Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30,
2006
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or
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from ____________ to
_____________
|
Commission
file number 1-31507
WASTE
CONNECTIONS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
94-3283464
(I.R.S.
Employer Identification No.)
35
Iron Point Circle, Suite 200, Folsom, CA 95630
(Address
of principal executive offices)
(Zip
code)
(916)
608-8200
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes
þ
No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer þ
Accelerated filer £
Non-accelerated filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
£
No þ
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock:
As
of October 16, 2006: 45,299,272
shares of common stock
WASTE
CONNECTIONS, INC.
FORM
10-Q
TABLE
OF CONTENTS
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Page
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PART I
- FINANCIAL INFORMATION (unaudited)
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Item 1.
Financial Statements
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1
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2
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3
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4
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5
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25
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37
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39
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PART II
- OTHER INFORMATION
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40
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41
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42
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43
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PART
I -
FINANCIAL INFORMATION
Item
1.
Financial Statements
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share and per share amounts)
|
|
December 31,
2005
|
|
September 30,
2006
|
|
Current
assets:
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
7,514
|
|
$
|
10,527
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$2,826 and $3,198 at December 31, 2005 and
|
|
|
|
|
|
|
|
September 30,
2006, respectively
|
|
|
94,438
|
|
|
102,155
|
|
Deferred
tax assets
|
|
|
5,145
|
|
|
7,296
|
|
Prepaid
expenses and other current assets
|
|
|
17,279
|
|
|
16,930
|
|
Total
current assets
|
|
|
124,376
|
|
|
136,908
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
700,508
|
|
|
730,741
|
|
Goodwill
|
|
|
723,120
|
|
|
748,686
|
|
Intangible
assets, net
|
|
|
87,651
|
|
|
86,977
|
|
Restricted
assets
|
|
|
13,888
|
|
|
15,142
|
|
Other
assets, net
|
|
|
26,764
|
|
|
23,972
|
|
|
|
$
|
1,676,307
|
|
$
|
1,742,426
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
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Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
54,795
|
|
$
|
57,446
|
|
Book
overdraft
|
|
|
8,869
|
|
|
2,726
|
|
Accrued
liabilities
|
|
|
44,522
|
|
|
64,407
|
|
Deferred
revenue
|
|
|
30,957
|
|
|
32,404
|
|
Current
portion of long-term debt and notes payable
|
|
|
10,858
|
|
|
7,078
|
|
Total
current liabilities
|
|
|
150,001
|
|
|
164,061
|
|
|
|
|
|
|
|
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|
Long-term
debt and notes payable
|
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|
586,104
|
|
|
638,042
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|
Other
long-term liabilities
|
|
|
20,478
|
|
|
16,061
|
|
Deferred
income taxes
|
|
|
175,167
|
|
|
188,666
|
|
Total
liabilities
|
|
|
931,750
|
|
|
1,006,830
|
|
|
|
|
|
|
|
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Commitments
and contingencies (Note 13)
|
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|
|
|
|
|
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Minority
interests
|
|
|
26,357
|
|
|
28,265
|
|
|
|
|
|
|
|
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Stockholders’
equity:
|
|
|
|
|
|
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|
Preferred
stock: $0.01 par value; 7,500,000 shares authorized; none issued
and
outstanding
|
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|
-
|
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|
-
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|
Common
stock: $0.01 par value; 100,000,000 shares authorized;
45,924,686 and 45,260,160 shares issued and
|
|
|
|
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|
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|
outstanding
at December 31, 2005 and September 30, 2006,
respectively
|
|
|
459
|
|
|
453
|
|
Additional
paid-in capital
|
|
|
373,382
|
|
|
301,135
|
|
Deferred
stock compensation
|
|
|
(2,234
|
)
|
|
-
|
|
Treasury
stock at cost, 106,600 shares outstanding at December 31,
2005
|
|
|
(3,672
|
)
|
|
-
|
|
Retained
earnings
|
|
|
345,308
|
|
|
402,104
|
|
Accumulated
other comprehensive income
|
|
|
4,957
|
|
|
3,639
|
|
Total
stockholders’ equity
|
|
|
718,200
|
|
|
707,331
|
|
|
|
$
|
1,676,307
|
|
$
|
1,742,426
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share and per share amounts)
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
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|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Revenues
|
|
$
|
188,745
|
|
$
|
216,547
|
|
$
|
533,454
|
|
$
|
613,686
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations
|
|
|
108,049
|
|
|
128,709
|
|
|
305,815
|
|
|
368,346
|
|
Selling,
general and administrative
|
|
|
17,686
|
|
|
21,424
|
|
|
51,924
|
|
|
61,846
|
|
Depreciation
and amortization
|
|
|
16,728
|
|
|
19,072
|
|
|
47,278
|
|
|
56,040
|
|
Gain
on disposal of assets
|
|
|
(198
|
)
|
|
(189
|
)
|
|
(332
|
)
|
|
(35
|
)
|
Operating
income
|
|
|
46,480
|
|
|
47,531
|
|
|
128,769
|
|
|
127,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(6,033
|
)
|
|
(7,572
|
)
|
|
(16,543
|
)
|
|
(21,685
|
)
|
Other
income (expense), net
|
|
|
55
|
|
|
141
|
|
|
226
|
|
|
(3,840
|
)
|
Income
before income tax provision and minority interests
|
|
|
40,502
|
|
|
40,100
|
|
|
112,452
|
|
|
101,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
(3,158
|
)
|
|
(3,719
|
)
|
|
(9,272
|
)
|
|
(9,748
|
)
|
Income
from continuing operations before income taxes
|
|
|
37,344
|
|
|
36,381
|
|
|
103,180
|
|
|
92,216
|
|
Income
tax provision
|
|
|
(12,869
|
)
|
|
(14,508
|
)
|
|
(37,360
|
)
|
|
(35,420
|
)
|
Income
from continuing operations
|
|
|
24,475
|
|
|
21,873
|
|
|
65,820
|
|
|
56,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on discontinued operations, net of tax (Note 3)
|
|
|
-
|
|
|
-
|
|
|
(579
|
)
|
|
-
|
|
Net
income
|
|
$
|
24,475
|
|
$
|
21,873
|
|
$
|
65,241
|
|
$
|
56,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.53
|
|
$
|
0.48
|
|
$
|
1.40
|
|
$
|
1.25
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
-
|
|
Net
income per common share
|
|
$
|
0.53
|
|
$
|
0.48
|
|
$
|
1.39
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.51
|
|
$
|
0.47
|
|
$
|
1.36
|
|
$
|
1.21
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
(0.02
|
)
|
|
-
|
|
Net
income per common share
|
|
$
|
0.51
|
|
$
|
0.47
|
|
$
|
1.34
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculating basic income per share
|
|
|
46,523,711
|
|
|
45,490,632
|
|
|
46,904,412
|
|
|
45,444,208
|
|
Shares
used in calculating diluted income per share
|
|
|
48,122,605
|
|
|
46,597,157
|
|
|
48,511,858
|
|
|
46,936,291
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WASTE
CONNECTIONS, INC.
