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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 2002
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: 1-14267
REPUBLIC SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 65-0716904
(State of Incorporation) (Irs Employer Identification No.)
110 S.E. 6TH STREET, 28TH FLOOR
FT. LAUDERDALE, FLORIDA 33301
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 769-2400
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On May 8, 2002, the registrant had outstanding 166,197,656 shares of Common
Stock, par value $.01 per share.
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REPUBLIC SERVICES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
2002 (Unaudited) and December 31, 2001...................... 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2002 and 2001......... 4
Unaudited Condensed Consolidated Statement of Stockholders'
Equity and Comprehensive Income for the Three Months
Ended March 31, 2002....................................... 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2002 and 2001.......... 6
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 26
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.............................. 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPUBLIC SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 48.5 $ 16.1
Accounts receivable, less allowance for doubtful accounts
of $19.2 and $19.0, respectively ......................... 224.0 232.9
Prepaid expenses and other current assets ................... 79.4 75.8
-------- --------
Total Current Assets .............................. 351.9 324.8
RESTRICTED CASH ............................................... 135.2 142.3
PROPERTY AND EQUIPMENT, NET ................................... 1,766.8 1,774.9
INTANGIBLE ASSETS, NET ........................................ 1,549.8 1,551.6
OTHER ASSETS .................................................. 68.3 62.7
-------- --------
$3,872.0 $3,856.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................ $ 79.3 $ 90.2
Accrued liabilities ......................................... 110.5 101.1
Amounts due to former owners ................................ 5.8 6.0
Deferred revenue ............................................ 77.1 72.8
Notes payable and current maturities of long-term debt ...... 3.5 33.6
Other current liabilities ................................... 99.2 82.7
-------- --------
Total Current Liabilities ......................... 375.4 386.4
LONG-TERM DEBT, NET OF CURRENT MATURITIES ..................... 1,334.8 1,334.1
ACCRUED ENVIRONMENTAL AND LANDFILL COSTS ...................... 224.0 219.4
DEFERRED INCOME TAXES ......................................... 127.1 118.7
OTHER LIABILITIES ............................................. 43.8 41.8
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 50,000,000
shares authorized; none issued ........................... -- --
Common stock, par value $.01 per share; 750,000,000 shares
authorized; 178,947,850 and 178,858,274 issued, including
shares held in treasury, respectively .................... 1.8 1.8
Additional paid-in capital .................................. 1,266.1 1,264.7
Retained earnings ........................................... 696.0 641.1
Treasury stock, at cost (11,897,900 and 9,213,600 shares,
respectively) ............................................ (196.6) (150.1)
Accumulated other comprehensive loss, net of tax ........... (.4) (1.6)
-------- --------
Total Stockholders' Equity ........................ 1,766.9 1,755.9
-------- --------
$3,872.0 $3,856.3
======== ========
The accompanying notes are an integral part of these statements
3
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Three Months Ended
March 31,
---------------------------
2002 2001
--------- ---------
REVENUE .................................. $ 551.9 $ 535.4
EXPENSES:
Cost of operations ..................... 342.0 329.7
Depreciation, amortization and depletion 44.4 50.3
Selling, general and administrative .... 58.6 56.5
------- -------
OPERATING INCOME ......................... 106.9 98.9
INTEREST EXPENSE ......................... (19.2) (20.9)
INTEREST INCOME .......................... .7 .7
OTHER INCOME (EXPENSE), NET .............. .1 1.3
------- -------
INCOME BEFORE INCOME TAXES ............... 88.5 80.0
PROVISION FOR INCOME TAXES ............... 33.6 30.4
------- -------
NET INCOME ............................... $ 54.9 $ 49.6
======= =======
BASIC AND DILUTED EARNINGS PER SHARE ..... $ .32 $ .29
======= =======
WEIGHTED AVERAGE DILUTED COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING ............................ 169.1 171.8
======= =======
The accompanying notes are an integral part of these statements.
4
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in millions)
Accumu-
Common Stock lated Compre-
-------------- Additional Compre- hensive
Shares, Par Paid-in Retained Treasury hensive Income for
Net Value Capital Earnings Stock Loss the Period
------- ------ ----------- -------- -------- ------ --------
BALANCE AT DECEMBER 31, 2001 .................. 169.6 $ 1.8 $ 1,264.7 $ 641.1 $ (150.1) $ (1.6)
Net income ................................... -- -- -- 54.9 -- -- $ 54.9
Issuance of common stock ..................... .1 -- 1.4 -- -- -- --
Purchase of common stock for treasury ........ (2.7) -- -- -- (46.5) -- --
Change in value of derivative instruments, net
of tax ...................................... -- -- -- -- -- 1.2 1.2
----- ------ ---------- -------- -------- ------ --------
BALANCE AT MARCH 31, 2002 ..................... 167.0 $ 1.8 $ 1,266.1 $ 696.0 $ (196.6) $ (.4) $ 56.1
===== ====== ========== ======== ======== ====== ========
The accompanying notes are an integral part of this statement.
5
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Three Months Ended
March 31,
----------------------
2002 2001
------ ------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income .............................................. $ 54.9 $ 49.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and depletion of property
and equipment ...................................... 42.1 39.3
Amortization of intangible and other assets .......... 2.3 11.0
Deferred tax provision ............................... 8.4 6.0
Provision for doubtful accounts ...................... 3.5 3.8
Other non-cash charges ............................... .1 .1
Changes in assets and liabilities, net of effects from
business acquisitions:
Accounts receivable ................................ 5.4 (9.8)
Prepaid expenses and other assets .................. (6.5) 10.0
Accounts payable and accrued liabilities ........... (9.3) (43.6)
Other liabilities .................................. 33.7 19.8
------ ------
134.6 86.2
------ ------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (37.6) (39.2)
Proceeds from sale of property and equipment ............ 3.9 2.2
Cash used in business acquisitions, net of cash
acquired ............................................. (4.2) (7.4)
Cash proceeds from business dispositions ................ 5.0 3.5
Amounts due and contingent payments to former owners .... (.2) (29.0)
Restricted cash ......................................... 7.0 19.9
------ ------
(26.1) (50.0)
------ ------
CASH USED IN FINANCING ACTIVITIES:
Payments of notes payable and long-term debt ............ (.8) (4.4)
Net payments on revolving credit facility ............... (30.0) 6.0
Issuance of common stock ................................ 1.2 4.9
Purchases of common stock for treasury .................. (46.5) (25.2)
Purchase of common stock to fund employee benefit plan .. -- (.1)
------ ------
(76.1) (18.8)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS .................... 32.4 17.4
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......... 16.1 2.0
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 48.5 $ 19.4
====== ======
The accompanying notes are an integral part of these statements.
6
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data)
1. BASIS OF PRESENTATION
Republic Services, Inc. (together with its subsidiaries, the "Company") is a
leading provider of non-hazardous solid waste collection and disposal services
in the United States.
The accompanying Unaudited Condensed Consolidated Financial Statements
include the accounts of the Company and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
All significant intercompany accounts and transactions have been eliminated.
Certain information related to the Company's organization, significant
accounting policies and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. In the opinion of
management, these Unaudited Condensed Consolidated Financial Statements reflect
all material adjustments (which include only normal recurring adjustments)
necessary to fairly state the financial position and the results of operations
for the periods presented, and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim periods are
not necessarily indicative of the results that can be expected for a full year.
These interim financial statements should be read in conjunction with the
Company's audited Consolidated Financial Statements and notes thereto appearing
in the Company's Form 10-K for the year ended December 31, 2001.
