratio (as such term is defined in the Credit Agreement as previously amended). The Amendment did not result in any material modifications to the representations and warranties, covenants or other terms and provisions of the Credit Agreement.
The following table highlights the revised margins included in the Amendment:
| Basis for | Leverage | Facility | LIBOR | All-In | Letter of Credit | Base Rate | ||||||||||||||||
| Pricing | Ratio | Fee | Margin | Spread | Fees | Margin | ||||||||||||||||
| Level I | < 3.00:1.0 | 0.375 | 2.125 | 2.500 | 2.125 | 1.625 | ||||||||||||||||
| Level II | ≥3.00:1.0 but <3.50:1.0 | 0.375 | 2.375 | 2.750 | 2.375 | 1.875 | ||||||||||||||||
| Level III | ≥3.50:1.0 but <4.00:1.0 | 0.375 | 2.625 | 3.000 | 2.625 | 2.125 | ||||||||||||||||
| Level IV | ≥4.00:1.0 but <4.50:1.0 | 0.625 | 2.625 | 3.250 | 2.625 | 2.125 | ||||||||||||||||
| Level V | ≥4.50:1.0 | 0.875 | 2.625 | 3.500 | 2.625 | 2.125 | ||||||||||||||||
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 substantially all of our operating 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 Agreement), 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.
Our credit facility is subject to various financial and other covenants, including, but not limited to, limitations on debt, consolidations, mergers, and sales of assets. The credit facility also contains financial covenants requiring us to limit leverage (both in terms of senior secured debt and total leverage), to maintain specified debt service ratios, to limit capital expenditures, and to maintain a minimum tangible net worth. Each of the financial covenants incorporates specially defined terms that would not correspond to GAAP or Non-GAAP measures disclosed in this report and that in certain instances are based on determinations and information not derived from or included in our financial statements. The financial covenants include the following:
| · | our maximum “Leverage Ratio” (as defined in the Credit Agreement) for the trailing 12-month reporting period on each quarterly reporting date is 4.75 to 1.00; |
| · | we maintain a Pro Forma Adjusted EBITDA Debt Service Ratio (as defined in the Credit Agreement) for the trailing 12-month period of not less than 2.25 to 1.00 until maturity; |
| · | our maximum Senior Secured Funded Debt Leverage Ratio (as defined in the Credit Agreement) is 2.50 to 1.00; |
| · | we cannot make any Maintenance Capital Expenditures (as defined in the Credit Agreement) exceeding 15% of our consolidated total revenue as calculated at the end of a fiscal year; and |
| · | we maintain minimum Tangible Net Worth (as defined in the Credit Agreement) 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. |
In February 2010, the definitions of “Pro Forma Adjusted EBITDA” and “Pro Forma Adjusted EBITDA Debt Service Ratio” were amended and “Consolidated Net Interest Expense” was added as a further defined term to the Credit Agreement. The purpose of such definitional modifications and addition are as follows:
| · | to exclude cash and non-cash income or expense attributable to any interest rate hedging agreement, now existing or which we enter into in the future, from the determination of our compliance with the Leverage Ratio under the terms of the Credit Agreement; and |
| · | to include cash income or expense (but not non-cash items) attributable to any interest rate hedging agreement that we enter into in the future from the determination of our compliance with the Pro Form Adjusted EBITDA Debt Service Ratio under the terms of the Credit Agreement. |
As of December 31, 2010, we were in compliance with all covenants under the credit facility.
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 9,800,633 shares of our common stock, which would represent approximately 29.3% of our outstanding common stock on a post-conversion basis as of March 1, 2011. Dividends are solely PIK through July 2011 — that is, they are payable solely by adding the amount of dividends to the stated value of each share. After July 2011, 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 29.7% 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 and no mandatory redemption requirements.
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: |
| · | liquidation; |
| · | bankruptcy; |
| · | 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; and |
| · | 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 its 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 Stock 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.
Contractual Obligations
As of December 31, 2010, we had the following contractual obligations (in thousands). For the year ended December 31, 2010, our cash paid for interest expense was $17.6 million. Please read note 7 to our consolidated financial statements for balances and terms of our credit facility at December 31, 2010.
| 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) | $ | 233,075 | $ | 500 | $ | 1,575 | $ | 231,000 | $ | — | ||||||||||
| Closure and post-closure costs (2) | 199,490 | — | 1,559 | 7,881 | 190,050 | |||||||||||||||
| Operating leases | 10,929 | 2,421 | 4,095 | 2,439 | 1,974 | |||||||||||||||
| Note payable | 1,251 | 1,251 | — | — | — | |||||||||||||||
| Estimated interest payments on long-term debt (3) | 55,468 | 16,339 | 32,568 | 6,561 | — | |||||||||||||||
| Estimated interest payments on note payable | 29 | 29 | — | — | — | |||||||||||||||
| Total | $ | 500,242 | $ | 20,540 | $ | 39,797 | $ | 247,881 | $ | 192,024 | ||||||||||
| (1) | The long-term debt principal amount outstanding includes a seller note valued at $496 thousand with one future payment of $500 thousand due on January 15, 2011. |
| (2) | The closure and post-closure costs amounts included reflect the amounts recorded in our consolidated balance sheet as of December 31, 2010, 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, 2010) until the expected time of payment, and then discounted to present value (8.5% at December 31, 2010). 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. |
| (3) | Estimated interest payments on fixed-rate debt including our senior notes are computed by using the fixed rates of interest on the balances of the debt according to the principal repayment schedule. Estimated interest payments on debt with variable rates such as our credit facility are computed by using the applicable LIBOR rate plus interest margin and the balance of the debt as of the reporting date. |
Other Commitments
As of December 31, 2010, 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) | $ | 82,037 | $ | 82,037 | $ | — | $ | — | $ | — | ||||||||||
| Standby letters of credit (2) | 12,111 | 12,111 | — | — | — | |||||||||||||||
| Total | $ | 94,148 | $ | 94,148 | $ | — | $ | — | $ | — | ||||||||||
| (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. 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, 2010, $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, 2010, we had provided $7.4 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, 2010, we had accrued approximately $2.8 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, 2010, 2009 and 2008 (in thousands):
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Cash and cash equivalents at the end of the period | $ | 2,763 | $ | 4,329 | $ | 955 | ||||||
| Net cash provided by operating activities | $ | 25,396 | $ | 31,747 | $ | 34,294 | ||||||
| Net cash used in investing activities | $ | (38,829 | ) | $ | (46,868 | ) | $ | (30,943 | ) | |||
| Net cash provided by (used in) financing activities | $ | 11,867 | $ | 18,495 | $ | (3,534 | ) | |||||
Net cash provided by operating activities for the years ended December 31, 2010, 2009 and 2008 was $25.4 million, $31.7 million and $34.3 million, respectively. The changes in cash flows from operating activities year over year were due to net income (loss) adjusted for non-cash charges and changes in components of working capital. Non-cash charges primarily consist of depreciation and amortization, deferred taxes, unrealized gain or loss on interest rate swap, amortization of deferred financing costs and debt discount, stock-based compensation, gain or loss on sale of assets and landfill accretion expense, as well as impairment of goodwill in 2008. While these non-cash charges affect our earnings comparison, they have no impact on net cash provided by operating activities. Adjusted for the non-cash charges, net income increased $2.0 million in 2010 over 2009 and decreased $7.1 million in 2009 over 2008. It primarily reflected the changes in cash generated from operating income year over year. Working capital changes are typically driven by changes in accounts receivable, which are affected by both revenue changes and timing of payments received, and changes in accounts payable, which are affected by both cost changes and timing of payments. Changes in our working capital accounts, mostly accounts receivable, negatively impacted our cash flows from operating activities by $0.9 million in 2008 and $4.8 million in 2010 and favorably impacted our cash flows from operating activities by $3.6 million in 2009.
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 $41.2 million, $47.2 million and $37.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. The fluctuation is mainly caused by acquisitions over the years. We spent substantially more on acquisitions in 2009 as we completed the Live Earth acquisition on December 31, 2009. On the other hand, capital expenditures related to our existing operations remained steady over the three-year period, with 2009 being slightly lower as we shifted our focus towards acquisition-related expenditures.
Net cash provided by (used in) financing activities during the years ended December 31, 2010, 2009 and 2008 was $11.9 million, $18.5 million and $(3.5) million, respectively. Net cash provided by (used in) financing activities during the years ended December 31, 2010, 2009 and 2008 mainly includes a combination of borrowings under our revolving credit facilities, repayments of debt, payments under the common stock repurchase program which was terminated on December 18, 2008, changes in restricted cash, and financing costs associated with our credit facilities.
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, 2010, we owned 25 landfills. Two of these landfills are fully permitted but not constructed and had not commenced operations as of December 31, 2010.
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, 2010, 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 aerial and ground surveys and other density measures and estimates made by our 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 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, 2010, we have included 144 million cubic yards of expansion airspace with estimated development costs of approximately $94.8 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 between 5 and 30 years depending on type and location.
Standards related to accounting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs require that we record closure and post-closure obligations 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 2010, 2009 and 2008:
| 2010 | 2009 | 2008 | ||||||||||
| Number of landfills owned | 25 | 25 | 24 | |||||||||
| Landfill depletion and amortization expense (in thousands) | $ | 12,598 | $ | 9,680 | $ | 11,058 | ||||||
| Accretion expense (in thousands) | 1,095 | 628 | 558 | |||||||||
| $ | 13,693 | $ | 10,308 | 11,616 | ||||||||
| Airspace consumed (in thousands of cubic yards) | 6,186 | 4,933 | 5,730 | |||||||||
| Depletion, amortization, accretion, closure and post-closure costs per cubic yard of airspace consumed | $ | 2.21 | $ | 2.09 | $ | 2.03 | ||||||
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, that 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.
Under the guidance of ASC Topic 350, the first step for the goodwill impairment test requires us to estimate the fair value of each reporting unit and to compare the fair value to the reporting unit’s carrying value. We estimated the fair value of our reporting units using a discounted cash flow approach. The key assumptions we used in preparing our discounted cash flow analysis were (1) projected cash flows, (2) expected long-term growth rate, and (3) discount rate. We based our projected cash flows on budgeted operating results for 2011. For 2012 and future periods, we assumed a growth rate of 2.5% based on the 20-year inflation rate as published by the Federal Reserve. We used an average discount rate of 9.6%, which represented our weighted average cost of capital and was evaluated by independent third parties for reasonableness. Our reporting units carry the majority of assets and liabilities related to their operations on their respective balance sheets, except for obligations associated with debt, self-insurance and deferred tax liabilities, as well as assets such as cash and deferred tax assets, which are primarily recorded on Corporate’s balance sheet. To determine the carrying value of each reporting unit at the measurement date, we allocated assets and liabilities accounted for within Corporate’s balance sheet to each of the reporting units based on the size of their respective operations. The Corporate assets and liabilities relate to the operations of each of the reporting units, therefore, management believe they should be allocated to each of the reporting units to determine the appropriate fair values for each of the reporting units. 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.
