-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MzQChpViQAZ8+oOF0aQv2xz0PsSflOc/JR/oa0LFwtu4/IYqQ0Dy2Oy2SsGOWRQh hT1+pAzAWjGGUf/WMh+QGg== 0001072613-01-501096.txt : 20020410 0001072613-01-501096.hdr.sgml : 20020410 ACCESSION NUMBER: 0001072613-01-501096 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASTE CONNECTIONS INC/DE CENTRAL INDEX KEY: 0001057058 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 943283464 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23981 FILM NUMBER: 1786643 BUSINESS ADDRESS: STREET 1: 620 COOLIDGE DRIVE STREET 2: SUITE 350 CITY: FOLSOM STATE: CA ZIP: 95630 BUSINESS PHONE: 9166088200 MAIL ADDRESS: STREET 1: 620 COOLIDGE DRIVE STREET 2: SUITE 350 CITY: FOLSOM STATE: CA ZIP: 95630-3155 10-Q 1 form10-q_10897.txt WASTE CONNECTIONS, INC. FORM 10-Q 09/30/2001 ================================================================================ 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 SEPTEMBER 30, 2001 COMMISSION FILE NO. 0-23981 WASTE CONNECTIONS, INC. ----------------------- (Exact name of registrant as specified in its charter) DELAWARE -------- (State or other jurisdiction of incorporation or organization) 94-3283464 ---------- (I.R.S. Employer Identification No.) 620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630 ----------------------------------------------- (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock: As of November 12, 2001: 27,412,555 Shares of Common Stock ================================================================================ PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets - December 31, 2000 and September 30, 2001 3 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2000 and 2001 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17 PART II - OTHER INFORMATION 18 Signatures 19 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 31, SEPTEMBER 30, 2000 2001 ---------- ---------- ASSETS (UNAUDITED) Current assets: Cash and equivalents $ 2,461 $ 3,993 Accounts receivable, less allowance for doubtful accounts of $1,899 at December 31, 2000 and $1,661 at September 30, 2001 42,155 52,935 Prepaid expenses and other current assets 4,419 8,657 ---------- ---------- Total current assets 49,035 65,585 Property and equipment, net 384,237 466,317 Intangible assets, net 363,505 421,171 Other assets 13,327 19,242 ---------- ---------- $ 810,104 $ 972,315 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and notes payable $ 3,644 $ 7,788 Accounts payable 25,636 30,936 Deferred revenue 9,595 11,731 Accrued liabilities 20,558 28,671 ---------- ---------- Total current liabilities 59,433 79,126 Long-term debt and notes payable, net 334,194 419,569 Other long-term liabilities 6,095 13,092 Deferred income taxes 76,174 76,745 Commitments and contingencies: Minority interests - 18,837 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; 27,319,121 shares issued and outstanding at September 30, 2001 265 273 Additional paid-in capital 296,439 311,165 Retained earnings 37,504 58,849 Unrealized loss on market value of interest rate swap - (5,341) ---------- ---------- Total stockholders' equity 334,208 364,946 ---------- ---------- $ 810,104 $ 972,315 ========== ========== See accompanying notes. 3 WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 2001 2000 2001 ---------- ---------- ---------- ---------- Revenues $ 81,510 $ 97,681 $ 221,543 $ 276,761 Operating expenses: Cost of operations 46,730 54,820 127,583 153,945 Selling, general and administrative 6,722 7,735 18,514 22,571 Depreciation and amortization 7,251 9,056 19,836 25,952 Stock compensation 54 - 163 - Acquisition related expenses - - 150 - ---------- ---------- ---------- ---------- Income from operations 20,753 26,070 55,297 74,293 Interest expense (7,426) (7,104) (21,147) (22,328) Other income (expense), net 21 (93) (911) (10,876) ---------- ---------- ---------- ---------- Income before income tax provision and minority interests 13,348 18,873 33,239 41,089 Minority interests - (1,871) - (5,370) ---------- ---------- ---------- ---------- Income before income tax provision 13,348 17,002 33,239 35,719 Income tax provision (5,401) (6,766) (13,620) (14,230) ---------- ---------- ---------- ---------- Net income before extraordinary item 7,947 10,236 19,619 21,489 Extraordinary item - extinguishment of debt, net of tax benefit of $96 - - - (144) ---------- ---------- ---------- ---------- Net income $ 7,947 $ 10,236 $ 19,619 $ 21,345 ========== ========== ========== ========== Basic earnings per common share: Income before extraordinary item $ 0.34 $ 0.38 $ 0.89 $ 0.80 Extraordinary item - - - (.01) ---------- ---------- ---------- ---------- Net income per common share $ 0.34 $ 0.38 $ 0.89 $ 0.79 ========== ========== ========== ========== Diluted earnings per common share: Income before extraordinary item $ 0.32 $ 0.37 $ 0.86 $ 0.78 Extraordinary item - - - (.01) ---------- ---------- ---------- ---------- Net income per common share $ 0.32 $ 0.37 $ 0.86 $ 0.77 ========== ========== ========== ========== Shares used in the per share calculations: Basic 23,650,205 27,181,791 22,149,002 27,030,199 ========== ========== ========== ========== Diluted 24,464,128 31,706,633 22,842,849 27,672,388 ========== ========== ========== ==========
