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WCN > SEC Filings for WCN > Form 10-Q on 23-Oct-2013All Recent SEC Filings

Show all filings for WASTE CONNECTIONS, INC.

Form 10-Q for WASTE CONNECTIONS, INC.


23-Oct-2013

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, 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, which may reduce the anticipated benefit from acquired businesses;

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

Our indebtedness could adversely affect our financial condition and limit our financial flexibility;

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

Our industry is highly competitive and includes larger and better capitalized companies, companies with lower prices, return expectations or other advantages, and governmental service providers, which could adversely affect our ability to compete and our operating results;

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;

The E&P waste disposal business depends on oil and gas prices and the level of drilling and production activity in the basins in which we operate;

We have limited experience in running an E&P waste treatment, recovery and disposal business;

Our E&P waste business is dependent upon the willingness of our customers to outsource their waste management activities;

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Changes in laws or government regulations regarding hydraulic fracturing could increase our customers' costs of doing business and reduce oil and gas production by our customers, which could adversely impact our business;

Our E&P waste business could be adversely affected by changes in laws regulating E&P waste;

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 diesel fuel may adversely affect our collection 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;

We could face significant withdrawal liability if we withdraw from participation in one or more multiemployer pension plans in which we participate and the accrued pension benefits are not fully funded;

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

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 could be adversely affected by impairments of goodwill or indefinite-lived intangibles;

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

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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;

Our E&P waste business in New Mexico could be adversely impacted if the New Mexico "Pit Rule" is rescinded or relaxed;

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

We are an integrated municipal solid waste services company that provides solid waste collection, transfer, disposal and recycling services primarily in exclusive and secondary markets in the U.S. and a leading provider of non-hazardous exploration and production, or E&P, waste treatment, recovery and disposal services in several of the most active natural resource producing areas of 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 seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. 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. We also target niche markets, like E&P waste treatment and disposal services, with similar characteristics and, we believe, higher comparative growth potential.

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As of September 30, 2013, we served residential, commercial, industrial and E&P customers from a network of operations in 31 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, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington and Wyoming. As of September 30, 2013, we owned or operated a network of 149 solid waste collection operations; 68 transfer stations; seven intermodal facilities, 37 recycling operations, 54 active MSW, E&P and/or non-MSW landfills, 20 E&P liquid waste injection wells, 15 E&P waste treatment and recovery facilities and 19 oil recovery facilities.

The municipal 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 municipal 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 municipal 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 operators within the municipal solid waste industry 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.

The E&P waste services industry is similarly regional in nature and is also highly fragmented, with acquisition opportunities available in several active basins. Competition for E&P waste comes primarily from smaller regional companies that utilize a variety of disposal methods and generally serve specific geographic markets. In addition, customers in many markets have the option of using internal disposal methods or outsourcing to another third party disposal company. The principal competitive factors in this business include:
gaining customer approval of treatment and disposal facilities; location of facilities in relation to customer activity; reputation; reliability of services; track record of environmental compliance; ability to accept multiple waste types at a single facility; and price.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with GAAP 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 in 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, 2013 AND
2012

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



                                              Three months ended September 30,                          Nine months ended September 30,
                                              2013                        2012                         2013                          2012
Revenues                             $ 503,646        100.0 %    $ 425,654        100.0 %    $ 1,442,918        100.0 %    $ 1,212,815        100.0 %
Cost of operations                     274,141         54.4        243,243         57.1          794,588         55.1          698,351         57.6
Selling, general and
administrative                          53,536         10.6         47,977         11.3          159,690         11.1          143,899         11.8
Depreciation                            55,863         11.1         42,313          9.9          162,277         11.2          119,331          9.8
Amortization of intangibles              6,211          1.2          6,267          1.5           18,861          1.3           18,115          1.5
Loss (gain) on disposal of assets       (1,129 )       (0.2 )          244          0.1            1,993          0.1              715          0.1
Loss (gain) on prior office leases        (596 )       (0.1 )           -            -             9,902          0.7               -            -
Gain from litigation settlement             -            -          (3,537 )       (0.8 )             -            -            (3,537 )       (0.3 )

Operating income                       115,620         23.0         89,147         20.9          295,607         20.5          235,941         19.5
Interest expense                       (17,911 )       (3.6 )      (11,949 )       (2.8 )        (55,851 )       (3.9 )        (36,063 )       (3.0 )
Other income (expense), net                845          0.2            825          0.2             (119 )         -             1,663          0.1
Income tax provision                   (37,641 )       (7.5 )      (28,403 )       (6.6 )        (93,049 )       (6.5 )        (77,967 )       (6.4 )
Net income attributable to
noncontrolling interests                  (207 )         -            (235 )       (0.1 )           (359 )         -              (470 )         -

Net income attributable to Waste
Connections                          $  60,706         12.1 %    $  49,385         11.6 %    $   146,229         10.1 %    $   123,104         10.2 %

Revenues. Total revenues increased $77.9 million, or 18.3%, to $503.6 million for the three months ended September 30, 2013, from $425.7 million for the three months ended September 30, 2012.