The Unaudited Condensed Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
and necessarily include amounts based on estimates and assumptions made by
management. Actual results could differ from these amounts. Significant items
subject to such estimates and assumptions include the depletion and amortization
of landfill development costs, accruals for closure and post-closure costs,
valuation allowances for accounts receivable, liabilities for potential
litigation, claims and assessments, and liabilities for environmental
remediation, deferred taxes and self-insurance.
During the fourth quarter of 2001, the Company recorded a charge of $86.1
million on an after-tax basis, or $132.0 million on a pre-tax basis, related to
completed and planned divestitures and closings of certain core and non-core
businesses, asset impairments, downsizing its compost, mulch and soil business
and related inventory adjustments, an increase in insurance reserves and an
increase in bad debt expense related to the economic slowdown. As of March 31,
2002, the Company was still in the process of divesting and closing certain core
and non-core operations pursuant to the plan adopted by management during the
fourth quarter of 2001. Management believes that the estimated charges recorded
during the fourth quarter of 2001 related to its planned divestitures and
closings are still appropriate.
During the three months ended March 31, 2002, the Company recorded
unrealized gains of $2.2 million ($1.3 million, net of tax), relating to the
change in fair value of its fuel hedge option agreements in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended. (For further
information, see Note 10, Fuel Hedge.) The effective portion of the unrealized
gain in the amount of $1.2 million, net of tax, was recorded to comprehensive
income during the three months ended March 31, 2002. The Company had no other
components of other comprehensive income (loss) for the periods presented.
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). In accordance with SFAS 142, the Company ceased amortizing intangibles
with indefinite lives effective January 1, 2002.
7
The following table summarizes the adjustments to net income and earnings
per share if SFAS 142 were adopted on January 1, 2001:
Three Months Ended
March 31,
----------------------
2002 2001
------ ------
Reported net income ......................... $ 54.9 $ 49.6
Goodwill amortization, net of tax ........... -- 6.0
------ ------
Adjusted net income ......................... $ 54.9 $ 55.6
====== ======
Reported basic and diluted earnings per share $ .32 $ .29
Goodwill amortization, net of tax ........... -- .03
------ ------
Adjusted basic and diluted earnings per share $ .32 $ .32
====== ======
The Company adopted Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 144") as of January 1, 2002. This statement supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121") and APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This statement establishes a single accounting model
for assets to be disposed of by sale and resolves certain SFAS 121
implementation issues. The adoption of this statement had no effect on the
Company's consolidated financial position or results of operations.
Certain amounts in the 2001 Condensed Consolidated Financial Statements have
been reclassified to conform to the 2002 presentation.
2. LANDFILL AND ENVIRONMENTAL COSTS
Life Cycle Accounting
The Company uses life cycle accounting and the units-of-consumption method
to recognize certain landfill costs. In life cycle accounting, all costs to
acquire, construct, close and maintain a site during the post-closure period are
capitalized or accrued and charged to expense based upon the consumption of
cubic yards of available airspace. Costs and airspace estimates are developed
annually by independent engineers together with the Company's engineers. These
estimates are used by the Company's operating and accounting personnel to
annually adjust the Company's rates used to expense capitalized costs and accrue
closure and post-closure costs. Changes in these estimates primarily relate to
changes in available airspace, inflation rates and applicable regulations.
Changes in available airspace include changes due to the addition of airspace
lying in expansion areas deemed likely to be permitted.
Total Available Disposal Capacity
As of March 31, 2002, the Company owned or operated 54 solid waste landfills
with total available disposal capacity of approximately 1.7 billion in-place
cubic yards. Total available disposal capacity represents the sum of estimated
permitted airspace plus an estimate of airspace which is likely to be permitted.
Likely to be Permitted Expansion Airspace
Before airspace included in an expansion area is determined as likely to be
permitted and, therefore, included in the Company's calculation of total
available disposal capacity, the following criteria must be met:
1. The land associated with the expansion airspace is either owned by the
Company or is controlled by the Company pursuant to an option agreement;
8
2. The Company is committed to supporting the expansion project financially
and with appropriate resources;
3. There are no identified fatal flaws or impediments associated with the
project, including political impediments;
4. Progress is being made on the project;
5. The expansion is attainable within a reasonable time frame; and
6. The Company believes it is likely the expansion permit will be received.
Upon meeting the Company's expansion criteria, the rates used at each
applicable landfill to expense costs to acquire, construct, close and maintain a
site during the post-closure period are adjusted to include likely to be
permitted airspace and all additional costs to be capitalized or accrued
associated with the expansion airspace.
The Company has identified three sequential steps that landfills generally
follow to obtain expansion permits. These steps are as follows:
1. Obtaining approval from local authorities;
2. Submitting a permit application with state authorities; and
3. Obtaining permit approval from state authorities.
Once a landfill meets the Company's expansion criteria, management
continuously monitors each site's progress in obtaining the expansion permit. If
at any point it is determined that an expansion area no longer meets the
required criteria, the likely to be permitted airspace is removed from the
landfill's total available capacity and the rates used at the landfill to
expense costs to acquire, construct, close and maintain a site during the
post-closure period are adjusted accordingly. The Company has never been denied
an expansion permit for a landfill that included likely to be permitted airspace
in its total available disposal capacity, although no assurances can be made
that all future expansions will be permitted as designed.
Capitalized Landfill Costs
Capitalized landfill costs include expenditures for land, permitting costs,
cell construction costs and environmental structures. Capitalized permitting and
cell construction costs are limited to direct costs relating to these
activities, including legal, engineering and construction associated with
excavation, liners and site berms. Interest is capitalized on landfill
construction projects while the assets are undergoing activities to ready them
for their intended use.
Costs related to acquiring land, excluding the estimated residual value of
unpermitted land, and costs related to permitting and cell construction are
depleted as airspace is consumed using the units-of-consumption method.
Environmental structures, which include leachate and methane collection systems,
and groundwater monitoring wells, are charged to expense over the shorter of
their useful life or the life of the landfill.
Capitalized landfill costs may also include an allocation of purchase price
paid for landfills. For landfills purchased as part of a group of several
assets, the purchase price assigned to the landfill is determined based upon the
discounted future expected cash flows of the landfill relative to the other
assets within the group. If the landfill meets the Company's expansion criteria,
the purchase price is further allocated between permitted airspace and expansion
airspace based upon the ratio of permitted versus likely to be permitted
airspace to total available airspace. Landfill purchase price is amortized using
the units-of-consumption method over the total available airspace including
likely to be permitted airspace where appropriate.
9
Closure and Post-Closure Costs
Landfill site closure and post-closure costs include estimated costs to be
incurred for final closure of the landfills and estimated costs for providing
required post-closure monitoring and maintenance of landfills. These costs are
accrued and charged to cost of operations based upon consumed airspace in
relation to total available disposal capacity using the units-of-consumption
method. The Company estimates future cost requirements for closure and
post-closure monitoring and maintenance for its solid waste facilities based on
the technical standards of the Environmental Protection Agency's Subtitle D
regulations and applicable state and local regulations. These estimates do not
take into account discounts for the present value of total estimated costs.
Accruals for closure and post-closure costs totaled approximately $5.5 million
and $4.7 million during the three months ended March 31, 2002 and 2001,
respectively.
A number of the Company's landfills were acquired from other entities and
recorded using the purchase method of accounting. Accordingly, the Company
assessed and recorded a closure and post-closure liability as of the date the
landfill was acquired based upon the estimated total closure and post-closure
costs and the percentage of total available disposal capacity utilized as of
such date. Thereafter, the difference between the closure and post-closure costs
accrued and the total estimated closure and post-closure costs to be incurred
are accrued and charged to expense as airspace is consumed. Estimated aggregate
closure and post-closure costs will be fully accrued for the Company's landfills
at the time such facilities cease to accept waste and are closed. As of March
31, 2002, assuming that all available landfill capacity is used, the Company
expects to expense approximately $554.0 million of such costs over the remaining
lives of these facilities.