Nine
months ended September 30, 2006
(Unaudited)
(In
thousands, except share amounts)
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
Common
Stock
|
|
Additional
|
|
Accumulated
Other
|
|
Deferred
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
Shares
|
|
Amounts
|
|
Paid-In
Capital
|
|
Comprehensive
Income
|
|
Stock
Compensation
|
|
Shares
|
|
Amounts
|
|
Retained
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
|
|
|
|
45,924,686
|
|
$
|
459
|
|
$
|
373,382
|
|
$
|
4,957
|
|
$
|
(2,234
|
)
|
|
106,600
|
|
$
|
(3,672
|
)
|
$
|
345,308
|
|
$
|
718,200
|
|
Vesting
of restricted stock
|
|
|
|
|
|
24,964
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cancellation
of unvested restricted stock
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(445
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(445
|
)
|
Stock-based
compensation
|
|
|
|
|
|
-
|
|
|
-
|
|
|
2,562
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,562
|
|
Exercise
of stock options and warrants
|
|
|
|
|
|
1,137,935
|
|
|
12
|
|
|
26,036
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
26,048
|
|
Excess
tax benefit on the exercise
of
stock options
|
|
|
|
|
|
- |
|
|
- |
|
|
5,660 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
5,660 |
|
Repurchase
of common stock
|
|
|
|
|
|
(2,788,600
|
)
|
|
(28
|
)
|
|
(100,217
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(100,245
|
)
|
Retirement
of treasury stock
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(3,672
|
)
|
|
-
|
|
|
-
|
|
|
(106,600
|
)
|
|
3,672
|
|
|
-
|
|
|
-
|
|
Conversion
of 2022 Floating Rate Convertible Subordinated Notes
|
|
|
|
|
|
961,175
|
|
|
10
|
|
|
(10
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of common stock
warrants
to consultants
|
|
|
|
|
|
-
|
|
|
-
|
|
|
73
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
73
|
|
Cumulative
change from adoption of accounting policy
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(2,234
|
)
|
|
-
|
|
|
2,234
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amounts
reclassified into
earnings,
net of taxes
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,004
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,004
|
)
|
Change
in fair value of interest
rate
swaps, net of taxes
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,686
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,686
|
|
Net
income
|
|
$
|
56,796
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
56,796
|
|
|
56,796
|
|
Other
comprehensive income
|
|
|
(2,043
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
tax effect of other comprehensive income
|
|
|
725
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Comprehensive
income
|
|
$
|
55,478
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balances
at September 30, 2006
|
|
|
|
|
|
45,260,160
|
|
$
|
453
|
|
$
|
301,135
|
|
$
|
3,639
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
$
|
402,104
|
|
$
|
707,331
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands)
|
|
Nine
months ended September 30,
|
|
|
|
2005
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
65,241
|
|
$
|
56,796
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Gain
on disposal of assets
|
|
|
(529
|
)
|
|
(35
|
)
|
Depreciation
|
|
|
45,450
|
|
|
52,990
|
|
Amortization
of intangibles
|
|
|
2,077
|
|
|
3,050
|
|
Deferred
income taxes, net of acquisitions
|
|
|
(4,814
|
)
|
|
11,524
|
|
Minority
interests
|
|
|
9,272
|
|
|
9,748
|
|
Amortization
of debt issuance costs
|
|
|
1,430
|
|
|
5,758
|
|
Stock-based
compensation
|
|
|
940
|
|
|
2,562
|
|
Interest
income on restricted assets
|
|
|
(272
|
)
|
|
(462
|
)
|
Closure
and post-closure accretion
|
|
|
509
|
|
|
476
|
|
Tax
benefit on the exercise of stock options
|
|
|
6,987
|
|
|
-
|
|
Excess
tax benefit on the exercise of stock options
|
|
|
-
|
|
|
(5,660
|
)
|
Net
change in operating assets and liabilities, net of
acquisitions
|
|
|
23,505
|
|
|
15,593
|
|
Net
cash provided by operating activities
|
|
|
149,796
|
|
|
152,340
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payments
for acquisitions, net of cash acquired
|
|
|
(73,548
|
)
|
|
(35,948
|
)
|
Capital
expenditures for property and equipment
|
|
|
(61,418
|
)
|
|
(73,482
|
)
|
Proceeds
from disposal of assets
|
|
|
4,420
|
|
|
1,950
|
|
Decrease
(increase) in restricted assets, net of interest income
|
|
|
1,111
|
|
|
(792
|
)
|
Increase
in other assets
|
|
|
(612
|
)
|
|
(321
|
)
|
Net
cash used in investing activities
|
|
|
(130,047
|
)
|
|
(108,593
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
195,098
|
|
|
655,996
|
|
Principal
payments on notes payable and long-term debt
|
|
|
(132,939
|
)
|
|
(608,141
|
)
|
Change
in book overdraft
|
|
|
(3,514
|
)
|
|
(6,143
|
)
|
Proceeds
from option and warrant exercises
|
|
|
25,216
|
|
|
26,048
|
|
Excess
tax benefit on the exercise of stock options
|
|
|
-
|
|
|
5,660
|
|
Distributions
to minority interest holders
|
|
|
(8,526
|
)
|
|
(7,840
|
)
|
Payments
for repurchase of common stock
|
|
|
(91,917
|
)
|
|
(100,245
|
)
|
Debt
issuance costs
|
|
|
(43
|
)
|
|
(6,069
|
)
|
Net
cash used in financing activities
|
|
|
(16,625
|
)
|
|
(40,734
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and equivalents
|
|
|
3,124
|
|
|
3,013
|
|
Cash
and equivalents at beginning of period
|
|
|
3,610
|
|
|
7,514
|
|
Cash
and equivalents at end of period
|
|
$
|
6,734
|
|
$
|
10,527
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activity:
|
|
|
|
|
|
|
|
Liabilities
assumed and notes payable issued to sellers of businesses
acquired
|
|
$
|
25,481
|
|
$
|
1,213
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
1. BASIS
OF
PRESENTATION AND SUMMARY
The
accompanying condensed consolidated financial statements relate to Waste
Connections, Inc. and its subsidiaries (“WCI” or “the Company”) as of
September 30, 2006 and for the three and nine month periods ended
September 30, 2005 and 2006. The consolidated financial statements of the
Company include the accounts of Waste Connections, Inc. and its wholly-owned
and
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. Operating results for the three and nine months
ended September 30, 2006 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2006.
The
Company’s condensed consolidated balance sheet as of September 30, 2006,
the condensed consolidated statements of income for the three and nine months
ended September 30, 2005 and 2006, the condensed consolidated statements of
stockholders’ equity and comprehensive income for the nine months ended
September 30, 2006, and the condensed consolidated statements of cash flows
for the nine months ended September 30, 2005 and 2006 are unaudited. In the
opinion of management, such consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for
a
fair presentation of the Company’s financial position, results of operations,
and cash flows for the periods presented. The consolidated financial statements
presented herein should be read in conjunction with the Company's 2005 annual
report on Form 10-K.
In
preparing the Company’s consolidated financial statements, estimates and
assumptions are made that affect the accounting for and recognition of assets,
liabilities, revenues and expenses. These estimates and assumptions must be
made
because certain information that is used in the preparation of the Company’s
consolidated financial statements is dependent on future events, cannot be
calculated with a high degree of precision from data available or is not capable
of being readily calculated based on generally accepted methodologies. In some
cases, these estimates are particularly difficult to determine and the Company
must exercise significant judgment. The estimates and the assumptions having
the
greatest amount of uncertainty, subjectivity and complexity are related to
the
Company’s accounting for landfills, self-insurance, allocation of acquisition
purchase price and asset impairments. Another area that involves estimation
is
the amount of potential exposure the Company may have with respect to
litigation, claims and assessments in accordance with SFAS No. 5, Accounting
for Contingencies.
Actual
results for all estimates could differ materially from the estimates and
assumptions that the Company uses in the preparation of its consolidated
financial statements.
2. NEW
ACCOUNTING STANDARDS
SFAS 153.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29
(“SFAS 153”). SFAS 153 is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged and amends APB No. 29 to eliminate the exception of nonmonetary
exchanges of similar productive assets and replaces it with a general exception
of exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange.
SFAS 153 is effective for nonmonetary asset exchanges occurring in annual
fiscal periods beginning after June 15, 2005. The adoption of SFAS 153
on January 1, 2006 did not have a material impact on the Company’s
financial position or results of operations.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
SFAS 154.
In May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections
(“SFAS 154”) which replaces APB Opinion No. 20, Accounting
Changes
(“APB 20”), and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion
No. 28.
SFAS 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. Specifically, SFAS 154 requires
“retrospective application” of the direct effect for a voluntary change in
accounting principle to prior periods’ financial statements, if it is
practicable to do so. SFAS 154 also strictly redefines the term
“restatement” to mean the correction of an error by revising previously issued
financial statements. SFAS 154 replaces APB 20, which requires that
most voluntary changes in accounting principle be recognized by including in
net
income of the period of the change the cumulative effect of changing to the
new
accounting principle. Unless adopted early, SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of SFAS 154 on January 1,
2006 did not have a material impact on the Company’s financial position or
results of operations.
FIN 48.
On
July 13, 2006, the FASB issued FASB Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS
No. 109, Accounting
for Income Taxes.
FIN 48 requires a company to evaluate whether the tax position taken by a
company will more likely than not be sustained upon examination by the
appropriate taxing authority. It also provides guidance on how a company should
measure the amount of benefit that the company is to recognize in its financial
statements. Under FIN 48, a company should also classify a liability for
unrecognized tax benefits as current to the extent the company anticipates
making a payment within one year. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact this statement will have on its financial position and results of
operations.
EITF
06-3.
In
June 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3,
How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That Is, Gross versus Net Presentation)
(“EITF 06-3”).
EITF 06-3 provides guidance on the presentation in the income statement of
any tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer. EITF 06-3
requires that taxes be presented in the income statement either on a gross
basis
(included in revenues and costs) or a net basis (excluded from revenues), and
that this accounting policy decision be disclosed. EITF 06-3 should be
applied to financial reports for interim and annual reporting periods beginning
after December 15, 2006. The Company does not expect the provisions of
EITF 06-3 to have a material impact on the Company’s consolidated financial
statements.
SFAS 157.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies under other
existing accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements.
However, the application of this statement may change the current practice
for
fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company is currently evaluating the
impact this statement will have on its financial position and results of
operations.
SAB 108.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(“SAB 108”). SAB 108 provides guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 is effective for
fiscal years ending after November 15, 2006. The Company does not expect
the provisions of SAB 108 to have a material impact on the Company’s
consolidated financial statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
AUG AIR-1.
In
September 2006, the FASB issued FASB Staff Position
No. AUG AIR-1, Accounting
for Planned Major Maintenance Activities
(“AUG AIR-1”), which provides guidance on which methods are allowed to
properly account for planned major maintenance activities. The three accepted
methods under AUG AIR-1 are direct expense, built-in overhaul, and deferral
methods. AUG AIR-1 must be applied to the first fiscal year beginning after
December 15, 2006. The Company does not expect the provisions of
AUG AIR-1 to have a material impact on the Company’s consolidated financial
statements.
3. DISCONTINUED
OPERATIONS
In
the
second quarter of 2005, the Company disposed of a hauling operation in Utah
and
exited a landfill operating contract with a finite term in California. The
nine
month period ending September 30, 2005, has been restated to present the
results for these operations as discontinued operations.
The
table
below reflects the discontinued operations for the nine months ended
September 30, 2005, as follows:
|
|
Nine
months ended
September 30,
2005
|
|
Revenues
|
|
$
|
1,367
|
|
Operating
expenses:
|
|
|
|
|
Cost
of operations
|
|
|
2,041
|
|
Selling,
general and administrative
|
|
|
196
|
|
Depreciation
and amortization
|
|
|
249
|
|
Gain
on disposal of assets and operations
|
|
|
(197
|
)
|
Operating
loss
|
|
|
(922
|
)
|
Other
income, net
|
|
|
-
|
|
Loss
from operations of discontinued operations
|
|
|
(922
|
)
|
Income
tax benefit
|
|
|
343
|
|
Loss
on discontinued operations
|
|
$
|
(579
|
)
|
4. STOCK-BASED
COMPENSATION
Effective
the beginning of the first quarter of 2006, the Company adopted the provisions
of SFAS No. 123 (revised 2004), Share-Based
Payment (“SFAS 123(R)”)
for its share-based compensation plans. The Company previously accounted for
these plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting
for Stock Issued to Employees (“APB 25”)
and related interpretations and disclosure requirements established by
SFAS 123, Accounting
for Stock-Based Compensation.
