================================================================================
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 JUNE 30, 2001
COMMISSION FILE NO. 0-23981
WASTE CONNECTIONS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3283464
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 August 10, 2001: 27,178,991 Shares of Common Stock
================================================================================
TABLE OF CONTENTS
-----------------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and June 30, 2001 .............................. 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2000 and 2001 ................ 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 and 2001 ...................... 5
Notes to Condensed Consolidated Financial Statements ............. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk ....... 16
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders .............. 17
Item 5 - Other Information ................................................ 17
Item 6 - Exhibits and Reports on Form 8-K ................................. 17
Signatures ................................................................ 18
-2-
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER JUNE
31, 2000 30, 2001
--------- ---------
(UNAUDITED)
ASSETS
- ------
Current assets:
Cash and equivalents $ 2,461 $ 5,157
Accounts receivable, less allowance for doubtful
accounts of $1,899 at December 31, 2000 and
$1,483 at June 30, 2001 42,155 48,975
Prepaid expenses and other current assets 4,419 7,356
--------- ---------
Total current assets 49,035 61,488
Property and equipment, net 384,237 438,142
Intangible assets, net 363,505 375,209
Other assets 13,327 19,351
--------- ---------
$ 810,104 $ 894,190
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt and notes payable $ 3,644 $ 8,098
Accounts payable 25,636 25,996
Deferred revenue 9,595 9,956
Accrued liabilities 20,558 18,030
--------- ---------
Total current liabilities 59,433 62,080
Long-term debt and notes payable, net 334,194 374,622
Other long-term liabilities 6,095 9,378
Deferred income taxes 76,174 76,745
Commitments and contingencies
Minority interests -- 18,192
Stockholders' equity:
Preferred stock: $.01 par value; 7,500,000 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, 27,092,395
shares issued and outstanding at June 30, 2001 265 271
Additional paid-in capital 296,439 307,123
Retained earnings 37,504 48,613
Unrealized loss on market value of interest rate swap -- (2,834)
--------- ---------
Total stockholders' equity 334,208 353,173
--------- ---------
$ 810,104 $ 894,190
========= =========
See accompanying notes.
-3-
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Revenues $ 76,022 $ 93,967 $ 140,033 $ 179,081
Operating expenses:
Cost of operations 44,049 51,864 80,853 98,881
Selling, general and administrative 6,401 8,400 11,792 15,059
Depreciation and amortization 6,599 8,704 12,584 16,896
Stock compensation 54 -- 109 --
Acquisition related expenses -- -- 150 --
------------ ------------ ------------ ------------
Income from operations 18,919 24,999 34,545 48,245
Interest expense (7,828) (7,643) (13,722) (15,245)
Other expense, net (938) (4,552) (932) (10,784)
------------ ------------ ------------ ------------
Income before income tax provision
and minority interests 10,153 12,804 19,891 22,216
Minority interests -- (2,168) -- (3,498)
------------ ------------ ------------ ------------
Income before income tax provision 10,153 10,636 19,891 18,718
Income tax provision (4,171) (4,238) (8,219) (7,464)
------------ ------------ ------------ ------------
Net income before extraordinary item 5,982 6,398 11,672 11,254
Extraordinary item - extinguishment of
debt, net of tax benefit of $96 -- -- -- (144)
------------ ------------ ------------ ------------
Net income $ 5,982 $ 6,398 $ 11,672 $ 11,110
============ ============ ============ ============
Basic earnings per common share:
Income before extraordinary item $ 0.28 $ 0.24 $ 0.55 $ 0.42
Extraordinary item -- -- -- (.01)
------------ ------------ ------------ ------------
Net income per common share $ 0.28 $ 0.24 $ 0.55 $ 0.41
============ ============ ============ ============
Diluted earnings per common share:
Income before extraordinary item $ 0.27 $ 0.23 $ 0.53 $ 0.41
Extraordinary item -- -- -- (.01)
------------ ------------ ------------ ------------
Net income per common share $ 0.27 $ 0.23 $ 0.53 $ 0.40
============ ============ ============ ============
Shares used in the per share calculations:
Basic 21,506,094 27,067,906 21,414,500 26,953,148
============ ============ ============ ============
Diluted 22,136,247 27,637,147 22,050,855 27,626,398
============ ============ ============ ============
See accompanying notes.
