WASTE CONNECTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results
of Operations
On January 18, 2016, we entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Progressive Waste Solutions Ltd., a corporation
organized under the laws of Ontario, Canada ("Progressive") and Water Merger Sub
LLC, a Delaware limited liability company and wholly-owned subsidiary of
Progressive ("Merger Sub"). Subject to the terms and conditions of the Merger
Agreement, Merger Sub will merge with and into Waste Connections, Inc. (the
"Merger"), with Waste Connections, Inc. surviving the Merger as a wholly-owned
subsidiary of Progressive.
The proposed Merger is expected to close in the second quarter of 2016. Upon
closing, the combined company will use the Waste Connections name and it is
anticipated that its shares will trade on the New York Stock Exchange and the
Toronto Stock Exchange. Upon completion of the proposed Merger, the combined
company will be led by our current management team. The Board of Directors for
the combined company will include the five current members of our Board and two
members from Progressive's current Board.
Under the terms of the Merger Agreement, our stockholders will receive 2.076843
Progressive shares for each Waste Connections share of common stock that they
own. Subject to the approval of Progressive's shareholders, Progressive expects
to implement, immediately following the Merger, a share consolidation whereby
every 2.076843 shares will be consolidated into one Progressive share on the
basis of 0.4815 (1 divided by the 2.076843 ratio above) of a share on a
post-consolidation basis for each one share outstanding on a pre-consolidation
basis. If the share consolidation is approved by Progressive's shareholders and
effected, our stockholders will receive one share of the combined company for
each existing Waste Connections share of common stock. In the event that the
Merger is consummated but the Progressive shareholder approval of the
consolidation is not obtained, Waste Connections stockholders will receive
2.076843 Progressive common shares for each share of Waste Connections common
stock as a result of the Merger and the number of Progressive common shares held
by Progressive shareholders will remain unchanged. Upon the completion of the
proposed Merger and regardless of whether or not the share consolidation occurs,
our stockholders will own approximately 70% of the combined company, and
Progressive shareholders will own approximately 30%.
The proposed Merger is subject to customary closing conditions, including the approval of both companies' shareholders.
The remainder of this Quarterly Report on Form 10-Q, other than the discussion
of certain risks related to the Merger in the section entitled "Risk Factors" in
Item 1A of Part II of this Quarterly Report, excludes any impact that results or
may result from the Merger.
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 agreement or raise additional capital, the responsibilities of our
subsidiaries with regard to possible cleanup obligations imposed by the EPA, the
impact of global, regional and local economic conditions, including the price of
crude oil, on our volume, business and results of operations, the effects of
seasonality on our business and results of operations, our ability to address
any impacts of inflation on our business, 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 and to provide collection services under
exclusive arrangements, our expectations with respect to our stock repurchase
program and future dividend payments, our expectations with respect to the
outcomes of our legal proceedings, our expectations with respect to the
potential financial impairment of our reporting units caused by dispositions of
certain operating units, and our expectations with respect to the closing of the
proposed Merger with Progressive. 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.
Factors that could cause actual results to differ from those projected include,
but are not limited to, those listed below and elsewhere in this report. 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.
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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:
· Negative trends or volatility in crude oil prices may adversely affect the
level of exploration, development and production activity of E&P companies and
the demand for our E&P waste services;
· Our results are vulnerable to economic conditions;
· Our financial and operating performance may be affected by the inability to
renew landfill operating permits, obtain new landfills and expand existing
ones;
· A portion of our growth and future financial performance depends on our ability
to integrate acquired businesses, and the success of our acquisitions;
· Each business that we acquire or have acquired may have liabilities or risks
that we fail or are unable to discover, or that become more adverse to our
business than we anticipated at the time of acquisition;
· 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;
· Our indebtedness could adversely affect our financial condition and limit our
financial flexibility;
· Price increases may not be adequate to offset the impact of increased costs, or
may cause us to lose volume;
· Fluctuations in prices for recycled commodities that we sell and rebates we
offer to customers may cause our revenues and operating results to decline;
· The seasonal nature of our business and "event-driven" waste projects cause our
results to fluctuate;
· We may lose contracts through competitive bidding, early termination or
governmental action;
· Alternatives to landfill disposal may cause our revenues and operating results
to decline;
· Increases in labor costs could impact our financial results;
· Increases in the price of diesel or compressed natural gas fuel may adversely
affect our collection business and reduce our operating margins;
· Labor union activity could divert management attention and adversely affect our
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;
· Pending or future litigation or governmental proceedings could result in
material adverse consequences, including judgments or settlements;
· 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;
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· Our financial results could be adversely affected by impairments of goodwill,
indefinite-lived intangibles or property and equipment;
· Increases in insurance costs and the amount that we self-insure for various
risks could reduce our operating margins and reported earnings;
· We rely on computer systems to run our business and disruptions or privacy
breaches in these systems could impact our ability to service our customers and
adversely affect our financial results, damage our reputation, and expose us to
litigation risk;
· Extensive and evolving environmental, health and safety laws and regulations
may restrict our operations and growth and increase our costs;
· Our E&P waste business could be adversely affected by changes in laws
regulating E&P waste;
· Our E&P waste business depends on the willingness of E&P companies to outsource
their waste services activities;
· 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;
· Future changes in laws regulating the flow of solid waste in interstate
commerce could adversely affect our operating results;
· Extensive regulations that govern the design, operation, expansion and closure
of landfills may restrict our landfill operations or increase our costs of
operating landfills;
· Our financial results are based upon estimates and assumptions that may differ
from actual results;
· Our accruals for our landfill site closure and post-closure costs may be
inadequate;
· We depend significantly on the services of the members of our senior and
regional 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 may adversely affect our operating results;
· Liabilities for environmental damage may adversely affect our financial
condition, business and earnings;
· 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; and
· Our ability to complete the proposed Merger with Progressive.
These risks and uncertainties, as well as others, are discussed in greater
detail in Item 1A to Part II of 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 OF OUR BUSINESS
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.
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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 owned or 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.
As of March 31, 2016, we served residential, commercial, industrial and E&P
customers in 32 states: Alabama, Alaska, Arizona, Arkansas, 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 March 31, 2016,
we owned or operated a network of 154 solid waste collection operations;
70 transfer stations; seven intermodal facilities, 37 recycling operations,
64 active MSW, E&P and/or non-MSW landfills, 24 E&P liquid waste injection wells
and 18 E&P waste treatment and 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 farther from the collection markets it
serves.
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 regional in nature and is also highly
fragmented, with acquisition opportunities available in several active natural
resource 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, and other solid waste companies. 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. The
demand for our E&P waste services depends on the continued demand for, and
production of, oil and natural gas. Crude oil and natural gas prices
historically have been volatile and the substantial reductions in crude oil
prices that began in October 2014, and continued through 2015 and the first
quarter of 2016, have resulted in a decline in the level of drilling and
production activity, reducing the demand for E&P waste services in the basins in
which we operate. A further reduction in crude oil and natural gas prices could
lead to continued declines in the level of production activity and demand for
our E&P waste services, which could result in the recognition of impairment
charges on our goodwill, intangible assets and property and equipment associated
with our E&P operations. At March 31, 2016, our E&P segment has remaining
balances of $921.2 million in property and equipment, $77.3 million in goodwill
and $21.5 million in indefinite-lived intangible assets.
