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WCN > SEC Filings for WCN > Form 10-Q on 23-Oct-2012All Recent SEC Filings

Show all filings for WASTE CONNECTIONS, INC.

Form 10-Q for WASTE CONNECTIONS, INC.


23-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q are forward-looking in nature, including statements related to our ability to provide adequate cash to fund our operating activities, our ability to draw on our credit facility or raise additional capital, the impact of global economic conditions on our volume, business and results of operations, the effects of landfill special waste projects on volume results, the effects of seasonality on our business and results of operations, demand for recyclable commodities and recyclable commodity pricing, the impact of the relocation of our corporate headquarters to The Woodlands, Texas, our expectations with respect to capital expenditures, our expectations with respect to our ability to obtain expansions of permitted landfill capacity, our expectations with respect to our stock repurchase program and future dividend payments, our expectations with respect to the outcomes of our legal proceedings and our expectations with respect to the purchase of fuel and fuel prices. These statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates," or the negative thereof or comparable terminology, or by discussions of strategy.

Our business and operations are subject to a variety of risks and uncertainties and, consequently, actual results may differ materially from those projected by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, the following:

Our acquisitions may not be successful, resulting in changes in strategy, operating losses or a loss on sale of the business acquired;

A portion of our growth and future financial performance depends on our ability to integrate acquired businesses into our organization and operations;

Competition for acquisition candidates, consolidation within the waste industry and economic and market conditions may limit our ability to grow through acquisitions;

We may be unable to compete effectively with larger and better capitalized companies, companies with lower return expectations, and governmental service providers;

We may lose contracts through competitive bidding, early termination or governmental action;

Price increases may not be adequate to offset the impact of increased costs or may cause us to lose volume;

Economic downturns adversely affect operating results;

Our results are vulnerable to economic conditions and seasonal factors affecting the regions in which we operate;

We may be subject in the normal course of business to judicial, administrative or other third party proceedings that could interrupt or limit our operations, require expensive remediation, result in adverse judgments, settlements or fines and create negative publicity;

Increases in the price of fuel may adversely affect our business and reduce our operating margins;

Increases in labor and disposal and related transportation costs could impact our financial results;

Efforts by labor unions could divert management attention and adversely affect operating results;

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We could face significant withdrawal liability if we withdraw from participation in one or more underfunded multiemployer pension plans in which we participate;

Increases in insurance costs and the amount that we self-insure for various risks could reduce our operating margins and reported earnings;

Our indebtedness could adversely affect our financial condition; we may incur substantially more debt in the future;

Each business that we acquire or have acquired may have liabilities or risks that we fail or are unable to discover, including environmental liabilities;

Liabilities for environmental damage may adversely affect our financial condition, business and earnings;

Our accruals for our landfill site closure and post-closure costs may be inadequate;

The financial soundness of our customers could affect our business and operating results;

We depend significantly on the services of the members of our senior, regional and district management team, and the departure of any of those persons could cause our operating results to suffer;

Our decentralized decision-making structure could allow local managers to make decisions that adversely affect our operating results;

We may incur charges related to capitalized expenditures of landfill development projects, which would decrease our earnings;

Because we depend on railroads for our intermodal operations, our operating results and financial condition are likely to be adversely affected by any reduction or deterioration in rail service;

Our financial results are based upon estimates and assumptions that may differ from actual results;

The adoption of new accounting standards or interpretations could adversely affect our financial results;

Pending or future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements;

If we are not able to develop and protect intellectual property, or if a competitor develops or obtains exclusive rights to a breakthrough technology, our financial results may suffer;

Fluctuations in prices for recycled commodities that we sell and rebates we offer to customers may cause our revenues and operating results to decline;

Our financial and operating performance may be affected by the inability to renew landfill operating permits, obtain new landfills and expand existing ones;

Future changes in laws or renewed enforcement of laws regulating the flow of solid waste in interstate commerce could adversely affect our operating results;

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Extensive and evolving environmental, health, safety and employment laws and regulations may restrict our operations and growth and increase our costs;

Climate change regulations may adversely affect operating results;

Extensive regulations that govern the design, operation and closure of landfills may restrict our landfill operations or increase our costs of operating landfills;

Alternatives to landfill disposal may cause our revenues and operating results to decline; and

Unusually adverse weather conditions may interfere with our operations, harming our operating results.

These risks and uncertainties, as well as others, are discussed in greater detail in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, or SEC, including our most recent Annual Report on Form 10-K. There may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change.

