1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001 COMMISSION FILE NO. 0-23981
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
94-3283464
(I.R.S. Employer Identification No.)
620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of May 7, 2001: 27,062,968 Shares of Common Stock
2
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 2000 and March 31, 2001
Condensed Consolidated Statements of Income for the three months ended
March 31, 2000 and 2001
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
Item 6 -- Exhibits and Reports on Form 8-K
Signatures
1
3
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, 2000 MARCH 31, 2001
----------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents $ 2,461 $ 4,207
Accounts receivable, less allowance for doubtful
accounts of $1,899 at December 31, 2000 and
$1,616 at March 31, 2001 42,155 42,923
Prepaid expenses and other current assets 4,419 5,932
--------- ---------
Total current assets 49,035 53,062
Property and equipment, net 384,237 434,036
Intangible assets, net 363,505 376,812
Other assets 13,327 16,033
--------- ---------
$ 810,104 $ 879,943
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt and notes payable $ 3,644 $ 8,310
Accounts payable 25,636 22,786
Deferred revenue 9,595 10,410
Accrued liabilities 20,558 17,928
--------- ---------
Total current liabilities 59,433 59,434
Long-term debt and notes payable, net 334,194 370,724
Other long term liabilities 6,095 9,563
Deferred income taxes 76,174 76,744
COMMITMENTS AND CONTINGENCIES
Minority interests -- 17,633
Stockholders' equity:
Preferred stock $.01 par value; 10,000,000 shares
authorized; none issued and outstanding -- --
Common stock: $.01 par value; 50,000,000 shares
authorized; 26,480,046 shares issued and
outstanding at December 31, 2000, 27,062,634
shares issued and outstanding at March 31, 2001 265 270
Additional paid-in capital 296,439 306,426
Retained earnings 37,504 42,216
Unrealized loss on market value of interest rate swap -- (3,067)
--------- ---------
Total stockholders' equity 334,208 345,845
--------- ---------
$ 810,104 $ 879,943
========= =========
See accompanying notes.
2
4
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2000 2001
------------ ------------
Revenues $ 64,011 $ 85,114
Operating expenses:
Cost of operations 36,804 47,017
Selling, general and administrative 5,391 6,659
Depreciation and amortization 5,986 8,192
Stock compensation 54 --
Acquisition related expenses 150 --
------------ ------------
Income from operations 15,626 23,246
Interest expense (5,894) (7,602)
Other income (expense), net 6 (6,232)
------------ ------------
Income before income tax provision and
minority interests 9,738 9,412
Minority interests -- (1,330)
------------ ------------
Income before income tax provision 9,738 8,082
Income tax provision (4,048) (3,226)
------------ ------------
Net income before extraordinary item 5,690 4,856
Extraordinary item - extinguishment of debt,
net of tax benefit of $96 -- (144)
------------ ------------
Net income $ 5,690 $ 4,712
============ ============
Basic earnings per common share:
Income before extraordinary item $ 0.27 $ 0.18
Extraordinary item -- (0.01)
------------ ------------
Net income per common share $ 0.27 $ 0.17
============ ============
Diluted earnings per common share:
Income before extraordinary item $ 0.26 $ 0.18
Extraordinary item -- (0.01)
------------ ------------
Net income per common share $ 0.26 $ 0.17
============ ============
Shares used in the per share calculations:
Basic 21,322,110 26,635,813
============ ============
Diluted 21,976,094 27,413,073
============ ============
See accompanying notes.