Environmental Costs
In the normal course of business, the Company is subject to ongoing
environmental monitoring and reporting to certain regulatory agencies.
Environmental costs are accrued by the Company through a charge to income in the
period such liabilities become probable and can be reasonably estimated. No
material amounts were charged to expense during the three months ended March 31,
2002 and 2001.
3. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, while maintenance and repairs are
charged to expense as incurred. Expenditures for rebuilding certain heavy
equipment are capitalized if the annual adjusted depreciation expense after the
rebuild is not in excess of annual depreciation expense on a new piece of
similar equipment and certain other criteria are met. Rebuilds for heavy
equipment not meeting this criteria and rebuilds on the Company's vehicles are
charged to expense as incurred. When property is retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in the Unaudited Condensed
Consolidated Statements of Operations.
The Company revises the estimated useful lives of property and equipment
acquired through business acquisitions to conform with its policies regarding
property and equipment. Depreciation is provided over the estimated useful lives
of the assets involved using the straight-line method. The estimated useful
lives are twenty to forty years for buildings and improvements, five to ten
years for vehicles, seven to ten years for most landfill equipment, five to
fifteen years for all other equipment, and five to ten years for furniture and
fixtures.
Landfills and landfill improvements are stated at cost and include direct
costs incurred to obtain a landfill permit and direct costs incurred to
construct and develop the site. These costs are depleted based on consumed
airspace. All indirect landfill development costs are expensed as incurred. (For
further information, see Note 2, Landfill and Environmental Costs.)
The Company capitalizes interest on landfill cell construction and other
construction projects in accordance with Statement of Financial Accounting
Standards No. 34, "Capitalization of Interest Cost." Construction projects must
meet the following criteria before interest is capitalized:
10
1. Total construction costs are $50,000 or greater,
2. The construction phase is one month or longer, and
3. The assets have a useful life of one year or longer.
Interest is capitalized on qualified assets while they undergo activities to
ready them for their intended use. Capitalization of interest ceases once an
asset is placed into service or if construction activity is suspended for more
than a brief period of time. The interest capitalization rate is based upon the
Company's weighted average cost of indebtedness. Interest capitalized was $.4
million and $.3 million for the three months ended March 31, 2002 and 2001,
respectively.
A summary of property and equipment is as follows:
March 31, December 31,
2002 2001
-------- ------------
Other land .................................. $ 98.3 $ 94.3
Non-depletable landfill land ................ 51.3 50.5
Landfill development costs .................. 960.0 958.8
Vehicles and equipment ...................... 1,176.3 1,153.2
Buildings and improvements .................. 268.4 256.4
Construction-in-progress-landfill ........... 16.5 17.6
Construction-in-progress-other .............. 10.4 23.5
-------- --------
2,581.2 2,554.3
-------- --------
Less: Accumulated depreciation, depletion and
amortization --
Landfill development costs ................ (250.6) (237.0)
Vehicles and equipment .................... (515.5) (495.7)
Building and improvements ................. (48.3) (46.7)
-------- --------
(814.4) (779.4)
-------- --------
Property and equipment, net ................. $1,766.8 $1,774.9
======== ========
The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of property and
equipment or whether the remaining balance of property and equipment should be
evaluated for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the property and equipment in
assessing their recoverability. The Company measures impairment loss as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset.
4. BUSINESS COMBINATIONS
The Company uses the purchase method of accounting to account for business
acquisitions. The Company acquired various solid waste businesses during the
three months ended March 31, 2002 and 2001. The aggregate purchase price paid by
the Company in these transactions was $4.2 million and $7.4 million in cash,
respectively.
During the three months ended March 31, 2001, $20.2 million of the total
purchase price paid for acquisitions and contingent payments to former owners
was allocated to landfill airspace. These allocations were based on the
discounted expected future cash flow of each landfill relative to other assets
within the acquired group, if applicable, and were adjusted for other
non-depletable landfill assets and liabilities acquired (primarily closure and
post-closure liabilities). Landfill purchase price is amortized using the
units-of-consumption method over total available airspace, which includes likely
to be permitted airspace where appropriate.
11
The following summarizes the preliminary purchase price allocations for
business combinations accounted for under the purchase method of accounting
consummated during the periods presented:
Three Months
Ended March 31,
--------------------
2002 2001
------ ------
Property and equipment .......................... $ .9 $ 2.1
Cost in excess of net assets acquired ........... 3.1 5.7
Working capital surplus (deficit) ............... .2 (.4)
------ ------
Cash used in acquisitions, net of cash acquired $ 4.2 $ 7.4
====== ======
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of the cost of acquired
businesses in excess of the fair value of net assets acquired ("goodwill") and
other intangible assets. Other intangible assets include values assigned to
long-term contracts and covenants not to compete and are amortized generally
over periods ranging from 3 to 25 years.
The following table summarizes the activity in the intangible asset and
related accumulated amortization accounts for the three months ended March 31,
2002:
Gross Intangible Assets
-------------------------------------------
Goodwill Other Total
-------- ------ --------
Balance, December 31, 2001 $1,661.7 $ 57.1 $1,718.8
Acquisitions ........... 3.1 -- 3.1
Other additions ........ -- .6 .6
Divestitures ........... (3.8) -- (3.8)
Retirements ............ -- (4.6) (4.6)
-------- ------ --------
Balance, March 31, 2002 .. $1,661.0 $ 53.1 $1,714.1
======== ====== ========
Accumulated Amortization
-------------------------------------------
Goodwill Other Total
-------- ------ --------
Balance, December 31, 2001 $ (142.4) $(24.8) $(167.2)
Amortization expense ... -- (1.9) (1.9)
Divestitures ........... .2 -- .2
Retirements ............ -- 4.6 4.6
-------- ------ --------
Balance, March 31, 2002 .. $ (142.2) $(22.1) $(164.3)
======== ====== ========
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). In accordance with SFAS 142, the Company ceased amortizing intangibles
with indefinite lives effective January 1, 2002.
SFAS 142 requires the Company upon its adoption and at least annually
thereafter to reassess the value of, and useful lives assigned to, intangible
assets including goodwill to determine whether the value of one or more
intangible assets is impaired. The first step of this impairment test requires
the Company to determine the fair value of the reporting unit, as defined by
SFAS 142, and compare it to the carrying value of the net assets allocated to
the reporting unit. If this fair value exceeds the carrying value, no further
analysis is required. If fair value of the reporting unit is less than the
carrying value of the net assets, the Company must perform step two of the
impairment test, which requires the Company to allocate the implied fair value
of the reporting unit to all underlying assets and liabilities, including both
recognized and unrecognized tangible and intangible assets, based on their fair
value. Impairment charges resulting from the application of this test would be
immediately recorded as a charge to earnings in the Company's statements of
operations.
During the three months ended March 31, 2002, the Company completed its
impairment test in accordance with SFAS 142 and determined that the fair value
of its reporting unit significantly exceeds its carrying value. As a result, no
impairment charge was required.