See accompanying notes. 4 WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2000 2001 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,619 $ 21,345 Adjustments to reconcile net income to net cash provided by operating activities: Loss on disposal of assets 944 4,921 Depreciation 13,766 18,149 Amortization of intangibles 6,069 7,803 Loss on termination of interest rate swap - 6,337 Minority interests - 5,369 Amortization of debt issuance costs and debt guarantee fees 485 1,110 Extraordinary item - early extinguishment of debt - 240 Stock compensation 163 - Net change in operating assets and liabilities, net of acquisitions (5,487) (8,320) ---------- ---------- Net cash provided by operating activities 35,559 56,954 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for acquisitions, net of cash acquired (127,674) (46,672) Capital expenditures for property and equipment (15,788) (26,719) Proceeds from disposal of assets - 2,948 Decrease in other assets (552) (804) ---------- ---------- Net cash used in investing activities (144,014) (71,247) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 119,363 248,021 Principal payments on long-term debt (92,080) (223,310) Termination of interest rate swap - (6,337) Proceeds from sale of common stock 82,110 - Distributions to minority interest shareholders - (2,391) Proceeds from options and warrants 777 6,097 Debt issuance costs (1,696) (6,255) ---------- ---------- Net cash provided by financing activities 108,474 15,825 ---------- ---------- Net increase in cash and equivalents 19 1,532 Cash and equivalents at beginning of period 2,393 2,461 ---------- ---------- Cash and equivalents at end of period $ 2,412 $ 3,993 ========== ========== 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 September 30, 2001 and for the three and nine month periods ended September 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 nine month periods ended September 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 September 30, 2001, the consolidated statements of income for the three and nine months ended September 30, 2000 and 2001, and the consolidated statements of cash flows for the nine months ended September 30, 2000 and 2001 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 for the year 2000. 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. SFAS 133 requires 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 is 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 its 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 its floating rate long-term debt under its 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 its floating rate long-term debt under its 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 the two aforementioned 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 $3,576, net of taxes of $2,364, 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 6 WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share and per share amounts) 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. The estimated net amount of the existing losses as of September 30, 2001 (based on the interest rate yield curve at that date) included in accumulated other comprehensive income expected to be reclassified into the income statement as payments are made under the terms of the interest rate protection agreements within the next 12 months is approximately $4,949. As of January 1, 2001, that amount was $2,702. The timing of actual amounts reclassified into earnings is dependent on future movements in interest rates. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS 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. In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations", effective for fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is currently evaluating the effect SFAS No. 143 will have on its financial statements and related disclosures. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective for fiscal years beginning after December 15, 2001. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company is currently evaluating the effect SFAS No. 144 will have on its financial statements and related disclosures. 7 WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share and per share amounts) 3. ACQUISITIONS For the nine months ended September 30, 2001, the Company acquired 14 solid waste collection businesses that were accounted for using the purchase method of accounting. The aggregate consideration for these acquisitions was approximately $46,672 in cash (net of cash acquired), $200 in notes to sellers and $8,637 in equity issued. Subsequent to June 30, 2001, the Company completed six acquisitions in which goodwill and indefinite lived intangible assets were allocated $45,259 of the total purchase price. In accordance with the provisions of SFAS Nos. 141 and 142, goodwill and indefinite lived intangible assets are not being amortized on these acquisitions. 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 September 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. 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. 8 WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share and per share amounts) 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 2001 2000 2001 ---------- ---------- ---------- ---------- Numerator: Net income before extraordinary item $ 7,947 $ 10,236 $ 19,619 $ 21,489 Extraordinary item - - - (144) ---------- ---------- ---------- ---------- Net income for basic earnings per share 7,947 10,236 19,619 21,345 Interest expense on convertible subordinated notes, net of tax effects - 1,385 - - ---------- ---------- ---------- ---------- Net income for diluted earnings per share $ 7,947 $ 11,621 $ 19,619 $ 21,345 ========== ========== ========== ========== Denominator: Basic shares outstanding 23,650,205 27,181,791 22,149,002 27,030,199 Dilutive effect of convertible subordinated notes - 3,944,775 - - Dilutive effect of options and warrants 813,923 580,067 693,847 642,189 ---------- ---------- ---------- ---------- Basic shares outstanding 24,464,128 31,706,633 22,842,849 27,672,388 ========== ========== ========== ==========