3
5
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,690 $ 4,712
Adjustments to reconcile net income to
Net cash provided by operating activities:
Loss on sale of assets -- 21
Loss on termination of interest rate swap -- 6,337
Depreciation 4,258 5,607
Amortization of intangibles 1,728 2,584
Minority interests -- 1,330
Amortization of debt issuance costs and debt guarantee fees 135 195
Extraordinary item -- early extinguishment of debt -- 240
Stock compensation 54 --
Net change in operating assets and liabilities, net of
acquisitions (5,227) (13,378)
-------- --------
Net cash provided by operating activities 6,638 7,648
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (28,281) (24,019)
Capital expenditures for property and equipment (4,992) (6,022)
(Increase) decrease in other assets 73 (88)
-------- --------
Net cash used in investing activities (33,200) (30,129)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 33,500 27,700
Principal payments on long-term debt (6,949) (6,783)
Proceeds from options and warrants 328 3,942
Debt issuance costs (53) (632)
-------- --------
Net cash provided by financing activities 26,826 24,227
-------- --------
Net increase in cash and equivalents 264 1,746
Cash and equivalents at beginning of period 2,393 2,461
-------- --------
Cash and equivalents at end of period $ 2,657 $ 4,207
======== ========
See accompanying notes.
4
6
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND SUMMARY
The accompanying statements of operations and cash flows relate to Waste
Connections, Inc. and its subsidiaries (the "Company") for the three month
periods ended March 31, 2000 and 2001. The consolidated financial statements of
the Company include the accounts of Waste Connections, Inc. and its wholly-owned
and majority owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three month period ended March
31, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.
The Company's consolidated balance sheet as of March 31, 2001, the consolidated
statements of income for the three months ended March 31, 2001 and 2000, and the
consolidated statements of cash flows for the three months ended March 31, 2001
and 2000 are unaudited. In the opinion of management, such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows for the periods presented. The consolidated
financial statements presented herein should be read in conjunction with the
Company's annual report on Form 10-K.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which was amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities (an Amendment of FASB Statement 133)," (collectively "SFAS 133").
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income (Note 5) until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company adopted SFAS 133 effective
January 1, 2001. The Company has evaluated its derivative instruments,
consisting solely of two interest rate protection agreements , and believes
these instruments qualify for hedge accounting pursuant to SFAS 133. Upon
adoption of SFAS 133, the Company recorded the fair value of these interest rate
protection agreements as an obligation of $3,570, net of taxes of $2,370, with
an equal amount recorded as an unrealized loss in other comprehensive income.
The adoption of SFAS 133 did not have a material effect on the Company's results
of operations.
3. ACQUISITIONS
For the three months ended March 31, 2001, the Company acquired 6 solid waste
collection businesses that were accounted for using the purchase method of
accounting. The aggregate consideration for these acquisitions was approximately
$24,019 in cash and liabilities assumed and $6,050 in equity issued.
The purchase prices have been allocated to the identified intangible assets and
tangible assets acquired based on fair values at the dates of acquisition, with
any residual amounts allocated to goodwill.
5
7
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
4. EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of earnings per common share:
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2000 2001
------------ ------------
Numerator:
Income before extraordinary item $ 5,690 $ 4,856
Extraordinary item -- (144)
------------ ------------
Net income $ 5,690 $ 4,712
============ ============
Denominator:
Basic shares outstanding 21,322,110 26,635,813
Dilutive effect of options & warrants 653,984 777,260
------------ ------------
Basic shares outstanding 21,976,094 27,413,073
============ ============
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes changes in the fair value of interest rate
protection agreements that qualify for hedge accounting (Note 2). During the
first quarter of 2001, the Company recorded total comprehensive income of
$1,645. The difference between net income and comprehensive income for the three
months ended March 31, 2001 is detailed in the following table:
Three months ended
March 31, 2001
(In thousands)
------------------
Net income $ 4,712
-------
Unrealized loss on interest rate
protection agreements, net of
tax of $2,036 (3,067)
-------
Comprehensive income $ 1,645
=======
8
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
The components of other comprehensive income and related tax effects for the
three months ended March 31, 2001 are shown as follows (in thousands):
Gross Tax effect Net of tax
------- ---------- ----------
Cumulative effect of accounting change $(5,940) $(2,370) $(3,570)
Amounts reclassified into earnings 410 164 246
Changes in fair value of interest rate
protection agreements (5,910) (2,373) (3,537)
Changes associated with current period
hedging transactions 6,337 2,543 3,794
------- ------- -------
$(5,103) $(2,036) $(3,067)
======= ======= =======
Changes associated with current period hedging transactions represents costs
incurred in connection with the termination of an interest rate swap. During
the three months ended March 31, 2001, the Company determined that the debt to
which the interest rate swap was designated would be repaid prior to its due
date as a result of the convertible subordinated debt offering (Note 6);
therefore, it was no longer probable that the variable cash flows under the
related debt would occur and the costs to terminate the interest rate swap were
recorded as a loss in other income (expense) in the accompanying financial
statements.