12
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
March 31, December 31,
2002 2001
-------- ------------
$225.0 million unsecured notes, net of unamortized discount of $.5 million,
and including $1.2 million and ($.2) million adjustments to fair market
value, respectively; interest payable semi-annually in May and November at
6 5/8%; principal due at maturity in 2004 ............................... $ 225.7 $ 224.3
$375.0 million unsecured notes, net of unamortized discount of $.4 million
and $.5 million; interest payable semi -annually in May and November at
7 1/8%; principal due at maturity in 2009 ................................ 374.6 374.5
$450.0 million unsecured notes, net of unamortized discount of $2.5 million
and $2.6 million; interest payable semi-annually in February and August
at 6 3/4%; principal due at maturity in 2011 ............................. 447.5 447.4
$750.0 million unsecured revolving credit facility; interest payable using
LIBOR-based rates; $300.0 million matures July 2002 and $450.0 million
matures 2003 ............................................................. -- --
Tax-exempt bonds and other tax-exempt financing; interest rates that float
based on prevailing market rates ......................................... 283.2 283.2
Other debt; unsecured and secured by real property,
equipment and other assets ............................................... 7.3 38.3
-------- --------
1,338.3 1,367.7
Less: Current portion ...................................................... (3.5) (33.6)
-------- --------
$1,334.8 $1,334.1
======== ========
In February 2002, the Company reduced the short- and long-term portions of
its revolving credit facility to $300.0 million and $450.0 million,
respectively. As of March 31, 2002, the Company had $438.2 million of
availability under its revolving credit facility.
As of March 31, 2002, the Company had $135.2 million of restricted cash, of
which $110.2 million were proceeds from the issuance of tax-exempt bonds and
other tax-exempt financing that will be used to fund capital expenditures.
Restricted cash also includes amounts held in trust as a guarantee of the
Company's performance.
Interest expense paid was $16.7 million (net of $.4 million of capitalized
interest) and $11.6 million (net of $.3 million of capitalized interest) for the
three months ended March 31, 2002 and 2001, respectively. The Company's ability
to obtain financing through the capital markets is a key component of its
financial strategy. Historically, the Company has managed risk associated with
executing this strategy, particularly as it relates to fluctuations in interest
rates, by using a combination of fixed and floating rate debt. During 2001, the
Company also entered into interest rate swap agreements to manage risk
associated with fluctuations in interest rates and to take advantage of
favorable floating interest rates. The swap agreements have a total notional
value of $225.0 million and mature in 2004, coterminous with the Company's
public notes that were sold in 1999. Under the swap agreements, the Company pays
interest at floating rates based on changes in LIBOR and receives interest at a
fixed rate of 6 5/8%. The Company has designated these agreements as hedges in
changes in the fair value of the Company's fixed-rate debt and accounts for them
in accordance with SFAS 133.
As of March 31, 2002, interest rate swap agreements are reflected at fair
market value of $1.2 million and are included in other assets and as an
adjustment to long-term debt in the accompanying Unaudited Condensed
Consolidated Balance Sheets. During the three months ended March 31, 2002, the
Company recorded net interest income of $1.3 million related to its interest
rate swap agreements which is included in interest expense in the accompanying
Unaudited Condensed Consolidated Statements of Operations.
7. INCOME TAXES
Income taxes have been provided for the three months ended March 31, 2002
and 2001 based upon the Company's anticipated annual effective income tax rate
of 38.0%. Income taxes paid were $.6 million and $14.2 million for the three
months ended March 31, 2002 and 2001, respectively.
13
8. STOCK OPTIONS
In July 1998, the Company adopted the 1998 Stock Incentive Plan ("Stock
Incentive Plan") to provide for grants of options to purchase shares of common
stock to employees, non-employee directors and independent contractors of the
Company who are eligible to participate in the Stock Incentive Plan. Options
granted under the Stock Incentive Plan are non-qualified and are granted at a
price equal to the fair market value of the Company's common stock at the date
of grant. Generally, options granted have a term of ten years from the date of
grant, and vest in increments of 25% per year over a four year period beginning
on the first anniversary date of the grant. Options granted to non-employee
directors have a term of ten years and are fully vested at the grant date. The
Company has reserved 20.0 million shares of common stock for issuance pursuant
to options granted under the Stock Incentive Plan. As of March 31, 2002, 2.3
million options remain available for future grants.
A summary of stock option transactions for the three months ended March 31,
2002 is as follows:
Weighted-average
Shares Exercise Price
------ ----------------
Options outstanding at beginning of year 12.4 $ 16.22
Granted ................................ 2.2 17.40
Exercised .............................. (.1) 13.77
Cancelled .............................. (.1) 15.72
---- -------
Options outstanding at March 31, 2002 .. 14.4 $ 16.41
==== =======
Options exercisable at March 31, 2002 .. 8.4 $ 16.96
==== =======
9. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
During 2000, the Company announced that its Board of Directors authorized
the repurchase of up to $150.0 million of its common stock. In October 2001, the
Company announced that its Board of Directors authorized the repurchase of up to
an additional $125.0 million of its common stock. As of March 31, 2002, the
Company had repurchased 11.9 million shares of its stock for $196.6 million, of
which 2.7 million shares were acquired during the three months ended March 31,
2002 for $46.5 million.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is based on the combined weighted average number of common shares and
common share equivalents outstanding which include, where appropriate, the
assumed exercise of employee stock options. In computing diluted earnings per
share, the Company utilizes the treasury stock method.
Earnings per share for the three months ended March 31, 2002 and 2001 is
calculated as follows (in thousands, except per share data):
Three Months
Ended March 31,
--------------------------
2002 2001
-------- --------
Numerator:
Net income ................................ $ 54,900 $ 49,600
======== ========
Denominator:
Denominator for basic earnings per share .. 168,094 171,185
Effect of dilutive securities-- Options to
purchase common stock .................... 956 606
-------- --------
Denominator for diluted earnings per share 169,050 171,791
======== ========
Basic and diluted earnings per share ..... $ .32 $ .29
======== ========
Antidilutive securities not included in the
diluted earnings per share calculation:
Options to purchase common stock ......... 2,604 9,967
Weighted average exercise price .......... $ 18.90 $ 17.88
14
10. FUEL HEDGE
The Company's results of operations are impacted by changes in the price of
diesel fuel. Because the market for derivatives in diesel fuel is limited, the
Company has entered into heating oil option agreements to manage a portion of
its exposure to fluctuations in diesel prices. The Company has minimized its
credit risk by entering into such heating oil option agreements with a group of
financial institutions having investment grade ratings. The Company's option
agreements qualify for hedge accounting treatment under SFAS 133. In order to
qualify for hedge accounting, certain criteria must be met including a
requirement that both at inception of the hedge, and on an ongoing basis, the
hedging relationship is expected to be highly effective in offsetting cash flows
attributable to the hedged risk during the term of the hedge.
Under these option agreements, the Company receives or makes payments based
on the difference between actual average heating oil prices and predetermined
fixed prices. These option agreements provide the Company protection from fuel
prices rising above a predetermined fixed price in the option agreements but
also limit the Company's ability to benefit from price decreases below the
predetermined fixed price in the option agreements.
In accordance with SFAS 133, to the extent the option agreements are
effective in hedging changes in diesel fuel prices, unrealized gains and losses
on these option agreements are recorded, net of tax, in stockholders' equity as
a component of accumulated other comprehensive income. To the extent the change
in the option agreements does not perfectly offset the change in value of diesel
fuel purchases being hedged, SFAS 133 requires the ineffective portion of the
hedge to immediately be recognized as other income or expense. The effectiveness
of these option agreements as a hedge against future purchases of diesel fuel is
periodically evaluated. If the option agreements were to become other than
highly effective, gains and or losses would be recognized currently in income.
Realized gains and losses on these option agreements are recognized as a
component of fuel expense in the period in which the corresponding fuel is
purchased.
During June 2001, the Company entered into option agreements for
approximately 14.3 million gallons of heating oil. These option agreements
settle each month in equal notional amounts through December 2002. The option
agreements were structured as zero-cost collars indexed to the price of heating
oil. The fair value of these option agreements at March 31, 2002 was determined
by third parties to be a gain of approximately $2.2 million ($1.3 million, net
of tax). In accordance with SFAS 133, $1.2 million, representing the effective
portion of the change in fair value for the three months ended March 31, 2002,
net of tax, has been recorded in stockholders' equity as a component of
accumulated other comprehensive income. The ineffective portion of the change in
fair value was a gain of approximately $.1 million for the three months ended
March 31, 2002, and has been included in other income (expense), net in the
accompanying Unaudited Condensed Consolidated Statements of Operations. Realized
losses of $.6 million related to these option agreements are included in cost of
operations in the Company's Unaudited Condensed Consolidated Statements of
Operations for the three months ended March 31, 2002.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is a party to various general legal proceedings which 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 periods in which they are resolved.