In
March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107, Share-Based
Payment (“SAB 107”),
relating to SFAS 123(R). The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R).
Under
APB 25, no expense was recorded in the income statement for the Company’s
stock options granted at fair market value. The pro forma effects on income
for
stock options were instead disclosed in a footnote to the financial statements.
Expense was recorded in the income statement for restricted stock, restricted
stock units, and stock options granted below fair market value on the date
of
grant.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
The
Company adopted SFAS 123(R) using the modified prospective method. Under
this method, all share-based compensation cost is measured at the grant date,
based on the estimated fair value of the award, and is recognized as expense
over the employee’s requisite service period. Prior periods are not restated.
Consistent
with prior years, the Company uses the Black-Scholes option pricing model which
requires extensive use of accounting judgment and financial estimation,
including estimates of the expected term option holders will retain their vested
stock options before exercising them, the estimated volatility of the Company’s
common stock price over the expected term, and the number of options that will
be forfeited prior to the completion of their vesting requirements. Application
of alternative assumptions could produce significantly different estimates
of
the fair value of stock-based compensation and consequently, the related amounts
recognized in the Condensed Consolidated Statements of Income.
Stock-based
compensation expense recognized during the three months ended September 30,
2006, was approximately $985 ($618 net of taxes), or approximately a $0.01
per share decrease to basic and diluted net income per common share and
consisted of stock option, restricted stock unit and restricted stock expense.
Stock-based compensation expense recognized during the nine months ended
September 30, 2006, was approximately $2,562 ($1,606 net of taxes), or
approximately a $0.04 per share decrease to basic and diluted net income
per common share and consisted of stock option, restricted stock unit and
restricted stock expense. Stock option expense recognized as a result of
adopting SFAS 123(R) was $167 and $424 for the three and nine months ended
September 30, 2006, respectively. During the fourth quarter of 2005, the
Company accelerated the vesting of all unvested stock options. As a result,
stock-based compensation in periods subsequent to the acceleration is
significantly reduced. This expense was included in “Selling, general and
administrative” expenses in the Condensed Consolidated Statements of Income. A
contra-equity balance of $2,234 in “Deferred stock compensation” on the
Condensed Consolidated Balance Sheet was reversed as a change in accounting
policy upon the adoption of SFAS 123(R) to “Additional paid-in capital” as
of January 1, 2006. The total compensation cost at September 30, 2006,
related to unvested stock option, restricted stock unit and restricted stock
awards was $12,478 and that future expense will be recognized over the remaining
vesting period of the stock option, restricted stock unit and restricted stock
awards which currently extends to 2011. The weighted average remaining vesting
period of those awards is 1.99 years.
The
excess tax benefits from the exercise of stock options were approximately $5,660
during the nine months ended September 30, 2006. Prior to the adoption of
SFAS 123(R), the Company presented all tax benefits of deductions resulting
from the exercise of stock options as an operating cash flow, in accordance
with
Emerging Issues Task Force (“EITF”) Issue No. 00-15, Classification
in the Statement of Cash Flows of the Income Tax Benefit Received by a Company
upon Exercise of a Nonqualified Employee Stock Option.
SFAS 123(R) requires the Company to reflect the tax savings resulting from
tax deductions in excess of expense reflected in its financial statements as
a
financing cash flow.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
The
following table summarizes the Company’s pro forma net income and pro forma
basic and diluted earnings per share for the three and nine months ended
September 30, 2005.
|
|
Three
months ended September 30, 2005
|
|
Nine
months ended September 30, 2005
|
|
Net
income, as reported
|
|
$
|
24,475
|
|
$
|
65,241
|
|
Add:
stock-based employee compensation expense included in reported net
income,
net of related tax effects
|
|
|
270
|
|
|
591
|
|
Deduct:
total stock-based employee compensation expense determined under
fair
value method for all awards, net of
related
tax effects
|
|
|
(2,561
|
)
|
|
(6,190
|
)
|
Pro
forma net income
|
|
$
|
22,184
|
|
$
|
59,642
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.53
|
|
$
|
1.39
|
|
Basic
- pro forma
|
|
$
|
0.48
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.51
|
|
$
|
1.34
|
|
Diluted
- pro forma
|
|
$
|
0.46
|
|
$
|
1.24
|
|
The
Company’s calculations of stock-based compensation expense for the three and
nine months ending September 30,
2005
and 2006 were made using the Black-Scholes option-pricing model. The fair value
of the Company’s stock option grants was estimated assuming no expected dividend
yield and the following weighted average assumptions for the three and nine
months ending September 30, 2005 and 2006, as follows:
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Expected
life
|
|
|
3
to 4 years
|
|
|
4
years
|
|
|
3
to 4 years
|
|
|
4
years
|
|
Risk-free
interest rate
|
|
|
3.7%
- 3.8
|
%
|
|
4.8
|
%
|
|
3.6%
- 3.8
|
%
|
|
4.8
|
%
|
Expected
volatility
|
|
|
20
|
%
|
|
20
|
%
|
|
20
|
%
|
|
20
|
%
|
Expected
life is calculated based on the weighted average historical life of the vested
stock options. Risk-free interest rate is based on the U.S. treasury yield
curve
for the period of the expected life of the stock option for the three and nine
month periods ending September 30, 2005 and 2006. Expected volatility is
calculated using the daily historical volatility over the last one year for
the
three and nine months ending September 30, 2005, and over the last three
years for the three and nine months ending September 30, 2006.
The
Company may grant stock options to selected employees, directors, and
consultants to the Company to purchase shares of the Company’s common stock. The
Company has multiple stock option plans including the Second Amended and
Restated 1997 Stock Option Plan (the “1997 Stock Option Plan”), the 2002 Stock
Option Plan, the 2002 Senior Management Equity Incentive Plan, and the Second
Amended and Restated 2004 Equity Incentive Plan (the “2004 Equity Incentive
Plan”). When stock options are exercised by the option holder, shares are issued
out of the pool of authorized shares of common stock. Refer to Note 12 for
details on the Company’s share repurchase program.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
Under
the
1997 Stock Option Plan, all officers, employees, directors and consultants
may
participate. Options granted under the 1997 Stock Option Plan may either be
incentive stock options or nonqualified stock options, generally have a term
of
10 years from the date of grant, and will vest over periods determined at the
date of grant. The exercise prices of the options are determined by the
Company’s Board of Directors and, in the case of incentive stock options, will
be at least 100% or 110% of the fair market value of the Company’s common stock
on the date of grant as provided for in the plan. A total of 5,250,000 shares
of
the Company’s common stock were reserved for issuance under the 1997 Stock
Option Plan. As of September 30, 2006, options for 53,746 shares of
common stock were available for future grants under the 1997 Stock Option Plan.
Under
the
2002 Stock Option Plan, participation is limited to consultants and employees,
other than officers and directors. Options granted under the 2002 Stock Option
Plan are nonqualified stock options and have a term of no longer than 10 years
from the date they are granted. Options generally become exercisable in
installments pursuant to a vesting schedule set forth in each option agreement.
The exercise prices of the options are determined by the Company’s Board of
Directors at the time of grant. A total of 3,750,000 shares of the Company’s
common stock were reserved for issuance under the 2002 Stock Option Plan. As
of
September 30, 2006, options for 79,520 shares of common stock were
available for future grants under the 2002 Stock Option Plan.
Under
the
2002 Senior Management Equity Incentive Plan, participation is limited to
officers and directors of the Company and its subsidiaries. Options granted
under the 2002 Senior Management Equity Incentive Plan may be either incentive
stock options or nonqualified stock options and have a term of no longer than
10
years from the date they are granted. Options generally become exercisable
in
installments pursuant to a vesting schedule set forth in each option agreement.
The exercise prices of the options are determined by the Company’s Board of
Directors and, in the case of incentive stock options, will be at least 100%
or
110% of the fair market value of the Company’s common stock on the date of grant
as provided for in the plan. A total of 4,500,000 shares of the Company’s
common stock were reserved for issuance under the 2002 Senior Management Equity
Incentive Plan. As of September 30, 2006, options for 1,059,110 shares
of common stock were available for future grants under the 2002 Senior
Management Equity Incentive Plan.
Under
the
2004 Equity Incentive Plan, all employees, officers, directors and consultants
may participate. Options granted under the 2004 Equity Incentive Plan are
nonqualified stock options and have a term of no longer than five years from
the
date they are granted. The exercise prices of the options are determined by
the
Company’s Board of Directors at the time of grant, and shall not be less than
the fair market value of the Company’s common stock on the date of grant.
Restricted stock awards under the plan may or may not require a cash payment
from a participant to whom an award is made; restricted stock unit awards under
the plan do not require any cash payment from the participant to whom an award
is made. Restricted stock, restricted stock units, and options generally vest
in
installments pursuant to a vesting schedule set forth in each option or
restricted stock or unit agreement. On May 25, 2006, the stockholders of
the Company approved the Second Amended and Restated 2004 Equity Incentive
Plan.
Under this plan, a total of 1,850,000 shares of the Company’s common stock
were reserved for issuance, all of which may be used for grants of stock
options, restricted stock and/or restricted stock units. As of
September 30, 2006, 791,925 shares of common stock were available to
be issued pursuant to future awards granted under the 2004 Equity Incentive
Plan.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
A
summary
of option activity under the foregoing stock option plans as of
December 31, 2005, and changes during the nine month period ending
September 30, 2006, is presented below:
|
|
Unvested
Shares
|
|
Vested
Shares
|
|
Total
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding
at December 31, 2005
|
|
|
-
|
|
|
5,482,934
|
|
|
5,482,934
|
|
$
|
25.62
|
|
Granted
|
|
|
344,600
|
|
|
1,000
|
|
|
345,600
|
|
|
34.81
|
|
Forfeited
|
|
|
(7,000
|
)
|
|
(10,250
|
)
|
|
(17,250
|
)
|
|
35.05
|
|
Exercised
|
|
|
-
|
|
|
(1,126,921
|
)
|
|
(1,126,921
|
)
|
|
23.11
|
|
Outstanding
at September 30, 2006
|
|
|
337,600
|
|
|
4,346,763
|
|
|
4,684,363
|
|
|
26.87
|
|
Exercisable
at September 30, 2006
|
|
|
-
|
|
|
4,346,763
|
|
|
4,346,763
|
|
|
26.25
|
|
The
weighted average grant date fair value per share for the 344,600 unvested stock
options granted during the nine month period ending September 30, 2006 was
$7.72. The weighted average grant date fair value per share for the
7,000 unvested stock options forfeited during the nine month period ending
September 30, 2006 was $8.50. The total intrinsic value of stock options
exercised during the nine month period ending September 30, 2006 was
$16,560. The total fair value of the 1,000 vested stock options granted
during the nine month period ending September 30, 2006 was $8.