In our discounted cash flow analysis in 2009 and 2010, the estimated fair value for each of our reporting units exceeded their respective carrying value. Accordingly, there was no indication of impairment. During the goodwill impairment test in 2008, we made an impairment adjustment of $41.7 million as the fair market value was less than the book value in the following reporting units: Florida, North Carolina, Oklahoma and Tennessee.
As a test of the reasonableness of the estimated fair values for our reporting units, we compared the fair value of our reporting units under the discounted cash flow approach less outstanding debt (implied fair value of equity) to our market capitalization as of the measurement date. We compared the implied fair value of our equity to our market capitalization noting that the implied fair value of equity exceeded the market capitalization. We considered the excess amount of implied fair value over market capitalization to be a control premium. A control premium represents the ability of an acquirer to control the operations of the business. The control premium determined as of the measurement date appeared reasonable as it is consistent with historical control premium levels observed in acquisitions of controlling interests in publicly-traded companies. We will continue to monitor our market capitalization and expectations of future cash flows and will perform additional interim impairment testing if deemed necessary.
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 fair value of the payment of contingent purchase price, which takes into consideration the probability of the events surrounding the contingency. |
| · | 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. |
Recent Accounting Pronouncements
In October 2009, the FASB issued FASB Accounting Standards Update (“ASU”) 2009-13 (ASU 2009-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force.” This update amends the criteria for revenue recognition of multi-deliverable arrangements and expands the required disclosures of those arrangements. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU 2009-13 is not expected to have a material impact on our financial position, results of operations or cash flows.
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements.” This update requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers. It also requires additional disclosure regarding purchases, sales, issuances and settlements of Level 3 measurements. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the additional disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010. We adopted ASU 2010-06 on January 1, 2011. The adoption of this standard did not have any impact on our financial position, results of operations or cash flows.
In February 2010, the FASB issued ASU 2010-09, “Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 updates ASC Topic 855, Subsequent Events. ASU 2010-09 requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement to disclose the date through which an entity has evaluated subsequent events. We adopted the provisions of this pronouncement upon issuance with no material impact to our financial position, results of operations or cash flows.
In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 updates ASC Topic 350, Intangibles—Goodwill and Other, to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We adopted ASU 2010-28 on January 1, 2011. The adoption did not have any material impact on our financial position, results of operations or cash flows.
In December 2010, the FASB issued ASU 2010-29, “Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU 2010-29 amends ASC Topic 805, Business Combinations. This update addresses diversity in the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. We adopted ASU 2010-29 on January 1, 2011. The adoption of this update did not have any material impact on our financial position, results of operations or cash flows.
There were various other updates recently issued, many of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to have a material impact on our financial position, results of operations or cash flows.
Off-Balance Sheet Arrangements
During the years ended December 31, 2010, 2009 and 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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.
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:
| · | prevailing U.S. economic conditions over the last two years and the related decline in construction activity, as well as any future downturns, has reduced and may continue to 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; |
| · | our failure to remain competitive with our competitors, some of whom have substantially 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 our prices in order to retain certain contracts, any of which would cause our revenue to decline; |
| · | 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; |
| · | increases in costs of insurance would reduce our operating margins; |
| · | 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; |
| · | changes in interest rates may affect our profitability; |
| · | increases in the costs of disposal in landfills owned by third parties may reduce our operating margins; |
| · | increases in the costs of labor may reduce our operating margins; |
| · | 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; |
| · | governmental authorities may enact climate change regulations that could increase our costs to operate; |
| · | 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; |
| · | 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 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; |
| · | the inability or failure of any syndicate bank to meet its obligations under our senior credit facility could adversely impact our short-term and/or long-term capital or cash needs by limiting our access to swing-line loans, increasing the cost of issuing letters of credit, or reducing the total capacity available under the revolving credit facility; and |
| · | adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital. |
Our future financial performance may also depend on our ability to execute our acquisition strategy, which will be subject to many risks and uncertainties including, but not limited to, the following:
| · | on February 28, 2011, we completed the acquisition of certain assets of Emerald Waste Services, including one transfer station and three collection operations in Central Florida with cash and issuance of our common stock. This acquisition is subject to various risks; |
| · | on December 31, 2009, we consummated the acquisition of the Live Earth Companies with cash and the issuance of our common stock. The acquisition of the Live Earth Companies is subject to various risks; |
| · | 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 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 and other unforeseen expenses 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:
| · | 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 preclude 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. |
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 with the intention to limit our exposure to a rising rate interest environment. For the year ended December 31, 2010, the net difference between the fixed amount we paid and the floating amount we received was $6.7 million. This interest rate swap expired on November 1, 2010, which will improve annual cash flow in future years by approximately $6.7 million based on 2010 results. 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 was not designated as a hedging transaction. Accordingly, any changes in the unrealized fair value of the swap were recognized in the statement of operations. We did not enter into the interest rate swap agreements for trading purposes.
As of December 31, 2010, we had $81.0 million in borrowings under our revolving credit facility which bears interest at variable or floating rates. A 100 basis point increase in LIBOR interest rates would increase our annual interest expense by approximately $0.8 million. 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, 2010 (dollars in thousands):
| Expected Maturity Dates | ||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | ||||||||||||||||||||||
| Debt: | ||||||||||||||||||||||||||||
| Senior notes | $ | — | $ | — | $ | — | $ | 150,000 | $ | — | $ | — | $ | 150,000 | ||||||||||||||
| Average interest rate (a) | ||||||||||||||||||||||||||||
| Revolving credit agreement | $ | — | $ | — | $ | — | $ | 81,000 | $ | — | $ | — | $ | 81,000 | ||||||||||||||
| Average interest rate (b) | ||||||||||||||||||||||||||||
| Other borrowings | $ | 500 | $ | 1,575 | $ | — | $ | — | $ | — | $ | — | $ | 2,075 | ||||||||||||||
| Average interest rate | 10.0 | % | 5.5 | % | — | — | — | — | 6.58 | % | ||||||||||||||||||
| Note payable | $ | 1,251 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,251 | ||||||||||||||
| Average interest rate | 5.5 | % | — | — | — | — | — | 5.5 | % | |||||||||||||||||||
| (a) | The interest rate of our senior notes is 9.25% as stipulated by the indenture. |
| (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, 2010, the interest rate in effect for the revolving credit agreement was 2.89%. |
Our financial instruments that are potentially sensitive to changes in interest rates also include our 9.25% senior notes. As of December 31, 2010, the fair value of these notes, based on quoted market prices, was approximately $155 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, 2010 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, 2010.
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, 2010 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 and subsidiaries (the Company) as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010. 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 and subsidiaries as of December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
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, 2010, 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 10, 2011 expressed an unqualified opinion on the effectiveness of internal control over financial reporting.
/s/ KPMG LLP
Houston, Texas
March 10, 2011
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, 2010, 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 WCA Waste Corporation’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, 2010, 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 and subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010 and our report dated March 10, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Houston, Texas
March 10, 2011
WCA WASTE CORPORATION
Consolidated Balance Sheets
(in thousands, except per share data)
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,763 | $ | 4,329 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $482 and $318 | 26,113 | 21,767 | ||||||
| Deferred tax assets | 3,436 | 1,452 | ||||||
| Prepaid expenses and other | 3,962 | 4,575 | ||||||
| Total current assets | 36,274 | 32,123 | ||||||
| Property and equipment, net | 320,564 | 320,923 | ||||||
| Goodwill, net | 71,578 | 65,318 | ||||||
| Intangible assets, net | 7,891 | 7,051 | ||||||
| Deferred financing costs, net | 3,210 | 3,628 | ||||||
| Deferred tax assets | — | 2,385 | ||||||
| Other assets | 345 | 145 | ||||||