15
Lease Commitments
The Company and its subsidiaries lease real property, equipment and software
under various other operating leases with terms from one to twenty-five years.
In December 1999, the Company entered into an operating lease facility
established to finance the acquisition of operating equipment. As of March 31,
2002, $76.3 million was outstanding under this facility.
Liability Insurance
The Company carries general liability, vehicle liability, employment
practices liability, pollution liability, directors and officers liability,
workers compensation and employer's liability coverage, as well as umbrella
liability policies to provide excess coverage over the underlying limits
contained in these primary policies. The Company also carries property
insurance.
The Company's insurance programs for worker's compensation, general
liability, vehicle liability and employee-related health care benefits are
effectively self-insured. Claims in excess of self-insurance levels are fully
insured. Accruals are based on claims filed and estimates of claims incurred but
not reported.
The Company's liabilities for unpaid and incurred but not reported claims at
March 31, 2002 were $61.2 million and are included in other current and other
liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets.
While the ultimate amount of claims incurred is dependent on future
developments, in management's opinion, recorded reserves are adequate to cover
the future payment of claims. However, it is reasonably possible that recorded
reserves may not be adequate to cover the future payment of claims. Adjustments,
if any, to estimates recorded resulting from ultimate claim payments will be
reflected in operations in the periods in which such adjustments are known.
Other Matters
In the normal course of business, the Company is required by regulatory
agencies and municipalities to post performance bonds, letters of credit and/or
cash deposits as a financial guarantee of the Company's performance. At March
31, 2002, letters of credit totaling $311.8 million were outstanding and surety
bonds totaling $672.0 million were outstanding, which will expire on various
dates through 2007. In addition, at March 31, 2002, the Company had $135.2
million of restricted cash deposits held as financial guarantees as well as
funds restricted for capital expenditures under certain debt facilities.
The Company's business activities are conducted in the context of a
developing and changing statutory and regulatory framework. Governmental
regulation of the waste management industry requires the Company to obtain and
retain numerous governmental permits to conduct various aspects of its
operations. These permits are subject to revocation, modification or denial. The
costs and other capital expenditures which may be required to obtain or retain
the applicable permits or comply with applicable regulations could be
significant. Any revocation, modification or denial of permits could have a
material adverse effect on the Company.
Through the date of the Company's initial public offering in July 1998, the
Company filed consolidated federal income tax returns with AutoNation, Inc. The
Internal Revenue Service is auditing AutoNation's consolidated tax returns for
fiscal years 1995 through 1999. In accordance with the Company's tax sharing
agreement with AutoNation, the Company may be liable for certain assessments
imposed by the Internal Revenue Service for the periods through June 1998,
resulting from this audit. Management believes that the tax liabilities recorded
are adequate. However, a significant assessment in excess of liabilities
recorded against the Company could have a material adverse effect on the
Company's financial position, results of operations or cash flows.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto included under
Item 1. In addition, reference should be made to our audited Consolidated
Financial Statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing in our Form
10-K for the year ended December 31, 2001.
Our Business
We are a leading provider of non-hazardous solid waste collection and
disposal services in the United States. We provide solid waste collection
services for commercial, industrial, municipal and residential customers through
145 collection companies in 22 states. We also own or operate 90 transfer
stations and 54 solid waste landfills.
We generate revenue primarily from our solid waste collection operations.
Our remaining revenue is obtained from landfill disposal services and other
services, including recycling, remediation and composting operations.
The following table reflects our total revenue by source for the three
months ended March 31, 2002 and 2001 (in millions):
Three Months Ended
March 31,
---------------------------------------------------
2002 2001
---------------------- --------------------
Collection:
Residential ................... $124.6 22.5% $113.1 21.1%
Commercial .................... 171.1 31.0 168.6 31.5
Industrial .................... 117.9 21.4 122.4 22.9
Other ......................... 12.1 2.2 11.3 2.1
------ ----- ------ -----
Total collection ...... 425.7 77.1 415.4 77.6
Transfer and disposal ........... 187.1 175.2
Less: Intercompany .............. (97.3) (93.5)
------ -----
Transfer and disposal, net..... 89.8 16.3 81.7 15.3
Other ........................... 36.4 6.6 38.3 7.1
------ ----- ------ -----
Total revenue ......... $551.9 100.0% $535.4 100.0%
====== ===== ====== =====
Our revenue from collection operations consists of fees we receive from
commercial, industrial, municipal and residential customers. Our residential and
commercial collection operations in some markets are based on long-term
contracts with municipalities. We generally provide industrial and commercial
collection services to individual customers under contracts with terms up to
three years. Our revenue from landfill operations is from disposal or tipping
fees charged to third parties. In general, we integrate our recycling operations
with our collection operations and obtain revenue from the sale of recyclable
materials. No one customer has individually accounted for more than 10% of our
consolidated revenue in any of the periods presented.
The cost of our collection operations is primarily variable and includes
disposal, labor, fuel and equipment maintenance costs. We seek operating
efficiencies by controlling the movement of waste streams from the point of
collection through disposal. During the three months ended March 31, 2002 and
2001, approximately 53% and 52%, respectively, of the total volume of waste we
collected was disposed of at our landfills.
17
Our landfill cost of operations includes daily operating expenses, costs of
capital for cell development, accruals for closure and post-closure costs, and
the legal and administrative costs of ongoing environmental compliance. We
expense all indirect landfill development costs as they are incurred. We use
life cycle accounting and the units-of-consumption method to recognize certain
direct landfill costs. In life cycle accounting, certain direct costs are
capitalized or accrued and charged to expense based upon the consumption of
cubic yards of available airspace. These costs include all costs to acquire,
construct, close and maintain a site during the post-closure period.
Cost and airspace estimates are developed annually by independent engineers
together with our engineers. These estimates are used by our operating and
accounting personnel to annually adjust the rates used to expense capitalized
costs and accrue closure and post-closure costs. Changes in these estimates
primarily relate to changes in available airspace, inflation rates and
applicable regulations. Changes in available airspace include changes due to the
addition of airspace lying in expansion areas deemed likely to be permitted.
Business Combinations
We make decisions to acquire or invest in businesses based on financial and
strategic considerations. We use the purchase method of accounting to account
for business acquisitions.
We acquired various solid waste businesses during the three months ended
March 31, 2002 and 2001. The aggregate purchase price we paid in these
transactions was $4.2 million and $7.4 million in cash, respectively.
During the three months ended March 31, 2001, $20.2 million of the total
purchase price paid for acquisitions and contingent payments to former owners
was allocated to landfill airspace. These allocations were based on the
discounted expected future cash flow of each landfill relative to other assets
within the acquired group, if applicable, and were adjusted for other
non-depletable landfill assets and liabilities acquired (primarily closure and
post-closure liabilities). Landfill purchase price is amortized using the
units-of-consumption method over total available airspace, which includes likely
to be permitted airspace where appropriate.
See Note 4, Business Combinations, of the Notes to the Unaudited Condensed
Consolidated Financial Statements, for further discussion of business
combinations.
Consolidated Results of Operations
Net income was $54.9 million for the three months ended March 31, 2002, or
$.32 per share, as compared to $49.6 million, or $.29 per share, for the three
months ended March 31, 2001.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," we ceased amortizing intangible assets
with indefinite lives effective January 1, 2002. If SFAS 142 had been effective
January 1, 2001, net income for the three months ended March 31, 2001 would have
been $55.6 million, or $.32 per share.