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 MONTHS ENDED MARCH 31, 2016 AND 2015
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 March 31,
2016 2015
Revenues $ 514,680 100.0 % $ 506,100 100.0 %
Cost of operations 287,192 55.8 281,123 55.6
Selling, general and administrative 67,682 13.2 58,144 11.5
Depreciation 60,897 11.8 57,307 11.3
Amortization of intangibles 7,694 1.5 6,999 1.4
Other operating items 236 0.0 662 0.1
Operating income 90,979 17.7 101,865 20.1
Interest expense (17,184 ) (3.3 ) (15,697 ) (3.1 )
Other income (expense), net 222 0.0 (220 ) (0.0 )
Income tax provision (29,000 ) (5.6 ) (33,867 ) (6.7 )
Net income 45,017 8.8 52,081 10.3
Net income attributable to
noncontrolling interests (175 ) (0.1 ) (257 ) (0.1 )
Net income attributable to Waste
Connections $ 44,842 8.7 % $ 51,824 10.2 %
Revenues. Total revenues increased $8.6 million, or 1.7%, to $514.7 million for
the three months ended March 31, 2016, from $506.1 million for the three months
ended March 31, 2015.
During the three months ended March 31, 2016, incremental revenue from
acquisitions closed during, or subsequent to, the three months ended March 31,
2015, increased revenues by approximately $22.1 million. Operations divested
during, or subsequent to, the three months ended March 31, 2015, decreased
revenues by approximately $0.6 million.
During the three months ended March 31, 2016, the net increase in prices charged
to our customers was $11.7 million, consisting of $13.4 million of core price
increases, partially offset by a decrease of $1.7 million from fuel, materials
and environmental surcharges due primarily to a decline in the market price
of
diesel fuel.
During the three months ended March 31, 2016, volume increases in our existing
business increased solid waste revenues by $14.1 million from increases in roll
off collection, transfer station volumes and landfill volumes resulting from
increased construction and general economic activity in our markets. E&P
revenues at facilities owned and fully-operated in each of the comparable
periods decreased by $38.1 million due to the substantial reductions in crude
oil prices that began in October 2014, and continued through the first quarter
of 2016, which resulted in a decline in the level of drilling and production
activity thereby reducing the demand for E&P waste services in the basins in
which we operate.
Revenues from sales of recyclable commodities at facilities owned during the
three months ended March 31, 2016 and 2015 decreased $0.9 million due primarily
to decreased recyclable commodity prices.
Other revenues increased by $0.3 million during the three months ended March 31,
2016.
Cost of Operations. Total cost of operations increased $6.1 million, or 2.2%,
to $287.2 million for the three months ended March 31, 2016, from $281.1 million
for the three months ended March 31, 2015. The increase was primarily the result
of $12.4 million of additional operating costs from solid waste acquisitions
closed during, or subsequent to, the three months ended March 31, 2015 and an
increase in operating costs at our existing solid waste and intermodal
operations of $13.4 million, less a decrease in operating costs at our existing
and internally developed E&P operations of $19.7 million.
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The increase in operating costs at our existing solid waste and intermodal
operations of $13.4 million for the three months ended March 31, 2016 was
comprised of an increase in labor expenses of $5.7 million due primarily to
employee pay rate and headcount increases to support volume increases, an
increase in taxes on revenues of $3.2 million due to increased revenues in our
solid waste markets, an increase in auto and workers' compensation claims
expense under our high deductible insurance program of $2.0 million due
primarily to adjustments to projected losses on prior period claims, an increase
in third-party disposal expense of $1.4 million due to disposal rate increases
and higher disposal costs associated with increased collection and transfer
station volumes, an increase in truck, container, equipment and facility
maintenance and repair expenses of $1.3 million due to variability in the timing
and severity of major repairs, an increase in third-party trucking and
transportation expenses of $1.1 million due to increased transfer station and
landfill volumes that require us to transport the waste to our disposal sites,
an increase in the cost of recyclable commodities of $0.5 million due to reduced
commodity sales values requiring, in certain markets, for us to pay third
parties to take final possession of recyclable commodities processed at our
facilities and $0.9 million of other net expense increases, partially offset by
a decrease in fuel expense of $2.7 million due to lower market prices for diesel
fuel not purchased under diesel fuel hedge agreements.
During the three months ended March 31, 2015 we incurred $5.0 million in
expenses due to site clean-up and remediation work associated with flooding and
other surface damage at two of our E&P disposal sites in New Mexico resulting
from heavy precipitation affecting the sites and $1.5 million of start-up
related expenses at two new E&P disposal facilities. The remaining decrease in
operating costs at our E&P operations of $13.2 million for the three months
ended March 31, 2016 was comprised of decreased fuel expenses of $0.8 million
due primarily to decreases in the price of diesel fuel and the following changes
attributable to a reduction in our operations resulting from the decline in the
level of drilling and production activity: decreased third-party trucking and
transportation expenses of $3.0 million, decreased employee wage expenses of
$2.8 million, decreased cell processing and site remediation work of $1.9
million, decreased equipment repair expenses of $1.7 million, decreased
equipment rental expenses of $1.0 million, decreased landfill operating supplies
of $0.7 million and $1.3 million of other expense decreases.
Cost of operations as a percentage of revenues increased 0.2 percentage points
to 55.8% for the three months ended March 31, 2016, from 55.6% for the three
months ended March 31, 2015. The increase as a percentage of revenues was
primarily the result of a 0.2 percentage point increase at our E&P operations,
comprised of a 1.5 percentage point increase resulting from fixed operating
expenses increasing as an overall percentage of revenues due to the
aforementioned decline in E&P revenues, partially offset by a 1.3 percentage
point decrease from the prior year expenses related to the aforementioned site
clean-up, remediation work and start-up related expenses. Cost of operations at
our solid waste operations as a percentage of revenue was unchanged due to the
net impact of a 0.4 percentage point increase resulting from the current year
quarter having one additional calendar day resulting in higher expenses without
the added benefit of higher revenue in our fixed price residential and
commercial collection businesses, a 0.4 percentage point increase in auto and
workers' compensation claims expense and a 0.4 percentage point increase in
taxes on revenues, partially offset by a 0.9 percentage point decrease in fuel
expense and a 0.3 percentage point decrease in disposal expense due to increases
in solid waste landfill revenues which do not have associated disposal expenses.