-4-
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------------------
2000 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,672 $ 11,110
Adjustments to reconcile net income to
Net cash provided by operating activities:
Loss on disposal of assets 939 4,879
Depreciation 8,794 11,723
Amortization of intangibles 3,790 5,173
Loss on termination of interest rate swap -- 6,337
Minority interests -- 3,498
Amortization of debt issuance costs and debt guarantee fees 342 635
Extraordinary item - early extinguishment of debt -- 240
Stock compensation 109 --
Net change in operating assets and liabilities, net of acquisitions (5,230) (14,794)
---------- ----------
Net cash provided by operating activities 20,416 28,801
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (106,244) (28,275)
Capital expenditures for property and equipment (10,199) (15,886)
Proceeds from disposal of assets -- 2,869
Decrease in other assets (122) (336)
---------- ----------
Net cash used in investing activities (116,565) (41,628)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 112,963 185,021
Principal payments on long-term debt (15,311) (160,427)
Termination of interest rate swap -- (6,337)
Distributions to minority interest holders -- (1,230)
Proceeds from options and warrants 329 4,640
Debt issuance costs (1,729) (6,144)
---------- ----------
Net cash provided by financing activities 96,252 15,523
---------- ----------
Net increase in cash and equivalents 103 2,696
Cash and equivalents at beginning of period 2,393 2,461
---------- ----------
Cash and equivalents at end of period $ 2,496 $ 5,157
========== ==========
See accompanying notes.
-5-
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 financial statements relate to Waste Connections, Inc. and its
subsidiaries (the "Company") as of and for the three and six month periods ended
June 30, 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 and six month periods
ended June 30, 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 June 30, 2001, the consolidated
statements of income for the three and six months ended June 30, 2001 and 2000,
and the consolidated statements of cash flows for the six months ended June 30,
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 STANDARDS
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 6) 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's objective for utilizing derivative instruments is to reduce its
exposure to fluctuations in cash flows due to changes in the variable interest
rates under its credit facility. The Company's strategy to achieve that
objective involves entering into interest rate swaps that are specifically
designated to existing debt under our credit facility and accounted for as cash
flow hedges pursuant to SFAS 133. The Company has two interest rate swaps
outstanding, both expiring in December 2003. The first interest rate swap
changes the interest on $125,000 of our floating rate long-term debt under our
revolving credit facility to a fixed rate of 6.1% plus an applicable margin. The
second interest rate swap changes the interest on $15,000 of our floating rate
long-term debt under our revolving credit facility to a fixed rate of 7.01% plus
an applicable margin.
The Company adopted SFAS 133 effective January 1, 2001. The Company has
evaluated its derivative instruments, consisting solely of two interest rate
swaps, 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 swaps 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. Because the relevant terms of the interest rate swaps and
the specific debts they have been designated to hedge are identical, there was
no ineffectiveness required to be recognized into earnings. In addition, there
are no components of the derivative instruments' gain or loss that have been
excluded from the assessment of hedge effectiveness.
-6-
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
The estimated net amount of the existing gains or losses as of June 30, 2001
(based on the interest rate yield curve at that date) included in accumulated
other comprehensive income expected to be reclassified into earnings as payments
are either made or received under the terms of the interest rate protection
agreements within the next 12 months is approximately $3,027. The timing of
actual amounts reclassified into earnings is dependent on future movements in
interest rates.
Further, the estimated net amount of the gains or losses as of January 1, 2001
(based on the interest rate yield curve at that date) recorded in accumulated
other comprehensive income upon adoption of SFAS 133 expected to be reclassified
into earnings as payments are either made or received under the terms of the
interest rate protection agreements within the next 12 months is approximately
$2,702.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
(collectively, the "Statements") effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their estimated useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002, except, as provided
for under the Statements, goodwill and indefinite lived intangible assets
resulting from acquisitions completed after June 30, 2001 will not be amortized.
The Company has not yet determined the annual effect of application of the
non-amortization provisions of the Statements. However, management of the
Company expects the impact to result in a material increase in pre-tax income.