6. SUBSEQUENT EVENTS
On April 4, 2001, Waste Connections issued 5.5% Convertible Subordinated Notes
Due 2006 (the "Notes") with an aggregate principal amount of $115,000 in a Rule
144A private placement. The Company also granted the initial purchaser an option
to purchase an additional $35,000 of the Notes, which was exercised in full on
April 26, 2001. The Notes are unsecured, rank junior to existing and future
Senior Indebtedness, as defined in the offering memorandum and are convertible
into common stock at a conversion price of $38.03 per share. The proceeds from
the sale of the notes are being used to repay a portion of the outstanding
indebtedness and related costs under the Company's credit facility and for
general corporate purposes.
1
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere herein.
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q, including,
without limitation, information appearing under Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934) that involve risks and uncertainties. Factors set forth herein and
from time to time in our other filings with the Securities and Exchange
Commission could affect our actual results and could cause our actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company in this Quarterly Report on Form 10-Q.
OVERVIEW
Waste Connections, Inc. is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in secondary markets of the Western U.S. As of March 31, 2001, we served more
than 700,000 commercial, industrial and residential customers in California,
Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, New Mexico, Oklahoma,
Oregon, South Dakota, Texas, Utah, Washington and Wyoming. We currently own 65
collection operations and operate or own 32 transfer stations, 21 Subtitle D
landfills and 17 recycling facilities.
We generally intend to pursue an acquisition-based growth strategy and as of
March 31, 2001 had acquired 121 businesses since our inception in September
1997. The results of operations of these acquired businesses have been included
in our financial statements only from the respective dates of acquisition,
except eight acquisitions accounted for under the poolings-of-interests method
of accounting, which are included for all periods presented. We anticipate that
a substantial part of our future growth will come from acquiring additional
solid waste collection, transfer and disposal businesses and, therefore, it is
expected that additional acquisitions could continue to affect period-to-period
comparisons of our operating results.
GENERAL
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. A large part of our
collection revenues come from providing commercial, industrial and residential
services. We frequently perform these services under service agreements or
franchise agreements with counties or municipal contracts. County franchise
agreements and municipal contracts generally last from one to ten years. Our
existing franchise agreements and all of our existing municipal contracts give
Waste Connections the exclusive right to provide specified waste services in the
specified territory during the contract term. These exclusive arrangements are
awarded, at least initially, on a competitive bid basis and subsequently on a
bid or negotiated basis. We also provide residential collection services on a
subscription basis with individual households. Approximately 50% of our revenues
for the three months ended March 31, 2001 were derived from services provided
under exclusive franchise agreements, long term municipal contracts and
governmental certificates. Governmental certificates grant Waste Connections
perpetual and exclusive collection rights in the covered areas. Contracts with
counties and municipalities and governmental certificates provide relatively
consistent cash flow during the terms of the contracts. Because we bill most
residential customers quarterly, subscription agreements also provide a stable
source of revenues for Waste Connections. Our collection business also generates
revenues from the sale of recyclable commodities.
We charge transfer station and landfill customers a tipping fee on a per ton
basis for disposing of their solid waste at the transfer stations and the
landfill facilities we own and operate. Most of our transfer and landfill
customers have entered into one to ten year disposal contracts with us, most of
which provide for annual cost of living increases.
