SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission File Number 0-22417
Waste Industries, Inc.
(exact name of Registrant as specified in its charter)
North Carolina 56-0954929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3949 Browning Place
Raleigh, North Carolina
(Address of principal executive offices)
27609
(Zip Code)
(919) 782-0095
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 the latest practicable date.
Common Stock, No Par Value 13,854,355 shares
(Class) (Outstanding at August 13, 1999)
PART 1 - Financial Information
Item 1. Financial Statements
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1999
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,665,073 $3,693,958
Accounts receivable - trade, less allowance for
uncollectible accounts (1998-$699,600; 1999-$666,351) 16,834,606 23,091,093
Inventories 1,334,409 1,548,361
Current deferred income taxes 493,835 493,835
Prepaid expenses and other current assets 1,588,920 3,442,231
---------- ----------
Total current assets 23,916,843 32,269,478
---------- ----------
PROPERTY AND EQUIPMENT, net 88,801,179 125,313,035
INTANGIBLE ASSETS, net 63,073,024 70,289,248
OTHER NONCURRENT ASSETS 410,122 429,306
---------- -----------
TOTAL ASSETS $176,201,168 $228,301,067
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $1,877,128 $1,309,368
Accounts payable - trade 10,170,654 12,542,554
Federal and state income taxes payable 187,906 731,940
Accrued expenses and other liabilities 2,995,160 5,057,032
Deferred revenue 1,742,921 2,309,296
---------- ----------
Total current liabilities 16,973,769 21,950,190
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 86,464,655 131,859,088
NONCURRENT DEFERRED INCOME TAXES 7,837,818 8,612,818
DISPOSAL SITE CLOSURE AND LONG-TERM CARE OBLIGATIONS 262,133 1,184,485
COMMITMENTS AND CONTINGENCIES (Note 5) -- --
SHAREHOLDERS' EQUITY:
Preferred stock, undesignated, shares authorized -
10,000,000, shares issued and outstanding - none -- --
Common stock, no par value, shares authorized - 80,000,000, shares
issued and outstanding: 1998 - 13,380,905; 1999 - 13,854,355 41,148,148 46,710,742
Paid-in capital 7,245,000 7,245,000
Retained earnings 16,596,296 22,512,679
Note receivable - Liberty Waste -- (11,538,000)
Shareholders' loans and receivables (326,651) (235,935)
----------- ------------
Total shareholders' equity 64,662,793 64,694,486
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $176,201,168 $228,301,067
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
---- ---- ---- ----
Revenues:
Service revenues $41,099,832 $52,601,008 $80,088,501 $99,891,659
Equipment sales 426,969 254,402 778,027 500,181
------- ------- -------- -------
Total revenues 41,526,801 52,855,410 80,866,528 100,391,840
---------- ----------- ----------- -----------
Operating costs and expenses:
Cost of operations 25,829,972 33,002,638 50,289,254 62,235,085
Cost of equipment sales 307,762 190,079 501,337 293,597
Selling, general and administrative 6,358,258 7,427,033 12,720,740 14,519,545
Depreciation and amortization expense 3,938,089 5,405,292 7,644,494 10,462,026
Merger and start-up costs 169,977 233,151 247,077 233,151
---------- ---------- -------- -------
Total operating costs and expenses 36,604,058 46,258,193 71,402,902 87,743,404
Operating income 4,922,743 6,597,217 9,463,626 12,648,436
Interest expense 1,048,812 2,123,602 1,995,591 3,935,073
Interest income (45,471) (332,636) (71,951) (525,961)
Other (145,851) (58,115) (264,018) (151,631)
--------- -------- --------- ---------
Total other expense, net 857,490 1,732,851 1,659,622 3,257,481
-------- ---------- ---------- ---------
Income before income taxes 4,065,253 4,864,366 7,804,004 9,390,955
Income tax expense
Income tax expensed 1,416,000 1,799,300 2,776,000 3,474,600
---------- ---------- ---------- ---------
Net income $2,649,253 $3,065,066 $5,028,004 $5,916,355
=========== =========== =========== ==========
Earnings per share:
Basic $0.21 $0.22 $0.40 $0.43
Diluted $0.20 $0.22 $0.39 $0.42
Income before income tax expense $4,065,253 $7,804,004
Pro forma income taxes 1,506,000 2,891,000
---------- ---------
Pro forma net income $2,559,253 $4,913,004
========== ==========
Pro forma - Earnings Per Share:
Basic $0.20 $0.39
Diluted $0.20 $0.38
Weighted average common shares:
Basic 12,651,701 13,760,605 12,651,701 13,632,272
Diluted 13,047,772 14,124,327 13,041,787 13,994,898
3
WASTE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six-Months Ended
June 30,
1998 1999
---- ----
OPERATING ACTIVITIES:
Net income $5,028,004 $5,916,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,644,494 10,462,026