| Total assets | $ | 439,862 | $ | 431,573 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 13,131 | $ | 10,013 | ||||
| Accrued liabilities and other | 13,921 | 17,489 | ||||||
| Interest rate swap | — | 6,489 | ||||||
| Note payable | 1,251 | 1,231 | ||||||
| Current maturities of long-term debt | 500 | 500 | ||||||
| Total current liabilities | 28,803 | 35,722 | ||||||
| Long-term debt, less current maturities and discount | 232,571 | 219,516 | ||||||
| Accrued closure and post-closure liabilities | 11,571 | 13,993 | ||||||
| Deferred tax liabilities | 1,399 | — | ||||||
| Other long-term liabilities | 1,789 | 1,813 | ||||||
| Total liabilities | 276,133 | 271,044 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Series A convertible preferred stock, $0.01 par value per share. Authorized 8,000 shares; issued and outstanding 914 shares and 870 shares, respectively (liquidation preference $96,006) | 9 | 9 | ||||||
| Common stock, $0.01 par value per share. Authorized 50,000 shares; issued 21,684 shares and 21,121 shares | 217 | 211 | ||||||
| Treasury stock | (5,322 | ) | (5,322 | ) | ||||
| Additional paid-in capital | 199,627 | 193,821 | ||||||
| Contingent considerations | 3,225 | 3,225 | ||||||
| Retained earnings (deficit) | (34,027 | ) | (31,415 | ) | ||||
| Total stockholders’ equity | 163,729 | 160,529 | ||||||
| Total liabilities and stockholders’ equity | $ | 439,862 | $ | 431,573 | ||||
WCA WASTE CORPORATION
Consolidated Statements of Operations
(in thousands, except per share data)
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenue | $ | 229,484 | $ | 194,138 | $ | 208,009 | ||||||
| Expenses: | ||||||||||||
| Cost of services | 165,110 | 130,287 | 142,129 | |||||||||
| Depreciation and amortization | 30,058 | 26,357 | 27,151 | |||||||||
| Impairment of goodwill | — | — | 41,725 | |||||||||
| General and administrative (including stock-based compensation of $1,564, $1,737 and $2,212, respectively) | 11,999 | 13,496 | 12,335 | |||||||||
| Gain on sale of assets | (938 | ) | (86 | ) | (178 | ) | ||||||
| 206,229 | 170,054 | 223,162 | ||||||||||
| Operating income (loss) | 23,255 | 24,084 | (15,153 | ) | ||||||||
| Other income (expense): | ||||||||||||
| Interest expense, net | (19,028 | ) | (18,052 | ) | (18,560 | ) | ||||||
| Write-off of deferred financing costs | (184 | ) | — | — | ||||||||
| Impact of interest rate swap | (236 | ) | (2,063 | ) | (7,547 | ) | ||||||
| Other income (expense), net | (3 | ) | (3 | ) | (240 | ) | ||||||
| (19,451 | ) | (20,118 | ) | (26,347 | ) | |||||||
| Income (loss) before income taxes | 3,804 | 3,966 | (41,500 | ) | ||||||||
| Income tax (provision) benefit | (1,915 | ) | (2,958 | ) | 13,737 | |||||||
| Net income (loss) | 1,889 | 1,008 | (27,763 | ) | ||||||||
| Accrued payment-in-kind dividend on preferred stock | (4,501 | ) | (4,278 | ) | (4,076 | ) | ||||||
| Net loss available to common stockholders | $ | (2,612 | ) | $ | (3,270 | ) | $ | (31,839 | ) | |||
| Net loss available to common stockholders: | ||||||||||||
| Earnings per share – basic | $ | (0.13 | ) | $ | (0.21 | ) | $ | (1.96 | ) | |||
| Earnings per share – diluted | $ | (0.13 | ) | $ | (0.21 | ) | $ | (1.96 | ) | |||
| Weighted average shares outstanding — basic | 19,598 | 15,824 | 16,257 | |||||||||
| Weighted average shares outstanding — diluted | 19,598 | 15,824 | 16,257 | |||||||||
WCA WASTE CORPORATION
Consolidated Statements of Stockholders’ Equity
(in thousands)
Additional Paid-in Capital | Contingent Considerations | Retained Earnings (Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
| 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 | — | — | 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 | |||||||||||||||||||||
| Accrued payment-in-kind dividend on preferred stock | — | — | — | — | — | — | 4,278 | — | (4,278 | ) | — | |||||||||||||||||||||||||||||
| Issuance of preferred stock | 42 | 1 | — | — | — | — | (1 | ) | — | — | — | |||||||||||||||||||||||||||||
| Issuance of common shares and earn-out shares grants | — | — | 3,555 | 35 | — | — | 15,253 | 3,225 | — | 18,513 | ||||||||||||||||||||||||||||||
| Restricted shares withheld | — | — | (73 | ) | (1 | ) | — | — | (174 | ) | — | — | (175 | ) | ||||||||||||||||||||||||||
| Issuance of restricted shares to employees and directors | — | — | 240 | 3 | — | — | (3 | ) | — | — | — | |||||||||||||||||||||||||||||
| Accretion of unearned compensation | — | — | — | — | — | — | 1,680 | — | — | 1,680 | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | 1,008 | 1,008 | ||||||||||||||||||||||||||||||
| Balance, December 31, 2009 | 870 | $ | 9 | 20,047 | $ | 211 | 1,074 | $ | (5,322 | ) | $ | 193,821 | $ | 3,225 | $ | (31,415 | ) | $ | 160,529 | |||||||||||||||||||||
| Accrued payment-in-kind dividend on preferred stock | — | — | — | — | — | — | 4,501 | — | (4,501 | ) | — | |||||||||||||||||||||||||||||
| Issuance of preferred stock | 44 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common shares | — | — | 20 | — | — | — | 100 | — | — | 100 | ||||||||||||||||||||||||||||||
| Restricted shares withheld | — | — | (77 | ) | — | — | — | (332 | ) | — | — | (332 | ) | |||||||||||||||||||||||||||
| Issuance of restricted shares to employees and directors | — | — | 620 | 6 | — | — | (6 | ) | — | — | — | |||||||||||||||||||||||||||||
| Accretion of unearned compensation | — | — | — | — | — | — | 1,543 | — | — | 1,543 | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | 1,889 | 1,889 | ||||||||||||||||||||||||||||||
| Balance, December 31, 2010 | 914 | $ | 9 | 20,610 | $ | 217 | 1,074 | $ | (5,322 | ) | $ | 199,627 | $ | 3,225 | $ | (34,027 | ) | $ | 163,729 | |||||||||||||||||||||
WCA WASTE CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 1,889 | $ | 1,008 | $ | (27,763 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 30,058 | 26,357 | 27,151 | |||||||||
| Impairment of goodwill | — | — | 41,725 | |||||||||
| Non-cash compensation charge | 1,564 | 1,737 | 2,212 | |||||||||
| Amortization of deferred financing costs and debt discount | 1,366 | 1,247 | 1,303 | |||||||||
| Write-off of deferred financing costs | 184 | — | — | |||||||||
| Deferred tax provision (benefit) | 1,439 | 2,416 | (14,339 | ) | ||||||||
| Accretion expense for closure and post-closure obligations | 1,095 | 628 | 558 | |||||||||
| Gain on sale of assets | (938 | ) | (86 | ) | (178 | ) | ||||||
| Net loss on early disposition of notes receivable/payable | — | — | 221 | |||||||||
| Unrealized (gain) loss on interest rate swap | (6,489 | ) | (5,168 | ) | 4,316 | |||||||
| Changes in assets and liabilities, net of effects of acquisitions: | ||||||||||||
| Accounts receivable, net | (4,342 | ) | 6,657 | (2,196 | ) | |||||||
| Prepaid expenses and other assets | 3,774 | (2,570 | ) | (287 | ) | |||||||
| Accounts payable and other liabilities | (4,204 | ) | (479 | ) | 1,571 | |||||||
| Net cash provided by operating activities | 25,396 | 31,747 | 34,294 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Acquisitions of businesses, net of cash acquired | (9,922 | ) | (23,375 | ) | (8,144 | ) | ||||||
| Proceeds from sale of fixed assets | 2,375 | 334 | 477 | |||||||||
| Principal of note receivable | — | — | 304 | |||||||||
| Proceeds from disposition of note receivable | — | — | 6,225 | |||||||||
| Capital expenditures | (31,282 | ) | (23,827 | ) | (29,805 | ) | ||||||
| Net cash used in investing activities | (38,829 | ) | (46,868 | ) | (30,943 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Principal payments on long-term debt | (500 | ) | (167 | ) | (16,130 | ) | ||||||
| Net change in revolving line of credit | 13,500 | 18,883 | 17,340 | |||||||||
| Payments under common stock repurchase program | — | — | (5,148 | ) | ||||||||
| Decrease in restricted cash | — | — | 1,339 | |||||||||
| Deferred financing costs | (1,133 | ) | (221 | ) | (935 | ) | ||||||
| Net cash provided by (used in) financing activities | 11,867 | 18,495 | (3,534 | ) | ||||||||
| Net change in cash and cash equivalents | (1,566 | ) | 3,374 | (183 | ) | |||||||
| Cash and cash equivalents at beginning of period | 4,329 | 955 | 1,138 | |||||||||
| Cash and cash equivalents at end of period | $ | 2,763 | $ | 4,329 | $ | 955 | ||||||
WCA WASTE CORPORATION
Consolidated Statements of Cash Flows — Continued
(in thousands)
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Supplemental cash flow information: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 17,577 | $ | 16,914 | $ | 17,797 | ||||||
| Taxes | 515 | 509 | 355 | |||||||||
| Non-cash investing and financing activities: | ||||||||||||
| Insurance premiums financed by direct debt | 1,541 | 3,135 | 305 | |||||||||
| Acquisitions of operations, net of divestitures: | ||||||||||||
| Accounts receivable | 4 | 3,514 | (186 | ) | ||||||||
| Prepaid expenses and other | (167 | ) | 167 | (25 | ) | |||||||
| Property and equipment, net | 1,973 | 44,706 | 3,405 | |||||||||
| Goodwill | 6,769 | 738 | 4,193 | |||||||||
| Intangible assets | 1,721 | 408 | 948 | |||||||||
| Debt and liabilities issued or assumed, net of debt discount | 278 | 2,442 | 191 | |||||||||
| Long-term debt | — | 859 | — | |||||||||
| Accrued closure post-closure liabilities | — | 4,344 | — | |||||||||
| Common stock | — | 35 | — | |||||||||
| Additional paid-in capital | 100 | 15,253 | — | |||||||||
| Contingent considerations | — | 3,225 | — | |||||||||
See accompanying notes to consolidated financial statements.
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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) is an integrated company engaged in the collection, transfer, processing and disposal of non-hazardous solid waste. The Company currently provides services to customers in Alabama, Arkansas, Colorado, Florida, Kansas, Massachusetts, Missouri, New Mexico, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee and Texas.
(b) Basis of Presentation
The consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for annual reports on Form 10-K.
Property and equipment, net and accrued liabilities as of December 31, 2009 have been increased by $199 due to an additional purchase price adjustment on December 31, 2009, the date of the Live Earth acquisition. This adjustment retrospectively increased the fair value of Sunny Farms Landfill to reflect new information obtained during 2010 about certain contingency that existed as of the acquisition date.
Certain reclassifications have been made to the prior period financial statements to conform to the current presentation.
(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
The Company considers all highly liquid debt instruments with original maturities at the date of purchase of three months or less to be cash equivalents.
(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 |
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(f) Landfill Accounting
Capitalized Landfill Costs
At December 31, 2010, the Company owned 25 landfills. Two of these landfills are fully permitted but not constructed and have not yet commenced operations as of December 31, 2010.
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, 2010, 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 aerial and 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.
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, 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 between 5 and 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.