2
10
We typically determine the prices for our solid waste services by the collection
frequency and level of service, route density, volume, weight and type of waste
collected, type of equipment and containers furnished, the distance to the
disposal or processing facility, the cost of disposal or processing, and prices
charged by competitors for similar services. The terms of our contracts
sometimes limit our ability to pass on price increases. Long-term solid waste
collection contracts typically contain a formula, generally based on a published
price index that automatically adjusts fees to cover increases in some, but not
all, operating costs.
Costs of operations include labor, fuel, equipment maintenance and tipping fees
paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and host community fees and
royalties. As of March 31, 2001, Waste Connections owned and/or operated 32
transfer stations, which reduce our costs by allowing us to use collection
personnel and equipment more efficiently and by consolidating waste to gain more
favorable disposal rates that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation overhead costs associated with our
marketing and sales force, professional services and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
their estimated useful lives using the straight-line method and amortization of
goodwill and other intangible assets using the straight-line method. Landfill
permitting, acquisition and preparation costs are amortized as permitted
airspace of the landfill is consumed. Landfill preparation costs include the
costs of construction associated with excavation, liners, site berms and the
installation of leak detection and leachate collection systems. In determining
the amortization rate for a landfill, preparation costs include the total
estimate costs to complete construction of the landfill's permitted capacity.
Units-of-production amortization rates are determined annually for the Company's
operating landfills. The rates are determined by management based on estimates
provided by the Company's internal and third party engineers and consider the
information provided by surveys which are performed at least annually.
Waste Connections capitalizes some third-party expenditures related to pending
acquisitions or development projects, such as legal and engineering expenses. We
expense indirect acquisition costs, such as executive and corporate overhead,
public relations and other corporate services, as we incur them. We charge
against net income any unamortized capitalized expenditures and advances (net of
any portion that we believe we may recover, through sale or otherwise) that
relate to any operation that is permanently shut down and any pending
acquisition or landfill development project that is not completed. We routinely
evaluate all capitalized costs, and expense those related to projects that we
believe are not likely to succeed. As of March 31, 2001, Waste Connections had
no capitalized expenditures relating to landfill development projects and
approximately $190,372 in capitalized expenditures relating to pending
acquisitions.
We accrue for estimated landfill closure and post-closure maintenance costs at
the landfills we own. Under applicable regulations, Waste Connections and Madera
County, as operator and owner, respectively, are jointly liable for closure and
post-closure liabilities with respect to the Fairmead Landfill. We have not
accrued for such liabilities because Madera County, as required by state law,
has established a special fund into which it deposits a portion of tipping fee
surcharges to pay such liabilities. Consequently, we do not believe that the
Company had any financial obligation for closure and post-closure costs for the
Fairmead Landfill as of March 31, 2001. We will have additional material
financial obligations relating to closure and post-closure costs of the other
disposal facilities that we currently own or operate and that we may own or
operate in the future. Waste Connections accrues and will accrue for those
obligations, based on engineering estimates of consumption of permitted landfill
airspace over the useful life of such landfills.
3
11
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
The following table sets forth items in Waste Connections' consolidated
statement of operations as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 2001
----- -----
Revenues 100.0% 100.0%
Cost of operations 57.5 55.2
Selling, general and
administrative expenses 8.4 7.9
Depreciation and
amortization expense 9.4 9.6
Stock compensation 0.1 --
Acquisition related expenses 0.2 --
----- -----
Operating income 24.4 27.3
Interest expense, net (9.2) (8.9)
Other expense, net 0.0 (7.3)
Minority interests -- (1.6)
Extraordinary item -- (0.2)
Income tax expense (6.3) (3.8)
----- -----
Net income 8.9% 5.5%
===== =====
EBITDA margin(1) 34.1% 36.9%
===== =====
(1) EBITDA margin represents EBITDA expressed as a percentage of revenues.