Gain on sale of property and equipment (159,166) (57,377)
Provision for deferred income taxes 470,000 354,933
Change in closure/post closure liabilities 20,720 922,352
Changes in assets and liabilities, net of effects
from acquisitions of related businesses:
Accounts receivable - trade (1,573,632) (4,621,747)
Inventories (511,368) (213,952)
Prepaid and other current assets (718,389) (1,811,055)
Accounts payable - trade 2,510,600 1,969,929
Income taxes payable 553,515 544,034
Accrued expenses and other liabilities 168,397 (8,411)
Deferred revenue 131,020 (7,706)
---------- -----------
Net cash provided by operating activities 13,564,195 13,449,381
---------- ----------
INVESTING ACTIVITIES:
Other noncurrent assets (445,730) (441,950)
Acquisitions of related business, net of cash acquired (4,655,908) (27,194,099)
Proceeds from sale of property and equipment 305,971 (6,587)
Purchases of property and equipment (18,075,672) (19,970,010)
----------- ------------
Net cash used in investing activities (22,871,339) (47,612,646)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 69,682,464 79,518,028
Principal payments on long-term debt (59,649,766) (37,170,660)
Repayments of notes receivable from shareholders 95,302 90,716
Increase in shareholder loans -- --
Proceeds from issuance of common stock -- 3,250,080
Proceeds from exercised options -- 44,101
Subchapter S distributions to shareholders (730,889) --
Loan to Liberty Waste -- (11,538,000)
Other 1,844 (2,115)
----- -------
Net cash provided by financing activities 9,398,955 34,192,150
--------- ----------
NET INCREASE IN CASH 91,811 28,885
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,175,557 3,665,073
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,267,368 $3,693,958
========== ==========
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
WASTE INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Basis of Presentation
The condensed financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. As applicable under such regulations, certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the presentations and
disclosures in the financial statements included herein are adequate to make the
information not misleading. The financial statements reflect normal adjustments
which are necessary for a fair statement of the results for the interim periods
presented. Operating results for interim periods are not necessarily indicative
of the results for full years or other interim periods.
The condensed financial statements included herein should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Recent Developments
Purchase Acquisitions:
During the six months ended June 30, 1999, the Company made the following
acquisitions accounted for as purchases:
o On June 11, 1999, the Company acquired assets from A&S Waste Services,
Inc. related to its solid waste collection and recycling business
located in the Douglas, Georgia area for approximately $550,000 in
cash.
o On June 1, 1999, the Company acquired assets from Keith D. Threet of
Crossville, Tennessee related to his waste collection business known as
"Keith's Disposal Service" for approximately $200,000 in cash.
o On May 31, 1999, the Company acquired assets from Elaine Woodard
related to her residential solid waste collection and recycling
business located in the Raleigh, North Carolina area and known as "A&B
Sanitation" for approximately $320,000 in cash.
o On May 20, 1999, the Company purchased customer routes, containers and
certain other assets of K&S Sanitation, Inc. related to its residential
solid waste collection business located in the Charlotte, North
Carolina area for approximately $550,000 in cash.
o On May 1, 1999, the Company acquired the assets of S&T Haulers, LLC
associated with its solid waste collection and recycling business
located in and around Kennesaw, Georgia for approximately $1.6 million
in cash.
o On May 1, 1999, the Company acquired North Mecklenburg Sanitation,
Inc., which operates a solid waste collection business in and around
Charlotte, North Carolina. The purchase price for this company was
approximately $4.5 million in cash and 281,249 unregistered shares of
our common stock which were registered effective June 1, 1999. This
transaction expands the Company's operations into the Charlotte, North
Carolina area.
o On April 30, 1999, the Company made a tuck-in acquisition of Central
Georgia Waste Services, Inc. for $0.5 million in cash. This tuck-in
acquisition further expands the Company's existing operations in and
around Atlanta, Georgia.