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 nine months ended September 30, 2001 is as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 ------------------ ------------------ Net income $ 10,236 $ 21,345 Unrealized loss on interest rate swaps, net of tax expense of $1,654 and $3,531 for the three and nine months ended September 30, 2001, respectively (2,503) (5,341) ----------- ----------- Comprehensive income $ 7,733 $ 16,004 =========== =========== 9 WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share and per share amounts) The components of other comprehensive income and related tax effects for the three and nine months ended September 30, 2001 are shown as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2001 Gross Tax effect Net of tax ---------- ---------- ---------- Amounts reclassified into earnings $ 906 $ 361 $ 545 Changes in fair value of interest rate swaps (5,063) (2,015) (3,048) ---------- ---------- ---------- $ (4,157) $ (1,654) $ (2,503) ========== ========== ========== NINE MONTHS ENDED SEPTEMBER 30, 2001 Gross Tax effect Net of tax ---------- ---------- ---------- Cumulative effect of accounting change $ (5,940) $ (2,364) $ (3,576) Amounts reclassified into earnings 1,919 764 1,155 Changes in fair value of interest rate swaps (11,188) (4,453) (6,735) Changes associated with current period hedging transactions 6,337 2,522 3,815 ---------- ---------- ---------- $ (8,872) $ (3,531) $ (5,341) ========== ========== ==========
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 an 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 costs to terminate the interest rate swap were recorded as a loss in other income (expense) in the accompanying financial statements. 10 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. Factors that could cause actual results to differ from those projected include, but are not limited to, the following: (1) competition or unfavorable industry conditions could lead to a decrease in demand for the Company's services and to a decline in prices realized by the Company for its services, (2) the Company may be required to pay increased prices for acquisitions, and it may experience difficulty in integrating and deriving synergies from acquisitions, (3) the Company cannot be certain that it will always have access to the additional capital that it may require for its growth strategy or that its cost of capital will not increase, (4) governmental regulations may require increased capital expenditures or otherwise affect the Company's business, (5) companies that Waste Connections acquires could have undiscovered liabilities, and (6) the Company is highly dependent on the services of senior management. These risks and uncertainties, as well as others, are discussed in greater detail in the Company's filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and its subsequent Quarterly Reports on Form 10-Q. The Company makes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. OVERVIEW Waste Connections, Inc. is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services primarily in secondary markets of the Western U.S. As of September 30, 2001, we served more than 780,000 commercial, industrial and residential customers in California, Colorado, Iowa, Kansas, Minnesota, Mississippi, Montana, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington and Wyoming. We currently own 73 collection operations and operate or own 35 transfer stations, 24 Subtitle D landfills and 17 recycling facilities. We generally intend to pursue an acquisition-based growth strategy and as of September 30, 2001 had acquired 129 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 14 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 nine months ended September 30, 2001 were derived from services provided under exclusive franchise agreements, long term municipal contracts and governmental certificates. Governmental certificates grant 11 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. 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 September 30, 2001, Waste Connections owned and/or operated 35 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. As described more fully below, goodwill and indefinite lived intangibles totaling $45.3 million, resulting from acquisitions completed after June 30, 2001 were not amortized. 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 estimated 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, we believe, will not be completed. We routinely evaluate all capitalized costs, and expense those related to projects that we believe are not likely to succeed. As of September 30, 2001, Waste Connections had capitalized $114,000 of expenditures relating to landfill development projects and $113,000 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. 12 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. In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations", effective for fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We are currently evaluating the effect SFAS No. 143 will have on our financial statements and related disclosures. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective for fiscal years beginning after December 15, 2001. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. We are currently evaluating the effect SFAS No. 144 will have on our financial statements and related disclosures. 