The
following summarizes information about stock options, under the foregoing stock
options plans, which are outstanding and exercisable as of September 30,
2006:
|
|
Weighted-Average
Remaining
Contractual
Term
(in
years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at September 30, 2006
|
|
|
6.8
|
|
$
|
51,825
|
|
Exercisable
at September 30, 2006
|
|
|
6.6
|
|
$
|
50,664
|
|
Restricted
Stock:
Under
the 2002 Restricted Stock Plan, selected employees, other than officers and
directors, may participate. Restricted stock awards under the 2002 Restricted
Stock Plan may or may not require a cash payment from a participant to whom
an
award is made. The awards become free of the stated restrictions over periods
determined at the date of the grant, subject to continuing employment, the
achievement of particular performance goals and/or the satisfaction of certain
vesting provisions applicable to each award of shares. A total of 142,500 shares
of the Company’s common stock were reserved for issuance under the 2002
Restricted Stock Plan. As of September 30, 2006, 19,483 shares of
common stock were available for future grants of restricted stock under the
2002
Restricted Stock Plan. Under the 2004 Equity Incentive Plan described above,
as
of September 30, 2006, up to 791,925 shares of common stock were
available for future grants of restricted stock and/or restricted stock units.
The fair value of restricted stock and restricted stock units for the nine
months ending September 30, 2005 and 2006 were determined based on the
number of shares granted and the quoted price of the Company’s common stock.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
A
summary
of activity under restricted stock and restricted stock unit plans as of
December 31, 2005, and changes during the nine month period ending
September 30, 2006, is presented below:
|
|
Unvested
Shares
|
|
Outstanding
at December 31, 2005
|
|
|
102,867
|
|
Granted
|
|
|
319,900
|
|
Forfeited
|
|
|
(9,679
|
)
|
Vested
|
|
|
(37,752
|
)
|
Outstanding
at September 30, 2006
|
|
|
375,336
|
|
The
weighted average grant date fair value per share for the 319,900 shares of
restricted stock units granted during the nine month period ending
September 30, 2006 was $34.90
Warrants:
Under
the 2002 Consultant Incentive Plan, warrants to purchase the Company’s common
stock may be issued to certain consultants to the Company. Warrants awarded
under the Consultant Incentive Plan are subject to a vesting schedule set forth
in each warrant agreement. Historically, warrants issued have been fully vested
and exercisable at the date of grant. The purchase price per share of the
warrants granted under the plan is determined by the Company’s Board of
Directors at the time of grant. The Board reserved 300,000 shares of the
Company’s common stock for issuance under the Consultant Incentive Plan. As of
September 30, 2006, 176,902 shares of common stock were available for
future grants of warrants under the 2002 Consultant Incentive Plan.
Warrants
issued to consultants are valued using the Black-Scholes pricing model with
assumed stock price volatility and risk-free interest rates similar to those
used for stock options, and with an expected life of five years. Warrants issued
to consultants are recorded as an element of the related cost of acquisitions
or
landfill development projects, based on the services provided by the consultant.
A
summary
of warrant activity as of December 31, 2005, and changes during the nine
month period ending September 30, 2006 is presented below:
|
|
Warrants
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
at December 31, 2005
|
|
|
61,099
|
|
$
|
23.52
|
|
Granted
|
|
|
6,663
|
|
|
38.88
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(31,050
|
)
|
|
24.93
|
|
Outstanding
at September 30, 2006
|
|
|
36,712
|
|
|
25.11
|
|
The
warrants are exercisable when granted and expire between 2007 and 2011.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
5.
LANDFILL
ACCOUNTING
At
September 30, 2006, the Company owned 24 landfills, and operated, but
did not own, three landfills under life-of-site operating contracts and
eight landfills under operating contracts with finite terms. The Company’s
landfills have site costs with a net book value of $416,854 at
September 30, 2006. With the exception of three owned landfills that
only accept construction and demolition waste, all landfills that the Company
owns or operates are municipal solid waste landfills. For the Company’s
eight landfills operated under agreements with finite terms, the owner of
the property, generally a municipality, usually owns the permit and is generally
responsible for final capping, closure and post-closure obligations. The Company
is responsible for all final capping, closure and post-closure liabilities
for
the three landfills that it operates under life-of-site operating
agreements.
Many
of
the Company’s existing landfills have the potential for expanded disposal
capacity beyond the amount currently permitted. The Company’s internal and
third-party engineers perform surveys at least annually to estimate the disposal
capacity at its landfills. The Company’s landfill depletion rates are based on
the remaining disposal capacity, considering both permitted and expansion
airspace, at its owned landfills and landfills operated under life-of-site
operating agreements. Depletion expense is also recognized on operated landfills
if the Company has responsibility for build out costs. Expansion airspace
consists of additional disposal capacity being pursued through means of an
expansion but is not actually permitted. Expansion airspace that meets certain
internal criteria is included in the estimate of total landfill airspace. The
Company’s internal criteria to determine when expansion airspace may be included
as disposal capacity are as follows:
|
(1) |
The
land where the expansion is being sought is contiguous to the current
disposal site, and the Company either owns the expansion property
or is
under an option, purchase, operating or other similar agreement;
|
|
(2) |
Total
development costs, final capping costs, and closure/post-closure
costs
have been determined;
|
|
(3) |
Internal
personnel have performed a financial analysis of the proposed
expansion
site and have determined that it has a positive financial and
operational
impact;
|
|
(4) |
Internal
or external personnel are actively working to obtain the necessary
approvals to obtain the landfill expansion permit;
|
|
(5) |
Obtaining
the expansion is considered probable (for a pursued expansion to
be
considered probable, there must be no significant known technical,
legal,
community, business, or political restrictions or similar issues
existing
that could impair the success of the expansion); and
|
|
(6) |
The
land where the expansion is being sought has the proper zoning
or proper
zoning can readily be obtained.
|
Based
on
remaining permitted capacity as of September 30,
2006,
and projected annual disposal volumes, the average remaining landfill life
for
the Company’s owned landfills and landfills operated under life-of-site
operating agreements is approximately 53 years. The Company is currently
seeking to expand permitted capacity at five of its owned landfills and
two landfills that it operates under life-of-site operating agreements, and
considers the achievement of these expansions to be probable. Although the
Company cannot be certain that all future expansions will be permitted as
designed, the average remaining life, when considering remaining permitted
capacity, probable expansion capacity and projected annual disposal volume,
of
the Company’s owned landfills and landfills operated under life-of-site
operating agreements is 59 years, with lives ranging from seven to
198 years.
The
Company uses the units of consumption method to calculate the depletion rate
at
its landfills. This methodology divides the costs associated with acquiring,
permitting and developing the permitted and expansion areas of the landfill
by
the total remaining permitted and probable expansion disposal capacity of that
landfill. The resulting per unit depletion rate is applied to each ton of waste
disposed at the landfill and is recorded as expense for that period. During
the
nine months ended September 30, 2005 and 2006, the Company expensed
approximately $12,012 and $13,314, respectively, or an average of $2.44 and
$2.48 per ton consumed, respectively, related to landfill depletion. On
January 1, 2006, the Company reclassified two landfills from
life-of-site classification to operated landfills. This reclassification is
reflected in all landfill balances as of September 30, 2005 and 2006.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
The
Company reserves for final capping, closure and post-closure maintenance
obligations at the landfills it owns and landfills it operates under
life-of-site operating agreements. The Company calculates the net present value
of its final capping, closure and post-closure commitments recorded in 2006
assuming a 2.5% inflation rate and a 7.5% discount rate. The resulting final
capping, closure and post-closure obligation is recorded on the balance sheet
as
an addition to site costs and amortized to depletion expense as the landfill’s
airspace is consumed. Interest is accreted on the recorded liability using
the
corresponding discount rate. During the nine months ended September 30,
2005 and 2006, the Company expensed approximately $509 and $476, respectively,
or an average of $0.10 and $0.09 per ton consumed, respectively, related to
final capping, closure and post-closure accretion expense.
The
following is a reconciliation of the Company’s final capping, closure and
post-closure liability balance from December 31, 2005 to September 30,
2006:
Final
capping, closure and post-closure liability at December 31,
2005
|
|
$
|
15,906
|
|
Decrease
in final capping, closure and post-closure liability from changes
in
annual engineering cost estimates
|
|
|
(2,630
|
)
|
Liabilities
incurred
|
|
|
784
|
|
Accretion
expense
|
|
|
476
|
|
Change
in third party final capping, closure and post-closure
liability
|
|
|
(3,398
|
)
|
Final
capping, closure and post-closure liability at September 30,
2006
|
|
$
|
11,138
|
|
The
primary decrease in the final capping, closure and post-closure liability
related to a change in the interim and final capping requirements for a
landfill, which permits the Company to use less expensive materials to cap
the
landfill. The Company performs its annual review of its engineering cost
estimates in the first quarter of each year.