o On April 1, 1999, the Company acquired Old Kings Road Solid Waste, Inc.
which operates a landfill and a related solid waste collection business
in and around Jacksonville, Florida, for approximately $1.0 million in
cash. This acquisition gives the Company its fourth landfill and
expands its operations into northeastern Florida, a new market for the
Company in the Southeastern U.S.
o On February 12, 1999 the Company purchased equipment and customer
contracts related to the commercial, industrial and residential solid
waste collection and recycling businesses of Clary's Container Corp.,
located in Max Meadow, Virginia, for approximately $1.3 million in
cash.
o On January 14, 1999, the Company acquired a regional municipal solid
waste landfill in Decatur County, Tennessee from Waste Services of
Decatur, LLC ("WSD") through Liberty Waste Services, LLC ("Liberty")
for approximately $12.9 million in cash. The acquisition was funded
with borrowings under the Company's long-term bank notes payable.
5
Components of cash used for the purchase acquisitions reflected in the unaudited
condensed consolidated statement of cash flows for the six months ended June 30,
1999 are as follows:
Fair value of tangible assets acquired 27,153,529
Liabilities assumed (5,945,707)
Non-compete agreements and contracts 94,420
Goodwill 10,343,401
----------
Net acquisition costs $31,645,643
===========
Net acquisition costs include the issuance of 281,249 shares of the Company's
common stock with a fair value of $4,451,541 as partial consideration for
certain business acquisitions (see Note 4).
Non-compete agreements and contracts are amortized using the straight-line
method over the lives of the agreements. Goodwill is amortized using the
straight-line method over 25-40 years. Such estimated useful lives assigned to
goodwill are based on the period over which management believes that such
goodwill can be recovered through undiscounted future operating cash flows of
the acquired operations.
In accordance with the purchase method of accounting, the purchase price has
been allocated to the underlying assets and liabilities based on their
respective fair values at the dates of acquisition. Such allocation has been
based on preliminary estimates which may be revised at a later date.
The unaudited pro forma results of operations reflecting the effects of the
acquisitions for the three- and six-month periods ended June 30, 1999 are not
presented because the effects are immaterial.
Pooling-of-Interests Transactions:
On August 28, 1998, the Company acquired, in exchange for 388,311 shares of
Company common stock valued at approximately $8.5 million, all of the
outstanding stock of Railroad Avenue Disposal, Inc. ("RAD"), a Mississippi
corporation that owns and operates a Class I rubbish pit and sand and gravel
operation in northwest Mississippi. The Company has restated the previously
issued financial statements for the three and six months ended June 30, 1998 to
reflect this acquisition, which was accounted for as a pooling-of-interests.
The RAD transaction and the related restatement were immaterial to the Company's
previously issued consolidated statements of operations for the three and six
months ended June 30, 1998.
2. INCOME TAXES
Certain companies acquired in poolings-of-interests transactions were previously
taxed as S Corporations. Pro forma net income and earnings per share amounts
have been computed as if the Company was subject to federal and all applicable
state corporate income taxes for each period presented.
3. PRO FORMA EARNINGS PER SHARE
Pro forma basic and diluted earnings per share computations are based on the
weighted-average common stock outstanding and include the dilutive effect of
stock options using the treasury stock method. Common stock outstanding used to
compute the weighted-average shares was retroactively adjusted for the
acquisitions accounted for applying the pooling of interests method of
accounting (including four acquisitions of entities under common control during
the three and six months ended June 30, 1998).
4. SHAREHOLDERS' EQUITY
On May 4, 1999, the Company issued 281,249 shares of common stock to James M.
Williamson and Dwane J. Williamson for approximately $4.5 million in connection
with the acquisition of North Mecklenburg Sanitation, Inc.
On April 1, 1999, pursuant to its 1997 Stock Option Plan, the Company granted
certain employees options to purchase 37,425 shares
6
at $15.25 per share, the fair market value on the date of grant, and other
employees options to purchase 23,045 shares at $16.775 per share.
On March 1, 1999, the Company received approximately $44,000 in proceeds from
the exercise of options to purchase 9,200 shares of common stock.
On February 4, 1999, the Company issued 183,000 shares of common stock to
Liberty Waste Services, LLC for $3.3 million. Also accounted for in equity is a
loan made to Liberty Waste Services for $11.5 million.