SG&A. SG&A expenses increased $9.6 million, or 16.4%, to $67.7 million for the
three months ended March 31, 2016, from $58.1 million for the three months ended
March 31, 2015. The increase was primarily the result of an increase in direct
acquisition costs of $8.3 million due primarily to our proposed Merger with
Progressive, which is expected to close in the second quarter of 2016, an
increase of $1.6 million from additional SG&A expenses attributable to
acquisitions closed during, or subsequent to, the three months ended March 31,
2015, an increase in payroll expenses of $0.8 million primarily related to
headcount increases in our solid waste segments and annual compensation
increases, an increase of $0.5 million in equity-based compensation expenses
associated with our annual recurring grant of restricted stock units to our
personnel and $0.2 million of other net expense increases, partially offset by a
decrease in accrued cash incentive compensation expense of $1.1 million as we
are not projected to achieve the same level of certain financial targets that
were met in the prior year period and a decrease in travel expenses of $0.7
million due primarily to a reduction in travel activity in our E&P segment
resulting from a decrease in the headcount of management-level personnel.
SG&A expenses as a percentage of revenues increased 1.7% percentage points to
13.2% for the three months ended March 31, 2016, from 11.5% for the three months
ended March 31, 2015. The increase as a percentage of revenues was primarily the
result of a 1.7 percentage point increase in direct acquisition costs, a 0.3
percentage point increase in payroll expenses and a 0.1 percentage point
increase in equity-based compensation expenses, partially offset by a 0.2
percentage point decrease in accrued cash incentive compensation expense and a
0.2 percentage point decrease from the benefit of leveraging existing
administrative functions to support acquisitions.
Depreciation. Depreciation expense increased $3.6 million, or 6.3%, to $60.9
million for the three months ended March 31, 2016, from $57.3 million for the
three months ended March 31, 2015. The increase was primarily the result of an
increase in depletion expense of $1.4 million at our existing solid waste
landfills due primarily to an increase in volumes, additional depreciation and
depletion expense of $3.6 million from acquisitions closed during, or subsequent
to, the three months ended March 31, 2015 and an increase in depreciation
expense of $1.7 million associated with additions to our fleet and equipment
purchased to support our existing operations, partially offset by a decrease in
depletion expense of $3.1 million at our existing E&P landfills due to volume
decreases resulting from a decline in the level of oil drilling and production
activity due to reductions in crude oil prices.
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Depreciation expense as a percentage of revenues increased 0.5 percentage points
to 11.8% for the three months ended March 31, 2016, from 11.3% for the three
months ended March 31, 2015. The increase as a percentage of revenues was due
primarily to the impact of a decline in E&P revenues from operations owned in
the comparable periods and depreciation expense associated with additions to our
fleet and equipment purchased to support our existing operations, partially
offset by the decrease in depletion expense at our existing E&P landfills.
Amortization of Intangibles. Amortization of intangibles expense increased $0.7
million, or 9.9%, to $7.7 million for the three months ended March 31, 2016,
from $7.0 million for the three months ended March 31, 2015. Amortization
expense as a percentage of revenues increased 0.1 percentage points to 1.5% for
the three months ended March 31, 2016, from 1.4% for the three months ended
March 31, 2015.
The dollar amount and percentage of revenues increases were attributable to
additional amortization expense during the three months ended March 31, 2016
from acquisitions closed during, or subsequent to, the three months ended March
31, 2015.
Operating Income. Operating income decreased $10.9 million to $91.0 million for
the three months ended March 31, 2016, from $101.9 million for the three months
ended March 31, 2015. The decrease was attributable to the $9.6 million
increase in SG&A expense, $6.1 million increase in costs of operations, $3.6
million increase in depreciation expense and $0.7 million increase in
amortization of intangibles expense, partially offset by the $8.6 million
increase in revenues and a $0.4 million decrease in other operating items.
Operating income as a percentage of revenues decreased 2.4 percentage points to
17.7% for the three months ended March 31, 2016, from 20.1% for the three months
ended March 31, 2015. The decrease as a percentage of revenues was comprised of
a 1.7 percentage point increase in SG&A expense, a 0.5 percentage point increase
in depreciation expense, a 0.2 percentage point increase in cost of operations
and a 0.1 percentage point increase in amortization expense, partially offset by
a 0.1 percentage point decrease in other operating items.
Interest Expense. Interest expense increased $1.5 million, or 9.5%, to
$17.2 million for the three months ended March 31, 2016, from $15.7 million for
the three months ended March 31, 2015. The increase was primarily attributable
to an increase of $4.2 million from the August 2015 issuance of our 2022 Notes
and 2025 Notes, an increase of $0.8 million resulting from the commencement of
four new interest rate swaps totaling $175 million with an average fixed rate of
2.34% and an increase of $0.6 due to an increase in the base rate and LIBOR rate
for outstanding borrowings under our revolving credit and term loan agreement,
partially offset by a decrease of $2.7 million for the redemption of our 2015
Notes in October 2015 using proceeds from our revolving credit facility which
has a lower interest rate relative to the fixed interest rate in effect when the
2015 Notes were outstanding, a decrease of $0.8 million from the net decrease in
the combined average outstanding borrowings under our revolving credit and term
loan agreement and a decrease of $0.6 million in interest accretion expense
primarily resulting from decreases to the fair value of contingent consideration
recorded in the third quarter of 2015 associated with an E&P acquisition closed
in a prior year period.
Other Income (Expense), Net. Other income (expense), net, increased $0.4
million, to an income total of $0.2 million for the three months ended March 31,
2016, from an expense total of $0.2 million for the three months ended March 31,
2015. The increase was primarily attributable to an expense charge of $0.6
million for the write-off of a portion of unamortized debt issuance costs
resulting from the January 2015 refinancing our prior term loan agreement and
prior credit agreement, partially offset by an increase of $0.2 million from
other net changes.
Income Tax Provision. Income taxes decreased $4.9 million, to $29.0 million for
the three months ended March 31, 2016, from $33.9 million for the three months
ended March 31, 2015, primarily as a result of decreased pre-tax income. Our
effective tax rate for the three months ended March 31, 2016 and 2015 was 39.2%
and 39.4%, respectively.
Our 2013 U.S. federal income tax return was examined by the Internal Revenue
Service in 2016. The examination has concluded and no changes were made as
a
result of such examination.
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SEGMENT RESULTS
General
No single contract or customer accounted for more than 10% of our total revenues
at the consolidated or reportable segment level during the periods presented.
The following tables reflect a breakdown of our revenue and inter-company
eliminations for the periods indicated (dollars in thousands).