18
The following table summarizes our costs and expenses in millions of dollars
and as a percentage of our revenue for the three months ended March 31, 2002 and
2001:
Three Months Ended
March 31,
-----------------------------------------------
2002 2001
------------------- --------------------
Revenue ...................................... $551.9 100.0% $535.4 100.0%
Expenses:
Cost of operations ......................... 342.0 62.0 329.7 61.6
Depreciation, amortization and
depletion of property and equipment ...... 42.1 7.6 39.3 7.3
Amortization of intangible assets .......... 2.3 .4 11.0 2.1
Selling, general and administrative expenses 58.6 10.6 56.5 10.5
------ ----- ------ -----
Operating income ............................. $106.9 19.4% $ 98.9 18.5%
====== ===== ====== =====
Revenue was $551.9 million and $535.4 million for the three months ended
March 31, 2002 and 2001, respectively, an increase of 3.1%. The following table
reflects the components of our revenue growth for the three months ended March
31, 2002 and 2001:
Three Months
Ended March 31,
------------------
2002 2001
---- ----
Price ................................................ 1.0% 1.4%
Volume ............................................... -- 2.1
--- ---
Total internal growth ...................... 1.0 3.5
Acquisitions ......................................... 2.1 3.3
--- ---
Total revenue growth ....................... 3.1% 6.8%
=== ===
Price growth for the three months ended March 31, 2002 was impacted by
declining commodity prices. Excluding the negative effect of commodity prices,
price growth was 1.3%. In addition, non-core operations increased volume growth
during the three months ended March 31, 2002. Excluding the positive impact of
non-core operations, volume growth was (.4%) for the three months ended March
31, 2002. As such, adjusted internal growth for the three months ended March 31,
2002 was .9%.
Price growth for the three months ended March 31, 2001 was impacted by
declining commodity prices. Excluding the negative effect of commodity prices,
price growth and adjusted internal growth were 2.2% and 4.3%, respectively, for
the three months ended March 31, 2001.
Cost of operations was $342.0 million for the three months ended March 31,
2002 versus $329.7 million for the comparable 2001 period. The increase in
aggregate dollars is primarily a result of the expansion of our operations
through acquisitions and internal growth. Cost of operations as a percentage of
revenue was 62.0% for the three months ended March 31, 2002 versus 61.6% for the
comparable 2001 period. The increase in cost of operations as a percentage of
revenue for the three months ended March 31, 2002 versus the comparable period
last year is primarily a result of higher insurance costs and lower commodity
prices partially offset by lower fuel prices and improved operating
efficiencies.
Expenses for depreciation, amortization and depletion of property and
equipment were $42.1 million for the three months ended March 31, 2002 versus
$39.3 million for the comparable 2001 period. Expenses for depreciation,
amortization and depletion of property and equipment as a percentage of revenue
were 7.6% for the three months ended March 31, 2002 versus 7.3% for the
comparable 2001 period. The increase in such expenses in aggregate dollars and
as a percentage of revenue versus the comparable periods last year is primarily
due to acquisitions and capital expenditures.
Expenses for amortization of intangible assets were $2.3 million for the
three months ended March 31, 2002 versus $11.0 million for the comparable 2001
period. Amortization of intangible assets as a percentage of revenue was .4% for
the three months ended March 31, 2002 versus 2.1% for the comparable 2001
period. The decrease in such expenses in aggregate dollars and as a percentage
of revenue versus the comparable period last year is due to the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS 142, we ceased amortizing intangible
assets with indefinite lives effective January 1, 2002. If SFAS 142 had been
effective January 1, 2001, amortization of intangible assets for the three
months ended March 31, 2001 would have been $1.4 million.
19
Selling, general and administrative expenses were $58.6 million for the
three months ended March 31, 2002 versus $56.5 million for the comparable 2001
period. Selling, general and administrative expenses as a percentage of revenue
were 10.6% for the three months ended March 31, 2002 versus 10.5% for the
comparable 2001 period. The increase in such expenses in aggregate dollars and
as a percentage of revenue versus the comparable period last year is primarily
due to the addition of area and regional management during 2001 and various
training and systems initiatives during 2002 and 2001.
Interest Expense
Interest expense relates primarily to borrowings under our unsecured notes,
revolving credit facility and tax-exempt bonds. Interest expense was $19.2
million for the three months ended March 31, 2002 versus $20.9 million for the
comparable 2001 period. The decrease in interest expense in aggregate dollars is
due to lower average interest rates partially offset by higher average
outstanding debt balances.
Capitalized interest was $.4 million for the three months ended March 31,
2002 versus $.3 million for the comparable 2001 period.
Interest and Other Income (Expense), Net
Interest and other income, net of other expense, was $.8 million for the
three months ended March 31, 2002 versus $2.0 million for the comparable 2001
period.
Income Taxes
The provision for income taxes was $33.6 million for the three months ended
March 31, 2002 versus $30.4 million for the comparable 2001 period. The
effective income tax rate was 38.0% for the three months ended March 31, 2002
and 2001. Income taxes have been provided based upon our anticipated annual
effective tax rate.
Landfill and Environmental Matters
Available Airspace
The following table reflects landfill airspace activity for landfills owned
or operated by us for the three months ended March 31, 2002:
Balance as of Changes in Balance as of
December 31, Expansions Permits Airspace Engineering March 31,
2001 Undertaken Granted Consumed Estimates 2002
------------- ---------- ------- -------- ----------- -------------
Permitted airspace:
Cubic yards (in millions)....... 1,329.0 .8 3.9 (7.6) 13.1 1,339.2
Number of sites ................ 54 -- -- 54
Expansion airspace:
Cubic yards (in millions)....... 359.6 48.0 (3.9) -- (2.1) 401.6
Number of sites ................ 20 2 -- 22
------- ---- --- ---- ---- -------
Total available airspace:
Cubic yards (in millions)....... 1,688.6 48.8 -- (7.6) 11.0 1,740.8
======= ==== === ==== ==== =======
Number of sites ................ 54 54
======= =======
As of March 31, 2002, we owned or operated 54 solid waste landfills with
total available disposal capacity estimated to be 1.7 billion in-place cubic
yards. Total available disposal capacity represents the sum of estimated
permitted airspace plus an estimate of airspace we have deemed likely to be
permitted. These estimates are developed annually by independent engineers
together with our engineers utilizing information provided by annual aerial
surveys. As of March 31, 2002, total available disposal capacity is estimated to
be 1.3 billion in-place cubic yards of permitted airspace plus .4 billion
in-place cubic yards of expansion airspace which we have deemed likely to be
permitted. Before airspace included in an expansion area is determined as likely
to be permitted and, therefore, included in our calculation of total available
disposal
20
capacity, it must meet our expansion criteria. See Note 2, Landfill and
Environmental Costs, of the Notes to our Unaudited Condensed Consolidated
Financial Statements for further information.
As of March 31, 2002, 22 of our landfills meet the criteria for including
expansion airspace in their total available disposal capacity. At projected
annual volumes, these 22 landfills have an estimated remaining average site life
of 34 years, including the expansion airspace. The average estimated remaining
life of all of our landfills is 34 years.
As of March 31, 2002, seven of our landfills that meet the criteria for
including expansion airspace had obtained approval from local authorities and
are proceeding into the state permitting process. Also, as of March 31, 2002,
seven of our 22 landfills that meet the criteria for including expansion
airspace had submitted permit applications to state authorities. The remaining
eight landfills that meet the criteria for including expansion airspace are in
the process of obtaining approval from local authorities and have not identified
any fatal flaws or impediments associated with the expansions at either the
local or state level.