5. CONTINGENCIES
Certain claims and lawsuits arising in the ordinary course of business have been
filed or are pending against the Company. In the opinion of management, all such
matters have been adequately provided for, are adequately covered by insurance,
or are of such kind that if disposed of unfavorably, would not have a material
adverse effect on the Company's financial position or results of operations.
The Company will have material financial obligations relating to closure and
post-closure of landfill facilities which it has acquired through June 30, 1999.
The Company provides accruals for future obligations (generally for a term of 30
to 40 years after final closure of the landfill) based on engineering estimates
of consumption of permitted landfill airspace over the useful life of the
landfill. There can be no assurance that the Company's ultimate financial
obligations for actual closing or post-closing costs will not exceed the amount
accrued and reserved or amounts otherwise receivable pursuant to insurance
policies or trust funds. Such a circumstance could have a material adverse
effect on the Company's financial condition and results of operation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THE ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998. CERTAIN MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS ARE "FORWARD-LOOKING STATEMENTS" INTENDED
TO QUALIFY FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS CAN
GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT WILL
INCLUDE WORDS SUCH AS THE COMPANY "BELIEVES," "ANTICIPATES," "EXPECTS" OR WORDS
OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE
PLANS, OBJECTIVES OR GOALS ARE ALSO FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CURRENTLY
ANTICIPATED. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE RELATED TO THE ABILITY
TO MANAGE GROWTH, THE AVAILABILITY AND INTEGRATION OF ACQUISITION TARGETS,
COMPETITION, GEOGRAPHIC CONCENTRATION, GOVERNMENT REGULATION AND OTHERS SET
FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K. SHAREHOLDERS, POTENTIAL
INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE FACTORS CAREFULLY IN
EVALUATING THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS MADE
HEREIN ARE ONLY MADE AS OF THE DATE OF THIS REPORT AND THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE SUCH FORWARD-LOOKING STATEMENTS TO REFLECT
SUBSEQUENT EVENTS OR CIRCUMSTANCES.
OVERVIEW
Waste Industries is a regional, integrated provider of solid waste services. The
Company operates primarily in North Carolina, South Carolina, Virginia,
Tennessee, Mississippi, Alabama, Georgia and Florida, providing solid waste
collections, transfer, recycling, processing and disposal services for 39 branch
facilities, 22 transfer stations, over 100 county convenience drop-off centers,
seven recycling facilities and four landfills. The Company had revenues of
$171.3 million and operating income of $20.1 million in the year ended December
31, 1998, and revenues of $100.4 million and operating income of $12.6 million
in the six months ended June 30, 1999.
The Company's presence in high-growth markets in the Southeastern U.S.,
including North Carolina, Georgia and Florida, has supported its internal
growth. In addition, from 1990 through the six months ended June 30, 1999, the
Company acquired 46 solid waste disposal operations. Current levels of
population growth and economic development in the Southeastern U.S. and the
Company's strong market presence in the region should provide the Company an
opportunity to increase its revenues and market share. As the Company adds
customers in existing markets, its density should improve, which
7
the Company expects will increase its collection efficiencies and profitability.
RESULTS OF OPERATIONS
GENERAL
The Company's branch waste collection operations generate revenues from fees
collected from commercial, industrial and residential collection and transfer
station customers. The Company derives a substantial portion of its collection
revenues from commercial and industrial services which are performed under
one-year to five-year service agreements. The Company's residential collection
services are performed either on a subscription basis with individual
households, or under contracts with municipalities, apartment owners, homeowners
associations or mobile home park operators. Residential customers on a
subscription basis are billed quarterly in advance and provide the Company with
a stable source of revenues. A liability for future service is recorded upon
billing and revenues are recognized at the end of each month in which services
are actually provided. Municipal contracts in the Company's existing markets are
typically awarded, at least initially, on a competitive bid basis and thereafter
on a bid or negotiated basis and usually range in duration from one to five
years. Municipal contracts provide consistent cash flow during the term of the
contracts.
The Company's prices for its solid waste services are typically determined 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 in its markets for similar services.
The Company's ability to pass on price increases is sometimes limited by the
terms of its contracts. Long-term solid waste collection contracts typically
contain a formula, generally based on a predetermined published price index, for
automatic adjustment of fees to cover increases in some, but not all, operating
costs.