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
The changes to landfill assets and closure and post-closure liabilities for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):
| Landfill Assets, Net | Closure and Post-closure Liabilities | |||||||
| 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 | ||||
| Capital expenditures | 18,320 | — | ||||||
| Acquisition of landfill and other adjustments | 28,600 | 4,344 | ||||||
| Amortization expense | (9,680 | ) | — | |||||
| Obligations incurred and capitalized | 414 | 414 | ||||||
| Revisions to estimates of closure and post-closure activities | 1,209 | 1,209 | ||||||
| Interest accretion | — | 628 | ||||||
| December 31, 2009 | $ | 218,451 | $ | 13,993 | ||||
| Capital expenditures | 16,037 | — | ||||||
| Amortization expense | (12,598 | ) | — | |||||
| Obligations incurred and capitalized | 690 | 690 | ||||||
| Revisions to estimates of closure and post-closure activities | (4,207 | ) | (4,207 | ) | ||||
| Interest accretion | — | 1,095 | ||||||
| December 31, 2010 | $ | 218,373 | $ | 11,571 | ||||
The Company’s liabilities for closure and post-closure costs for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Recorded amounts: | ||||||||||||
| Current portion | $ | — | $ | — | $ | — | ||||||
| Noncurrent portion | 11,571 | 13,993 | 7,398 | |||||||||
| Total recorded | $ | 11,571 | $ | 13,993 | $ | 7,398 | ||||||
The Company’s total anticipated cost for closure and post-closure activities is $199.5 million, as measured in current dollars. The recorded liabilities as of December 31, 2010 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):
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||
| $ | — | $ | — | $ | 1,559 | $ | 233 | $ | 7,648 | $ | 190,050 | |||||||||||
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
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, 2010, 2009 and 2008) until expected time of payment and then discounted to present value (8.5% for each of the years ended December 31, 2010, 2009 and 2008). 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 $43.1 million, $39.4 million and $29.6 million at December 31, 2010, 2009 and 2008, 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 2010, 2009 and 2008). | |
| 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 2010, 2009 and 2008. | |
| 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 2010, 2009 and 2008). |
(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.
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
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.
During the measurement period, the Company may retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. During the measurement period, the Company may also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. When such adjustments are made, the Company revises comparative information for prior periods presented in financial statements as needed, including making any change in depreciation, amortization, or other income effects recognized in completing the initial accounting.
The Company accrues the fair value of the payment of contingent purchase price, which takes into consideration the probability of the events surrounding the contingency. Contingent purchase price related to landfills is allocated to landfill airspace and contingent purchase price for acquisitions other than landfills is allocated to the assets purchased and then to goodwill to the extent that the purchase price exceeds the fair value of the assets acquired. At December 31, 2010, the Company recorded approximately $3.2 million of contingent consideration related to the fair value of 2,000,000 shares of the Company’s common stock that are issuable pursuant to certain earn-out provisions in the Live Earth acquisition agreement.
(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.
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(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 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, the Company expensed $115 of such costs, which are included in general and administrative cost in WCA’s consolidated statements of operations. In accordance with ASC Topic 805, starting in 2009 all acquisition-related transaction and restructuring costs are expensed as incurred rather than capitalized as part of the acquisition costs. The Company expensed $457 and $1,030 of such costs during 2010 and 2009, respectively.
(k) Deferred Financing Costs
Deferred financing costs are amortized as a component of interest expense using the effective interest method. During 2010, 2009 and 2008, the Company expensed $1,366, $1,246 and $896, respectively, of such costs, which are reflected as interest expense in WCA’s consolidated statements of operations. In addition, the Company wrote off $184 of deferred financing costs in proportion to reduced commitments from the original participating lenders as a result of an amendment on June 30, 2010, which extended the term of the Company’s revolving credit agreement from July 5, 2011 to January 31, 2014 and increased its borrowing capacity from $175 million to $200 million under the agreement.
(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, 2010, 2009 and 2008, interest expense consists of the following (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Note payable and long-term debt | $ | 17,680 | $ | 16,837 | $ | 17,616 | ||||||
| Amortization of deferred financing costs | 1,366 | 1,246 | 896 | |||||||||
| Amortization of debt discount | — | — | 406 | |||||||||
| 19,046 | 18,083 | 18,918 | ||||||||||
| Less interest income | 18 | 31 | 358 | |||||||||
| Interest expense, net | $ | 19,028 | $ | 18,052 | $ | 18,560 | ||||||
(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.
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Income taxes have been calculated in accordance with ASC Topic 740. 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. Tax positions measured and recognized in accordance with guidance issued by the FASB in 2006 (“Accounting for Uncertainty in Income Taxes”) are recorded in other long-term liabilities on the Company’s balance sheets.
(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 and Accounts Receivable
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.
The Company’s receivables are recorded when billed or accrued and represent claims against third parties that will be settled in cash. The carrying value of the Company’s receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. 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. Past-due receivable balances are written off when the Company’s internal collection efforts have been unsuccessful in collecting the amount due.
(p) Derivative Financial Instruments
The Company accounts for derivatives and hedging activities in accordance with ASC Topic 815, which requires that all derivative instruments be recorded on the balance sheet at their respective fair values.
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 was not designated as a hedging transaction and any changes in the unrealized fair value of the swap were recognized in the statement of operations as a non-cash gain or loss. For the years ended December 31, 2010, 2009 and 2008, the Company recorded $6.7 million, $7.2 million and $3.2 million, respectively, of realized loss as well as $(6.5) million, $(5.2) million and $4.3 million, respectively, of unrealized (gain) loss related to the interest rate swap in the consolidated statement of operations. This interest rate swap expired on November 1, 2010.
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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 ASC Topic 825. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value. 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.
As of December 31, 2010, the fair value of the Company’s 9.25% senior notes, based on quoted market prices (Level 1), was approximately $155 million compared to a carrying amount of $150 million. Since the interest rate swap agreement expired on November 1, 2010, the Company had no financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010.
(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, 2010, 2009 and 2008, 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 in the United States. Operating segments (regions) are determined by the reporting structure and the vertical integration of the related operations. The four 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.
(u) Recent Accounting Pronouncements
In October 2009, the FASB issued FASB Accounting Standards Update (“ASU”) 2009-13 (ASU 2009-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force.” This update amends the criteria for revenue recognition of multi-deliverable arrangements and expands the required disclosures of those arrangements. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU 2009-13 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements.” This update requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers. It also requires additional disclosure regarding purchases, sales, issuances and settlements of Level 3 measurements. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the additional disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010. The Company adopted ASU 2010-06 on January 1, 2011. The adoption of this standard did not have any impact on its financial position, results of operations or cash flows.
In February 2010, the FASB issued ASU 2010-09, “Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 updates ASC Topic 855, Subsequent Events. ASU 2010-09 requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement to disclose the date through which an entity has evaluated subsequent events. The Company adopted the provisions of this pronouncement upon issuance with no material impact to its financial position, results of operations or cash flows.
In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 updates ASC Topic 350, Intangibles—Goodwill and Other, to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted ASU 2010-28 on January 1, 2011. The adoption did not have any material impact on its financial position, results of operations or cash flows.
In December 2010, the FASB issued ASU 2010-29, “Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU 2010-29 amends ASC Topic 805, Business Combinations. This update addresses diversity in the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The Company adopted ASU 2010-29 on January 1, 2011. The adoption of this update did not have any material impact on its financial position, results of operations or cash flows.
There were various other updates recently issued, many of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to have a material impact 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 reserves. These significant estimates and assumptions as well as other estimates and assumptions the Company considers in the preparation of its financial statements are described below.
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
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.
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,
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WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
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).
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.
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.
Contingent Liabilities. The Company estimates the amount of potential exposure it may have with respect to litigation, claims and assessments in accordance with ASC Topic 450.
Actual results could differ materially from the estimates and assumptions that the Company uses in the preparation of its financial statements.
(3) Acquisitions
During 2010, the Company completed four acquisitions. Total consideration for these acquisitions included $9.9 million of cash and 20,492 shares of the Company’s common stock valued at $0.1 million.
On December 31, 2009, the Company consummated the acquisition of the operating subsidiaries of Live Earth, LLC (collectively, the “Live Earth Companies”), which included certain assets and related liabilities held by Live Earth, LLC that relate to the Live Earth Companies, including the Sunny Farms Landfill, the Champion City Recovery Transfer Station and the related rail haul assets providing transfer of waste from the east coast to the Sunny Farms Landfill by rail. Total consideration for this acquisition included $19.7 million of cash, 3,555,556 shares of the Company’s common stock valued at $15.3 million, and 2,000,000 contingent earn-out shares valued at $3.2 million on the acquisition date.
During 2009, the Company completed three acquisitions including the Live Earth acquisition. Total consideration for these transactions included $22.9 million of cash, 3,555,556 shares of the Company’s common stock valued at $15.3 million, 2,000,000 contingent earn-out shares valued at $3.2 million on the acquisition date, and a seller note valued at $0.9 million with two future payments of $0.5 million due on January 15, 2010 and 2011, respectively. These acquisitions resulted in the addition of one landfill, one transfer station and some tuck-in operations.
74
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
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.
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):
| 2010 | 2009 | 2008 | ||||||||||
| Accounts receivable | $ | 4 | $ | 3,514 | $ | (186 | ) | |||||
| Prepaid expenses and other | (167 | ) | 167 | — | ||||||||
| Property and equipment, net | 1,973 | 44,706 | 3,406 | |||||||||
| Goodwill | 6,769 | 738 | 4,193 | |||||||||
| Intangible assets | 1,721 | 408 | 947 | |||||||||
| Accounts payable and accrued liabilities | (278 | ) | (6,786 | ) | (191 | ) | ||||||
| $ | 10,022 | $ | 42,747 | $ | 8,169 | |||||||
The table above reflected $425 of purchase price adjustments in 2009 relating to the 2008 acquisitions. In 2008, $20 of purchase price adjustments were related to the 2007 acquisitions.