We have never been denied an expansion permit for a landfill that included
likely to be permitted airspace in its total available disposal capacity,
although no assurance can be made that all future expansions will be permitted
as designed.
Closure and Post-Closure Costs
The following table reflects our closure and post-closure expense per cubic
yard of airspace consumed for the three months ended March 31, 2002 and 2001:
Three Months Ended
March 31,
----------------------
2002 2001
------- -------
Closure and post-closure expense
(in millions) ............... $ 5.5 $ 4.7
Cubic yards of airspace consumed
(in millions) ............... 7.6 7.5
Closure and post-closure expense
per cubic yard ............... $ .72 $ .63
The increase in closure and post-closure expense per cubic yard from 2001
to 2002 is due primarily to the addition of two landfills during the second
quarter of 2001 that have higher costs per cubic yard than the Company's
average.
As of March 31, 2002, accrued closure and post-closure costs were $243.8
million. The current portion of these costs of $20.9 million is reflected in our
Unaudited Condensed Consolidated Balance Sheets in other current liabilities.
The long-term portion of these costs of $222.9 million is reflected in our
Unaudited Condensed Consolidated Balance Sheets in accrued environmental and
landfill costs. As of March 31, 2002, assuming that all available landfill
capacity is used, we expect to expense approximately $554.0 million of
additional closure and post-closure costs over the remaining lives of our
facilities.
Our estimates for closure and post-closure costs do not take into account
discounts for the present value of total estimated costs. If total estimated
costs were discounted to present value, they would be lower.
21
Investment in Landfills
The following table reflects changes in our investments in landfills for the
three months ended March 31, 2002 and the future expected investment as of March
31, 2002 (in millions):
Balance Transfers Additions Balance
as of and Charged as of Expected Total
December Capital Adjust- to March Future Expected
31, 2001 Additions ments Expense 31, 2002 Investment Investment
------- --------- --------- -------- -------- ---------- ----------
Non-depletable landfill land..... $ 50.5 $ .8 $ -- $ -- $ 51.3 $ -- $ 51.3
Landfill development costs....... 958.8 2.5 (1.3) -- 960.0 1,181.7 2,141.7
Construction in
progress-- landfill........... 17.6 4.0 (5.1) -- 16.5 -- 16.5
Accumulated depletion
and amortization.............. (237.0) -- .5 (14.1) (250.6) -- (250.6)
------- ---- ------ ------- ------- -------- --------
Net investment in
landfill and land
development costs............. $ 789.9 $7.3 $ (5.9) $ (14.1) $ 777.2 $1,181.7 $1,958.9
======= ==== ====== ======= ======= ======== ========
The following table reflects our net investment in our landfills, excluding
non-depletable land, and our depletion and amortization expense for the three
months ended March 31, 2002 and 2001:
<Table>
<Caption>
2002 2001
--------- ---------
Number of landfills owned or operated.................... 54 53
Net investment, excluding non-depletable land
(in millions).......................................... $ 725.9 $ 744.0
Total estimated available disposal capacity
(in millions of cubic yards)........................... 1,740.8 1,732.0
Net investment per cubic yard............................ $ .42 $ .43
Landfill depletion and amortization expense
(in millions).......................................... $ 14.1 $ 14.1
Airspace consumed (in millions of cubic yards)........... 7.6 7.5
Depletion and amortization per cubic yard of
airspace consumed........................................ $ 1.86 $ 1.88
</Table>
As of March 31, 2002, we expect to spend an estimated additional $1.2
billion on existing landfills, primarily related to cell construction and
environmental structures, over their expected remaining lives. Our total
expected gross investment, excluding non-depletable land, estimated to be $1.9
billion, or $1.10 per cubic yard, is used in determining our depletion and
amortization expense based upon airspace consumed using the units-of-consumption
method. Our estimates for expected future investment in landfills do not take
into account discounts for the present value of total estimated costs. For
further information, see "Closure and Post-Closure Costs."
We accrue costs related to environmental remediation activities through a
charge to income in the period such liabilities become probable and can be
reasonably estimated. No material amounts were charged to expense during the
three months ended March 31, 2002 and 2001, respectively.
Financial Condition
At March 31, 2002, we had $135.2 million of restricted cash, of which $110.2
million related to proceeds from tax-exempt bonds and other tax-exempt financing
that will be used to fund capital expenditures. At March 31, 2002, we had $283.2
million of tax-exempt bonds and other tax-exempt financing outstanding at
favorable interest rates.
In July 1998, we entered into a $1.0 billion unsecured revolving credit
facility with a group of banks. $500.0 million of the credit facility expires in
July 2002 and the remaining $500.0 million expires in July 2003. Borrowings
under the credit facility bear interest at LIBOR-based rates. We use our
operating cash flow and proceeds from our credit facilities to finance our
working capital, capital expenditures, acquisitions, share repurchases and other
requirements. As a result of our strong financial position and liquidity, in
February 2002 we reduced the short- and long-term portions of our credit
facility to $300.0 million
22
and $450.0 million, respectively. As of March 31, 2002, we had $438.2 million
available under the credit facility.
In May 1999, we sold $600.0 million of unsecured notes in the public market.
$225.0 million of these notes bear interest at 6 5/8% per annum and mature in
2004. The remaining $375.0 million bear interest at 7 1/8% per annum and mature
in 2009. Interest on these notes is payable semi-annually in May and November.
The $225.0 million and $375.0 million in notes were offered at a discount of
$1.0 million and $.5 million, respectively. Proceeds from the notes were used to
repay our revolving credit facility.
In December 1999, we entered into an operating lease facility established
to finance the acquisition of operating equipment. As of March 31, 2002, $76.3
million was outstanding under this facility.
In August 2001, we sold $450.0 million of unsecured notes in the public
market. The notes bear interest at 6 3/4% and mature in 2011. Interest on these
notes is payable semi-annually in February and August. The notes were offered at
a discount of $2.6 million. Proceeds from the notes were used to repay our
revolving credit facility.
In order to manage risk associated with fluctuations in interest rates and
to take advantage of favorable floating interest rates, in September 2001, we
entered into interest rate swap agreements with investment grade rated financial
institutions. The swap agreements have a total notional value of $225.0 million
and require our company to pay interest at floating rates based upon changes in
LIBOR and receive interest at a fixed rate of 6 5/8%. The swap agreements
terminate in May 2004.
We plan to extend to July 2003 the maturity of our revolving short-term
credit facility prior to its expiration in July 2002. We believe that such an
extension would provide us with sufficient financial resources to meet our
anticipated capital requirements and obligations as they come due. We believe
that we would be able to raise additional debt or equity financing, if
necessary, to fund special corporate needs or to complete acquisitions. However,
we cannot assure you that we would be able to obtain additional financing under
favorable terms or to extend the existing short-term credit facility on the same
terms.
SELECTED BALANCE SHEET ACCOUNTS
The following table reflects the activity in our allowance for doubtful
accounts, accrued closure and post-closure, accrued self-insurance and amounts
due to former owners during the three months ended March 31, 2002 (in millions):
Allowance for Closure and Amounts Due to
Doubtful Accounts Post-Closure Self-Insurance Former Owners
----------------- ------------ -------------- -------------
Balance, December 31, 2001................. $ 19.0 $ 239.5 $ 57.6 $ 6.0
Additions charged to expense............... 3.5 5.5 30.0 --
Additions due to acquisitions, net
of divestitures.......................... -- -- -- --
Usage...................................... (3.3) (1.2) (26.4) (.2)
------ ------- ------ -----
Balance, March 31, 2002.................... 19.2 243.8 61.2 5.8
Current portion............................ 19.2 20.9 42.0 5.8
------ ------- ------ -----
Long-term portion.......................... $ -- $ 222.9 $ 19.2 $ --
====== ======= ====== =====
Additions to accrued liabilities related to acquisitions are periodically
reviewed during the year subsequent to the acquisition. During such reviews,
accrued liabilities, which are considered to be in excess of amounts required
for a specific acquisition, are reversed and charged against goodwill (cost in
excess of net fair value of assets acquired).