During the first quarter of 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
3. ACQUISITIONS
For the six months ended June 30, 2001, the Company acquired 8 solid waste
collection businesses that were accounted for using the purchase method of
accounting. The aggregate consideration for these acquisitions was approximately
$28,275 in cash and $6,050 in equity issued.
The purchase prices have been allocated to the identified intangible assets and
tangible assets acquired based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill. The purchase price
allocations are considered preliminary until the Company is no longer waiting
for information that it has arranged to obtain and that is known to be available
or obtainable. Although the time required to obtain the necessary information
will vary with circumstances specific to an individual acquisition, the
"allocation period" for finalizing purchase price allocations generally does not
exceed one year from the consummation of a business combination.
As of June 30, 2001, the Company had eleven acquisitions for which purchase
price allocations were preliminary mainly as a result of tax related
settlements. The Company believes the potential changes to its preliminary
purchase price allocations will not have a material impact on its financial
condition, results of operations or cash flows.
During the six months ended June 30, 2001, the Company sold some of its Utah
operations that were deemed to no longer be of strategic importance. The Company
recognized a pre-tax loss of $4,879 from this sale, which is reflected in other
expense in the accompanying financial statements.
-7-
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
4. LONG-TERM DEBT
In April 2001, Waste Connections issued 5.5% Convertible Subordinated Notes Due
2006 (the "Notes") with an aggregate principal amount of $150,000 in a Rule 144A
private placement. The Notes are unsecured, rank junior to existing and future
Senior Indebtedness, as defined in the indenture governing the notes, and are
convertible at any time at the option of the holder into common stock at a
conversion price of $38.03 per share. The proceeds from the sale of the Notes
were used to repay a portion of the outstanding indebtedness and related costs
under the Company's credit facility.
5. 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Numerator:
Income before extraordinary item $ 5,982 $ 6,398 $ 11,672 $ 11,254
Extraordinary item -- -- -- (144)
------------ ------------ ------------ ------------
Net income $ 5,982 $ 6,398 $ 11,672 $ 11,110
============ ============ ============ ============
Denominator:
Basic shares outstanding 21,506,094 27,067,906 21,414,500 26,953,148
Dilutive effect of options & warrants 630,153 569,241 636,355 673,250
------------ ------------ ------------ ------------
Diluted shares outstanding 22,136,247 27,637,147 22,050,855 27,626,398
============ ============ ============ ============
-8-
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
6. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate swaps
that qualify for hedge accounting (Note 2). The difference between net income
and comprehensive income for the three and six months ended June 30, 2001 is as
follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2001
------------- -------------
Net income $ 6,398 $ 11,110
Change in unrealized loss on interest rate swaps,
net of tax (expense) benefit of $(155) and
$1,881 for the three and six months ended
June 30, 2001, respectively 233 (2,834)
------------- -------------
Comprehensive income $ 6,631 $ 8,276
============= =============
The components of other comprehensive income and related tax effects for the
three and six months ended June 30, 2001 are shown as follows:
THREE MONTHS ENDED JUNE 30, 2001
---------------------------------------
Gross Tax effect Net of tax
--------- --------- ---------
Beginning balance $ (5,103) $ (2,036) $ (3,067)
Amounts reclassified into earnings 603 241 362
Changes in fair value of interest rate swaps (215) (86) (129)
--------- --------- ---------
$ (4,715) $ (1,881) $ (2,834)
========= ========= =========
SIX MONTHS ENDED JUNE 30, 2001
---------------------------------------
Gross Tax effect Net of tax
--------- --------- ---------
Cumulative effect of accounting change $ (5,940) $ (2,370) $ (3,570)
Amounts reclassified into earnings 1,013 404 609
Changes in fair value of interest rate swaps (6,125) (2,444) (3,681)
Changes associated with current period swap
transactions 6,337 2,529 3,808
--------- --------- ---------
$ (4,715) $ (1,881) $ (2,834)
========= ========= =========
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 4); therefore, it was
no longer probable that the variable cash flows under the related debt would
occur and the interest rate swap was terminated, resulting in a $6,337 loss
recorded in other expense in the accompanying financial statements.