(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 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, 2010, 2009 and 2008 is as follows (in thousands, except per share data):
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Numerator: | ||||||||||||
| Net income (loss) | $ | 1,889 | $ | 1,008 | $ | (27,763 | ) | |||||
| Accrued payment-in-kind dividend on preferred stock | (4,501 | ) | (4,278 | ) | (4,076 | ) | ||||||
| Net loss available to common stockholders | $ | (2,612 | ) | $ | (3,270 | ) | $ | (31,839 | ) | |||
| Denominator: | ||||||||||||
| Weighted average basic shares outstanding | 19,598 | 15,824 | 16,257 | |||||||||
| Weighted average diluted shares outstanding | 19,598 | 15,824 | 16,257 | |||||||||
| Earnings (loss) per share: | ||||||||||||
| Basic | $ | (0.13 | ) | $ | (0.21 | ) | $ | (1.96 | ) | |||
| Diluted | $ | (0.13 | ) | $ | (0.21 | ) | $ | (1.96 | ) | |||
75
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Stock options | 491 | 525 | 576 | |||||||||
| Restricted shares | 959 | 638 | 687 | |||||||||
| Convertible preferred stock | 9,534 | 9,074 | 8,637 | |||||||||
| Convertible debt | 154 | 154 | 790 | |||||||||
| 11,138 | 10,391 | 10,690 | ||||||||||
(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, 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Balance, beginning of year | $ | 318 | $ | 1,173 | $ | 1,498 | ||||||
| Amounts charged to expense | 719 | 829 | 827 | |||||||||
| Amounts written off, net of amounts recovered | (555 | ) | (1,684 | ) | (1,152 | ) | ||||||
| Balance, end of year | $ | 482 | $ | 318 | $ | 1,173 | ||||||
Prepaid Expenses and Other
Prepaid expenses and other consist of the following at December 31, 2010 and 2009 (in thousands):
| 2010 | 2009 | |||||||
| Prepaid insurance premiums | $ | 1,449 | $ | 1,978 | ||||
| Prefunded insurance claims | 244 | 285 | ||||||
| Other | 2,269 | 2,312 | ||||||
| $ | 3,962 | $ | 4,575 | |||||
Property and Equipment
Property and equipment consist of the following at December 31, 2010 and 2009 (in thousands):
| 2010 | 2009 | |||||||
| Land and landfills | $ | 321,529 | $ | 306,528 | ||||
| Vehicles and equipment | 100,190 | 94,263 | ||||||
| Containers | 38,135 | 35,772 | ||||||
| Buildings and improvements | 17,192 | 16,985 | ||||||
| Computers and software | 1,525 | 1,606 | ||||||
| Furniture and fixtures | 1,139 | 1,055 | ||||||
| 479,710 | 456,209 | |||||||
| Less accumulated depreciation and amortization | 159,146 | 135,286 | ||||||
| $ | 320,564 | $ | 320,923 | |||||
76
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Accrued Liabilities and Other
Accrued liabilities and other consist of the following at December 31, 2010 and 2009 (in thousands):
| 2010 | 2009 | |||||||
| Accrued insurance claims | $ | 3,372 | $ | 2,841 | ||||
| Accrued payroll costs | 1,536 | 3,493 | ||||||
| Deferred revenue | 5,327 | 4,994 | ||||||
| Accrued taxes | 870 | 1,258 | ||||||
| Accrued interest | 868 | 2,819 | ||||||
| Other | 1,948 | 2,084 | ||||||
| $ | 13,921 | $ | 17,489 | |||||
(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, 2008 | $ | 64,580 | ||
| Acquisitions | 738 | |||
| Balance, December 31, 2009 | $ | 65,318 | ||
| Acquisitions | 6,769 | |||
| Divestitures | (509 | ) | ||
| Balance, December 31, 2010 | $ | 71,578 |
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.
Under the guidance of ASC Topic 350, the first step for the goodwill impairment test requires the Company to estimate the fair value of each reporting unit and to compare the fair value to the reporting unit’s carrying value. The Company estimated the fair value of its reporting units using a discounted cash flow approach. The key assumptions the Company used in preparing its discounted cash flow analysis were (1) projected cash flows, (2) expected long-term growth rate, and (3) discount rate. The Company based its projected cash flows on budgeted operating results for 2011. For 2012 and future periods, the Company assumed a growth rate of 2.5% based on the 20-year inflation rate as published by the Federal Reserve. The Company used an average discount rate of 9.6%, which represented its weighted average cost of capital and was evaluated by independent third parties for reasonableness. The Company’s reporting units carry the majority of assets and liabilities related to their operations on their respective balance sheets, except for obligations associated with debt, self-insurance and deferred tax liabilities, as well as assets such as cash and deferred tax assets, which are primarily recorded on Corporate’s balance sheet. To determine the carrying value of each reporting unit at the measurement date, the Company allocated assets and liabilities accounted for within its Corporate’s balance sheet to each of the reporting units based on the size of their respective operations. The Corporate assets and liabilities relate to the operations of each of the reporting units, therefore, management believe they should be
77
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
allocated to each of the reporting units to determine the appropriate fair values for each of the reporting units. 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.
In the Company’s discounted cash flow analysis in 2009 and 2010, the estimated fair value for each of its reporting units exceeded their respective carrying value. Accordingly, there was no indication of impairment. 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, 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.
As a test of the reasonableness of the estimated fair values for its reporting units, the Company compared the fair value of its reporting units under the discounted cash flow approach less outstanding debt (implied fair value of equity) to its market capitalization as of the measurement date. The Company compared the implied fair value of its equity to its market capitalization noting that the implied fair value of equity exceeded the market capitalization. The Company considered the excess amount of implied fair value over market capitalization to be a control premium. A control premium represents the ability of an acquirer to control the operations of the business. The control premium determined as of the measurement date appeared reasonable as it is consistent with historical control premium levels observed in acquisitions of controlling interests in publicly-traded companies. The Company will continue to monitor its market capitalization and expectations of future cash flows and will perform additional interim impairment testing if deemed necessary.
Intangible assets, all of which are subject to amortization, consist of the following at December 31, 2010 and 2009 (in thousands):
| Customer Contracts and Customer Lists | Covenants Not-to-Compete | Total | ||||||||||
| December 31, 2010 | ||||||||||||
| Intangible assets | $ | 10,041 | $ | 1,437 | $ | 11,478 | ||||||
| Less accumulated amortization | 2,701 | 886 | 3,587 | |||||||||
| $ | 7,340 | $ | 551 | $ | 7,891 | |||||||
| December 31, 2009 | ||||||||||||
| Intangible assets | $ | 8,461 | $ | 1,296 | $ | 9,757 | ||||||
| Less accumulated amortization | 2,059 | 647 | 2,706 | |||||||||
| $ | 6,402 | $ | 649 | $ | 7,051 | |||||||
Amortization expense for these intangible assets was approximately $881, $843 and $733 for 2010, 2009 and 2008, respectively. The intangible asset amortization expense estimated as of December 31, 2010, for the five years following 2010 is as follows (in thousands):
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||
| $ | 971 | $ | 889 | $ | 813 | $ | 703 | $ | 564 | |||||||||
78
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, 2010 and 2009 (in thousands):
| 2010 | 2009 | |||||||
| Senior notes, with interest rate of 9.25%, due in June 2014 | $ | 150,000 | $ | 150,000 | ||||
| Revolving credit facility with financial institutions, variable interest rate based on LIBOR plus a margin (2.89% and 3.24% at December 31, 2010 and 2009, respectively) | 81,000 | 67,500 | ||||||
| Seller note, with two installments of $500 due on January 15, 2010 and 2011 | 496 | 941 | ||||||
| Seller convertible notes, with interest rate of 5.5%, due in October 2012 | 1,575 | 1,575 | ||||||
| 233,071 | 220,016 | |||||||
| Less current maturities | 500 | 500 | ||||||
| $ | 232,571 | $ | 219,516 | |||||
The Company has a $200 million revolving credit facility. As of December 31, 2010, there were $81.0 million outstanding under the credit facility and $12.1 million in letters of credit that serve as collateral for insurance claims and bonding, leaving $106.9 million in available capacity under the revolving credit facility. 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 senior notes pay interest semi-annually on June 15 and December 15, commencing December 15, 2006, with the following redemption provisions:
| · | 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 |
| · | 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 that, among other provisions, limits the Company’s ability to incur additional indebtedness, make capital expenditures, create liens, sell assets and make dividend and other payments. In addition, the indenture includes financial covenants including a covenant allowing the Company to incur indebtedness or issue disqualified stock or preferred stock only if the Fixed Charge Coverage Ratio (as defined in the indenture) for the four full fiscal quarters most recently ended prior to issuance would have been at least 2.0 to 1, determined on a pro forma basis, as if the additional indebtedness had been incurred or the disqualified stock or preferred stock had been issued at the beginning of such four-quarter period. The defined terms are set forth in the indenture.
The senior notes due 2014 are guaranteed by all of the Company’s current and future subsidiaries as of December 31, 2010. 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.
79
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
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. The credit facility includes covenants related to interest margins associated with various leverage ratios. These interest margins were amended in October 2008, February 2009 and 2010, and again in June 2010. 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.
On June 30, 2010, the Company and Comerica Bank, in its capacity as Administrative Agent, together with BBVA Compass Bank as Documentation Agent, and in each of those bank’s capacities as Co-Lead Arrangers, along with Regions Bank, in its capacity as Syndication Agent, and certain other lenders, entered into the Twelfth Amendment to Revolving Credit Agreement (the “Amendment”) to amend the Credit Agreement. Regions Bank, Branch Banking and Trust Company, and CoBank have become new participating lenders under the Credit Agreement.
The Amendment extended the term of the Credit Agreement and the revolving credit facility, which would have expired on July 5, 2011, to January 31, 2014. The Amendment also increased the total revolving credit commitments available to the Company from the participating lenders under the Credit Agreement to $200 million from $175 million. The Company incurred $1.0 million of financing costs associated with the Amendment. In addition, the Company wrote off $0.2 million of deferred financing costs in proportion to reduced commitments from the original participating lenders.
The Amendment modified some of the pricing terms and conditions of the Credit Agreement; however, such modifications will not significantly increase the Company’s borrowing costs at current borrowing levels. In lieu of an unused commitment fee, the Company is required to pay, quarterly in arrears, an annual facility fee in an amount ranging from 0.375% to 0.875% of the total revolving credit commitments of $200 million available under the Credit Agreement (the “Facility Fee”). The Company is also obligated to pay an annual letter of credit fee in an amount ranging from 2.125% to 2.625% of the letter of credit obligations outstanding under the Credit Agreement (the “L/C Fee”). Any borrowings under the Credit Agreement will bear interest at either (x) the Eurodollar London Interbank Offered Rate (“LIBOR”) for the applicable interest period, plus a spread ranging from 2.125% to 2.625% per annum (a “LIBOR Loan”) or (y) a base rate equal to the greater of (1) the Federal Funds Rate plus 1%, (2) the Prime Rate as published by Comerica Bank from time to time, or (3) one-month LIBOR plus 1.00%, plus a spread ranging from 1.625% to 2.125% (a “Base Rate Loan”). The Facility Fee, the L/C Fee and the applicable spread on a LIBOR Loan and a Base Rate Loan depends on the Company’s Leverage Ratio (as such term is defined in the Credit Agreement as previously amended). The Amendment did not result in any material modifications to the representations and warranties, covenants or other terms and provisions of the Credit Agreement.