The Company currently operates approximately 100 convenience sites under
contract with 15 counties in order to consolidate waste in rural areas. These
contracts, which are usually competitively bid, generally have terms of one to
five years and provide consistent cash flow during the term of the contract
since the Company is paid regularly by the local government. The Company also
operates seven recycling processing facilities as part of its collection and
transfer operations where it collects, processes, sorts and recycles paper
products, aluminum and steel cans, pallets, certain plastics, glass, and certain
other items. The Company's recycling facilities generate revenues from the
collection, processing and resale of recycled commodities, particularly recycled
wastepaper. Through a centralized effort, the Company resells recycled
commodities using commercially reasonable practices and seeks to manage
commodity pricing risk by spreading the risk among its customers. The Company
also operates curbside residential recycling programs in connection with its
residential collection operations in most of the communities it serves.
Operating expenses for the Company's collection operations include labor, fuel,
equipment maintenance and tipping fees paid to landfills. The Company owns or
operates 22 transfer stations which reduce the Company's costs by improving its
utilization of collection personnel and equipment and by consolidating the waste
stream to gain more favorable disposal rates. The Company owns and operates four
landfills. Operating expenses for these landfill operations include labor,
equipment, legal and administrative, ongoing environmental compliance, host
community fees, site maintenance and accruals for closure and post-closure
maintenance. Cost of equipment sales primarily consists of the Company's cost to
purchase the equipment that it resells.
The Company capitalizes certain expenditures related to pending acquisitions or
development projects. Indirect acquisition and project development costs, such
as executive and corporate overhead, public relations and other corporate
services, are expensed as incurred. The Company's policy is to charge against
net income any unamortized capitalized expenditures and advances (net of any
portion that the Company estimates to be recoverable, through sale or otherwise)
relating to any operation that is permanently shut down, any pending acquisition
that is not consummated and any landfill development project that is not
expected to be successfully completed. Engineering, legal, permitting,
construction and other costs directly associated with the acquisition or
development of a landfill, together with associated interest, are capitalized.
At June 30, 1999, the Company had recorded $191,328 of capitalized land
acquisition costs in connection with the development of a new land clearing and
inner debris ("LCID") landfill.
Selling, general and administrative ("SG&A") expenses include management
salaries, clerical and administrative overhead, professional services, costs
associated with the Company's marketing and sales force and community relations
expense.
Property and equipment is depreciated over the estimated useful life of the
assets using the straight line method.
8
Other income and expense, which is comprised primarily of interest income and
gains and losses on sales of equipment, has not historically been material to
the Company's results of operations.
To date, inflation has not had a significant impact on the Company's operations.
The following table sets forth for the periods indicated the percentage of
revenues represented by the individual line items reflected in the Company's
Unaudited Condensed Statements of Operations:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1998 1999 1998 1999
---- ---- ---- ----
Total revenues 100.0% 100.0% 100.0% 100.0%
Service revenues 99.0% 99.5% 99.0% 99.5%
Equipment Sales 1.0% 0.5% 1.0% 0.5%
---- ---- ---- ----
Cost of service operations 62.2% 62.4% 62.2% 62.0%
Cost of equipment sales 0.7% 0.4% 0.6% 0.3%
Selling, general and administrative 15.3% 14.1% 15.7% 14.5%
Depreciation and amortization 9.5% 10.2% 9.5% 10.4%
Merger and start-up costs 0.4% 0.4% 0.3% 0.2%
---- ---- ---- ----
Operating income 11.9% 12.5% 11.7% 12.6%
Interest expense 2.5% 3.4% 2.3% 3.4%
Other income -0.4% -0.1% -0.3% -0.2%
----- ----- ----- -----
Income before income taxes 9.8% 9.2% 9.7% 9.4%
Income taxes (1) 3.6% 3.4% 3.6% 3.5%
---- ---- ---- ----
Net income 6.2% 5.8% 6.1% 5.9%
==== ==== ==== ====
(1) Certain companies acquired in poolings-of-interests transactions in fiscal
1998 were previously taxed as S corporations. For the three- and six-month
periods ended June 30, 1998, income taxes have been computed as if the companies
acquired were subject to federal and all applicable state corporate income taxes
for the period presented assuming the tax rate that would have applied had the
companies been taxed as C corporations.