-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, Waste Connections 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 June 30, 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
June 30, 2001 had acquired 123 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, we expect
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 comes 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 six months ended June 30, 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.
-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 June 30, 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 our operating
landfills. The rates are determined by management based on estimates provided by
our 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, engineering and interest
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 June 30, 2001, Waste Connections had
capitalized $45,000 of expenditures relating to landfill development projects
and transfer station projects and $57,000 in capitalized expenditures relating
to pending acquisitions.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
(collectively, the "Statements") effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their estimated useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002, except, as provided for under the
new Statements, goodwill and indefinite lived intangible assets resulting from
acquisitions completed after June 30, 2001 will not be amortized. We have not
yet determined the annual effect of application of the non-amortization
provisions of the Statements. However, we expect the impact to result in a
material increase in pre-tax income. During the first quarter of 2002, we will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and we have not yet determined
what the effect of these tests will be on our earnings and financial position.
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 we had
any financial
-11-
obligation for closure and post-closure costs for the Fairmead Landfill as of
June 30, 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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 2001 2000 2001
-------- -------- -------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 57.9 55.2 57.7 55.2
Selling, general and
administrative expenses 8.4 8.9 8.4 8.4
Depreciation and
amortization expense 8.7 9.3 9.0 9.5
Stock compensation 0.1 0.0 0.1 0.0
Acquisition related expenses 0.0 0.0 0.1 0.0
-------- -------- -------- --------
Operating income 24.9 26.6 24.7 26.9
Interest expense, net (10.3) (8.1) (9.8) (8.5)
Other expense, net (1.2) (4.9) (0.7) (6.0)
Minority interests 0.0 (2.3) 0.0 (2.0)
Extraordinary item 0.0 0.0 0.0 (0.1)
Income tax expense (5.5) (4.5) (5.9) (4.1)
-------- -------- -------- --------
Net income 7.9% 6.8% 8.3% 6.2%
======== ======== ======== ========
Revenues. Total revenues increased $18.0 million, or 23.6%, to $94.0 million for
the three months ended June 30, 2001 from $76.0 million for the three months
ended June 30, 2000. Revenues for the six months ended June 30, 2001 increased
$39.1 million, or 27.9%, to $179.1 million from $140.0 million for the six
months ended June 30, 2000. These increases were primarily attributable to the
inclusion of the acquisitions closed throughout the balance of 2000 and the
first six months of 2001, selected price increases and growth in the existing
business.
Cost of Operations. Total cost of operations increased $7.8 million, or 17.7%,
to $51.9 million for the three months ended June 30, 2001 from $44.1 million for
the three months ended June 30, 2000. Cost of operations for the six months
ended June 30, 2001 increased $18.0 million, or 22.3%, to $98.9 million from
$80.9 million for the six months ended June 30, 2000. The increase was primarily
attributable to acquisitions closed over the balance of 2000 and the first six
months of 2001. Cost of operations as a percentage of revenues declined 2.7
percentage points to 55.2% for the three months ended June 30, 2001 from 57.9%
for the three months ended June 30, 2000. Cost of operations as a percentage of
revenues for the six months ended June 30, 2001 declined 2.5 percentage points
to 55.2% from 57.7% for the six months ended June 30, 2000. These decreases as a
percentage of revenues were primarily attributable to the effect of tuck-in
acquisitions closed during the course of 2000 and the first six months of 2001,
economies of scale from the greater revenue base and selective price increases.
SG&A. SG&A expenses increased $2.0 million, or 31.2%, to $8.4 million for the
three months ended June 30, 2001 from $6.4 million for the three months ended
June 30, 2000. SG&A expenses for the six months ended June 30, 2001 increased
$3.3 million, or 27.7%, to $15.1 million from $11.8 million for the six months
ended June 30, 2000. Our SG&A increased as a result of additional personnel from
companies acquired and some additional corporate overhead to accommodate our
growth. Additionally, during the three months ended June 30, 2001, we incurred
$879,000 of expenses related to the termination of negotiations and due
diligence for a large potential acquisition. SG&A as a
-12-
percentage of revenues increased 0.5 percentage points to 8.9% for both the
three and six months ended June 30, 2001 from 8.4% for both the three and six
months ended June 30, 2000. The increase in SG&A as a percentage of revenues was
the result of terminated acquisition expenses and increases in corporate
overhead, partially offset by the spreading of overhead expenses over a larger
base of revenue from the acquisitions completed in the course of 2000 and the
first six months of 2001.