EBITDA represents earnings presented above before interest, income taxes,
depreciation and amortization expense, acquisition related expenses, and stock
compensation expense. EBITDA is not a measure of cash flow, operating results or
liquidity, as determined in accordance with generally accepted accounting
principles.
Revenues. Total revenues increased $21.1 million, or 33.0%, to $85.1 million for
the three months ended March 31, 2001 from $64.0 million for the three months
ended March 31, 2000. The increase was primarily attributable to the inclusion
of the acquisitions closed throughout the balance of 2000 and the first quarter
of 2001, selected price increases and growth in the existing business.
Cost of Operations. Total cost of operations increased $10.2 million, or 27.7%,
to $47.0 million for the three months ended March 31, 2001 from $36.8 million
for the three months ended March 31, 2000. The increase was primarily
attributable to acquisitions closed over the course of 2000, offset by greater
integration of collection volumes into landfills we own or operate. Cost of
operations as a percentage of revenues declined 2.3 percentage points to 55.2%
for the three months ended March 31, 2001 from 57.5% for the three months ended
March 31, 2000. The decrease as a percentage of revenues was primarily
attributable to the effect of tuck-in acquisitions closed during the course of
2000, economies of scale from the greater revenue base, greater integration of
collection volumes into landfills we own or operate and selective price
increases.
SG&A. SG&A expenses increased $1.3 million, or 23.5%, to $6.7 million for the
three months ended March 31, 2001 from $5.4 million for the three months ended
March 31, 2000. Our SG&A increased as a result of additional personnel from
companies acquired and some additional corporate overhead to accommodate our
growth. SG&A as a percentage of revenues declined 0.5 percentage points to 7.9%
for the three months ended March 31, 2001 from 8.4% for the three months ended
March 31, 2000. The decline in SG&A as a percentage of revenues was a result of
spreading of overhead expenses over a larger base of revenue from the
acquisitions completed in the course of 2000, offset by increases in corporate
overhead.
Depreciation and Amortization. Depreciation and amortization expense increased
$2.2 million, or 36.9%, to $8.2 million for the three months ended March 31,
2001 from $6.0 million for the three months ended March 31, 2000.
4
12
The increase resulted primarily from the acquisitions and the inclusion of their
depreciation and amortization as well as the amortization of goodwill associated
with such acquisitions. Depreciation and amortization as a percentage of
revenues increased 0.2 percentage points to 9.6% for the three months ended
March 31, 2001 from 9.4% for the three months ended March 31, 2000. The increase
in depreciation and amortization as a percentage of revenues was primarily a
result of amortization of goodwill associated with acquisitions and a higher
proportion of landfill revenues, which have higher variable depletion costs than
collection.
Stock Compensation Expense. Stock compensation expense decreased to $0 for the
three months ended March 31, 2001 from $54,000 for the three months ended March
31, 2000. Our prior year stock compensation expense was attributable to the
valuation of common stock options and warrants with exercise prices less than
the estimated fair value of our common stock on the date of the grant and
relates solely to stock options granted prior to the initial public offering in
May 1998. Our stock compensation expense in 2000 consisted of continued
amortization of deferred stock compensation recorded in 1998 at the time of the
initial public offering. This compensation expense was fully amortized on
September 30, 2000.
Acquisition Related Expenses. Acquisition related expenses decreased to $0 for
the three months ended March 31, 2001 from $150,000 for the three months ended
March 31, 2000. The prior year acquisition related expenses were for
commissions, professional fees, and other direct costs resulting from the Waste
Wrangler acquisition that was accounted for using the pooling-of-interests
method.
Operating Income. Operating income increased $7.6 million to $23.2 million for
the three months ended March 31, 2001 from $15.6 million for the three months
ended March 31, 2000. The increase was primarily attributable to the inclusion
of acquisitions closed in the last year, economies of scale from a greater
revenue base, greater integration of collection volumes into landfills we own or
operate and selective price increases. This was offset by higher depreciation
and amortization and SG&A expenses. Operating income as a percentage of revenues
increased 2.9 percentage points to 27.3% for the three months ended March 31,
2001 from 24.4% for the three months ended March 31, 2000. The increase in
operating income before acquisition related expenses is attributable to the
improvement in gross margins coupled with declines in SG&A expenses as a
percentage of revenues offset by increases in depreciation and amortization as a
percentage of revenues.