The
Company owns two landfills for which the prior owner is obligated to reimburse
Waste Connections for certain costs the Company incurs for final capping,
closure and post-closure activities on the portion of the landfill utilized
by
the prior owner. At September 30, 2006, the Company has recorded on its
balance sheet a receivable of $3,376 from the prior owners in long-term other
assets and has accrued the prior owners’ portions of the final capping, closure
and post-closure obligation, totaling $3,376, in other long-term liabilities.
At
September 30, 2006, $13,074 of the Company’s restricted assets balance was
for purposes of settling future final capping, closure and post-closure
liabilities.
6. ACQUISITIONS
The
Company’s growth strategy includes the acquisition of solid waste businesses
located in markets with significant growth opportunities. Acquisitions are
accounted for under the purchase method of accounting. The results of operations
of the acquired businesses have been included in the Company’s consolidated
financial statements from their respective acquisition dates.
During
the nine months ended September 30, 2005, the Company acquired
13 non-hazardous solid waste collection and disposal businesses. Aggregate
consideration for the acquisitions consisted of $71,098 in cash (net of cash
acquired), common stock warrants valued at $42 and the assumption of debt and
other obligations totaling $25,481.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
During
the nine months ended September 30, 2006, the Company acquired
11 non-hazardous solid waste collection, transfer and recycling businesses.
Aggregate consideration for the acquisitions consisted of $34,809 in cash (net
of cash acquired), $893 of net assets exchanged for new operations, common
stock
warrants valued at $74 and the assumption of debt totaling $1,213.
The
purchase prices have been allocated to the identified intangible assets and
tangible assets acquired and liabilities assumed based on their estimated fair
values at the dates of acquisition, with any residual amounts allocated to
goodwill. The purchase price allocations are considered preliminary until the
Company is no longer waiting for information that it has arranged to obtain
and
that is known to be available or obtainable. Although the time required to
obtain the necessary information will vary with circumstances specific to an
individual acquisition, the “allocation period” for finalizing purchase price
allocations does not exceed one year from the consummation of a business
combination.
As
of
September 30, 2006, the Company had two acquisitions for which
purchase price allocations were preliminary, mainly as a result of pending
working capital valuations. The Company believes the potential changes to its
preliminary purchase price allocations will not have a material impact on its
financial condition, results of operations or cash flows.
A
summary
of the purchase price allocations for acquisitions consummated in the nine
months ended September 30, 2005 and preliminary purchase price allocations
for acquisitions consummated in the nine months ended September 30, 2006 is
as follows:
|
|
2005
Acquisitions
|
|
2006
Acquisitions
|
|
Acquired
Assets:
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
3,141
|
|
$
|
549
|
|
Prepaid
expenses and other current assets
|
|
|
439
|
|
|
374
|
|
Property
and equipment
|
|
|
21,168
|
|
|
10,667
|
|
Goodwill
|
|
|
58,604
|
|
|
25,009
|
|
Long-term
franchise agreements and contracts
|
|
|
3,263
|
|
|
1,752
|
|
Indefinite-lived
intangibles
|
|
|
6,646
|
|
|
-
|
|
Other
intangibles
|
|
|
9,570
|
|
|
363
|
|
Non-competition
agreements
|
|
|
752
|
|
|
80
|
|
Other
assets
|
|
|
-
|
|
|
591
|
|
Assumed
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(1,852
|
)
|
|
(134
|
)
|
Accrued
liabilities
|
|
|
(2,150
|
)
|
|
(2,006
|
)
|
Debt
and other liabilities assumed
|
|
|
(25,481
|
)
|
|
(1,213
|
)
|
Deferred
revenue
|
|
|
(1,735
|
)
|
|
(600
|
)
|
Deferred
taxes
|
|
|
(1,225
|
)
|
|
(549
|
)
|
Total
consideration, net
|
|
$
|
71,140
|
|
$
|
34,883
|
|
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
During
the nine months ended September 30, 2005, the Company paid or adjusted
$2,450 of acquisition-related liabilities accrued at December 31, 2004.
During the nine months ended September 30, 2006, the Company paid or
adjusted $1,139 of acquisition-related liabilities accrued at December 31,
2005.
The
13
acquisitions acquired in the nine months ended September 30, 2005 were not
material to the Company’s results of operations. The 11 acquisitions
acquired in the nine months ended September 30, 2006 were not material to
the Company’s results of operations.
Goodwill,
and long-term franchise agreements, contracts, other intangibles and
non-competition agreements acquired in the nine months ended September 30,
2005, totaling $57,444 and $18,121, respectively, are expected to be deductible
for tax purposes. Goodwill, and long-term franchise agreements, contracts,
other
intangibles and non-competition agreements acquired in the nine months ended
September 30, 2006, totaling $20,860 and $892 respectively, are expected to
be deductible for tax purposes.
7. INTANGIBLE
ASSETS
Intangible
assets, exclusive of goodwill, consisted of the following at September 30,
2006:
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
Long-term
franchise agreements and contracts
|
|
$
|
58,550
|
|
$
|
(6,850
|
)
|
$
|
51,700
|
|
Non-competition
agreements
|
|
|
4,749
|
|
|
(3,725
|
)
|
|
1,024
|
|
Other
|
|
|
13,469
|
|
|
(3,064
|
)
|
|
10,405
|
|
|
|
|
76,768
|
|
|
(13,639
|
)
|
|
63,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonamortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets
|
|
|
23,848
|
|
|
-
|
|
|
23,848
|
|
Intangible
assets, exclusive of goodwill
|
|
$
|
100,616
|
|
$
|
(13,639
|
)
|
$
|
86,977
|
|
The
weighted-average amortization periods of long-term franchise agreements and
contracts, non-competition agreements and other intangibles acquired during
the
nine months ended September 30, 2006 are 9.5 years, 7.0 years,
and 8.4 years, respectively.
The
amounts assigned to indefinite-lived intangible assets consist of the value
of
certain perpetual rights to provide solid waste collection and transportation
services in specified territories.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
Estimated
future amortization expense for the next five years of amortizable intangible
assets is as follows:
|
For
the year ended December 31, 2006
|
|
$
|
3,993
|
|
|
For
the year ended December 31, 2007
|
|
|
3,939
|
|
|
For
the year ended December 31, 2008
|
|
|
3,708
|
|
|
For
the year ended December 31, 2009
|
|
|
3,581
|
|
|
For
the year ended December 31, 2010
|
|
|
3,511
|
|
8. LONG-TERM
DEBT
Long-term
debt consists of the following:
|
|
December 31,
2005
|
|
September 30,
2006
|
|
Revolver
under Credit Facility, bearing interest ranging from 5.7% to
8.25%*
|
|
$
|
367,000
|
|
$
|
400,000
|
|
2026
Senior Convertible Notes, bearing interest at 3.75%
|
|
|
-
|
|
|
200,000
|
|
2022
Floating Rate Convertible Subordinated Notes^
|
|
|
175,000
|
|
|
-
|
|
2001
Wasco Bonds, bearing interest from 7.0% to 7.3%*
|
|
|
12,165
|
|
|
11,740
|
|
California
Tax-Exempt Bonds, bearing interest ranging from 3.1% to 4.0%*
|
|
|
24,045
|
|
|
20,090
|
|
Notes
payable to sellers in connection with acquisitions, bearing interest
at
5.5% to 7.5%*
|
|
|
7,849
|
|
|
4,916
|
|
Notes
payable to third parties, bearing interest at 5.1% to
11.0%*
|
|
|
10,903
|
|
|
8,374
|
|
|
|
|
596,962
|
|
|
645,120
|
|
Less
- current portion
|
|
|
(10,858
|
)
|
|
(7,078
|
)
|
|
|
$
|
586,104
|
|
$
|
638,042
|
|
*
Interest rates in the table above represent the range of interest rates incurred
during the nine month period ended September 30, 2006.
^
Redeemed during the three month period ended June 30, 2006.
On
March 20, 2006, the Company completed its offering of $200,000 aggregate
principal amount of its 3.75% Convertible Senior Notes due 2026
(“2026 Notes”), pursuant to a private placement. The terms and conditions
of the 2026 Notes are set forth in the Indenture, dated as of
March 20, 2006, between the Company and U.S. Bank National Association, as
trustee. The 2026 Notes rank equally in right of payment to all of the
Company’s other existing and future senior uncollateralized and unsubordinated
indebtedness. The 2026 Notes rank senior in right of payment to all of the
Company’s existing and future subordinated indebtedness and are subordinated in
right of payment to the Company’s collateralized obligations to the extent of
the assets collateralizing such obligations. The 2026 Notes bear interest
at 3.75% per annum payable semi-annually in arrears on April 1 and
October 1 of each year, beginning on October 1, 2006, until the
maturity date of April 1, 2026. The Company’s obligations under the
2026 Notes are not guaranteed by any third party.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
The
2026 Notes are convertible into cash and, if applicable, shares of common
stock based on an initial conversion rate of 19.6078 shares of common stock
per
$1 principal amount of 2026 Notes (which is equal to an initial conversion
price of approximately $51.00 per share), subject to adjustment, and only under
certain circumstances. If the conversion value is greater than the principal
amount of each note, the Company will be required to deliver to holders upon
conversion, at its option, (i) a number of shares of the Company’s common stock,
(ii) cash, or (iii) a combination of cash and shares of the Company’s common
stock in an amount calculated as described in the prospectus filed by the
Company in connection with the exchange offer. The holders of the
2026 Notes who convert their notes in connection with a change in control
(as defined in the Indenture) may be entitled to a make-whole premium in the
form of an increase in the conversion rate.
Holders
may surrender notes for conversion into cash and, if applicable, shares of
the
Company’s common stock at an initial conversion price of $51.00 per share
(equivalent to an initial conversion rate of 19.6078 shares per $1 principal
amount of notes) at any time prior to the close of business on the maturity
date, if the closing sale price of the Company’s common stock for at least 20
trading days in the period of 30 consecutive trading days ending on the last
trading day of the quarter preceding the quarter in which the conversion occurs,
is more than 130% of the conversion price per share of the Company’s common
stock on that 30th
day.