Depreciation and Amortization. Depreciation and amortization expense increased
$2.1 million, or 31.9%, to $8.7 million for the three months ended June 30, 2001
from $6.6 million for the three months ended June 30, 2000. Depreciation and
amortization expenses for the six months ended June 30, 2001 increased $4.3
million, or 34.3%, to $16.9 million from $12.6 million for the six months ended
June 30, 2000. The increases resulted primarily from acquisitions in 2000 and
the first six months of 2001 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 0.6 percentage points to 9.3% for the three months ended June 30, 2001
from 8.7% for the three months ended June 30, 2000. Depreciation and
amortization as a percentage of revenues for the six months ended June 30, 2001
increased 0.5 percentage points to 9.5% from 9.0% for the six months ended June
30, 2000. The increases in depreciation and amortization as a percentage of
revenues were 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 and six months ended June 30, 2001 from $54,000 and $109,000 for the three
and six months ended June 30, 2000, respectively. 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. This compensation
expense was fully amortized on September 30, 2000.
Acquisition Related Expenses. Acquisition related expenses decreased to $0 for
the six months ended June 30, 2001 from $150,000 for the six months ended June
30, 2000. The prior year acquisition related expenses were for commissions,
professional fees, and other direct costs resulting from the one acquisition
that was accounted for using the pooling-of-interests method.
Operating Income. Operating income increased $6.1 million, or 32.1%, to $25.0
million for the three months ended June 30, 2001 from $18.9 million for the
three months ended June 30, 2000. Operating income for the six months ended June
30, 2001 increased $13.7 million, or 39.7%, to $48.2 million from $34.5 million
for the six months ended June 30, 2000. The increases were primarily
attributable to the inclusion of acquisitions closed in 2000 and the first six
months of 2001, 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 1.7
percentage points to 26.6% for the three months ended June 30, 2001 from 24.9%
for the three months ended June 30, 2000. Operating income as a percentage of
revenues for the six months ended June 30, 2001 increased 2.2 percentage points
to 26.9% from 24.7% for the six months ended June 30, 2000. The increase in
operating income is attributable to the improvement in gross margins offset by
increases in SG&A expenses and depreciation and amortization as a percentage of
revenues.
Interest Expense. Interest expense decreased $185,000, or 2.4%, to $7.6 million
for the three months ended June 30, 2001 from $7.8 million for the three months
ended June 30, 2000. The decrease is attributable to lower interest rates on our
revolving credit facility and our replacing a portion of the borrowings under
our revolving credit facility with lower interest subordinated debt obligations,
partially offset by higher total debt levels. Interest expense for the six
months ended June 30, 2001 increased $1.5 million, or 11.1%, to $15.2 million
from $13.7 million for the six months ended June 30, 2000. The increase was
primarily attributable to higher debt levels incurred to fund certain of our
acquisitions, partially offset by lower interest rates on our revolving credit
facility and our replacing a portion of the borrowings under our revolving
credit facility with lower interest subordinated debt obligations.
Other Income (Expense). Other income (expense) increased to ($4.6) million for
the three months ended June 30, 2001 from ($938,000) for the three months ended
June 30, 2000. Other income (expense) increased to ($10.8) million for the six
months ended June 30, 2001 from ($932,000) for the six months ended June 30,
2000. The primary component of the net expense total for the three months ended
June 30, 2001 was a $4.9 million non cash loss recognized on the sale of certain
Utah operations that were deemed to no longer be of strategic importance to us.
The primary components of the net expense for the six months ended June 30, 2001
were the loss from the sale
-13-
of the Utah operations and $6.3 million of expenses resulting from the early
termination of an interest rate swap. During the three months ended March 31,
2001, we determined that the debt to which an interest rate swap related would
be repaid prior to its due from the net proceeds of our 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 were $2.2 million and $3.5 million for
the three and six month periods ended June 30, 2001, respectively, compared to
$0 for both the three and six month periods ended June 30, 2000. The increase is
attributable to the purchase by Waste Connections during the first quarter of
2001 of majority interests in two unrelated entities, one in California and one
in Washington.