Interest Expense. Interest expense increased $1.7 million, or 29.0%, to $7.6
million for the three months ended March 31, 2001 from $5.9 million for the
three months ended March 31, 2000. The increase was primarily attributable to
higher debt levels incurred to fund certain of our acquisitions and higher
interest rates on our revolving credit facility.
Other Income (Expense). Other income (expense) increased to ($6.2) million for
the three months ended March 31, 2001 from $6,000 for the three months ended
March 31, 2000. The increase was primarily related to the early termination of
an interest rate hedge. During the three months ended March 31, 2001, the
Company determined that the debt to which the interest rate swap was designated
would be repaid prior to its due date as a result of the convertible
subordinated debt offering; therefore, it was no longer probable that the
variable cash flows under the related debt would occur.
Minority Interests. Minority interests increased $1.3 million to $1.3 million
for the three months ended March 31, 2001 from $0 for the three months ended
March 31, 2000. The increase is attributable to the purchase by Waste
Connections during the three-month period ending March 31, 2001 of majority
interests in two unrelated entities, one in California and one in Washington.
Provision for Income Taxes. Income taxes decreased $822,000 to $3.2 million for
the three months ended March 31, 2001 from $4.0 million for the three months
ended March 31, 2000. The effective income tax rate for the three months ended
March 31, 2001, before acquisition related and stock compensation expenses, was
39.9%, which is above the federal statutory rate of 35.0% as the result of state
and local taxes and non-deductible goodwill associated with certain
acquisitions.
Net Income before Extraordinary Item. Net income decreased by $834,000 to $4.9
million for the three months ended March 31, 2001, from $5.7 million for the
three months ended March 31, 2000. The decrease was primarily attributable to
the cost associated with the early termination of an interest rate hedge and was
offset by the inclusion of acquisitions closed in the last year, economies of
scale from a greater revenue base, greater integration of
5
13
collection volumes into landfills we own or operate, selective price increases
and the decline in acquisition related expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, we had a working capital deficit of $6.4 million,
including cash and cash equivalents of $4.2 million. Our strategy in managing
our working capital is generally to apply the cash generated from our operations
that remains available after satisfying our working capital and capital
expenditure requirements to reduce our indebtedness under our bank revolving
credit facility and to minimize our cash balances.
We have a revolving credit facility with a syndicate of banks for which Fleet
Boston Financial Corporation acts as agent, under which we can borrow up to $435
million and which is secured by virtually all assets of Waste Connections,
including our interest in the equity securities of our subsidiaries. The credit
facility matures in 2005 and bears interest at a rate per annum equal to, at our
discretion, either: (i) the Base Rate; or (ii) the Eurodollar Rate plus
applicable margin. The credit facility requires us to maintain certain financial
ratios and satisfy other predetermined requirements, such as minimum net worth,
net income and limits on capital expenditures. It also requires the lenders'
approval of acquisitions in certain circumstances. As of March 31, 2001, an
aggregate of approximately $331.2 million was outstanding under our credit
facility, and the interest rate on outstanding borrowings, including
amortization of fees, under the credit facility was approximately 8.0%.
Subsequent to the end of the quarter ending March 31, 2001, we closed on $150
million of our 5.5% subordinated convertible notes. The notes are unsecured and
are convertible at any time by the holders into common stock at 26.2985 shares
per $1,000 principal amount of notes. Concurrent with the closing of this
financing, we modified certain of our revolving credit covenants allowing us to
increase our overall leverage ratio's modestly. There was no change in the
available borrowing capacity under our revolving credit facility. Proceeds from
the offering were used to repay the revolving credit facility and associated
costs.