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 obligation for closure and post-closure costs for the Fairmead Landfill as of September 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 NINE MONTHS ENDED SEPTEMBER 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 2001 2000 2001 ---------- ---------- ---------- ---------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of operations 57.3 56.1 57.6 55.6 Selling, general and administrative expenses 8.2 7.9 8.4 8.2 Depreciation and amortization expense 8.9 9.3 8.9 9.4 Stock compensation 0.1 - 0.1 - Acquisition related expenses - - - - ---------- ---------- ---------- ---------- Operating income 25.5 26.7 25.0 26.8 Interest expense, net (9.1) (7.3) (9.6) (8.1) Other expense, net - (0.1) (0.4) (3.9) Minority interests - (1.9) - (1.9) Extraordinary item - - - (0.1) Income tax expense (6.6) (6.9) (6.1) (5.1) ---------- ---------- ---------- ---------- Net income 9.8% 10.5% 8.9% 7.7% ========== ========== ========== ========== 13 REVENUES. Total revenues increased $16.2 million, or 19.8%, to $97.7 million for the three months ended September 30, 2001 from $81.5 million for the three months ended September 30, 2000. Revenues for the nine months ended September 30, 2001 increased $55.3 million, or 24.9%, to $276.8 million from $221.5 million for the nine months ended September 30, 2000. These increases were primarily attributable to the inclusion of the acquisitions closed throughout the balance of 2000 and the first nine months of 2001 and selected price increases, partially offset by a decline in commodity prices. COST OF OPERATIONS. Total cost of operations increased $8.1 million, or 17.3%, to $54.8 million for the three months ended September 30, 2001 from $46.7 million for the three months ended September 30, 2000. Cost of operations for the nine months ended September 30, 2001 increased $26.3 million, or 20.7%, to $153.9 million from $127.6 million for the nine months ended September 30, 2000. The increase was primarily attributable to acquisitions closed over the balance of 2000 and the first nine months of 2001. Cost of operations as a percentage of revenues declined 1.2 percentage points to 56.1% for the three months ended September 30, 2001 from 57.3% for the three months ended September 30, 2000. Cost of operations as a percentage of revenues for the nine months ended September 30, 2001 declined 2.0 percentage points to 55.6% from 57.6% for the nine months ended September 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 nine months of 2001, greater integration of collection volumes into landfills we own or operate and selective price increases. SG&A. SG&A expenses increased $1.0 million, or 15.1%, to $7.7 million for the three months ended September 30, 2001 from $6.7 million for the three months ended September 30, 2000. SG&A expenses for the nine months ended September 30, 2001 increased $4.1 million, or 21.9%, to $22.6 million from $18.5 million for the nine months ended September 30, 2000. Our SG&A increased as a result of additional personnel from companies acquired and additional corporate overhead to accommodate our growth. SG&A as a percentage of revenues decreased 0.3 percentage points to 7.9% for the three months ended September 30, 2001 from 8.2% for the three months ended September 30, 2000. SG&A as a percentage of revenues decreased 0.2 percentage points to 8.2% for the nine months ended September 30, 2001 from 8.4% for the nine months ended September 30, 2000. The decrease in SG&A as a percentage of revenues was the result of spreading overhead expenses over a larger base of revenue from the acquisitions completed in the course of 2000 and the first nine months of 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $1.8 million, or 24.9% to $9.1 million for the three months ended September 30, 2001 from $7.3 million for the three months ended September 30, 2000. Depreciation and amortization expenses for the nine months ended September 30, 2001 increased $6.1 million, or 30.8%, to $25.9 million from $19.8 million for the nine months ended September 30, 2000. The increases resulted primarily from acquisitions in 2000 and the first nine months of 2001 and the inclusion of their depreciation and amortization, and the amortization of goodwill associated with such acquisitions, and additional depreciation resulting from capital expenditures. Depreciation and amortization as a percentage of revenues increased 0.4 percentage points to 9.3% for the three months ended September 30, 2001 from 8.9% for the three months ended September 30, 2000. Depreciation and amortization as a percentage of revenues for the nine months ended September 30, 2001 increased 0.5 percentage points to 9.4% from 8.9% for the nine months ended September 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 revenues. STOCK COMPENSATION EXPENSE. Stock compensation expense decreased to $0 for the three and nine months ended September 30, 2001 from $54,000 and $163,000 for the three and nine months ended September 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 nine months ended September 30, 2001 from $150,000 for the nine months ended September 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. 14 OPERATING INCOME. Operating income increased $5.3 million, or 25.6%, to $26.1 million for the three months ended September 30, 2001 from $20.8 million for the three months ended September 30, 2000. Operating income for the nine months ended September 30, 2001 increased $19.0 million, or 34.4%, to $74.3 million from $55.3 million for the nine months ended September 30, 2000. The increases were primarily attributable to the inclusion of acquisitions closed in 2000 and the first nine months of 2001, greater integration of collection volumes into landfills we own or operate and selective price increases, partially offset by higher depreciation and amortization expenses and SG&A expenses. Operating income as a percentage of revenues increased 1.2 percentage points to 26.7% for the three months ended September 30, 2001 from 25.5% for the three months ended September 30, 2000. Operating income as a percentage of revenues for the nine months ended September 30, 2001 increased 1.8 percentage points to 26.8% from 25.0% for the nine months ended September 30, 2000. The increase in operating income is attributable to the improvement in gross