THREE AND SIX MONTHS ENDED JUNE 30, 1999 VS. THREE AND SIX MONTHS ENDED
JUNE 30, 1998
REVENUES. Total revenues increased approximately $11.3 million, or 27.3%, and
$19.5 million, or 24.2%, for the three- and six- month periods ended June 30,
1999, respectively, as compared with the same periods in 1998. These increases
for each 1999 period were attributable primarily to the following factors: (i)
the effect of eight businesses acquired during the year ended December 31, 1998
and nine businesses acquired during the six months ended June 30, 1999; and (ii)
to a lesser extent, increased collection volumes resulting from new municipal
and commercial contracts and residential subscriptions.
COST OF OPERATIONS. Cost of operations increased $7.2 million, or 27.8%, and
$11.9 million, or 23.8%, for the three-and six-month periods ended June 30,
1999, respectively, as compared to the same periods in 1998. These increases for
each 1999 period were attributable primarily to the following factors: (i) the
effect of eight businesses acquired during the year ended December 31, 1998 and
nine businesses acquired during the six-months ended June 30, 1999; and (ii) to
a lesser extent, increased collection volumes resulting from new municipal and
commercial contracts and residential subscriptions.
SG&A. SG&A increased $1.1 million, or 16.8%, and $1.8 million, or 14.1%, for the
three- and six-month periods ended June 30, 1999, respectively. As a percentage
of revenues, SG&A decreased from 15.3% to 14.1% in the second quarter of 1999
compared to the second quarter of 1998 and from 15.7% to 14.5% in the first half
of 1999 compared to the first half of 1998, due primarily to synergies achieved
through acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.5
million, or 37.3%, and $2.8 million, or 36.9%, for the three- and six-month
periods ended June 30, 1999, respectively, compared to the same periods in 1998.
Depreciation and amortization, as a percentage of revenues, increased to 10.2%
from 9.5%, and to 10.4% from 9.5%, for the three- and six-month periods ended
June 30, 1999, respectively, compared to the same periods in 1998. The principal
reasons for the increase were
9
depreciation of additional property and equipment acquired and put into service
because of higher collection volumes, depreciation of assets of acquired
businesses, amortization of landfill costs, and amortization of intangibles
related to acquired businesses.
INTEREST EXPENSE. Interest expense increased $1.1 million, or 102.5%, and $1.9
million, or 97.2%, for the three- and six-month periods ended June 30, 1999,
respectively, compared to the same periods in 1998. These increases for each
1999 period were primarily due to the higher level of average outstanding
indebtedness related to acquired businesses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 1999 was $10.3 million compared to
$6.9 million at December 31, 1998. The Company's strategy in managing its
working capital has been to apply the cash generated from its operations which
remains available after satisfying its working capital and capital expenditure
requirements to reduce its indebtedness under its bank revolving credit facility
and to minimize its cash balances. The Company generally finances its working
capital requirements from internally generated funds and bank borrowings. In
addition to internally generated funds, the Company has in place financing
arrangements to satisfy its currently anticipated working capital needs in 1999.
The Company has a revolving credit facility with Branch Banking & Trust ("BB&T")
allowing the Company to borrow up to $50 million for acquisitions and capital
expenditures and $10 million for working capital. The Company has also
established three $25 million term loan facilities and a $25 million shelf
facility with Prudential Insurance Company of America ("Prudential"). As of June
30, 1999, approximately $50.0 million was outstanding under the BB&T facility,
which matures November 2002, and the Company had fully drawn down the three
Prudential term facilities, leaving the Company with an uncommitted shelf
facility of $25 million. Both the BB&T and the Prudential credit facilities
require the Company to maintain certain financial ratios, such as debt to
earnings and fixed charges to earnings, and satisfy other predetermined
requirements, such as minimum net worth, net income and deposit balances. At
June 30, 1999, the Company was in compliance with all covenants. The 12-month
weighted average interest rate on outstanding borrowings under the BB&T facility
was 6.83% at June 30, 1999. Interest on the BB&T facility is payable monthly
based on an adjusting spread to LIBOR. Interest on the three Prudential term
facilities is paid quarterly, based on a fixed rate of 7.28%, 6.96% and 6.84%,
respectively. Of the Company's committed Prudential facilities, $25 million
mature in April 2006, $25 million mature in June 2008, and $25 million mature in
February 2009, subject to renewal. As of June 30, 1999, the Company had a
compensating balance arrangement with BB&T for $375,000.