OVERVIEW

The solid waste industry is a local and highly competitive business, requiring substantial labor and capital resources. The participants compete for collection accounts primarily on the basis of price and, to a lesser extent, the quality of service, and compete for landfill business on the basis of tipping fees, geographic location and quality of operations. The solid waste industry has been consolidating and continues to consolidate as a result of a number of factors, including the increasing costs and complexity associated with waste management operations and regulatory compliance. Many small independent operators and municipalities lack the capital resources, management, operating skills and technical expertise necessary to operate effectively in such an environment. The consolidation trend has caused solid waste companies to operate larger landfills that have complementary collection routes that can use company-owned disposal capacity. Controlling the point of transfer from haulers to landfills has become increasingly important as landfills continue to close and disposal capacity moves further from collection markets.

Generally, the most profitable industry operators are those companies that are vertically integrated or enter into long-term collection contracts. A vertically integrated operator will benefit from: (1) the internalization of waste, which is bringing waste to a company-owned landfill; (2) the ability to charge third-party haulers tipping fees either at landfills or at transfer stations; and (3) the efficiencies gained by being able to aggregate and process waste at a transfer station prior to landfilling.

We are an integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets in the U.S. We also provide intermodal services for the rail haul movement of cargo and solid waste containers in the Pacific Northwest through a network of intermodal facilities. We also own and operate a facility in Southwest Louisiana where we treat and dispose of non-hazardous waste that is generated in the exploration and production of oil and natural gas. We seek to avoid highly competitive, large urban markets and instead target markets where we can provide either solid waste services under exclusive arrangements, or markets where we can be integrated and attain high market share. In markets where waste collection services are provided under exclusive arrangements, or where waste disposal is municipally funded or available at multiple municipal sources, we believe that controlling the waste stream by providing collection services under exclusive arrangements is often more important to our growth and profitability than owning or operating landfills. As of September 30, 2012, we served more than two million residential, commercial and industrial customers from a network of operations in 30 states: Alabama, Alaska, Arizona, California, Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington and Wyoming. As of that date, we owned or operated a network of 149 solid waste collection operations, 62 transfer stations, seven intermodal facilities, 39 recycling operations, 46 municipal solid waste landfills, four construction and demolition landfills and one exploration and production waste treatment and disposal facility.

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On September 16, 2012, we entered into a Purchase and Sale Agreement to acquire the business of R360 Environmental Solutions, Inc. ("R360"). The aggregate purchase price, subject to adjustment, is approximately $1.33 billion in cash. R360 provides non-hazardous oilfield waste treatment, recovery and disposal services in several of the most active natural resource producing areas in the United States, including the Permian, Bakken and Eagle Ford Basins. The acquisition of R360 remains subject to certain closing conditions. Closing is expected to occur in the fourth quarter of 2012.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements. As described by the SEC, critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on the financial condition or operating performance of a company. Such critical accounting estimates and assumptions are applicable to our reportable segments. Refer to our most recent Annual Report on Form 10-K for a complete description of our critical accounting estimates and assumptions.

NEW ACCOUNTING PRONOUNCEMENTS

For a description of the new accounting standards that affect us, see Note 2 to our Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND
2011

The following table sets forth items in our condensed consolidated statements of
net income as a percentage of revenues for the periods indicated.



                                                          Three months ended             Nine months ended
                                                            September 30,                  September 30,
                                                         2012            2011           2012           2011
Revenues                                                   100.0 %        100.0 %         100.0 %       100.0 %
Cost of operations                                          57.1           56.6            57.6          56.6
Selling, general and administrative                         11.3           10.2            11.8          10.7
Depreciation                                                 9.9            9.6             9.8           9.7
Amortization of intangibles                                  1.5            1.3             1.5           1.3
Loss on disposal of assets                                   0.1            0.2             0.1           0.1
Gain from litigation settlement                             (0.8 )           -             (0.3 )          -

Operating income                                            20.9           22.1            19.5          21.6

Interest expense                                            (2.8 )         (3.0 )          (3.0 )        (2.8 )
Interest income                                              0.1             -               -             -
Other income (expense), net                                  0.1           (0.2 )           0.1          (0.1 )
Income tax provision                                        (6.6 )         (7.4 )          (6.4 )        (7.3 )
Net income attributable to noncontrolling interests         (0.1 )           -               -           (0.1 )

Net income attributable to Waste Connections                11.6 %         11.5 %          10.2 %        11.3 %

Revenues. Total revenues increased $21.7 million, or 5.4%, to $425.7 million for the three months ended September 30, 2012, from $404.0 million for the three months ended September 30, 2011. Total revenues increased $87.2 million, or 7.7%, to $1.213 billion for the nine months ended September 30, 2012, from $1.126 billion for the nine months ended September 30, 2011.

Acquisitions closed during, or subsequent to, the three months ended September 30, 2011, increased revenues by approximately $34.3 million in the three months ended September 30, 2012. Operations divested during, or subsequent to, the three months ended September 30, 2011, decreased revenues by approximately $1.5 million. Acquisitions closed during, or subsequent to, the nine months ended September 30, 2011, increased revenues by approximately $96.0 million in the nine months ended September 30, 2012. Operations divested during, or subsequent to, the nine months ended September 30, 2011, decreased revenues by approximately $6.3 million.