Provision for Income Taxes. Income taxes were $4.2 million for both the three
month periods ended June 30, 2001 and 2000. Income taxes decreased $755,000 to
$7.5 million for the six months ended June 30, 2001 from $8.2 million for the
six months ended June 30, 2000. The effective income tax rate for the three and
six months ended June 30, 2001 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 before extraordinary item
increased $416,000 to $6.4 million for the three months ended June 30, 2001,
from $6.0 million for the three months ended June 30, 2000. The increase was
primarily attributable to the inclusion of acquisitions closed in the last year
and first six months of 2001, economies of scale from a greater revenue base,
greater integration of collection volumes into landfills we own or operate and
selective price increases, partially offset by the loss recognized on the sale
of certain Utah operations and expenses related to the termination of
negotiations and due diligence for a large potential acquisition. Net income
before extraordinary item decreased $418,000 to $11.3 million for the six months
ended June 30, 2001, from $11.7 million for the six months ended June 30, 2000.
The decrease was primarily attributable to the cost associated with the early
termination of an interest rate swap, the loss recognized on the sale of
certain Utah operations and expenses related to the termination of a large
potential acquisition, and was offset by 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, selective
price increases and the decline in acquisition related expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, we had a working capital deficit of $592,000, including
cash and equivalents of $5.2 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 June 30, 2001, an
aggregate of approximately $186 million was outstanding under our credit
facility, and the interest rate on outstanding borrowings, including
amortization of fees, under the credit facility was approximately 8.9%.
During April 2001, we sold $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 a conversion price of $38.03 per share. Concurrent with the
closing of this financing, we modified certain of our revolving credit covenants
allowing us to increase our overall leverage ratios. Proceeds from the offering
were used to repay a portion of our debt under the revolving credit facility and
associated costs.
For the six months ended June 30, 2001, net cash provided by operations was
approximately $28.8 million. $14.8 million of cash provided by operations was
used to fund increases in working capital for the period.
For the six months ended June 30, 2001, net cash used by investing activities
was $41.6 million. Of this, $28.3 million was used to fund the cash portion of
acquisitions. Cash used for capital expenditures was $15.9 million,
-14-
which was primarily for investments in fixed assets, consisting primarily of
trucks, containers and other equipment. Cash inflows from investing activities
consisted of $2.9 million received from the sale of a subsidiary.
For the six months ended June 30, 2001, net cash provided by financing
activities was $15.5 million, which was provided by $24.6 million of net
borrowings under our various debt arrangements and $4.6 million of proceeds from
stock option and warrant exercises, less $6.1 million of cash paid for debt
issuance costs, $6.3 million of cash paid to terminate an interest rate swap
and $1.2 million of cash distributions to minority interest holders.
Capital expenditures relating to existing businesses for the remainder of 2001
are currently expected to be approximately $27 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 internally
generated funds, 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 Waste Connections. If we determine that a given operating unit
does not have future strategic importance, we may sell or otherwise dispose of
those operations. Although we believe our operations would not be impaired by
such dispositions, we could incur losses on them.
-15-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to market risk, including
changes in interest rates and certain commodity prices. We use swap agreements
to manage a portion of our risks related to interest rates. While we are exposed
to credit risk in the event of non-performance by counterparties to our swap
agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue
derivative financial instruments for trading purposes. We monitor our swap
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
In December 1999, we entered into an interest rate swap agreement with
BankBoston, N.A. Under this swap 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 swap agreement would increase one
basis point for every LIBOR basis point above 7.0%.
In May 2000, we entered into an interest rate swap with Union Bank of
California, N.A. Under this swap 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 swap 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 swap agreements, extending their maturity through December 2003 and
removing the embedded option features of the agreements. The Fleet Bank swap
(formerly the Bank Boston, N.A. swap) 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 swap 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 swap.
We have performed sensitivity analyses using a discounted cash flow model to
determine how market rate changes will affect the fair value of our market risk
sensitive swap positions and all other debt. Such an analysis is inherently
limited in that it represents a singular, hypothetical set of assumptions.