Three months ended March 31, 2016
Intercompany
Reported % of Reported
Revenue Revenue Revenue Revenue
Solid waste collection $ 356,598 $ (1,321 ) $ 355,277 69.0 %
Solid waste disposal and transfer 170,083 (66,034 ) 104,049 20.2
Solid waste recycling 10,619 (639 ) 9,980 2.0
E&P waste treatment, recovery and disposal 32,851 (2,366
) 30,485 5.9
Intermodal and other 14,889 - 14,889 2.9
Total $ 585,040 $ (70,360 ) $ 514,680 100.0 %
Three months ended March 31, 2015
Intercompany
Reported % of Reported
Revenue Revenue Revenue Revenue
Solid waste collection $ 327,005 $ (919 ) $ 326,086 64.4 %
Solid waste disposal and transfer 142,430 (56,326 ) 86,104 17.0
Solid waste recycling 11,069 (221 ) 10,848 2.1
E&P waste treatment, recovery and disposal 72,556 (3,998
) 68,558 13.6
Intermodal and other 14,504 - 14,504 2.9
Total $ 567,564 $ (61,464 ) $ 506,100 100.0 %
Our CODM evaluates operating segment profitability and determines resource
allocations based on several factors, of which the primary financial measure is
segment EBITDA. We define segment EBITDA as earnings before interest, taxes,
depreciation, amortization, other operating items and other income (expense).
Segment EBITDA is not a measure of operating income, operating performance or
liquidity under GAAP and may not be comparable to similarly titled measures
reported by other companies. Our management uses segment EBITDA in the
evaluation of segment operating performance as it is a profit measure that is
generally within the control of the operating segments.
We manage our operations through three geographic operating segments (Western,
Central and Eastern) and our E&P segment, which includes the majority of our E&P
waste treatment and disposal operations. Our three geographic operating segments
and our E&P segment comprise our reportable segments. Each operating segment is
responsible for managing several vertically integrated operations, which are
comprised of districts. Our Western segment is comprised of operating locations
in Alaska, California, Idaho, Montana, Nevada, Oregon, Washington and western
Wyoming; our Central segment is comprised of operating locations in Arizona,
Colorado, Kansas, Louisiana, Minnesota, Nebraska, New Mexico, Oklahoma, South
Dakota, Texas, Utah and eastern Wyoming; and our Eastern segment is comprised of
operating locations in Alabama, Illinois, Iowa, Kentucky, Massachusetts,
Michigan, Mississippi, New York, North Carolina, South Carolina and Tennessee.
The E&P segment is comprised of our E&P operations in Arkansas, Louisiana, New
Mexico, North Dakota, Oklahoma, Texas, Wyoming and along the Gulf of Mexico.
32
Revenues, net of intercompany eliminations, for our reportable segments are shown in the following table in thousands and as a percentage of total revenues for the periods indicated:
Three months ended March 31,
2016 2015
Western $ 219,234 42.6 % $ 205,626 40.6 %
Central 142,476 27.7 134,935 26.7
Eastern 122,502 23.8 98,024 19.4
E&P 30,468 5.9 67,515 13.3
$ 514,680 100.0 % $ 506,100 100.0 %
Segment EBITDA for our reportable segments is shown in the following table in
thousands and as a percentage of segment revenues for the periods indicated:
Three months ended March 31,
2016 2015
Western $ 73,789 33.7 % $ 68,892 33.5 %
Central 49,837 35.0 47,350 35.1
Eastern 38,246 31.2 30,072 30.7
E&P 6,422 21.1 20,976 31.1
Corporate(a) (8,488 ) - (457 ) -
$ 159,806 31.0 % $ 166,833 33.0 %
____________________
(a) Corporate functions include accounting, legal, tax, treasury, information
technology, risk management, human resources, training and other administrative
functions. Amounts reflected are net of allocations to the four operating
segments.
A reconciliation of segment EBITDA to Income before income tax provision is included in Note 8 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this report.
Significant changes in revenue and segment EBITDA for our reportable segments
for the three month period ended March 31, 2016, compared to the three month
period ended March 31, 2015, are discussed below:
Segment Revenue
Revenue in our Western segment increased $13.6 million, or 6.6%, to
$219.2 million for the three months ended March 31, 2016, from $205.6 million
for the three months ended March 31, 2015. The components of the increase
consisted of solid waste volume increases of $9.6 million associated with
landfill municipal solid waste, landfill special waste and residential,
commercial and roll off collection operations, net price increases of $3.2
million, revenue growth from acquisitions closed during, or subsequent to, the
three months ended March 31, 2015, of $0.9 million and other revenue increases
of $0.4 million, partially offset by decreased recyclable commodity sales of
$0.3 million resulting from declines in the price of recyclable commodities and
decreases of $0.2 million from reduced E&P disposal volumes at our solid waste
landfills.
Revenue in our Central segment increased $7.6 million, or 5.6%, to $142.5
million for the three months ended March 31, 2016, from $134.9 million for the
three months ended March 31, 2015. The components of the increase consisted of
net price increases of $5.8 million, solid waste volume increases of $1.4
million associated with increases in roll off collection, landfill municipal
solid waste and landfill special waste exceeding declines in residential
collection volumes and net revenue growth from acquisitions and divestitures
closed during, or subsequent to, the three months ended March 31, 2015, of $2.0
million, partially offset by decreases of $1.5 million from reduced E&P disposal
volumes at our solid waste landfills and other revenue decreases of $0.1
million.
Revenue in our Eastern segment increased $24.5 million, or 25.0%, to $122.5
million for the three months ended March 31, 2016, from $98.0 million for the
three months ended March 31, 2015. The components of the increase consisted of
revenue growth from acquisitions closed during, or subsequent to, the three
months ended March 31, 2015, of $18.6 million, net price increases of $2.7
million and solid waste volume increases of $3.7 million primarily from volume
increases in roll off collection, transfer station and landfill special waste
exceeding volume decreases in residential collection, partially offset by
recyclable commodity sales decreases of $0.4 million due primarily to declines
in the price of recyclable commodities and other revenue decreases of $0.1
million.
33
Revenue in our E&P segment decreased $37.0 million, or 54.9%, to $30.5 million
for the three months ended March 31, 2016, from $67.5 million for the three
months ended March 31, 2015. During the three months ended March 31, 2016, our
E&P segment was adversely affected by the substantial reductions in crude oil
prices that began in October 2014, and continued through 2015 and early 2016,
resulting in a decline in the level of drilling and production activity,
reducing the demand for E&P waste services in the basins in which we operate.
The carryover impact from the aforementioned reduction in the price of crude
oil, which has dropped again at the beginning of 2016, is expected to contribute
to revenue at our E&P segment in 2016 declining between 20% and 30% from 2015.
Segment EBITDA
Segment EBITDA in our Western segment increased $4.9 million, or 7.1%, to $73.8
million for the three months ended March 31, 2016, from $68.9 million for the
three months ended March 31, 2015. The increase was due primarily to an
increase in revenues of $13.6 million and a decrease in fuel expense of $0.6
million due to lower market prices for diesel fuel not purchased under diesel
fuel hedges, partially offset by an increase in direct and administrative labor
expenses of $3.4 million due primarily to employee pay rate increases and
increased headcount to support revenue volume increases, an increase in taxes on
revenues of $2.1 million due to increased revenues, an increase in auto,
workers' compensation and property claims expenses under our high deductible
insurance program of $0.7 million due primarily to adjustments to projected
losses on prior period claims, an increase in third-party disposal expense of
$0.6 million due to increased collection volumes and disposal rate increases, an
increase in the cost of recyclable commodities of $0.6 million due to reduced
commodity sales values requiring, in certain markets, for us to pay third
parties to take final possession of recyclable commodities processed at our
facilities, an increase in corporate overhead expense allocations of $0.6
million due primarily to revenue growth, an increase in truck, container,
equipment and facility maintenance and repair expenses of $0.4 million due to
variability in the timing and severity of major repairs and $0.9 million of
other net expense increases.