Beginning
on April 1, 2010, the Company may redeem in cash all or part of the
2026 Notes at a price equal to 100% of the principal amount plus accrued
and unpaid interest, including additional interest, if any, and, if redeemed
prior to April 1, 2011, an interest make-whole payment. The holders of the
2026 Notes have the ability to require the Company to repurchase all or a
part of the 2026 Notes in cash on each of April 1, 2011, 2016 and
2021, and in the event of a change of control of the Company, at a purchase
price of 100% of the principal amount of the 2026 Notes plus any accrued
and unpaid interest, including additional interest, if any. The Company is
amortizing the $5,759 debt issuance costs over a five-year term through the
first put date, or April 1, 2011.
In
April
2006, the Company called for redemption $87,500 of the $175,000 aggregate
principal amount of its 2022 Floating Rate Convertible Subordinated Notes
(“2022 Notes”) on May 8, 2006, and the remaining $87,500 on
June 5, 2006. Holders of the 2022 Notes had the right to convert their
notes at any time prior to 5:00 p.m., New York City time, on the day that
was two business days immediately preceding the corresponding redemption date.
Notes converted into common stock prior to the corresponding redemption date
were not entitled to receive interest accrued from May 1, 2006. Unless
earlier converted, the Company was obligated to redeem the 2022 Notes at a
price of $1.020 per $1 principal amount of the 2022 Notes, together
with accrued and unpaid interest to the corresponding redemption date. After
that date, interest ceased to accrue on the redeemed 2022 Notes. The
Company paid approximately $175,000 in cash and issued 961,175 shares of
its common stock in connection with the conversion and redemption. The Company
funded the conversion and redemption with borrowings under its senior secured
revolving credit facility. Additionally, due to the Company’s closing stock
price meeting the 2022 Notes’ conversion threshold in the first quarter of
2006 of trading at more than 110% of the conversion price per share for at
least
20 trading days in a period of 30 consecutive trading days, the
Company recorded a non-cash, pre-tax charge of $4,185 ($2,637 net of taxes)
in
other income (expense) for the write-off of unamortized debt issuance costs
associated with the full $175,000 aggregate principal amount of the notes called
for redemption.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
At
September 30, 2006, the Company’s derivative instruments consisted of seven
interest rate swap agreements that effectively fix the interest rate on the
applicable notional amounts of the Company’s variable rate debt as follows:
Date
Entered
|
|
Notional
Amount
|
|
Interest
Rate*
|
|
Effective
Date
|
|
Expiration
Date
|
|
May
2003
|
|
$
|
87,500
|
|
|
2.67%
|
|
|
February
2004
|
|
|
February
2007
|
|
May
2003
|
|
$
|
87,500
|
|
|
2.68%
|
|
|
February
2004
|
|
|
February
2007
|
|
March
2004
|
|
$
|
37,500
|
|
|
2.25%
|
|
|
March
2004
|
|
|
March
2007
|
|
March
2004
|
|
$
|
37,500
|
|
|
2.25%
|
|
|
March
2004
|
|
|
March
2007
|
|
September
2005
|
|
$
|
175,000
|
|
|
4.33%
|
|
|
February
2007
|
|
|
February
2009
|
|
September
2005
|
|
$
|
75,000
|
|
|
4.34%
|
|
|
March
2007
|
|
|
March
2009
|
|
December
2005
|
|
$
|
150,000
|
|
|
4.76%
|
|
|
June
2006
|
|
|
June
2009
|
|
*
Plus
applicable margin.
All
the
interest rate swap agreements are considered highly effective as cash flow
hedges for a portion of the Company’s variable rate debt, and the Company
applies hedge accounting to account for these instruments. The notional amounts
and all other significant terms of the swap agreements are matched to the
provisions and terms of the variable rate debt being hedged.
9. INCOME
TAX
Income
taxes increased $1,639 for the three months ended September 30, 2006 as
compared to the three months ended September 30, 2005. Income taxes
decreased $1,940 for the nine months ended September 30, 2006 as compared
to the nine months ended September 30, 2005. The Company’s effective tax
rates for the three months ended September 30, 2005 and 2006 were 34.5% and
39.9%, respectively, and 36.2% and 38.4% for the nine months ended
September 30, 2005 and 2006, respectively. The increases in the Company’s
effective tax rates for the three and nine months ended September 30, 2006,
were
primarily due to an increase in the Company’s estimated effective current and
deferred state tax rates as a result of the geographical apportionment of the
Company’s state taxes, partially offset by tax planning strategies. The tax rate
increases resulted in a $2,600 adjustment to the Company’s deferred tax account
balances and a corresponding increase to income tax expense. The Company’s tax
rate for the nine months ended September 30, 2006, was also increased from
the recognition of an initial deferred tax liability from the impact of
implementing the new Texas margin tax. The Texas margin tax is an income tax
on
revenues generated from services provided in the state of Texas.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
10. NET
INCOME PER SHARE INFORMATION
The
following table sets forth the numerator and denominator used in the computation
of basic and diluted net income per common share for the three and nine months
ended September 30, 2005 and 2006:
|
|
Three
months ended
September 30,
|
|
Nine
months ended
September 30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income for basic and diluted earnings per share
|
|
$
|
24,475
|
|
$
|
21,873
|
|
$
|
65,241
|
|
$
|
56,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares outstanding
|
|
|
46,523,711
|
|
|
45,490,632
|
|
|
46,904,412
|
|
|
45,444,208
|
|
Dilutive
effect of 2022 Notes
|
|
|
518,949
|
|
|
-
|
|
|
424,489
|
|
|
262,017
|
|
Dilutive
effect of stock options and warrants
|
|
|
1,056,248
|
|
|
1,014,774
|
|
|
1,153,723
|
|
|
1,153,206
|
|
Dilutive
effective of restricted stock
|
|
|
23,697
|
|
|
91,751
|
|
|
29,234
|
|
|
76,860
|
|
Diluted
shares outstanding
|
|
|
48,122,605
|
|
|
46,597,157
|
|
|
48,511,858
|
|
|
46,936,291
|
|
The
Company’s 2022 Notes were convertible, under certain circumstances, into
5,424,668 shares of common stock until they were redeemed in May and June 2006
(see Note 8). The 2022 Notes were exchanged in 2004 and required
(subject to certain exceptions) payment of the principal value in cash and
net
share settle of the conversion value in excess of the principal value of the
notes upon conversion. In accordance with EITF 04-8, The
Effect of Contingently Convertible Instruments on Diluted Earnings per
Share,
the
Company has included the dilutive effect of the conversion value in excess
of
the principal value of the notes.
The
Company’s 2026 Notes are convertible, under certain circumstances, into
3,921,569 shares of common stock. The 2026 Notes require (subject to
certain exceptions) payment of the principal value in cash and net share settle
of the conversion value in excess of the principal value of the notes upon
conversion. In accordance with EITF 04-8, these shares have not been
included in the computation of diluted net income per share for the nine months
ended September 30, 2006 because the conversion value was not in excess of
the principal value of the notes. In addition, the conversion feature of the
2026 Notes meet all the requirements of EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock,
to be
accounted for as an equity interest and not as a derivative. Therefore, in
the
event the 2026 Notes become convertible, a holder electing to convert will
receive a cash payment for the principal amount of the debt and net shares
of
the Company’s common stock equal to the value of the conversion spread, which
the Company will account for as a debt repayment with no gain or loss, and
the
issuance of common stock will be recorded in stockholders’ equity.
For
the
three months ended September 30, 2005 and 2006, stock options and warrants
to purchase 18,500 and 18,113 shares, respectively, were excluded from the
computation of diluted earnings per share as they were anti-dilutive. For the
nine months ended September 30, 2005 and 2006, stock options and warrants
to purchase 20,000 and 16,125 shares, respectively, were excluded from the
computation of diluted earnings per share as they were anti-dilutive.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
11. COMPREHENSIVE
INCOME
Comprehensive
income includes changes in the fair value of interest rate swaps that qualify
for hedge accounting. The difference between net income and comprehensive income
for the three and nine months ended September 30, 2005 and 2006 is as
follows:
|
|
Three
months ended
September 30,
|
|
Nine
months ended
September 30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Net
income
|
|
$
|
24,475
|
|
$
|
21,873
|
|
$
|
65,241
|
|
$
|
56,796
|
|
Unrealized
gain (loss) on interest rate swaps, net of tax expense (benefit)
of $1,056
and $(2,682) for the three months ended September 30, 2005 and 2006,
respectively, and $1,342 and $(725) for the nine months ended
September 30, 2005 and 2006, respectively
|
|
|
1,784
|
|
|
(4,651
|
)
|
|
2,265
|
|
|
(1,318
|
)
|
Comprehensive
income
|
|
$
|
26,259
|
|
$
|
17,222
|
|
$
|
67,506
|
|
$
|
55,478
|
|
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
The
components of other comprehensive income and related tax effects for the three
and nine months ended September 30, 2005 and 2006 are as follows:
|
|
Three
months ended September 30, 2005
|
|
|
|
Gross
|
|
Tax
effect
|
|
Net
of tax
|
|
Amounts
reclassified into earnings
|
|
$
|
(628
|
)
|
$
|
(234
|
)
|
$
|
(394
|
)
|
Changes
in fair value of interest rate swaps
|
|
|
3,468
|
|
|
1,290
|
|
|
2,178
|
|
|
|
$
|
2,840
|
|
$
|
1,056
|
|
$
|
1,784
|
|
|
|
Three
months ended September 30, 2006
|
|
|
|
Gross
|
|
|
Tax
effect
|
|
|
Net
of tax
|
|
Amounts
reclassified into earnings
|
|
$
|
(2,021
|
)
|
$
|
(759
|
)
|
$
|
(1,262
|
)
|
Changes
in fair value of interest rate swaps
|
|
|
(5,312
|
)
|
|
(1,923
|
)
|
|
(3,389
|
)
|
|
|
$
|
(7,333
|
)
|
$
|
(2,682
|
)
|
$
|
(4,651
|
)
|
|
|
Nine
months ended September 30, 2005
|
|
|
|
Gross
|
|
|
Tax
effect
|
|
|
Net
of tax
|
|
Amounts
reclassified into earnings
|
|
$
|
(933
|
)
|
$
|
(347
|
)
|
$
|
(586
|
)
|
Changes
in fair value of interest rate swaps
|
|
|
4,540
|
|
|
1,689
|
|
|
2,851
|
|
|
|
$
|
3,607
|
|
$
|
1,342
|
|
$
|
2,265
|
|
|
|
Nine
months ended September 30, 2006
|
|
|
|
Gross
|
|
|
Tax
effect
|
|
|
Net
of tax
|
|
Amounts
reclassified into earnings
|
|
$
|
(4,811
|
)
|
$
|
(1,807
|
)
|
$
|
(3,004
|
)
|
Changes
in fair value of interest rate swaps
|
|
|
2,768
|
|
|
1,082
|
|
|
1,686
|
|
|
|
$
|
(2,043
|
)
|
$
|
(725
|
)
|
$
|
(1,318
|
)
|
The
estimated amount of the existing unrealized gains as of September 30, 2006
(based on the interest rate yield curve at that date) included in accumulated
other comprehensive income expected to be reclassified into pre-tax earnings
within the next 12 months is $4,115. The timing of actual amounts reclassified
into earnings is dependent on future movements in interest rates.