During the three months ended September 30, 2012, the net increase in prices charged to our customers from core price increases was $11.6 million. There was minimal impact on revenues from changes in fuel, materials and environmental surcharges. During the nine months ended September 30, 2012, the net increase in prices charged to our customers was $35.3 million, consisting of $34.1 million of core price increases and $1.2 million of fuel, materials and environmental surcharges.

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Volume decreases in our existing business during the three and nine months ended September 30, 2012, decreased revenues by approximately $13.8 million and $22.3 million, respectively. The net decreases in volume were primarily attributable to decreases in landfill municipal solid waste volumes, due primarily to the decision to forego low-priced tonnage from one large hauler at one of our large landfills; lower landfill special waste volumes, due primarily to a decrease in large non-recurring projects; decreased commercial hauling revenue due primarily to service level declines with existing customers and a reduction in customer counts due to competition in our markets; and decreased roll off hauling activity due primarily to construction slowdowns affecting our markets, partially offset by increased exploration and production waste treatment and disposal activity due to increased drilling activity.

Decreased recyclable commodity prices during the three and nine months ended September 30, 2012, partially offset by increased recyclable commodity volumes collected, decreased revenues by $9.4 million and $15.9 million, respectively. The decrease in recyclable commodity prices was primarily due to decreased overseas demand for recyclable commodities.

Other revenues during the three and nine months ended September 30, 2012 increased by $0.5 million and $0.4 million, respectively. The increases were primarily due to an increase in cargo volume at our intermodal operations.

Cost of Operations. Total cost of operations increased $14.6 million, or 6.4%, to $243.2 million for the three months ended September 30, 2012, from $228.6 million for the three months ended September 30, 2011. The increase was primarily attributable to $17.6 million of additional operating costs associated with acquisitions closed during, or subsequent to, the three months ended September 30, 2011, and the following changes at operations owned in comparable periods in 2011 and 2012: an increase in employee benefit expenses of $1.1 million due to an increase in claims severity under our self-insured medical plan, an increase in third party trucking and transportation expenses of $0.9 million due to changes in the disposal internalization of collected waste volumes and increased trucking of purchased recyclable commodities, an increase in truck, container and equipment maintenance and repair expenses of $0.4 million, an increase in labor expenses of $0.3 million due to employee pay increases, an increase in leachate disposal costs of $0.3 million at certain landfills we own and an increase in rail transportation expenses of $0.3 million due to an increase in intermodal cargo volume, partially offset by a decrease in taxes on revenues of $2.7 million due primarily to lower landfill volumes, a decrease in disposal expense on collected volumes of $2.5 million due primarily to increased internalization of collected waste volumes in our New York markets and a decrease in diesel fuel expenses of $1.1 million resulting from the net impact of a decline in diesel fuel gallons consumed in our operations and higher market prices for fuel.

Total cost of operations increased $60.9 million, or 9.5%, to $698.4 million for the nine months ended September 30, 2012, from $637.5 million for the nine months ended September 30, 2011. The increase was primarily attributable to $47.2 million of additional operating costs associated with acquisitions closed during, or subsequent to, the nine months ended September 30, 2011, and the following changes at operations owned in comparable periods in 2011 and 2012: an increase in labor expenses of $4.4 million due to employee pay increases, an increase in truck, container and equipment maintenance and repair expenses of $4.0 million, an increase in third party trucking and transportation expenses of $2.7 million due to changes in the disposal internalization of collected waste volumes and increased special waste projects that require us to transport the volume to our disposal sites, an increase in disposal expenses on collected volumes of $2.4 million due to disposal rate increases and re-directing collected waste volumes to alternative third party disposal sites, an increase in leachate disposal costs of $1.8 million at certain landfills we own, an increase in auto and workers' compensation expense under our high deductible insurance program of $1.4 million due to an increase in projected losses on open claims, an increase in equipment and real estate rental expense of $0.7 million, an increase in employee benefit expenses of $0.7 million due to an increase in claims severity under our self-insured medical plan, an increase in landfill monitoring and maintenance expenses of $0.6 million, an increase in diesel fuel expenses of $0.5 million resulting from the net impact of higher market prices for fuel and reduced fuel gallons consumed in our operations and $0.7 million of other net increases, partially offset by a decrease in taxes on revenues of $4.5 million due to lower landfill revenues at certain sites we own and an adjustment to a prior year tax liability, a decrease in the cost of recyclable commodities of $1.0 million due to declines in commodity values and a decrease in general liability and property insurance claims expense of $0.7 million under our high deductible insurance program due to adjustments to prior year claims.