margins and economies of scale from a greater revenue base, partially offset by increases in depreciation and amortization as a percentage of revenues. INTEREST EXPENSE. Interest expense decreased $0.3 million, or 4.3%, to $7.1 million for the three months ended September 30, 2001 from $7.4 million for the three months ended September 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 nine months ended September 30, 2001 increased $1.2 million, or 5.6%, to $22.3 million from $21.1 million for the nine months ended September 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 ($93,000) for the three months ended September 30, 2001 from $21,000 for the three months ended September 30, 2000. Other income (expense) increased $10.0 million to ($10.9) million for the nine months ended September 30, 2001 from ($0.9) million for the nine months ended September 30, 2000. The primary components of the net expense for the nine months ended September 30, 2001 were 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 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 date 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 $1.9 million and $5.4 million for the three and nine month periods ended September 30, 2001, respectively, compared to $0 for both the three and nine month periods ended September 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 increased $1.4 to $6.8 million for the three months ended September 30, 2001 from $5.4 million for the three months ended September 30, 2000. Income taxes increased $0.6 million to $14.2 million for the nine months ended September 30, 2001 from $13.6 million for the nine months ended September 30, 2000. The effective income tax rate for the three and nine months ended September 30, 2001 was 39.8%, 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 $2.3 to $10.2 million for the three months ended September 30, 2001, from $7.9 million for the three months ended September 30, 2000. The increase was primarily attributable to the inclusion of acquisitions closed in the last year and first nine months of 2001, greater integration of collection volumes into landfills we own or operate, economies of scale from a greater revenue base, lower interest expense as a percentage of revenues and selective price increases, partially offset by higher depreciation and amortization expenses as a percentage of revenues. Net income before extraordinary item increased $1.9 to $21.5 million for the nine months ended September 30, 2001, from $19.6 million for the nine months ended September 30, 2000. The increase was primarily attributable to the inclusion of acquisitions closed in the last year, economies of scale from a greater revenue base, greater integration of collection volumes into landfills we own or operate, lower interest expense as a percentage of revenues and selective price increases, partially offset by higher depreciation and amortization expenses as a percentage of revenues, 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. 15 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, we had a working capital deficit of $13.5 million, including cash and equivalents of $4.0 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 Prime 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 September 30, 2001, an aggregate of approximately $230.7 million was outstanding under our credit facility, and the interest rate on outstanding borrowings, including amortization of fees, under the credit facility was approximately 8.0%. 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 nine months ended September 30, 2001, net cash provided by operations was approximately $57.0 million. $8.3 million of cash provided by operations was used to fund increases in working capital for the period. For the nine months ended September 30, 2001, net cash used by investing activities was $71.2 million. Of this, $46.7 million was used to fund the cash portion of acquisitions. Cash used for capital expenditures was $26.7 million, which was primarily for investments in fixed assets, consisting primarily of trucks, containers and other equipment. Cash inflows from investing activities include $2.9 million received from the sale of a subsidiary. For the nine months ended September 30, 2001, net cash provided by financing activities was $15.8 million, which was provided by $24.7 million of net borrowings under our various debt arrangements and $6.1 million of proceeds from stock option and warrant exercises, less $6.3 million of cash paid for debt issuance costs, $6.3 million of cash paid to terminate an interest rate swap and $2.4 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 $12 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 their sale. 16 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 hedge 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 hedge 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 hedge 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 hedge 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 $90.7 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 September 30, 2001 would decrease our annual pre-tax income by approximately $925,000. 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 September 30, 2001 would not have a material impact on our cash flows or pre-tax income. 17 WASTE CONNECTIONS, INC. PART II. OTHER INFORMATION 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. WASTE CONNECTIONS, INC. BY: /s/ Ronald J. Mittelstaedt ------------------------------------- Date: November 14, 2001 Ron J. Mittelstaedt, President and Chief Executive Officer BY: /s/ Steven F. Bouck ------------------------------------- Date: November 14, 2001 Steven F. Bouck, Executive Vice President and Chief Financial Officer 19 -----END PRIVACY-ENHANCED MESSAGE-----