80
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
The following table highlights the revised margins included in the Amendment:
| Basis for | Leverage | Facility | LIBOR | All-In | Letter of Credit | Base Rate | ||||||||||||||||
| Pricing | Ratio | Fee | Margin | Spread | Fees | Margin | ||||||||||||||||
| Level I | < 3.00:1.0 | 0.375 | 2.125 | 2.500 | 2.125 | 1.625 | ||||||||||||||||
| Level II | ≥3.00:1.0 but <3.50:1.0 | 0.375 | 2.375 | 2.750 | 2.375 | 1.875 | ||||||||||||||||
| Level III | ≥3.50:1.0 but <4.00:1.0 | 0.375 | 2.625 | 3.000 | 2.625 | 2.125 | ||||||||||||||||
| Level IV | ≥4.00:1.0 but <4.50:1.0 | 0.625 | 2.625 | 3.250 | 2.625 | 2.125 | ||||||||||||||||
| Level V | ≥4.50:1.0 | 0.875 | 2.625 | 3.500 | 2.625 | 2.125 | ||||||||||||||||
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 substantially all of the Company’s operating 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 Agreement), 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. The credit facility also contains financial covenants requiring the Company to limit leverage (both in terms of senior secured debt and total leverage), maintain specified debt service ratios, limit capital expenditures, and maintain a minimum tangible net worth. Each of the financial covenants incorporates specially defined terms that would not correspond to GAAP or Non-GAAP measures disclosed in this report and that in certain instances are based on determinations and information not derived from or included in the Company’s financial statements. The financial covenants include the following:
| · | the Company’s maximum “Leverage Ratio” (as defined in the Credit Agreement) for the trailing 12-month reporting period on each quarterly reporting date is 4.75 to 1.00; |
| · | the Company maintains a Pro Forma Adjusted EBITDA Debt Service Ratio (as defined in the Credit Agreement) for the trailing 12-month period of not less than 2.25 to 1.00 until maturity; |
| · | the Company’s maximum Senior Secured Funded Debt Leverage Ratio (as defined in the Credit Agreement) is 2.50 to 1.00; |
| · | the Company cannot make any Maintenance Capital Expenditures (as defined in the Credit Agreement) exceeding 15% of our consolidated total revenue as calculated at the end of a fiscal year; and |
| · | the Company maintains minimum Tangible Net Worth (as defined in the Credit Agreement) 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; |
In February 2010, the definitions of “Pro Forma Adjusted EBITDA” and “Pro Forma Adjusted EBITDA Debt Service Ratio” were amended and “Consolidated Net Interest Expense” was added as a further defined term to the Credit Agreement. The purpose of such definitional modifications and addition are as follows:
81
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
| · | to exclude cash and non-cash income or expense attributable to any interest rate hedging agreement, now existing or which the Company enters into in the future, from the determination of its compliance with the Leverage Ratio under the terms of the Credit Agreement; and |
| · | to include cash income or expense (but not non-cash items) attributable to any interest rate hedging agreement that the Company enters into in the future from the determination of its compliance with the Pro Form Adjusted EBITDA Debt Service Ratio under the terms of the Credit Agreement. |
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 connection with one acquisition in 2009, the Company issued a seller note. As of December 31, 2010, the seller note was valued at $496 with one future payment of $500 due on January 15, 2011.
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. This interest rate swap expired on November 1, 2010. 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, 2010 are as follows (in thousands):
| 2011 | $ | 500 | ||
| 2012 | 1,575 | |||
| 2013 | — | |||
| 2014 | 231,000 | |||
| 2015 | — | |||
| Thereafter | — | |||
| $ | 233,075 |
82
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(8) Note Payable
In December of 2010, the Company issued a note payable for $1,541 to a financial institution to fund the payments of general insurance premiums. The note bears interest at 5.5% and principal and interest are payable monthly through October 1, 2011.
(9) Stockholders’ Equity
Preferred Stock
On July 13, 2006, the Company’s shareholders 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, 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 right to appoint 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 has the option to PIK or pay a cash dividend at the rate of 5% per annum. The preferred shares have no stated maturity and no mandatory redemption requirements. 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. On September 28, 2010, the stockholders of the Company approved the Fourth Amended and Restated 2004 WCA Waste Corporation Incentive Plan. This amendment (1) increased the Company’s common stock authorized for issuance under the plan from 2,250,000 shares to 2,900,000 shares, (2) established an “evergreen” provision to increase the number of shares available for awards and grants on January 1 of each year by the lesser of (i) 500,000 additional shares or (ii) a number of shares such that the total authorized shares under the plan following such increase would be equal to 9% of the fully-diluted common shares issued and outstanding as of December 31 of the preceding year, and (3) made the shares surrendered by participants to satisfy tax withholding obligations available for future issuance. As of December 31, 2010, there were approximately 633,000 remaining shares of the Company’s common stock authorized for issuance.
83
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
During 2010, 2009 and 2008, approximately 627,000, 313,000 and 388,000 restricted shares of the common stock of the Company were granted to certain directors, officers and key employees with an aggregate market value of $2,850, $939 and $2,477 on the grant dates, respectively. The unearned compensation is being amortized to expense on a straight-line basis over the required employment period, or the vesting period, as the restrictions lapse at the end of each anniversary after the date of grant. During the years ended December 31, 2010, 2009 and 2008, $1,543, $1,653 and $2,182 of stock compensation expense related to these restricted shares was recognized. As of December 31, 2010, the unrecognized compensation expense associated with restricted shares was $3,111 and will be recognized over an average period of 1.95 years.
The following table reflects the restricted share activity for the Company during 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | |||||||||||||||||||||||||
| 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 | 638 | $ | 5.10 | 687 | $ | 6.93 | 594 | $ | 7.85 | ||||||||||||||||||
| Granted | 627 | 4.54 | 313 | 3.00 | 388 | 6.38 | |||||||||||||||||||||
| Vested | (299 | ) | 5.46 | (289 | ) | 6.87 | (258 | ) | 8.21 | ||||||||||||||||||
| Forfeited | (7 | ) | 5.45 | (73 | ) | 6.26 | (37 | ) | 6.97 | ||||||||||||||||||
| Unvested at end of year | 959 | $ | 4.62 | 1.95 | 638 | $ | 5.10 | 1.93 | 687 | $ | 6.93 | 2.62 | |||||||||||||||
The following table reflects the option activity for the Company during 2010, 2009 and 2008 (in thousands, except per share data):
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||||
| Outstanding at beginning of year | 525 | $ | 9.52 | 576 | $ | 9.52 | 621 | $ | 9.51 | |||||||||||||||
| Grants | — | — | — | — | — | — | ||||||||||||||||||
| Forfeitures | (34 | ) | 9.50 | (51 | ) | 9.50 | (45 | ) | 9.50 | |||||||||||||||
| Outstanding at end of year | 491 | $ | 9.52 | 525 | $ | 9.52 | 576 | $ | 9.52 | |||||||||||||||
The following table summarizes information about the stock options outstanding at December 31, 2010 (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 | 480 | $ | 9.50 | 3.5 | ||||||||||
| 10.28 – 10.39 | 11 | 10.34 | 4.0 | |||||||||||
| 491 | $ | 9.52 | 3.5 | |||||||||||
As the exercise prices of all outstanding options were greater than the Company’s common stock share price as of December 31, 2010, there was no intrinsic value as of December 31, 2010. In addition, no compensation expense remains to be recognized as all stock options outstanding are vested.
84
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
Other
On December 31, 2009, the Company issued 3,555,556 shares of its common stock valued at $15.3 million and granted 2,000,000 contingent earn-out shares valued at $3.2 million in connection with the Live Earth acquisition. The fair value of the earn-out shares on the acquisition date was recorded as Contingent Considerations within Stockholders’ Equity and remains on the Company’s balance sheet until the earn-out contingency resolves.
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.
(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, 2010, 2009 and 2008 totaled $366, $288 and $402, 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):
| 2010 | 2009 | 2008 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 335 | $ | — | $ | (93 | ) | |||||
| State | (476 | ) | (542 | ) | (509 | ) | ||||||
| Deferred: | ||||||||||||
| Federal | (1,986 | ) | (1,616 | ) | 14,313 | |||||||
| State | 212 | (800 | ) | 26 | ||||||||
| Income tax (provision) benefit | $ | (1,915 | ) | $ | (2,958 | ) | $ | 13,737 | ||||
85
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
At December 31, 2010 and 2009, the individually significant components that comprise the Company’s deferred tax assets and liabilities are as follows (in thousands):
| 2010 | 2009 | |||||||
| Deferred tax assets: | ||||||||
| Federal net operating loss carryforward | $ | 13,841 | $ | 13,506 | ||||
| State net operating loss carryforward | 7,819 | 6,717 | ||||||
| Other | 1,465 | 3,444 | ||||||
| Alternative minimum tax | — | 335 | ||||||
| Deferred tax assets before valuation allowance | 23,125 | 24,002 | ||||||
| Valuation allowance | (8,160 | ) | (7,647 | ) | ||||
| Deferred tax assets after valuation allowance | 14,965 | 16,355 | ||||||
| Deferred tax liabilities: | ||||||||
| Excess of book basis over tax basis of property | (14,191 | ) | (13,379 | ) | ||||
| Prepaid expenses | (403 | ) | (378 | ) | ||||
| Other | 1,667 | 1,239 | ||||||
| Deferred tax liabilities | (12,927 | ) | (12,518 | ) | ||||
| Net deferred tax assets | $ | 2,038 | $ | 3,837 | ||||
At December 31, 2010, the Company had a federal net operating loss carryforward (NOL) of approximately $39.6 million which, if not utilized, will begin to expire in 2022. Additionally the Company has state NOLs of approximately $194.9 million which, if not utilized, will expire beginning in 2011. 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, 2010 and 2009 was $8,160 and $7,647, respectively. The change in the total valuation allowance for the years ended December 31, 2010, 2009 and 2008 was a net increase of $513, $1,426 and $2,905, 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 a pronouncement (“Accounting for Uncertainty in Income Taxes”) which is included in ASC Topic 740. This pronouncement 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. The pronouncement is effective for fiscal years beginning after December 15, 2006. The Company is required to record the impact of its adoption as an adjustment to the January 1, 2007, beginning balance of retained earnings rather than the consolidated statement of operations.
As a result of the implementation in 2007, 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.
86
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Balance at January 1, 2010 | $ | 1,813 | ||
| Additions for tax positions of prior years | 2 | |||
| Reductions for tax positions of prior years | — | |||
| Additions for tax positions related to the current year | — | |||
| Settlements | — | |||
| Lapse of statute of limitations | (26 | ) | ||
| Balance at December 31, 2010 | $ | 1,789 |
Included in the balance of unrecognized tax benefits as of December 31, 2010, was $1,789 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, 2010, the Company accrued approximately $2 of gross interest and penalties.
Within the next 12 months, the Company anticipates a reduction of approximately $21 in the balance of unrecognized tax benefits for a tax position related to prior years.
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 2001. Currently, the Company is not involved in any income tax examinations for any year.