Segment EBITDA in our Central segment increased $2.4 million, or 5.3%, to
$49.8 million for the three months ended March 31, 2016, from $47.4 million for
the three months ended March 31, 2015. The increase was due primarily to an
increase in revenues of $7.6 million and a decrease in fuel expense of $1.1
million due to lower market prices for diesel fuel not purchased under diesel
fuel hedge agreements, partially offset by an increase in direct and
administrative labor expenses of $2.1 million due primarily to employee pay rate
increases, a net $1.9 million increase in cost of operations and SG&A expenses
attributable to acquired operations, an increase in truck, container, equipment
and facility maintenance and repair expenses of $0.5 million due to variability
in the timing and severity of major repairs, an increase in auto, workers'
compensation and property claims expenses under our high deductible insurance
program of $0.5 million due primarily to adjustments to projected losses on
prior period claims, an increase in taxes on revenues of $0.4 million due
primarily to increased landfill revenues, an increase in corporate overhead
expense allocations of $0.3 million due primarily to revenue growth and $0.6
million of other net expense increases.
Segment EBITDA in our Eastern segment increased $8.1 million, or 27.2%, to
$38.2 million for the three months ended March 31, 2016, from $30.1 million for
the three months ended March 31, 2015. The increase was due primarily to an
increase in revenues of $24.5 million and a decrease in fuel expense of $1.1
million due to lower market prices for diesel fuel not purchased under diesel
fuel hedge agreements, partially offset by a net $12.1 million increase in cost
of operations and SG&A expenses attributable to acquired operations, an increase
in direct and administrative labor expenses of $1.5 million due primarily to
employee pay rate increases and increased headcount to support internal growth,
an increase in corporate overhead expense allocations of $0.8 million due
primarily to revenue growth, an increase in third-party trucking and
transportation expenses of $0.7 million due to increased landfill special waste
volumes and transfer station volumes that require us to be responsible for the
costs of transporting the waste to our disposal operations, an increase in taxes
on revenues of $0.7 million at a new landfill site that commenced operations in
2015, an increase in disposal expense of $0.6 million due to rate increases at
third-party disposal operations, an increase in truck, container, equipment and
facility maintenance and repair expenses of $0.4 million due to variability in
the timing and severity of major repairs and $0.7 million of other net expense
increases.
Segment EBITDA in our E&P segment decreased $14.6 million, or 69.4%, to $6.4
million for the three months ended March 31, 2016, from $21.0 million for the
three months ended March 31, 2015. The decrease was due primarily to a $37.0
million decrease in revenues, partially offset by decreased expenses of $5.0
million associated with costs incurred during the three months ended March 31,
2015 for site clean-up and remediation work associated with flooding and other
surface damage at two of our E&P disposal sites in New Mexico resulting from
heavy precipitation affecting the sites, a decrease of $1.5 million in expenses
resulting from start-up costs incurred during the three months ended March 31,
2015 at two new E&P disposal facilities, a decrease in corporate overhead
expense allocations of $0.8 million due primarily to declines in revenue,
decreased fuel expenses of $0.8 million due primarily to decreases in the price
of diesel fuel and the following changes attributable to a reduction in our
operations resulting from the decline in the level of drilling and production
activity: decreased employee wage expenses of $3.5 million, decreased
third-party trucking and transportation expenses of $3.0 million, decreased cell
processing and site remediation work of $1.9 million, decreased equipment repair
expenses of $1.7 million, decreased equipment rental expenses of $1.0 million,
decreased landfill operating supplies of $0.7 million, decreased employee travel
expenses of $0.6 million and $1.9 million of other expense decreases.
34
Segment EBITDA at Corporate decreased $8.0 million, to a loss of $8.5 million
for the three months ended March 31, 2016, from a loss of $0.5 million for the
three months ended March 31, 2015. The increased loss was due to an increase in
direct acquisition expenses of $8.3 million attributable primarily to our
proposed Merger with Progressive, which is expected to close in the second
quarter of 2016, an increase in legal expenses of $0.6 million, an increase of
$0.5 million in equity-based compensation expenses associated with our annual
recurring grant of restricted stock units to our personnel, an increase in
payroll expenses of $0.5 million due primarily to pay rate increases and $0.3
million of other net expense increases, partially offset by a decrease in
accrued cash incentive compensation expense of $1.2 million as we did not
achieve the same level of certain financial targets that were met in the prior
year period and an increase in revenue-based corporate overhead expense
allocations to our segments of $1.0 million due primarily to our revenue growth
in our solid waste segments.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain cash flow information for the three month periods ended March 31, 2016 and 2015 (in thousands):
Three Months Ended
March 31,
2016 2015
Net cash provided by operating activities $ 164,716 $ 162,571 Net cash used in investing activities
(59,042 ) (132,174 )
Net cash used in financing activities (107,385 ) (29,016 )
Net increase (decrease) in cash and equivalents (1,711 ) 1,381 Cash and equivalents at beginning of period
10,974 14,353
Cash and equivalents at end of period $ 9,263 $ 15,734
Operating Activities Cash Flows
For the three months ended March 31, 2016, net cash provided by operating activities was $164.7 million. For the three months ended March 31, 2015, net cash provided by operating activities was $162.6 million. The $2.1 million increase was due primarily to the following:
1) A decrease in net income of $7.1 million, adjusted for an increase in cash
flows from operating assets and liabilities, net of effects from closed
acquisitions, of $9.0 million. Cash provided by operating assets and
liabilities, net of effects from closed acquisitions, was $30.6 million and
$21.6 million for the three months ended March 31, 2016 and 2015,
respectively. The significant components of the $30.6 million in net cash
inflows from changes in operating assets and liabilities, net of effects from
closed acquisitions, for the three months ended March 31, 2016, include the
following:
a) an increase in cash resulting from an $18.4 million decrease in accounts
receivable due, in part, to improved collection results;
b) an increase in cash resulting from a $7.6 million decrease in prepaid expenses
and other current assets due primarily to decreases in prepaid income taxes
and prepaid insurance premiums;
c) an increase in cash resulting from a $5.8 million increase in accounts payable
due primarily to the timing of vendor payments; less
d) a decrease in cash resulting from a decrease in accrued liabilities of $0.8
million due primarily to a reduction in accrued cash incentive compensation
expense due to the payment of annual cash incentive compensation for 2015
during the three months ended March 31, 2016, partially offset by an increase
in accrued direct acquisition costs associated with the proposed Merger with
Progressive and an increase in accrued payroll-related expenses due to the
timing of our bi-weekly pay cycles;
2) An increase in depreciation expense of $3.6 million due primarily to increased
depreciation expense resulting from increased capital expenditures; less
3) A decrease of $3.0 million attributable to an increase in the excess tax
benefits associated with equity-based compensation, due to an increase in
taxable income recognized by employees from equity-based compensation that is
tax deductible to us.