12. SHARE
REPURCHASE PROGRAM
On
May 3, 2004, the Company announced that its Board of Directors had
authorized a common stock repurchase program for the repurchase of up to
$200,000 of common stock over a two-year period. On July 25, 2005, the
Company announced that its Board of Directors authorized a $100,000 increase
to
its existing $200,000 common stock repurchase program. On October 23, 2006,
the Company announced that its Board of Directors authorized a $200,000 increase
to its existing $300,000 common stock repurchase program. The Board also
extended the program’s term through December 31, 2008 from its existing
term end of March 31, 2007. 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 the Company's capital structure, the market
price of the Company’s common stock and overall market conditions. During the
nine months ended September 30, 2005 and 2006, the Company repurchased
2,616,005 and 2,682,000 shares, respectively, of its common stock under
this program at a cost of $91,917 and $100,245, respectively. The remaining
maximum dollar value of shares available for purchase under the program is
approximately $221,941, giving effect to the increase announced on
October 23, 2006.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
13. COMMITMENTS
AND CONTINGENCIES
The
Company’s subsidiary, High Desert Solid Waste Facility, Inc. (formerly known as
Rhino Solid Waste, Inc.), owns undeveloped property in Chaparral, New Mexico,
for which it sought a permit to operate a municipal solid waste landfill. After
a public hearing, the New Mexico Environment Department approved the permit
for
the facility on January 30, 2002. Colonias Development Council, or CDC, a
nonprofit organization, opposed the permit at the public hearing and appealed
the Department’s decision to the courts of New Mexico, primarily on the grounds
that the Department failed to consider the social impact of the landfill on
the
community of Chaparral, and failed to consider regional planning issues. On
July 18, 2005, in Colonias
Dev. Council v. Rhino Envtl. Servs., Inc. (In re Rhino Envtl. Servs.),
2005 NMSC 24, 117 P.3d 939, the
New
Mexico Supreme Court remanded the matter back to the Department to conduct
a
limited public hearing on certain evidence that CDC claims was wrongfully
excluded from consideration by the hearing officer, and to allow the Department
to reconsider the evidence already proffered concerning the impact of the
landfill on the surrounding community’s quality of life. The hearing is
scheduled for April 2007. At September 30, 2006, the Company had
$8,338 of capitalized expenditures related to this landfill development project.
If the Company is not ultimately issued a permit to operate the landfill, the
Company will be required to expense in a future period the $8,338 of capitalized
expenditures, less the recoverable value of the undeveloped property and other
amounts recovered, which would likely have a material adverse effect on the
Company’s reported income for that period.
The
Company opened a municipal solid waste landfill in Harper County, Kansas in
January 2006, following the issuance by the Kansas Department of Health and
Environment (“KDHE”) of a final permit to operate the landfill. This landfill
has been opposed by a citizens’ group calling itself “Tri-County Concerned
Citizens” and others. On October 3, 2005, landfill opponents filed a suit
(Board
of Commissioners of Sumner County, Kansas, Tri-County Concerned Citizens and
Dalton Holland v. Roderick Bremby, Secretary of the Kansas Department of Health
and Environment, et al.)
in the
District Court of Shawnee County, Kansas (Case No. 05-C-1264), seeking a
judicial review of the order, alleging that a site analysis prepared for the
Company and submitted to the Department as part of the process leading to the
issuance of the permit was deficient in several respects. The action sought
to
stay the effectiveness of the permit and to nullify it. The Company intervened
in this case. On April 7, 2006, the District Court issued an order denying
the plaintiffs’ request for judicial review on the grounds that they lack
standing to bring the action. The plaintiffs have appealed this decision to
the
Kansas Court of Appeals. On November 26, 2005, counsel for Tri-County Concerned
Citizens, Inc. and Dalton Holland also filed a notice of intent to sue under
the
Clean Water Act with respect to the landfill, alleging that the U.S. Army Corps
of Engineers’ determination that no jurisdictional wetlands would be impacted by
the landfill was erroneous, arbitrary, capricious and unsupported by substantial
evidence. The letter also alleges that the Company is in violation of the
Company’s general permit under the National Pollutant Discharge Elimination
System program for storm water. The letter is a pre-requisite to the complaining
parties’ filing of a suit against the Company under the Clean Water Act, but no
suit has yet been filed. On December 23, 2005, counsel for these same
parties wrote a letter to the Secretary of the KDHE alleging that the Company
is
in violation of its permit for allegedly not having submitted to the KDHE
certain information contained in the report of a consultant commissioned by
the
landfill opponents. While the Company believes that it will prevail with respect
to all the matters described, a final adverse determination with respect to
the
permit would likely have a material adverse effect on the Company’s reported
income in the future.
Resourceful
Environmental Services, Inc. (“RES”) filed a complaint alleging that Waste
Connections, Inc. and Waste Connections of Mississippi, LLC misrepresented
their
intention concerning the potential purchase of RES (Resourceful
Environmental Services, Inc. v. Waste Connections, et al.,
filed
on December 31, 2002 in the Circuit Court of Tippah County, Mississippi,
Case No. T-02-308). The Company acquired Liberty Waste in October 2001. The
Company considered acquiring RES, a company Liberty Waste had considered
purchasing, and ultimately WCI decided not to buy the company. RES’s complaint
alleges misrepresentation and conspiracy based on alleged oral assurances that
the acquisition
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
would
go
forward. A trial is scheduled for June 4, 2007. Plaintiff is seeking
compensatory damages of $400, and punitive damages of $50,000. The Company
believes that this case is without merit. The Company has not established a
reserve for this case, and it has no insurance coverage in the event of recovery
by the plaintiff. An adverse determination in this case, coupled with a
significant damage award to the plaintiff, could have an adverse effect on
the
Company’s reported income in the period incurred.
On
August 24, 2006, a purported shareholder derivative complaint was filed in
the Superior Court of California, County of Sacramento, naming certain of
the
Company’s current and former directors and officers as defendants, and naming
the Company as a nominal defendant. The plaintiff in this suit purports to
be one of our stockholders who seeks to bring claims on behalf of the Company
against the defendants. The suit, captioned
Banister v. Mittelstaedt, et al.,
alleges
breach of fiduciary duty and related claims based on alleged wrongdoing in
connection with the timing of certain stock option grants. The complaint
seeks to recover unspecified damages and other relief on behalf of the Company,
as well as payment of costs and attorneys fees. On October 25, 2006,
a second purported shareholder derivative complaint was filed, naming the
Company as a nominal defendant. The suit, captioned
Travis v. Mittelstaedt, et al.
and
filed in the United States District Court for the Eastern District of
California, alleges violations of various federal and California securities
laws, breach of fiduciary duty, and related claims in connection with the
timing
of certain stock option grants. On October 30, 2006, we were served
with a third purported shareholder derivative complaint, naming the Company
as a
nominal defendant. The suit, captioned
Nichols v. Mittelstaedt et al.
and
filed in the Superior Court of California, County of Sacramento, contains
allegations substantially similar to the earlier suits. We have been
informed that on October 30, 2006, a fourth purported shareholder
derivative suit, captioned Pierce
v. Mittelstaedt et al.,
was
filed in the Superior Court of California, County of Sacramento. This suit
contains allegations substantially similar to the earlier suits. As is
typical in this type of litigation, additional suits containing substantially
similar allegations may be filed in the future. The
Company has completed a review of its historical stock option granting
practices, including all option grants since the Company's initial public
offering in May 1998, and reported the results of the review to the Audit
Committee of the Company’s Board of Directors. The review identified a
small number of immaterial exceptions to non-cash compensation expense
attributable to administrative and clerical errors. These exceptions are
not
material to the current and historical financial statements of the Company,
and
the Audit Committee concluded that no further action was necessary. As with
any
litigation proceeding, the Company cannot predict with certainty the eventual
outcome of this pending litigation.
In
the
normal course of its business and as a result of the extensive governmental
regulation of the solid waste industry, the Company is subject to various other
judicial and administrative proceedings involving federal, state or local
agencies. In these proceedings, an agency may seek to impose fines on the
Company or to revoke or deny renewal of an operating permit held by the Company.
From time to time the Company may also be subject to actions brought by
citizens’ groups or adjacent landowners or residents in connection with the
permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to
which
the Company operates.
In
addition, the Company is a party to various claims and suits pending for alleged
damages to persons and property, alleged violations of certain laws and alleged
liabilities arising out of matters occurring during the normal operation of
the
waste management business. Except as noted in the legal cases described above,
as of September 30, 2006, there is no current proceeding or litigation
involving the Company that the Company believes will have a material adverse
impact on its business, financial condition, results of operations or cash
flows.