Revenues during the three months ended September 30, 2013 from the acquisition of the business of R360 Environmental Solutions, Inc., or R360, were $61.0 million. All other acquisitions closed during, or subsequent to, the three months ended September 30, 2012, increased revenues by approximately $1.3 million. Operations divested during, or subsequent to, the three months ended September 30, 2012, decreased revenues by approximately $1.5 million.

During the three months ended September 30, 2013, the net increase in prices charged to our customers was $11.4 million, consisting of $10.2 million of core price increases and $1.2 million of fuel, materials and environmental surcharges.

During the three months ended September 30, 2013, volume increases in our existing business increased revenues by $8.1 million. The increase in volume was primarily attributable to increases in landfill municipal solid waste volumes, landfill special waste projects and roll off hauling resulting from increased construction and general economic activity in our markets, partially offset by declines in E&P waste volumes at our existing locations.

During the three months ended September 30, 2013, decreased recyclable commodity volumes in our Eastern segment and the closure of a recycling operation in our Western segment, partially offset by increased recyclable commodity prices, decreased revenues by $0.2 million.

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Other revenues decreased by $2.2 million during the three months ended September 30, 2013, primarily due to a decrease in cargo volume at our intermodal operations.

Total revenues increased $230.1 million, or 19.0%, to $1.443 billion for the nine months ended September 30, 2013, from $1.213 billion for the nine months ended September 30, 2012.

Revenues during the nine months ended September 30, 2013 from the R360 acquisition were $170.0 million. All other acquisitions closed during, or subsequent to, the nine months ended September 30, 2012, increased revenues by approximately $32.7 million. Operations divested during, or subsequent to, the nine months ended September 30, 2012, decreased revenues by approximately $2.3 million.

During the nine months ended September 30, 2013, the net increase in prices charged to our customers was $35.1 million, consisting of $31.5 million of core price increases and $3.6 million of fuel, materials and environmental surcharges.

During the nine months ended September 30, 2013, volume increases in our existing business increased revenues by $3.8 million. The increase in volume was primarily attributable to increases in landfill municipal solid waste volumes, landfill special waste projects and roll off hauling resulting from increased construction and general economic activity in our markets, partially offset by declines in commercial hauling primarily attributable to service level declines with existing customers and a reduction in customer counts due to competition in our markets.

During the nine months ended September 30, 2013, decreased recyclable commodity volumes in our Eastern segment, the closure of a recycling operation in our Western segment and decreased recyclable commodity prices, primarily due to decreased overseas demand for recyclable commodities, decreased revenues by $5.9 million.

Other revenues decreased by $3.3 million during the nine months ended September 30, 2013, primarily due to a decrease in cargo volume at our intermodal operations.

Cost of Operations. Total cost of operations increased $30.9 million, or 12.7%, to $274.1 million for the three months ended September 30, 2013, from $243.2 million for the three months ended September 30, 2012. The increase was primarily the result of $24.4 million of additional operating costs during the three months ended September 30, 2013 from the R360 acquisition and the following changes at operations owned in comparable periods in 2012 and 2013: an increase in third party disposal expense of $3.1 million due to increased disposal rates, increased collection volumes and changes in the disposal internalization of collected volumes in certain markets, an increase in labor expenses of $2.7 million due primarily to employee pay rate increases, an increase in third party trucking and transportation expenses of $1.7 million due to increased landfill volumes that require us to transport the waste to our disposal sites, an increase in diesel fuel expenses of $1.5 million resulting from the net impact of higher market prices for fuel and the expiration of a prior year fuel hedge in which the diesel fuel fixed price under the hedge agreement was less than the diesel fuel retail price and $1.1 million of other net increases, partially offset by a $0.8 million decrease in auto and workers' compensation expense under our high deductible insurance program due to a reduction in projected losses on open claims, a decrease in rail transportation expenses at our intermodal operations of $1.1 million due to decreased rail cargo volume, a decrease in the cost of recyclable commodities of $0.9 million due to declines in commodity values and a decrease in operating costs of $0.8 million resulting from operations divested during, or subsequent to, the three months ended September 30, 2012.