35
As of March 31, 2016, we had a working capital deficit of $46.4 million,
including cash and equivalents of $9.3 million. Our working capital deficit
increased $30.6 million from a working capital deficit of $15.8 million at
December 31, 2015, including cash and equivalents of $11.0 million. To date, we
have experienced no loss or lack of access to our cash or cash equivalents;
however, we can provide no assurances that access to our cash and cash
equivalents will not be impacted by adverse conditions in the financial
markets. Our strategy in managing our working capital is generally to apply the
cash generated from our operations that remains after satisfying our working
capital and capital expenditure requirements, along with stock repurchase and
dividend programs, to reduce the unhedged portion of our indebtedness under our
credit agreement and to minimize our cash balances.
Investing Activities Cash Flows
Net cash used in investing activities decreased $73.2 million to $59.0 million
for the three months ended March 31, 2016, from $132.2 million for the three
months ended March 31, 2015. The significant components of the decrease include
a decrease in payments for acquisitions of $87.3 million, partially offset by an
increase in capital expenditures for property and equipment of $14.9 million.
The decrease in payments for acquisitions was due to a reduction in the number
of acquisitions closed. During the three months ended March 31, 2016, we
acquired four solid waste collection businesses. During the three months ended
March 31, 2015, we acquired four solid waste collection businesses, an E&P waste
stream treatment and recycling business and a permitted, development stage E&P
landfill site. The increase in capital expenditures for property and equipment
was due primarily to increases in expenditures for collection trucks and
landfill site costs and expenditures resulting from the November 2015
acquisition of Rock River Environmental Services, Inc.
Financing Activities Cash Flows
Net cash used in financing activities increased $78.4 million to $107.4 million
for the three months ended March 31, 2016, from $29.0 million for the three
months ended March 31, 2015. The significant components of the increase include
the following:
1) An increase in net repayments of long-term borrowings of $95.4 million due
primarily to reduced proceeds from borrowings to fund payments for
acquisitions and payments to repurchase our common stock during the three
months ended March 31, 2016;
2) An increase in payment of contingent consideration recorded at acquisition
date of $2.2 million due primarily to the payout of the fair value of a
contingent liability associated with obtaining a permit to construct and
operate a new E&P landfill operation; and
3) An increase in cash dividends paid of $1.6 million due primarily to an
increase in our quarterly dividend rate to $0.145 per share for the three
months ended March 31, 2016, from $0.13 per share for the three months ended
March 31, 2015; less
4) A decrease in payments to repurchase our common stock of $18.4 million due to
no shares being repurchased during the three months ended March 31, 2016; less
5) An increase of $3.0 million attributable to an increase in the excess tax
benefits associated with equity-based compensation, due to an increase in
taxable income recognized by employees from equity-based compensation that is
tax deductible to us; less
6) A decrease in payments for debt issuance costs of $3.0 million incurred in
connection with our revolving credit and term loan agreement that we entered
into in January 2015.
Our business is capital intensive. Our capital requirements include
acquisitions and capital expenditures for landfill cell construction, landfill
development, landfill closure activities and intermodal facility construction in
the future.
Our Board of Directors has authorized a common stock repurchase program for the
repurchase of up to $1.2 billion of our common stock through December 31, 2017.
Under the program, stock repurchases may be made in the open market or in
privately negotiated transactions from time to time at management's discretion.
The timing and amounts of any repurchases will depend on many factors, including
our capital structure, the market price of the common stock and overall market
conditions. As of March 31, 2016 and 2015, we had repurchased in aggregate 42.0
million and 40.5 million shares, respectively, of our common stock at an
aggregate cost of $882.5 million and $809.7 million, respectively. No shares
were repurchased under the program during the three months ended March 31, 2016.
As of March 31, 2016, the remaining maximum dollar value of shares available for
purchase under the program was approximately $317.5 million. Following the
announcement of our proposed Merger with Progressive on January 19, 2016, we
suspended our stock repurchase program.
Our Board of Directors authorized the initiation of a quarterly cash dividend in
October 2010 and has increased it on an annual basis. In October 2015, our Board
of Directors authorized an increase to our regular quarterly cash dividend of
$0.015, from $0.13 to $0.145 per share. Cash dividends of $17.8 million and
$16.2 million were paid during the three months ended March 31, 2016 and 2015,
respectively. We cannot assure you as to the amounts or timing of future
dividends.
36
We made $56.6 million in capital expenditures during the three months ended
March 31, 2016. We expect to make capital expenditures of approximately $230
million in 2016 in connection with our existing business. We have funded and
intend to fund the balance of our planned 2016 capital expenditures principally
through cash on hand, internally generated funds and borrowings under our credit
agreement. In addition, we may make substantial additional capital expenditures
in acquiring MSW and E&P waste businesses. If we acquire additional landfill
disposal facilities, we may also have to make significant expenditures to bring
them into compliance with applicable regulatory requirements, obtain permits or
expand our available disposal capacity. We cannot currently determine the
amount of these expenditures because they will depend on the number, nature,
condition and permitted status of any acquired landfill disposal facilities. We
believe that our cash and equivalents, credit agreement and the funds we expect
to generate from operations will provide adequate cash to fund our working
capital and other cash needs for the foreseeable future. However, disruptions
in the capital and credit markets could adversely affect our ability to draw on
our credit agreement or raise other capital. Our access to funds under the
credit agreement is dependent on the ability of the banks that are parties to
the agreement to meet their funding commitments. Those banks may not be able to
meet their funding commitments if they experience shortages of capital and
liquidity or if they experience excessive volumes of borrowing requests within a
short period of time.
We are a well-known seasoned issuer with an effective shelf registration
statement on Form S-3 filed in February 2015, which registers an unspecified
amount of debt and equity securities, including preferred securities, warrants,
stockholder rights and units. In the future, we may issue debt or equity
securities under our shelf registration statement or in private placements from
time to time on an opportunistic basis, based on market conditions and available
pricing. We expect to use the proceeds from any such offerings for general
corporate purposes, including repaying, redeeming or repurchasing debt,
acquiring additional assets or businesses, capital expenditures and increasing
our working capital.
As of March 31, 2016, $800.0 million under the term loan and $309.0 million
under the revolving credit facility were outstanding under our credit agreement,
exclusive of outstanding standby letters of credit of $78.4 million. Our credit
agreement matures in January 2020.