For the three months ended March 31, 2001, net cash provided by operations was
approximately $7.6 million. $13.4 million of cash provided by operations was
used by an increase in working capital (net of acquisitions) for the period.
For the three months ended March 31, 2001, net cash used by investing activities
was $30.1 million. Of this, $24.0 million was used to fund the cash portion of
acquisitions. Cash used for capital expenditures was $6.0 million, which was
primarily for investments in fixed assets, consisting primarily of trucks,
containers and other equipment.
For the three months ended March 31, 2000, net cash provided by financing
activities was $24.2 million, which was provided by net borrowings under our
various debt arrangements.
Capital expenditures relating to existing businesses for the remainder of 2001
are currently expected to be approximately $37 million. We intend to fund our
remaining planned 2001 capital expenditures principally through internally
generated funds, and borrowings under our existing credit facility. We intend to
fund our future acquisitions and capital requirements through additional
borrowings under our credit facility and funds raised from sale of our equity
securities under appropriate market conditions. We believe that the credit
facility, and the funds expected to be generated from operations, will provide
adequate cash to fund our working capital and other cash needs for the
foreseeable future. However, increased use of debt to fund our capital
requirements will increase our interest expense. It may also raise our
debt-to-equity ratio, which could hinder our ability to obtain additional
credit. If we are unable to obtain additional debt financing or to sell
additional equity securities in the future, we may be unable to fund future
acquisitions, which could cause a decline in the growth rate of our revenues.
From time to time we evaluate our existing operations and their strategic
importance to the Company. In the event a given operating unit is not considered
to have future strategic importance, we may sell or otherwise dispose of those
operations. Although the Company believes its operations are not impaired, such
a decision to dispose of certain operations could result in a loss on
disposition.
6
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In December 1999, we entered into an interest rate hedge agreement with
BankBoston, N.A. Under this hedge agreement, which was effective through
December 2001, the interest rate on $125 million of our floating rate long-term
debt was effectively fixed with an interest rate of 6.1% plus an applicable
margin. This rate remained at 6.1% if LIBOR was less than 7.0%. If LIBOR
exceeded 7.0%, the interest rate under this hedge agreement would increase one
basis point for every LIBOR basis point above 7.0%.
In May 2000, we entered into an interest rate hedge with Union Bank of
California, N.A. Under this hedge agreement, which was effective through May
2003, the interest rate on $125 million of our floating rate long-term debt was
effectively fixed with an interest rate of 7.19% plus an applicable margin. The
rate remained at 7.19% if LIBOR was less than 8.0%. If LIBOR exceeded 8.0%, the
interest rate under this hedge agreement would increase one basis point for
every LIBOR basis point above 8%.
In December 2000, we restructured both of the previously outstanding interest
rate hedge agreements, extending their maturity through December 2003 and
removing the embedded option features of the agreements. The Fleet Bank hedge
(formerly the Bank Boston, N.A. hedge) is now on a notional amount of $125
million at a fixed rate of 6.17% plus applicable margin. After the December 2000
restructuring, the Union Bank of California hedge was on a notional amount of
$125 million at a fixed rate of 7.01% plus applicable margin; in March, 2001, we
terminated $110 million of this hedge.
We are exposed to cash flow risk due to changes in interest rates with respect
to the remainder of the balance of our credit facility and the municipal bond
obligations in the combined amount of approximately $24 million associated with
Madera, Columbia Resource Company and Wasco.
7
15
WASTE CONNECTIONS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no current proceeding or litigation involving the Company that the
Company believes will have a material adverse impact on the Company's business,
financial condition, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WASTE CONNECTIONS, INC.
BY: /s/ Ronald J. Mittelstaedt
Date: May 11, 2000 -------------------------------------
Ron J. Mittelstaedt,
President and Chief Executive Officer
BY: /s/ Steven F. Bouck
Date: May 11, 2000 -------------------------------------
Steven F. Bouck,
Executive Vice President and Chief
Financial Officer
8