As of March 31, 2002, accounts receivable were $224.0 million, net of
allowance for doubtful accounts of $19.2 million, resulting in days sales
outstanding of 37, or 24 days net of deferred revenue.
23
Property and Equipment
The following tables reflect the activity in our property and equipment
accounts for the three months ended March 31, 2002 (in millions):
Gross Property and Equipment
-------------------------------------------------------------------------
Acquisi- Trans-
Balance tions fers Balance
as of Net of and as of
December 31, Capital Retire- Divesti- Adjust- March 31,
31, 2001 Additions ments tures ments 2002
------------- --------- ------- -------- ------- --------
Other land......................... $ 94.3 $ 2.8 $ -- $ -- $ 1.2 $ 98.3
Non-depletable landfill land....... 50.5 .8 -- -- -- 51.3
Landfill development costs......... 958.8 2.5 -- -- (1.3) 960.0
Vehicles and equipment............. 1,153.2 23.2 (7.4) 1.0 6.3 1,176.3
Buildings and improvements......... 256.4 1.7 (0.1) (1.8) 12.2 268.4
Construction in progress--
landfill........................ 17.6 4.0 -- -- (5.1) 16.5
Construction in
progress -- other................ 23.5 2.6 -- -- (15.7) 10.4
-------- ------ ----- ----- ------ --------
Total..................... $2,554.3 $ 37.6 $(7.5) $ (.8) $ (2.4) $2,581.2
======== ====== ===== ===== ====== ========
Accumulated Depreciation, Amortization and Depletion
-------------------------------------------------------------------------
Trans-
Balance fers Balance
as of and as of
December 31, Capital Retire- Divesti- Adjust- March 31,
31, 2001 Additions ments tures ments 2002
------------ --------- ------- -------- ------- --------
Landfill development costs......... $(237.0) $(14.1) $ -- $ -- $ .5 $ (250.6)
Vehicles and equipment............. (495.7) (25.8) 3.7 .8 1.5 (515.5)
Buildings and improvements........ (46.7) (2.2) .1 .1 .4 (48.3)
-------- ------ ----- ----- ------ --------
Total..................... $(779.4) $(42.1) $ 3.8 $ .9 $ 2.4 $ (814.4)
======== ====== ===== ===== ====== ========
LIQUIDITY AND CAPITAL RESOURCES
The major components of changes in cash flows for the three months ended
March 31, 2002 and 2001 are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash provided by operating activities
was $134.6 million and $86.2 million for the three months ended March 31, 2002
and 2001, respectively. The changes in cash provided by operating activities
during the periods are due to expansion of our business and timing of payments
for accounts payable and income taxes. We use cash flows from operations to fund
capital expenditures, acquisitions, share repurchases and debt repayments.
CASH FLOWS USED IN INVESTING ACTIVITIES. Cash used in investing activities
consists primarily of cash used for capital additions and business acquisitions
in 2002 and 2001, and amounts due and contingent payments to former owners in
2001. Cash used to acquire businesses, net of cash acquired, was $4.2 million
and $7.4 million during the three months ended March 31, 2002 and 2001,
respectively.
We intend to finance capital expenditures and acquisitions through cash on
hand, cash flow from operations, our revolving credit facility, tax-exempt bonds
and other financings. We expect to use primarily cash for future business
acquisitions.
CASH FLOWS USED IN FINANCING ACTIVITIES. Cash used in financing activities
for the three months ended March 31, 2002 and 2001 was $76.1 million and $18.8
million, respectively.
In 2000, we announced that our Board of Directors authorized the repurchase
of up to $150.0 million of our common stock. In October 2001, we announced that
our Board of Directors authorized the repurchase of up to an additional $125.0
million of our common stock. As of March 31, 2002, we had repurchased 11.9
million shares of our stock for $196.6 million, of which 2.7 million shares were
acquired during the three months ended March 31, 2002 for $46.5 million. We
intend to finance share repurchases from cash on hand, cash flow from
operations, our revolving credit facility and other financings.
24
In December 1999, we entered into an operating lease facility established to
finance the acquisition of operating equipment consisting primarily of
revenue-producing vehicles. At March 31, 2002, $76.3 million was outstanding
under this facility.
We used proceeds from bank facilities and tax-exempt bonds to fund
acquisitions and capital additions.
We have received investment grade ratings from several credit rating
agencies. As of March 31, 2002, our senior debt was rated Baa3 by Moody's, BBB
by Standard & Poor's and BBB+ by Fitch.
Seasonality
Our operations can be adversely affected by periods of inclement weather
which could delay the collection and disposal of waste, reduce the volume of
waste generated, or delay the construction or expansion of our landfill sites
and other facilities.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement no.
143, "Accounting for Asset Retirement Obligations." This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002,
and will require our company to change the accounting methodology we currently
use to record closure and post-closure liabilities related to our landfills. The
more significant of these changes includes measuring all future obligations at
fair value and discounting obligations to reflect today's dollars. This
statement requires a cumulative effect approach to recognizing transition
amounts for existing retirement obligations. We are currently evaluating the
effect of adoption of this statement, and have not determined whether the impact
of adoption will be material to our consolidated financial position or results
of operations.
Disclosure Regarding Forward Looking Statements
Certain statements and information included herein constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance, or achievements of our company to be materially
different from any future results, performance, or achievements expressed or
implied, in or by such forward-looking statements. Such factors include, among
other things, whether our estimates and assumptions concerning our selected
balance sheet accounts, closure and post-closure costs, available airspace, and
projected costs and expenses related to our landfills and property and
equipment, labor and fuel rates, and inflationary and general and economic
trends turn out to be correct or appropriate, and various factors that will
impact our actual business and financial performance such as: competition and
demand for services in the solid waste industry; general economic conditions
including but not limited to inflation, changes in fuel, labor and other
variable costs and changes in commodity prices, which are generally not within
our control; our ability to maintain our investment grade rating and to generate
sufficient cash flow; our dependence on acquisitions for growth; our ability to
manage growth; our dependence on large, long-term collection contracts; risk
associated with undisclosed liabilities of acquired businesses; our dependence
on key personnel; compliance with and future changes in environmental
regulations; our ability to obtain approval from regulatory agencies in
connection with expansions at our landfills; the ability to extend the maturity
of our short-term credit facility; our ability to purchase our common stock at
prices that are accretive to earnings per share; the outcome of the IRS audit;
and other risk factors and more detailed information contained in our Annual
Report on Form 10-K and our other filings with the Securities and Exchange
Commission.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market sensitive financial instruments consist primarily of variable
rate debt. Therefore, our major market risk exposure is changing interest rates
in the United States and fluctuations in LIBOR. We manage interest rate risk
through a combination of fixed and floating rate debt as well as interest rate
swap agreements.
26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 - Employment Agreement dated May 14, 2001 by and between
Michael Cordesman, who became an executive officer in March
2002, and the Company (filed herewith).
(b) Reports on Form 8-K:
(1) Form 8-K, dated and filed January 30, 2002, including a press release
announcing the Company's operating results for the three and twelve
months ended December 31, 2001.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Republic Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REPUBLIC SERVICES, INC.
By: /s/ Tod C. Holmes
-------------------------------------
Tod C. Holmes
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Charles F. Serianni
-------------------------------------
Charles F. Serianni
Chief Accounting Officer
(Principal Accounting Officer)
Date: May 13, 2002
28