As of March 31, 2016, we had the following contractual obligations:
Payments Due by Period
(amounts in thousands)
Less Than 1 to 3 Over 5
Recorded Obligations Total 1 Year Years 3 to 5 Years Years
Long-term debt $ 2,075,260 $ 1,590 $ 67,407 $ 1,385,380 $ 620,883
Cash interest payments $ 327,923 $ 63,852 $ 119,328 $ 74,271 $ 70,472
Contingent consideration $ 68,170 $ 20,430 $ 4,631 $ 7,369 $ 35,740
Final capping, closure and
post-closure $ 836,717 $ - $ 5,632 $ 8,261 $ 822,824
Long-term debt payments include:
1) $309.0 million in principal payments due January 2020 related to our revolving
credit facility under our credit agreement. We may elect to draw amounts on
our credit agreement in either base rate loans or LIBOR loans. At March 31,
2016, $305.0 million of the outstanding borrowings drawn under the revolving
credit facility were in LIBOR loans, which bear interest at the LIBOR rate
plus the applicable LIBOR margin (for a total rate of 1.64% at March 31, 2016)
and $4.0 million of the outstanding borrowings drawn under the revolving
credit facility were in base rate loans, which bear interest at the base rate
plus the applicable base rate margin (for a total rate of 3.70% at March 31,
2016).
2) $800.0 million in principal payments due January 2020 related to our term loan
under our credit agreement. Outstanding amounts on the term loan can be
either base rate loans or LIBOR loans. At March 31, 2016, all amounts
outstanding under the term loan were in LIBOR loans which bear interest at the
LIBOR rate plus the applicable LIBOR margin (for a total rate of 1.64% at
March 31, 2016).
3) $100.0 million in principal payments due April 1, 2016 related to our
2016 Notes. Holders of the 2016 Notes may require us to purchase their notes
in cash at a purchase price of 100% of the principal amount of the 2016 Notes
plus accrued and unpaid interest, if any, upon a change in control, as defined
in the master note purchase agreement. The 2016 Notes bear interest at a rate
of 3.30%. We have recorded this obligation in the payments due in 3 to 5
years category in the table above as we redeemed the 2016 Notes on April 1,
2016 using borrowings under our credit agreement.
4) $50.0 million in principal payments due 2018 related to our 2018 Notes.
Holders of the 2018 Notes may require us to purchase their notes in cash at a
purchase price of 100% of the principal amount of the 2018 Notes plus accrued
and unpaid interest, if any, upon a change in control, as defined in the
master note purchase agreement. The 2018 Notes bear interest at a rate of
4.00%.
37
5) $175.0 million in principal payments due 2019 related to our 2019 Notes.
Holders of the 2019 Notes may require us to purchase their notes in cash at a
purchase price of 100% of the principal amount of the 2019 Notes plus accrued
and unpaid interest, if any, upon a change in control, as defined in the
master note purchase agreement. The 2019 Notes bear interest at a rate of
5.25%.
6) $100.0 million in principal payments due 2021 related to our 2021 Notes.
Holders of the 2021 Notes may require us to purchase their notes in cash at a
purchase price of 100% of the principal amount of the 2021 Notes plus accrued
and unpaid interest, if any, upon a change in control, as defined in the
master note purchase agreement. The 2021 Notes bear interest at a rate of
4.64%.
7) $125.0 million in principal payments due 2022 related to our 2022 Notes.
Holders of the 2022 Notes may require us to purchase their notes in cash at a
purchase price of 100% of the principal amount of the 2022 Notes plus accrued
and unpaid interest, if any, upon a change in control, as defined in the
master note purchase agreement. The 2022 Notes bear interest at a rate of
3.09%.
8) $375.0 million in principal payments due 2025 related to our 2025 Notes.
Holders of the 2025 Notes may require us to purchase their notes in cash at a
purchase price of 100% of the principal amount of the 2025 Notes plus accrued
and unpaid interest, if any, upon a change in control, as defined in the
master note purchase agreement. The 2025 Notes bear interest at a rate of
3.41%.
9) $31.4 million in principal payments related to our tax-exempt bonds, which
bear interest at variable rates (0.46% at March 31, 2016). The tax-exempt
bonds have maturity dates ranging from 2018 to 2033.
10) $9.8 million in principal payments related to our notes payable to sellers
and other third parties. Our notes payable to sellers and other third
parties bear interest at rates between 3.0% and 10.9% at March 31, 2016, and
have maturity dates ranging from 2016 to 2036.
The following assumptions were made in calculating cash interest payments:
1) We calculated cash interest payments on the credit agreement using the LIBOR
rate plus the applicable LIBOR margin at March 31, 2016. We assumed the
credit agreement is paid off when it matures in January 2020.
2) We calculated cash interest payments on our interest rate swaps using the
stated interest rate in the swap agreement less the LIBOR rate through the
earlier expiration of the term of the swaps or the term of the credit
facility.
Contingent consideration payments include $47.6 million recorded as liabilities
in our condensed consolidated financial statements at March 31, 2016, and $20.5
million of future interest accretion on the recorded obligations.
The estimated final capping, closure and post-closure expenditures presented above are in current dollars.
Amount of Commitment Expiration Per Period
(amounts in thousands)
Less Than 1 to 3 3 to 5 Over 5
Unrecorded Obligations(1) Total 1 Year Years Years Years
Operating leases $ 108,944 $ 16,416 $ 25,067 $ 16,983 $ 50,478
Unconditional purchase
obligations $ 42,275 $ 25,279 $ 16,996 $ - $ -
____________________
(1) We are party to operating lease agreements and unconditional purchase
obligations. These lease agreements and purchase obligations are
established in the ordinary course of our business and are designed to
provide us with access to facilities and products at competitive,
market-driven prices. At March 31, 2016, our unconditional purchase
obligations consisted of multiple fixed-price fuel purchase contracts
under which we have 16.1 million gallons remaining to be purchased for a
total of $42.3 million. The current fuel purchase contracts expire on or
before December 31, 2017. These arrangements have not materially
affected our financial position, results of operations or liquidity
during the three months ended March 31, 2016, nor are they expected to
have a material impact on our future financial position, results of
operations or liquidity.
We have obtained financial surety bonds, primarily to support our financial
assurance needs and landfill and E&P operations. We provided customers and
various regulatory authorities with surety bonds in the aggregate amounts of
approximately $474.1 million and $475.5 million at March 31, 2016 and
December 31, 2015, respectively. These arrangements have not materially
affected our financial position, results of operations or liquidity during the
three months ended March 31, 2016, nor are they expected to have a material
impact on our future financial position, results of operations or liquidity.
38
From time to time, we evaluate our existing operations and their strategic
importance to us. 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 reporting units would not be impaired by
such dispositions, we could incur losses on them.