Net cash provided by operating activities totaled $13.4 million for the six
months ended June 30, 1999, compared to $13.6 million for the six months ended
June 30, 1998. This decrease was caused principally by increases in net income
and depreciation and amortization which was partially offset by increases in
accounts receivable balances outstanding.
Net cash used in investing activities totaled $52.1 million for the six months
ended June 30, 1999, compared to $22.9 million for the six months ended June 30,
1998. This increase was caused principally by a higher level of acquisitions of
related businesses.
Capital expenditures for 1999 are currently expected to be approximately $28.0
million, compared to $30.0 million in 1998. In 1999, approximately $20.0 million
is expected to be utilized for vehicle and equipment additions and replacements,
approximately $1.0 for expansion of transfer station services and approximately
$7.0 million for facilities, additions and improvements. The Company intends to
fund its planned 1999 capital expenditures principally through internally
generated funds and borrowings under existing credit facilities. In addition,
the Company anticipates that it may require substantial additional capital
expenditures to facilitate its growth strategy of acquiring solid waste
collection and disposal businesses. As an owner of and potential acquirer of
additional new landfill disposal facilities, the Company may also be required to
make significant expenditures to bring such newly acquired disposal facilities
into compliance with applicable regulatory requirements, obtain permits for
these facilities or expand their available disposal capacity. The amount of
these expenditures cannot be currently determined, since they will depend on the
nature and extent of any acquired landfill disposal facilities, the condition of
any facilities acquired and the permitting status of any acquired sites.
Net cash provided by financing activities totaled $34.2 million for the six
months ended June 30, 1999, compared to $9.4 million for the six months ended
June 30, 1998. The increase was primarily attributable to net increases in
long-term debt due to acquisitions.
At June 30, 1999, the Company had approximately $133.2 million of long-term and
short-term borrowings outstanding and approximately $465,500 in letters of
credit. At June 30, 1999, the ratio of the Company's long-term debt to total
capitalization was 67.1% compared to 57.2% at December 31, 1998.
SEASONALITY
The Company's results of operations tend to vary seasonally, with the first
quarter typically generating the least amount of revenues, higher revenues in
the second and third quarters, and a decline in the fourth quarter. This
seasonality reflects the lower volume of waste during the fall and winter
months. Also, certain operating and fixed costs remain relatively constant
throughout the calendar year, which when offset by these revenues results in a
similar seasonality of operating income.
10
YEAR 2000 TECHNOLOGY ISSUES
The Year 2000 problem is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have data-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in other routine business activities.
As of June 30, 1999, the Company has substantially completed testing of
information technology ("IT") systems with the assistance of software
specialists and consultants. Based on these tests, the Company has determined
that there are no current Year 2000 problems related to processing within these
IT systems. Going forward, the Company will evaluate the need, if any, for
further testing based on both hardware and software additions.
After an inventory of all non-IT systems within the Company, senior management
determined that one non-IT system required an upgrade in order to be Year 2000
ready. The Company has purchased and installed the appropriate upgrade for this
non-IT system and is, therefore, substantially Year 2000 ready with respect to
non-IT systems.
The Company is in the process of formal communications with its significant
suppliers, business partners, and customers to determine the extent to which it
may be affected by these third parties' plans to remediate their own Year 2000
issues in a timely manner. Although there can be no assurances as such, the
financial impact of potential third party Year 2000 issues on the Company is not
anticipated to be material to its financial position or results of operations.
The Company has incurred approximately $10,000 of Year 2000 project expenses to
date for IT and non-IT systems. The expenses were funded by cash generated from
operations. Future expenses are expected to be approximately $10,000. Total Year
2000 expenses are expected to be approximately 2% of the Company's 1999 IT
budget. These expectations are based on future hardware and software
modifications, if any, and the planned testing of the Company's personal
computers. Such testing of the Company's personal computers was substantially
completed during the first half of 1999. Such cost estimates are based on
presently available information and actual costs may materially differ from such
expectations as the Company continues to evaluate Year 2000 issues. Furthermore,
the Company's aggregate cost estimate does not include time and costs that may
be incurred by the Company as a result of the failure of any third parties,
including suppliers, to become Year 2000 ready or costs to implement any
contingency plans. Other IT projects within the Company have not been delayed as
a result of the Company's Year 2000 activities.