Actual market movements may vary significantly from our assumptions. Fair value
sensitivity is not necessarily indicative of the ultimate cash flow or earnings
effect we would recognize from the assumed market rate movements.
We are exposed to cash flow risk due to changes in interest rates with respect
to the $46 million remaining floating rate balance owed under our credit
facility and floating rate municipal bond obligations in the combined amount of
approximately $1.8 million associated with Madera. A one percentage point
increase in interest rates on our variable-rate debt as of June 30, 2001 would
decrease our annual pre-tax income by approximately $478,000.
All of our remaining debt instruments are at fixed rates, or effectively fixed
under the interest rate swap agreements described above; therefore, changes in
market interest rates under these instruments would not significantly impact our
cash flows or results of operations.
We market a variety of recyclable materials, including cardboard, office paper,
plastic containers, glass bottles and ferrous and aluminum metals. We own and
operate 17 recycling processing facilities and sell other collected recyclable
materials to third parties for processing before resale. We often share the
profits from our resale of recycled materials with other parties to our
recycling contracts. For example, certain of our municipal recycling contracts
in Washington, negotiated before we acquired those businesses, specify certain
benchmark resale prices for recycled commodities. To the extent the prices we
actually receive for the processed recycled commodities collected under the
contract exceed the prices specified in the contract, we share the excess with
the municipality, after recovering any previous shortfalls resulting from actual
market prices falling below the prices specified in the contract. To reduce our
exposure to commodity price risk with respect to recycled materials, we have
adopted a pricing strategy of charging collection and processing fees for
recycling volume collected from third parties. Although there can be no
assurance of market recoveries in the event of a decline, because of the
provisions within certain of our contracts which pass commodity risk along to
the customers, we believe, given historical trends and fluctuations within the
recycling commodities market, that the ultimate net impact of a 10% decrease in
average recycled commodity prices at June 30, 2001 would not have a material
impact on our cash flows or pre-tax income.
-16-
WASTE CONNECTIONS, INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of stockholders was held on May 16, 2001.
Ronald J. Mittelstaedt was elected as director by the votes indicated:
Total Votes For: 16,855,351
Total Votes Withheld: 6,266,740
Total Votes Instructed: 1,515
The term for Mr. Mittelstaedt expires on the date of the annual meeting in 2004.
The following proposal was also adopted at the annual meeting by the votes
indicated:
To ratify the appointment of Ernst & Young LLP as Independent Auditors for Waste
Connections for the year 2001:
Total Votes For: 23,035,338
Total Votes Against: 83,730
Total Votes Abstained: 4,538
ITEM 5. OTHER INFORMATION
On June 11, 2001, we appointed Robert Davis to our board of directors and to the
audit committee of the board as an independent member.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description of Exhibits
------ -----------------------
*4.1 Form of Note for Waste Connections, Inc.'s 5.5% Convertible
Subordinated Notes due April 15, 2006
*4.2 Indenture between Waste Connections, Inc., as Issuer, and State
Street Bank and Trust Company, as Trustee, dated as of
April 4, 2001
*4.3 Purchase Agreement between Waste Connections, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated dated March 30, 2001
*4.4 Registration Rights Agreement between Waste Connections, Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated dated
as of April 4, 2001
* Incorporated by reference to the exhibits to Waste Connections,
Inc.'s registration statement on Form S-3/A (No. 333-62322).
b. Reports on Form 8-K:
On April 3, 2001, we filed a report on Form 8-K reporting our sale of
$115 million principal amount of 5.5% Convertible Subordinated Notes
due 2006 in a private placement.
On April 26, 2001, we filed a report on Form 8-K reporting our sale of
an additional $35 million principal amount of its 5.5% Convertible
Subordinated Notes due 2006 in a private placement.
-17-
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.
Date: August 13, 2001 BY: /s/ Ronald J. Mittelstaedt
---------------------------
Ron J. Mittelstaedt,
President and Chief Executive Officer
Date: August 13, 2001 BY: /s/ Steven F. Bouck
---------------------------
Steven F. Bouck,
Executive Vice President and Chief
Financial Officer
-18-