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, 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Statutory federal tax (provision) benefit | $ | (1,331 | ) | $ | (1,388 | ) | $ | 14,525 | ||||
| State income tax (provision) benefit, net of federal tax (provision) benefit | 341 | 554 | 2,592 | |||||||||
| Adjustment to valuation allowance | (513 | ) | (1,426 | ) | (2,905 | ) | ||||||
| Nondeductible expenses and other | (436 | ) | (695 | ) | (469 | ) | ||||||
| FIN 48 interest and penalties | 24 | (3 | ) | (6 | ) | |||||||
| Effective tax (provision) benefit | $ | (1,915 | ) | $ | (2,958 | ) | $ | 13,737 | ||||
87
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(12) Segment Reporting
The Company’s operations consist of the collection, transfer, processing and disposal of non-hazardous solid waste. Revenues are generated primarily from the Company’s 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, 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Collection: | ||||||||||||
| Residential | $ | 53,619 | $ | 55,086 | $ | 50,433 | ||||||
| Commercial | 25,917 | 25,082 | 21,607 | |||||||||
| Roll-off | 43,534 | 45,763 | 57,756 | |||||||||
| Total collection | 123,070 | 125,931 | 129,796 | |||||||||
| Disposal | 98,841 | 68,831 | 75,456 | |||||||||
| Less intercompany | 28,338 | 25,109 | 29,527 | |||||||||
| Disposal, net | 70,503 | 43,722 | 45,929 | |||||||||
| Transfer and other | 47,493 | 35,924 | 46,413 | |||||||||
| Less intercompany | 11,582 | 11,439 | 14,129 | |||||||||
| Transfer and other, net | 35,911 | 24,485 | 32,284 | |||||||||
| Total revenue | $ | 229,484 | $ | 194,138 | $ | 208,009 | ||||||
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; Region IV: Massachusetts, Ohio) for the years ended December 31, 2010, 2009 and 2008 (in thousands).
| Region I | Region II | Region III | Region IV | Corporate | Total | |||||||||||||||||||
| Year ended December 31, 2010: | ||||||||||||||||||||||||
| Revenue | $ | 50,316 | $ | 96,750 | $ | 44,369 | $ | 38,049 | $ | — | $ | 229,484 | ||||||||||||
| Depreciation and amortization | 5,357 | 13,133 | 6,586 | 4,540 | 442 | 30,058 | ||||||||||||||||||
| Operating income | 6,331 | 8,363 | 8,057 | 83 | 421 | 23,255 | ||||||||||||||||||
| Total assets | 80,261 | 188,995 | 100,575 | 47,223 | 22,808 | 439,862 | ||||||||||||||||||
| Goodwill | 25,367 | 25,417 | 20,794 | — | — | 71,578 | ||||||||||||||||||
| Capital expenditures | 4,950 | 16,725 | 6,096 | 3,494 | 17 | 31,282 | ||||||||||||||||||
| Year ended December 31, 2009: | ||||||||||||||||||||||||
| Revenue | $ | 50,846 | $ | 101,749 | $ | 41,543 | $ | — | $ | — | $ | 194,138 | ||||||||||||
| Depreciation and amortization | 5,783 | 12,811 | 7,276 | — | 487 | 26,357 | ||||||||||||||||||
| Operating income (loss) | 5,795 | 16,771 | 3,659 | — | (2,141 | ) | 24,084 | |||||||||||||||||
| Total assets | 81,983 | 176,913 | 101,304 | 45,321 | 26,052 | 431,573 | ||||||||||||||||||
| Goodwill | 25,367 | 18,648 | 21,303 | — | — | 65,318 | ||||||||||||||||||
| Capital expenditures | 5,780 | 15,391 | 2,625 | — | 31 | 23,827 | ||||||||||||||||||
| 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) | 6,341 | (10,060 | ) | (13,052 | ) | — | 1,618 | (15,153 | ) | |||||||||||||||
| Capital expenditures | 6,552 | 16,020 | 6,370 | — | 359 | 29,301 | ||||||||||||||||||
Total assets for Corporate include cash, certain permitted but unopened landfills and corporate airplane.
88
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(13) Commitments and Contingencies
(a) Operating Leases
The Company leases certain of its operating and office facilities for various terms. Lease expense aggregated $4,012, $2,132 and $2,028 during 2010, 2009 and 2008, respectively. The long-term, non-cancelable rental obligations as of December 31, 2010 are due in the following years (in thousands):
| 2011 | $ | 2,421 | ||
| 2012 | 2,209 | |||
| 2013 | 1,886 | |||
| 2014 | 1,433 | |||
| 2015 | 1,006 | |||
| 2016 and thereafter | 1,974 | |||
| $ | 10,929 |
(b) Financial Instruments
Letters of credit, performance bonds, and other guarantees have been provided by WCA to support 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, 2010 aggregated approximately $82.0 million.
(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, 2010, the Company was not aware of any significant environmental liabilities.
89
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(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.
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.
(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. 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.
(14) Related-Party Transactions
The Company reimburses its outside board members for expenses incurred in connection with their service as directors. Total payments of $61, $1 and $10 were made during 2010, 2009 and 2008, respectively, for such reimbursements.
90
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
(15) Unaudited Quarterly Financial Data
The following table summarizes quarterly financial information for 2010 and 2009 (in thousands, except per share data):
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year Ended December 31, | ||||||||||||||||
| 2010: | ||||||||||||||||||||
| Revenue | $ | 52,307 | $ | 60,295 | $ | 59,279 | $ | 57,603 | $ | 229,484 | ||||||||||
| Operating income | 3,657 | 7,554 | 6,683 | 5,361 | 23,255 | |||||||||||||||
| Net loss available to common stockholders | (1,856 | ) | 210 | (355 | ) | (611 | ) | (2,612 | ) | |||||||||||
| Basic earnings (loss) per share | $ | (0.10 | ) | $ | 0.01 | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.13 | ) | ||||||
| Diluted earnings (loss) per share | $ | (0.10 | ) | $ | 0.01 | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.13 | ) | ||||||
| 2009: | ||||||||||||||||||||
| Revenue | $ | 48,190 | $ | 50,174 | $ | 49,546 | $ | 46,228 | $ | 194,138 | ||||||||||
| Operating income | 6,500 | 6,761 | 7,032 | 3,791 | 24,084 | |||||||||||||||
| Net loss available to common stockholders | (490 | ) | (229 | ) | (250 | ) | (2,301 | ) | (3,270 | ) | ||||||||||
| Basic earnings (loss) per share | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.14 | ) | $ | (0.21 | ) | |||||
| Diluted earnings (loss) per share | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.14 | ) | $ | (0.21 | ) | |||||
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.
(16) Subsequent Events
Acquisition of WCA of Chickasha
On January 3, 2011, effective January 1, 2011, the Company acquired all of the outstanding capital stock of IESI OK Corporation, which is now known as WCA of Chickasha (the “Chickasha Operations”). The acquired Chickasha operations consist of nine commercial and residential routes around Chickasha, Oklahoma, which is approximately 40 miles southwest of Oklahoma City, and a transfer station in Chickasha, Oklahoma (the “Chickasha Transfer Station”), which is approximately 50 miles from WCA’s Pauls Valley Landfill. The Chickasha Transfer Station is fully permitted but is not currently in operation. The Company paid cash consideration of $1.875 million to IESI Corporation for all of the capital stock of IESI OK Corporation.
Stoughton Option and Operating Transaction
On February 15, 2011, the Company entered into (i) an operating agreement with Stoughton Recycling Technologies, LLC (SRT) and (ii) an option to purchase SRT. SRT is a commercial and demolition recycling facility and transfer station (the “SRT Business”) in Stoughton, Massachusetts. This facility is located three miles from the WCA-owned Champion City Recovery (CCR) transfer station and approximately 25 miles south of Boston, Massachusetts.
91
WCA WASTE CORPORATION
Notes to Consolidated Financial Statements — Continued
(dollars in thousands unless otherwise indicated)
In consideration for the purchase option and the operating agreement, the Company paid $3.0 million in cash and issued 406,669 shares of its common stock to SRT (the “SRT Stock Consideration”). The SRT Stock Consideration represented an agreed stock consideration amount of $2.0 million based on the average closing price of the Company’s common stock for the ten trading days ending on February 9, 2011. The term of the SRT purchase option runs to December 31, 2040, and can be exercised by WCA at any time upon 30 days’ prior notice to SRT. If the option is not exercised within the first six years, the Company is required to pay SRT an additional annual fee of $0.2 million to maintain its rights under the option agreement. To exercise the SRT purchase option, the Company is required to assume all outstanding indebtedness and other related obligations of SRT with respect to the SRT Business.
The Company will operate the SRT Business pursuant to the operating agreement until the purchase option is exercised or the option agreement terminates. Accordingly, the operating agreement is for a term of 30 years to match the term of the option agreement. Under the operating agreement, the Company is entitled to all revenues from the operation of the SRT Business and is obligated to pay all operating expenses. In addition, the Company will pay SRT a monthly management fee under the operating agreement.
SRT also owns a construction and demolition landfill adjacent to the SRT Business. Neither the operating agreement nor option agreement that entered into with SRT involves any aspect of the Stoughton landfill assets, business or operations. If the Company elects to exercise the purchase option, SRT is obligated to transfer the landfill to another person or entity and has agreed to indemnify and hold WCA harmless from any claims, liabilities or expenses associated with the Stoughton landfill.
Emerald Waste Central Florida Acquisition
On December 15, 2010, WCA and certain of its subsidiaries entered into an Equity Interest Purchase Agreement (the “Original Agreement”) with EWS Holdings, LLC, (EWS Holdings), WRH Gainesville, LLC (WRH Gainesville), WRH Gainesville Holdings, LLC (WRH Gainesville Holdings), WRH Orange City, LLC (WRH Orange City), EWS Central Florida Hauling, LLC (EWS CF), MacLand Holdings, Inc. (MacLand Holdings), MacLand Disposal Center, Inc. (MacLand I), MacLand Disposal Inc. II (MacLand II) and Emerald Waste Services, LLC (EWS and, together with WRH Gainesville, WRH Gainesville Holdings, WRH Orange City, EWS CF, MacLand I and MacLand II, the “Acquired Companies”). Pursuant to the Original Agreement, the WCA Parties were to acquire all of the outstanding equity interests of the Acquired Companies, which own and operate the MacLand I commercial and industrial municipal solid waste landfill and the MacLand II construction and demolition landfill located in Mississippi which services five counties in Mississippi and Alabama, and a transfer station and collection operations located in Central Florida which consist of 117 residential, commercial and roll-off routes servicing seven counties and 113,500 customers in the Gainesville, Orange City and Daytona Beach market areas. For further information regarding the Original Agreement refer to the Current Report on Form 8-K filed with the Securities Exchange Commission on December 20, 2010.