The disposal tonnage that we received in the three month periods ended March 31,
2016 and 2015, at all of our landfills during the respective period, is shown
below (tons in thousands):
Three months ended March 31,
2016 2015
Total Total
Number of Sites Tons Number of Sites Tons
Owned operational landfills and
landfills operated under life-of-site
agreements 59 5,182 54 4,566
Operated landfills 5 126 5 116
64 5,308 59 4,682
39
NON-GAAP FINANCIAL MEASURES
Adjusted Free Cash Flow
We present adjusted free cash flow, a non-GAAP financial measure, supplementally
because it is widely used by investors as a valuation and liquidity measure in
the solid waste industry. Management uses adjusted free cash flow as one of the
principal measures to evaluate and monitor the ongoing financial performance of
our operations. We define adjusted free cash flow as net cash provided by
operating activities, plus proceeds from disposal of assets, plus or minus
change in book overdraft, plus excess tax benefit associated with equity-based
compensation, less capital expenditures for property and equipment and
distributions to noncontrolling interests. We further adjust this calculation
to exclude the effects of items management believes impact the ability to assess
the operating performance of our business. This measure is not a substitute for,
and should be used in conjunction with, GAAP liquidity or financial measures.
Other companies may calculate adjusted free cash flow differently. Our adjusted
free cash flow for the three month periods ended March 31, 2016 and 2015, are
calculated as follows (amounts in thousands):
Three months ended
March 31,
2016 2015
Net cash provided by operating activities $ 164,716 $ 162,571
Plus/less: Change in book overdraft (151 )
25
Plus: Proceeds from disposal of assets 681
598
Plus: Excess tax benefit associated with equity-based
compensation 4,434
1,479
Less: Capital expenditures for property and equipment (56,575 ) (41,706 )
Less: Distributions to noncontrolling interests (4 ) (43 )
Adjustment:
Payment of contingent consideration recorded in earnings
(a) 33
-
Acquisition-related costs, net of taxes (b) 424
-
Adjusted free cash flow $ 113,558 $ 122,924
____________________
(a) Reflects the addback of acquisition-related payments for contingent
consideration that were recorded as expenses in earnings and as a component
of cash flows from operating activities as the amounts paid exceeded the fair
value of the contingent consideration recorded at the acquisition date.
(b) Reflects the addback of third party expenses and reimbursable advances to
employees associated with the proposed Merger, net of taxes at the applied
tax rate for the period.
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Adjusted EBITDA
We present adjusted EBITDA, a non-GAAP financial measure, supplementally because
it is widely used by investors as a performance and valuation measure in the
solid waste industry. Management uses adjusted EBITDA as one of the principal
measures to evaluate and monitor the ongoing financial performance of our
operations. We define adjusted EBITDA as net income, plus income tax provision,
plus interest expense, plus depreciation and amortization expense, plus closure
and post-closure accretion expense, plus or minus any loss or gain on other
operating items, plus other expense, less other income. We further adjust this
calculation to exclude the effects of other items management believes impact the
ability to assess the operating performance of our business. This measure is
not a substitute for, and should be used in conjunction with, GAAP financial
measures. Other companies may calculate adjusted EBITDA differently. Our
adjusted EBITDA for the three month periods ended March 31, 2016 and 2015, are
calculated as follows (amounts in thousands):
Three months ended
March 31,
2016 2015
Net income $ 45,017 $ 52,081
Plus: Income tax provision 29,000 33,867
Plus: Interest expense 17,184 15,697
Plus: Depreciation and amortization 68,591 64,306
Plus: Closure and post-closure accretion 1,116 955
Plus: Other operating items (a) 236 662
Plus/less: Other expense (income), net (222 ) 220 Adjustments: Plus: Acquisition-related costs (b)
8,815 512
Adjusted EBITDA $ 169,737 $ 168,300
____________________
(a) Reflects the addback of other operating items.
(b) Reflects the addback of acquisition-related transaction costs.
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Adjusted Net Income and Adjusted Net Income per Diluted Share
We present adjusted net income and adjusted net income per diluted share, both
non-GAAP financial measures, supplementally because they are widely used by
investors as a valuation measure in the solid waste industry. Management uses
adjusted net income and adjusted net income per diluted share as one of the
principal measures to evaluate and monitor the ongoing financial performance of
our operations. We provide adjusted net income to exclude the effects of items
management believes impact the comparability of operating results between
periods. Adjusted net income has limitations due to the fact that it excludes
items that have an impact on our financial condition and results of operations.
Adjusted net income and adjusted net income per diluted share are not a
substitute for, and should be used in conjunction with, GAAP financial measures.
Other companies may calculate adjusted net income and adjusted net income per
diluted share differently. Our adjusted net income and adjusted net income per
diluted share for the three month periods ended March 31, 2016 and 2015, are
calculated as follows (amounts in thousands, except per share amounts):
Three months ended
March 31,
2016 2015
Reported net income attributable to Waste Connections $ 44,842
$ 51,824
Adjustments:
Amortization of intangibles (a) 7,694
6,999
Acquisition-related costs (b) 8,815 512
Other operating items (c) 236 662
Tax effect (d) (6,371 ) (3,134 )
Adjusted net income attributable to Waste Connections $ 55,216
$ 56,863
Diluted earnings per common share attributable to Waste
Connections' common stockholders:
Reported net income $ 0.36 $ 0.42
Adjusted net income $ 0.45 $ 0.46
____________________
(a) Reflects the elimination of the non-cash amortization of acquisition-related
intangible assets.
(b) Reflects the elimination of acquisition-related transaction costs.
(c) Reflects the addback of other operating items.
(d) The aggregate tax effect of the adjustments in footnotes (a) through (c) is
calculated based on the applied tax rates for the respective periods.
INFLATION
Other than volatility in fuel prices and labor costs in certain markets,
inflation has not materially affected our operations in recent years.
Consistent with industry practice, many of our contracts allow us to pass
through certain costs to our customers, including increases in landfill tipping
fees and, in some cases, fuel costs. Therefore, we believe that we should be
able to increase prices to offset many cost increases that result from inflation
in the ordinary course of business. However, competitive pressures or delays in
the timing of rate increases under our contracts may require us to absorb at
least part of these cost increases, especially if cost increases exceed the
average rate of inflation. Management's estimates associated with inflation
have an impact on our accounting for landfill liabilities.
SEASONALITY
We expect our operating results to vary seasonally, with revenues typically
lowest in the first quarter, higher in the second and third quarters and lower
in the fourth quarter than in the second and third quarters. This seasonality
reflects (a) the lower volume of solid waste generated during the late fall,
winter and early spring because of decreased construction and demolition
activities during winter months in the U.S. and (b) reduced E&P activity during
harsh weather conditions, with expected fluctuation due to such seasonality
between our highest and lowest quarters of approximately 12% to 15%. In
addition, some of our operating costs may be higher in the winter months.
Adverse winter weather conditions slow waste collection activities, resulting in
higher labor and operational costs. Greater precipitation in the winter
increases the weight of collected municipal solid waste, resulting in higher
disposal costs, which are calculated on a per ton basis.
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