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Total cost of operations increased $96.2 million, or 13.8%, to $794.6 million for the nine months ended September 30, 2013, from $698.4 million for the nine months ended September 30, 2012. The increase was primarily the result of $70.8 million of additional operating costs during the nine months ended September 30, 2013 from the R360 acquisition, $16.4 million of additional operating costs from all other acquisitions closed during, or subsequent to, the nine months ended September 30, 2012, and the following changes at operations owned in comparable periods in 2012 and 2013: an increase in labor expenses of $3.3 million due primarily to employee pay rate increases, an increase in third party trucking and transportation expenses of $2.6 million due to increased landfill volumes that require us to transport the waste to our disposal sites, an increase in diesel fuel expenses of $2.1 million resulting from the net impact of the expiration of a prior year fuel hedge in which the diesel fuel fixed price under the hedge agreement was less than the diesel fuel retail price and an increase in total diesel fuel gallons consumed, less lower market prices for diesel fuel not purchased under diesel fuel hedge agreements, an increase in taxes on revenues of $1.6 million due primarily to higher landfill revenues, an increase in third party disposal expense of $0.9 million due to increased disposal rates and changes in the disposal internalization of collected volumes in certain markets, an increase in truck, container and equipment maintenance and repair expenses of $0.7 million due to variability in the timing and severity of major equipment repairs, an increase in insurance premiums under our high deductible insurance program of $0.7 million due to our growth from acquisitions, an increase in facility repair and maintenance expenses of $0.7 million, an increase in cell processing reserves at certain E&P locations of $0.5 million and $2.3 million of other net increases, partially offset by a $2.5 million decrease in insurance claims expense under our high deductible insurance program due to a reduction in projected losses on open auto and workers' compensation claims, a decrease in the cost of recyclable commodities of $1.7 million due to declines in commodity values, a decrease in rail transportation expenses at our intermodal operations of $1.6 million due to decreased rail cargo volume and a decrease in operating costs of $0.6 million resulting from operations divested during, or subsequent to, the nine months ended September 30, 2012.

Cost of operations as a percentage of revenues decreased 2.7 percentage points to 54.4% for the three months ended September 30, 2013, from 57.1% for the three months ended September 30, 2012. The decrease as a percentage of revenues was comprised of a 2.1 percentage point decrease from acquisitions closed during, or subsequent to, the three months ended September 30, 2012, having lower cost of operations as a percentage of revenue than our historical company average, a 0.3 percentage point decrease from lower rail transportation expenses, a 0.3 percentage point decrease from the decrease in the cost of recyclable commodities, a 0.2 percentage point decrease from lower auto and workers' compensation expenses and a 0.1 percentage point decrease from a decrease in labor expenses as a percentage of revenues, partially offset by a 0.3 percentage point increase from increased disposal expenses.

Cost of operations as a percentage of revenues decreased 2.5 percentage points to 55.1% for the nine months ended September 30, 2013, from 57.6% for the nine months ended September 30, 2012. The decrease as a percentage of revenues was comprised of a 1.9 percentage point decrease from acquisitions closed during, or subsequent to, the nine months ended September 30, 2012, having lower cost of operations as a percentage of revenue than our historical company average, a 0.3 percentage point decrease from lower auto and workers' compensation expense, a 0.2 percentage point decrease from a decrease in the cost of recyclable commodities and a 0.1 percentage point decrease from a decrease in labor expenses as a percentage of revenues resulting from increased labor productivity.

SG&A. SG&A expenses increased $5.5 million, or 11.6%, to $53.5 million for the three months ended September 30, 2013, from $48.0 million for the three months ended September 30, 2012. The increase was primarily the result of $4.9 million of additional SG&A expenses during the three months ended September 30, 2013 from the R360 acquisition and the following changes at operations owned in comparable periods in 2012 and 2013: an increase in payroll and payroll-related expenses of $0.9 million primarily related to annual compensation increases, an increase in recurring equity-based compensation expense associated with our annual grant of restricted stock awards to our personnel of $0.6 million due to an increase in the number of personnel receiving restricted stock awards, an increase in cash incentive compensation expense of $0.3 million resulting from the achievement of certain financial targets and $1.1 million of other net increases, partially offset by a decrease in direct acquisition expenses of $1.3 million due to a reduction in acquisition activity and a decrease of $1.0 million associated with relocation expenses, the majority of which were incurred . . .

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