On February 28, 2011, the parties to the Original Agreement entered into an Amended and Restated Equity Purchase Agreement (the “Amended Purchase Agreement”). Pursuant to the Amended Purchase Agreement, the Company agreed to acquire the outstanding equity interests of WRH Gainesville, WRH Gainesville Holdings, WRH Orange City, EWS CF and EWS (the “Florida Companies”), thereby only acquiring the transfer station and collection operations located in Central Florida. In consideration for the Florida Companies, the Company agreed to pay $33.0 million in cash, a portion of which is to be used to pay all existing indebtedness of the Florida Companies, and 2,409,639 shares (the “Closing Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”). The Closing Shares represent an agreed stock consideration amount of $12.0 million based on the volume weighted average price of the Common Stock for the ten trading days ending on February 24, 2011.
The Company has evaluated subsequent events through the date the financial statements were issued.
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.
Item 9A. Controls and Procedures.
Effectiveness of Disclosure Controls and Procedures
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, 2010. 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, 2010 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, 2010. 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.
Management’s Report on Internal Control over Financial Reporting
Management’s report on our internal control over financial reporting can be found in Part II, Item 8 “Financial Statements and Supplementary Data” of this report. KPMG LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2010 as stated in their report, which appears in Item 8 of this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Forward looking statements regarding the effectiveness of internal controls during future periods are subject to the risk that controls may become inadequate because of change in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
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 2011 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 2011 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 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.
Item 11. Executive Compensation.
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 2011 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 2011 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 2011 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 2011 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 | Equity Interest and Asset Purchase Agreement dated December 9, 2009 among WCA Waste Corporation, WCA of Massachusetts, LLC, WCA of Ohio, LLC, Live Earth LLC, Champion City Recovery, LLC, Boxer Realty Redevelopment, LLC, Sunny Farms Landfill, LLC and New Amsterdam & Seneca Railroad Company, LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 15, 2009). | |
| 2.2 | Amended and Restated Equity Interest Purchase Agreement dated February 28, 2011 by and among WCA Waste Corporation, WCAWaste Systems, Inc., WCA of Mississippi, LLC, EWS Holdings, LLC, WRH Gainesville, LLC, WRH Gainesville Holdings, LLC, WRH Orange City, LLC, EWS Central Florida Hauling, LLC, MacLand Holdings, Inc., MacLand Disposal Center, Inc., MacLand Disposal Inc. II and Emerald Waste Services, LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on March 3, 2011). | |
| 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 4.2 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). |
Exhibit No. | Description | |
| 10.1+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, 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 May 20, 2010). | |
| 10.2+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, between WCA Management Company, L.P., WCA Waste Corporation and Jerome Kruszka (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on May 20, 2010). | |
| 10.3+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, 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 May 20, 2010). | |
| 10.4+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, 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 May 20, 2010). | |
| 10.5 | 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). | |
| 10.6 | 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). | |
| 10.7 | 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). | |
| 10.8 | 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). | |
| 10.9 | 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). | |
| 10.10 | 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). | |
| 10.11 | 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). | |
| 10.12 | 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). | |
| 10.13+ | Form of Stock Option Agreement under the Fourth 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). |
Exhibit No. | Description | |
| 10.14+ | Form of Executive Officer Restricted Stock Grant under the Fourth 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). | |
| 10.15 | Form of Non Employee Director Restricted Stock Grant under the Fourth 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). | |
| 10.16 | Form of Restricted Stock Grant under the Fourth 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). | |
| 10.17 | 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). | |
| 10.18 | 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). | |
| 10.19 | Tenth Amendment to Revolving Credit Agreement, dated December 31, 2009, 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 January 5, 2010). | |
| 10.20 | Registration Rights Agreement dated December 31, 2009 among WCA Waste Corporation and the individuals and entities named therein (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on January 5, 2010). | |
| 10.21 | Stockholders’ Agreement dated January 15, 2010 among WCA Waste Corporation, Joseph E. LoConti, Daniel J. Clark, Gregory J. Skoda Revocable Trust, and Patricia A. Skoda Revocable Trust (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 50808) filed with the SEC on January 15, 2010). | |
| 10.22 | Eleventh Amendment to Revolving Credit Agreement, dated February 17, 2009, 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 February 26, 2010). | |
| 10.23 | Twelfth Amendment to Revolving Credit Agreement, dated June 30, 2010, 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 July 6, 2010). | |
| 10.24 | Fourth Amended and Restated 2004 WCA Waste Corporation Incentive Plan, effective September 28, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on September 28, 2010). | |
| 10.25 | Registration Rights Agreement dated February 28, 2011 among WCA Waste Corporation and EWS Holdings, LLC (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on March 3, 2011). | |
| 10.26 | Stockholders’ Agreement dated February 28, 2011 among WCA Waste Corporation and EWS Holdings, LLC (incorporated by reference to Exhibit 10.3 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on March 3, 2011). | |
| 12.1* | Statement regarding computation of ratio of earnings to fixed charges for the year ended December 31, 2010. |
Exhibit No. | Description | |
| 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. | |
| 24.1* | Power of Attorney (included on signature page to this Form 10-K). | |
| 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. |
| * | Filed herewith. |
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 10, 2011
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 10, 2011 | ||
| Tom J. Fatjo, Jr. | and Chief Executive Officer (Principal Executive Officer) | |||
/s/ Jerome M. Kruszka | President, Chief Operating Officer | March 10, 2011 | ||
| Jerome M. Kruszka | and Director | |||
/s/ Charles A. Casalinova | Senior Vice President and Chief | March 10, 2011 | ||
| Charles A. Casalinova | Financial Officer (Principal Financial Officer) | |||
/s/ joseph J. Scarano, Jr. | Vice President and Controller | March 10, 2011 | ||
| Joseph J. Scarano, Jr. | (Principal Accounting Officer) | |||
/s/ Richard E. Bean | Director | March 10, 2011 | ||
| Richard E. Bean | ||||
/s/ Ryan Berry | Director | March 10, 2011 | ||
| Ryan Berry | ||||
/s/ Daniel J. Clark | Director | March 10, 2011 | ||
| Daniel J. Clark | ||||
/s/ Preston Moore, Jr. | Director | March 10, 2011 | ||
| Preston Moore Jr. | ||||
/s/ Roger A. Ramsey | Director | March 10, 2011 | ||
| Roger A. Ramsey | ||||
/s/ Jeffrey S. Serota | Director | March 10, 2011 | ||
| Jeffrey S. Serota | ||||
/s/ John V. Singleton | Director | March 10, 2011 | ||
| Honorable John V. Singleton |
Exhibit No. | Description | |
| 2.1 | Equity Interest and Asset Purchase Agreement dated December 9, 2009 among WCA Waste Corporation, WCA of Massachusetts, LLC, WCA of Ohio, LLC, Live Earth LLC, Champion City Recovery, LLC, Boxer Realty Redevelopment, LLC, Sunny Farms Landfill, LLC and New Amsterdam & Seneca Railroad Company, LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on December 15, 2009). | |
| 2.2 | Amended and Restated Equity Interest Purchase Agreement dated February 28, 2011 by and among WCA Waste Corporation, WCAWaste Systems, Inc., WCA of Mississippi, LLC, EWS Holdings, LLC, WRH Gainesville, LLC, WRH Gainesville Holdings, LLC, WRH Orange City, LLC, EWS Central Florida Hauling, LLC, MacLand Holdings, Inc., MacLand Disposal Center, Inc., MacLand Disposal Inc. II and Emerald Waste Services, LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on March 3, 2011). | |
| 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 4.2 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+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, 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 May 20, 2010). | |
| 10.2+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, between WCA Management Company, L.P., WCA Waste Corporation and Jerome Kruszka (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on May 20, 2010). | |
| 10.3+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, 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 May 20, 2010). | |
| 10.4+ | Amended and Restated Employment Agreement, effective as of January 1, 2010, 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 May 20, 2010). | |
| 10.5 | 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). | |
| 10.6 | 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). | |
| 10.7 | 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). | |
| 10.8 | 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). | |
| 10.9 | 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). | |
| 10.10 | 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). | |
| 10.11 | 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). | |
| 10.12 | 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). | |
| 10.13+ | Form of Stock Option Agreement under the Fourth 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). | |
| 10.14+ | Form of Executive Officer Restricted Stock Grant under the Fourth 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). | |
| 10.15 | Form of Non Employee Director Restricted Stock Grant under the Fourth 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). | |
| 10.16 | Form of Restricted Stock Grant under the Fourth 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). | |
| 10.17 | 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). | |
| 10.18 | 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). | |
| 10.19 | Tenth Amendment to Revolving Credit Agreement, dated December 31, 2009, 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 January 5, 2010). | |
| 10.20 | Registration Rights Agreement dated December 31, 2009 among WCA Waste Corporation and the individuals and entities named therein (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on January 5, 2010). | |
| 10.21 | Stockholders’ Agreement dated January 15, 2010 among WCA Waste Corporation, Joseph E. LoConti, Daniel J. Clark, Gregory J. Skoda Revocable Trust, and Patricia A. Skoda Revocable Trust (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 50808) filed with the SEC on January 15, 2010). | |
| 10.22 | Eleventh Amendment to Revolving Credit Agreement, dated February 17, 2009, 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 February 26, 2010). | |
| 10.23 | Twelfth Amendment to Revolving Credit Agreement, dated June 30, 2010, 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 July 6, 2010). | |
| 10.24 | Fourth Amended and Restated 2004 WCA Waste Corporation Incentive Plan, effective September 28, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on September 28, 2010). | |
| 10.25 | Registration Rights Agreement dated February 28, 2011 among WCA Waste Corporation and EWS Holdings, LLC (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on March 3, 2011). | |
| 10.26 | Stockholders’ Agreement dated February 28, 2011 among WCA Waste Corporation and EWS Holdings, LLC (incorporated by reference to Exhibit 10.3 to the registrant’s Form 8-K (File No. 000-50808) filed with the SEC on March 3, 2011). | |
| 12.1* | Statement regarding computation of ratio of earnings to fixed charges for the year ended December 31, 2010. | |
| 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. | |
| 24.1* | Power of Attorney (included on signature page to this Form 10-K). | |
| 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. |
| * | Filed herewith. |
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.