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Cost of operations as a percentage of revenues increased 0.5 percentage points to 57.1% for the three months ended September 30, 2012, from 56.6% for the three months ended September 30, 2011. The increase was comprised of a 0.5 percentage point increase from increased labor expenses, a 0.4 percentage point increase from increased benefits expenses, a 0.3 percentage point increase from increased third party trucking, a 0.3 percentage point increase from increased vehicle, container and equipment maintenance expenses and a 0.1 percentage point increase from increased rail transportation expenses, partially offset by a 0.5 percentage point decrease from decreased taxes on revenues, a 0.4 percentage point decrease from decreased disposal expense, a 0.1 percentage point decrease due to acquisitions closed during, or subsequent to, the three months ended September 30, 2011 having lower costs, as a percentage of revenue, relative to our company average and a 0.1 percentage point decrease from decreased fuel expense.

Cost of operations as a percentage of revenues increased 1.0 percentage points to 57.6% for the nine months ended September 30, 2012, from 56.6% for the nine months ended September 30, 2011. The increase was comprised of a 0.4 percentage point increase from increased vehicle, container and equipment maintenance expenses, a 0.3 percentage point increase from increased labor expenses, a 0.2 percentage point increase in disposal expenses, a 0.2 percentage point increase from increased leachate disposal expenses, a 0.2 percentage point increase from increased third party trucking expenses, a 0.1 percentage point increase in equipment and real estate rental expenses and a 0.1 percentage point increase from increased auto and workers' compensation expenses, partially offset by a 0.4 percentage point decrease from decreased taxes on revenues and a 0.1 percentage point decrease in the cost of recyclable commodities.

SG&A. SG&A expenses increased $7.0 million, or 16.9%, to $48.0 million for the three months ended September 30, 2012, from $41.0 million for the three months ended September 30, 2011. The increase was primarily the result of $2.2 million of additional SG&A expenses from acquisitions closed during, or subsequent to, the three months ended September 30, 2011, and the following changes at operations owned in comparable periods in 2011 and 2012: $1.8 million of expenses associated with the relocation of our corporate headquarters from Folsom, California to The Woodlands, Texas, an increase in direct acquisition expenses of $1.3 million, an increase in deferred compensation expense resulting from deferred compensation liabilities to employees being increased as a result of increases in the market value of investments to which employee deferred compensation balances are tracked of $1.1 million, an increase in payroll and payroll-related expenses of $0.6 million related to pay increases, an increase in equity-based compensation expense associated with our annual grant of restricted stock units to our personnel of $0.3 million and $0.1 million of other net increases, partially offset by a decrease in expenses for uncollectible accounts receivable of $0.4 million.

SG&A expenses increased $22.8 million, or 18.9%, to $143.9 million for the nine months ended September 30, 2012, from $121.1 million for the nine months ended September 30, 2011. The increase was primarily the result of $6.3 million of additional SG&A expenses from acquisitions closed during, or subsequent to, the nine months ended September 30, 2011, and the following changes at operations owned in comparable periods in 2011 and 2012: $6.5 million of expenses associated with the relocation of our corporate headquarters from Folsom, California to The Woodlands, Texas, $3.6 million of equity-based compensation expense resulting from a grant of immediately vested restricted stock units to certain executive officers at the time the executives agreed to modifications to their employment contracts, an increase in payroll and payroll-related expenses of $2.4 million related to pay increases, an increase in direct acquisition expenses of $2.3 million, an increase in equity-based compensation expense associated with our annual grant of restricted stock units to our personnel of $1.0 million, an increase in deferred compensation expense resulting from deferred compensation liabilities to employees being increased as a result of increases in the market value of investments to which employee deferred compensation balances are tracked of $1.0 million, an increase in employee travel expenses of $0.5 million and $0.3 million of other net increases, partially offset by a decrease in cash incentive compensation expense of $1.1 million due to us not achieving certain budgeted financial targets, for which cash incentive compensation payments are based, during the nine months ended September 30, 2012.

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SG&A expenses as a percentage of revenues increased 1.1 percentage points to 11.3% for the three months ended September 30, 2012, from 10.2% for the three months ended September 30, 2011. The increase as a percentage of revenues was attributable to a 0.5 percentage point increase from expenses associated with the relocation of our corporate headquarters to The Woodlands, Texas, a 0.3 percentage point increase from increased direct acquisition expenses, a 0.3 percentage point increase from increased deferred compensation expense, a 0.3 percentage point increase from increased labor expenses and a 0.1 percentage point increase in equity-based compensation expense, partially offset by a 0.3 percentage point decrease due to acquisitions closed during, or subsequent to, the three months ended September 30, 2011 having lower SG&A expenses as a percentage of revenue than our company average and a 0.1 percentage point . . .

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