The Company has identified the two most reasonably likely worst case scenarios
that the Year 2000 problem could have on operations. First, the Company has
identified several large municipal customers whose potential cash payment delay,
in the event of complications with the Year 2000 problem, could adversely impact
the Company's short term cash flow. However, in the event of such a
complication, the Company plans to utilize its existing unused bank working
capital line of credit. Second, the Company has identified a potential delay in
diesel deliveries as another reasonably likely worst case scenario. However, in
the event of an interruption of short-term diesel supplies as a result of Year
2000 problems, the Company believes that existing bulk storage facilities at
each branch will be adequate to supply diesel for operations.
With regard to risk and contingency plans, due to the nature of the Company's
operations, the Company's management does not believe that the Year 2000 issue
will have a materially adverse effect on its financial condition or results of
operations. Accordingly, the Company has not developed a contingency plan based
on currently obtained knowledge. The Company provides service to a largely
diversified customer base and has a large supplier network. Accordingly, the
Company believes that these factors will mitigate potential adverse Year 2000
impacts. The Company believes, however, that due to the widespread nature of
potential Year 2000 issues, the contingency and risk evaluation process is an
ongoing one which will require further modifications as the Company obtains
future information regarding third party readiness. Furthermore, the Company's
beliefs and expectations, are based on certain assumptions and expectations that
may ultimately prove to be inaccurate. The Company's senior management and the
Board of Directors has received and will continue to receive regular updates on
the status of the Company's Year 2000 readiness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the six months ended June 30, 1999, the Company's market exposure was
affected by the issuance of $79.5 million principal amount of senior notes and
repayments of $37.2 million aggregate principal amount of senior and
subordinated notes. Total fixed-rate long-term debt increased by the principal
amount issued; the average interest rate at June 30, 1999 was 6.83%. The
proceeds from the issuance were used to fund acquisitions during the three and
six months ended June 30, 1999.
In addition the Company acquired $2.5 million in non-interest bearing debt
through acquisitions.
PART II
11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) No material modifications
(b) No material limitations or qualifications
(c) During the six months ended June 30, 1999, the Company issued the
following unregistered securities, none of which involved the use of
underwriters or the payment of commissions:
(1) On February 1, 1999, the Company issued 183,000 shares of its common
stock to Liberty Waste Services, LLC. Such shares were issued in a
transaction intended to qualify as a Section 4(2) exemption from
registration.
(2) On May 4, 1999, the Company issued 281,249 shares of its common stock
to James M. Williamson and Dwane J. Williamson. These shares were
registered for resale on a Form S-3 Registration Statement that
became effective June 1, 1999.
ITEM 4. SUBMISION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 26, 1999. The
following is a brief description of each matter voted upon at the meeting and
the number of affirmative votes and the number of negative votes cast with
respect to each matter.
(a) The elected the following persons as directors of the Company: Lonnie C.
Poole, Jr.; Jim W. Perry; J. Gregory Poole, Jr.; Thomas F. Darden; and
Thomas C. Cannon. The votes for and against (withheld) each nominee were
as follows:
Nominee Votes For Votes Withheld Votes Abstained
------- --------- -------------- ---------------
Lonnie C. Poole, Jr. 11,551,331 10,700 0
Jim W. Perry 11,551,331 10,700 0
J. Gregory Poole, Jr. 11,551,331 10,700 0
Thomas F. Darden 11,547,331 14,700 0
Thomas C. Cannon 11,551,331 10,700 0
(b) The shareholders ratified the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 31,
1999, with 11,560,535 shares voting for, 1,000 shares against and 496
shares abstained.
ITEM 5. OTHER INFORMATION
Pursuant to recently amended Rule 14a-4 promulgated under the Securities
Exchange Act of 1934, as amended, any shareholders seeking to have a proposal
considered at the 2000 Annual Meeting of Shareholders must notify the Company of
such proposal by March 16, 2000 or the persons acting as proxies may exercise
their discretionary voting authority on the proposal notwithstanding that the
shareholders have not been advised of the proposal prior to the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) None
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1999 Waste Industries, Inc.
(Registrant)
By: /s/ Stephen C. Shaw
-------------------
Stephen C. Shaw
Vice President, Finance
13
WASTE INDUSTRIES, INC.
EXHIBIT INDEX
Second Quarter 1999
Exhibit Number Exhibit Description
-------------- -------------------
11 Computations of Earnings Per Share
27 Financial Data Schedule
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
FINANCIAL STATEMENTS OF WASTE INDUSTRIES, INC. AS OF AND FOR THE THREE MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
14