FORWARD
LOOKING STATEMENTS
Certain
statements contained in this Quarterly Report on Form 10-Q are
forward-looking in nature. These statements can be identified by the use of
forward-looking terminology such as “believes,” “expects,” “may,” “will,”
“should,” “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: (1) we
may
be unable to compete effectively with larger and better capitalized companies
and governmental service providers; (2) increases in the price of fuel may
adversely affect our business and reduce our operating margins; (3) increases
in
labor and disposal and related transportation costs could impact our financial
results; (4) efforts by labor unions could divert management attention and
adversely affect operating results; (5) increases in insurance costs and the
amount that we self-insure for various risks could reduce our operating margins
and reported earnings; (6) we may lose contracts through competitive bidding,
early termination or governmental action; (7) the geographic concentration
of
our business makes our results vulnerable to economic and seasonal factors
affecting the regions in which we operate; (8) competition for acquisition
candidates, consolidation within the waste industry and economic and market
conditions may limit our ability to grow through acquisitions; (9) our growth
and future financial performance depend significantly on our ability to
integrate acquired businesses into our organization and operations; (10) our
acquisitions may not be successful, resulting in changes in strategy, operating
losses or a loss on sale of the business acquired; (11) 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; (12) our intermodal business could be adversely affected by
steamship lines diverting business to ports other than those we service, or
by
heightened security measures or actual or threatened terrorist attacks; (13)
we
depend significantly on the services of the members of our senior and district
management team, and the departure of any of those persons could cause our
operating results to suffer; (14) our decentralized decision-making structure
could allow local managers to make decisions that adversely affect our operating
results; (15) our financial results are based upon estimates and assumptions
that may differ from actual results; (16) we may incur additional charges
related to capitalized expenditures, which would decrease our earnings; (17)
each business that we acquire or have acquired may have liabilities that we
fail
or are unable to discover, including environmental liabilities; and (18) the
adoption of new accounting standards or interpretations could adversely impact
our financial results.
These
risks and uncertainties, as well as others, are discussed in greater detail
in
our other filings with the Securities and Exchange Commission, 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.
The
following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included elsewhere herein.
OVERVIEW
The
solid
waste industry is a local and highly competitive business, requiring substantial
labor and capital resources. The participants compete for collection accounts
primarily on the basis of price and, to a lesser extent, the quality of service,
and compete for landfill business on the basis of tipping fees, geographic
location and quality of operations. The solid waste industry has been
consolidating and continues to consolidate as a result of a number of factors,
including the increasing costs and complexity associated with waste management
operations and regulatory compliance. Many small independent operators and
municipalities lack the capital resources, management, operating skills and
technical expertise necessary to operate effectively in such an environment.
The
consolidation trend has caused solid waste companies to operate larger landfills
that have complementary collection routes that can use company-owned disposal
capacity. Controlling the point of transfer from haulers to landfills has become
increasingly important as landfills continue to close and disposal capacity
moves further from collection markets.
Generally,
the most profitable industry operators are those companies that are vertically
integrated or enter into long-term collection contracts. A vertically integrated
operator will benefit from: (1) the internalization of waste (bringing waste
to
a company-owned landfill); (2) the ability to charge third-party haulers tipping
fees either at landfills or at transfer stations; and (3) the efficiencies
gained by being able to aggregate and process waste at a transfer station prior
to landfilling.
We
are an
integrated solid waste services company that provides solid waste collection,
transfer, disposal and recycling services in mostly secondary markets in the
Western and Southern U.S. We also provide intermodal services for the rail
haul
movement of cargo containers in the Pacific Northwest through a network of
six intermodal facilities. We seek to avoid highly competitive, large urban
markets and instead target markets where we can provide either non-integrated
or
integrated solid waste services under exclusive arrangements, or markets where
we can be integrated and attain high market share. In markets where waste
collection services are provided under exclusive arrangements, or where waste
disposal is municipally funded or available at multiple municipal sources,
we
believe that controlling the waste stream by providing collection services
under
exclusive arrangements is often more important to our growth and profitability
than owning or operating landfills. As of September 30,
2006,
we served more than one million residential, commercial and industrial
customers from a network of operations in 22 states: Alabama, Arizona,
California, Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Minnesota,
Mississippi, Montana, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota,
Tennessee, Texas, Utah, Washington and Wyoming. As of that date, we owned or
operated a network of 115 solid waste collection operations,
37 transfer stations, 26 recycling operations, 32 municipal solid
waste landfills and three construction and demolition landfills.
CRITICAL
ACCOUNTING ESTIMATES AND ASSUMPTIONS
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities in the consolidated financial
statements. As described by the Securities and Exchange Commission, 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. There were two changes to our critical accounting estimates and
assumptions in the nine months ended September 30, 2006, which are
described below. Refer to our most recent Annual Report on Form 10-K for a
complete description of our critical accounting estimates and assumptions.
Effective
the beginning of the first quarter of 2006, we adopted the provisions of
SFAS 123(R) for our share-based compensation plans. We previously accounted
for these plans under the recognition and measurement principles of APB 25
and related interpretations and disclosure requirements established by
SFAS 123, Accounting
for Stock-Based Compensation.
We
adopted SFAS 123(R) using the modified prospective method. Under this
method, all share-based compensation cost is measured at the grant date, based
on the estimated fair value of the award, and is recognized as expense over
the
employee’s requisite service period. Prior periods are not restated.
Consistent
with prior years, we use the Black-Scholes option pricing model which requires
extensive use of accounting judgment and financial estimation, including
estimates of the expected term option holders will retain their vested stock
options before exercising them, the estimated volatility of our common stock
price over the expected term, and the number of options that will be forfeited
prior to the completion of their vesting requirements. Application of
alternative assumptions could produce significantly different estimates of
the
fair value of stock-based compensation and, consequently, the related amounts
recognized in the Condensed Consolidated Statements of Income within this
document.
Stock-based
compensation expense recognized during the three months ended September 30,
2006, totaled approximately $1.0 million
($0.6 million net of taxes) and consisted of stock option, restricted stock
unit and restricted stock expense. Stock-based compensation expense recognized
during the nine months ended September 30, 2006, totaled approximately
$2.6 million ($1.6 million net of taxes) and consisted of stock
option, restricted stock unit and restricted stock expense. This expense was
included in “Selling, general and administrative” expenses in the Condensed
Consolidated Statements of Income within this Form 10-Q. A contra-equity balance
of $2.2 million in “Deferred stock compensation” on the Condensed
Consolidated Balance Sheet was reversed as a change in accounting policy upon
the adoption of SFAS 123(R) to “Additional paid-in capital” as of
January 1, 2006. The excess tax benefits from the exercise of stock options
were approximately $5.7 million during the nine months ended
September 30, 2006.
Income
taxes.
We use
the liability method to account for income taxes. Accordingly, deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. If our judgment and estimates concerning
assumptions made in calculating our expected future income tax rates are
incorrect, our deferred tax assets and liabilities would change. Based on our
net deferred tax liability balance at September 30, 2006, each
0.1 percentage point change to our expected future income tax rate would
change our net deferred tax liability balance and income tax expense by
approximately $0.5 million.
GENERAL
Our
solid
waste revenues consist mainly of fees we charge customers for collection,
transfer, disposal and recycling services. Our collection business also
generates revenues from the sale of recyclable commodities, which have
significant variability. A large part of our collection revenues comes from
providing residential, commercial and industrial services. We frequently perform
these services under service agreements, municipal contracts or franchise
agreements with governmental entities. Our existing franchise agreements and
all
of our existing municipal contracts give us the exclusive right to provide
specified waste services in the specified territory during the contract term.
These exclusive arrangements are awarded, at least initially, on a competitive
bid basis and subsequently on a bid or negotiated basis. We also provide
residential collection services on a subscription basis with individual
households.
Approximately
50% of our revenues for the nine months ended September 30, 2006, were
derived from market areas where we are the exclusive service provider in a
specified market. Contracts with counties and municipalities and governmental
certificates, or G Certificates, provide relatively consistent cash flow during
the terms of the contracts. Since we bill most residential customers quarterly,
subscription agreements also provide a stable source of revenues for us.
We
charge
transfer station and landfill customers a tipping fee on a per ton and/or per
yard basis for disposing of their solid waste at our transfer stations and
landfill facilities. Many of our transfer station and landfill customers have
entered into one- to ten-year disposal contracts with us, most of which provide
for annual, indexed price increases.
We
typically determine the prices of our solid waste services by the collection
frequency and level of service, route density, volume, weight and type of waste
collected, type of equipment and containers furnished, the distance to the
disposal or processing facility, the cost of disposal or processing, and prices
charged by competitors for similar services. The terms of our contracts
sometimes limit our ability to pass on price increases. Long-term solid waste
collection contracts often contain a formula, generally based on a published
price index, that automatically adjusts fees to cover increases in some, but
not
all, operating costs, or that limit increases to less than 100% of the increase
in the applicable price index.
Our
revenues from intermodal services consist mainly of fees we charge customers
for
the movement of cargo containers between our intermodal facilities. We also
generate revenue from the storage, maintenance and repair of cargo containers,
and the sale or lease of containers and chassis.
The
table
below shows for the periods indicated our total reported revenues attributable
to services provided (dollars in thousands).
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
Collection
|
|
$
|
134,634
|
|
|
62.7
|
%
|
|
$
|
157,891
|
|
|
64.0
|
%
|
|
$
|
380,201
|
|
|
62.5
|
%
|
|
$
|
449,541
|
|
|
64.2
|
%
|
Disposal
and transfer
|
|
|
60,182
|
|
|
28.0
|
|
|
|
69,016
|
|
|
28.0
|
|
|
|
169,716
|
|
|
27.9
|
|
|
|
193,608
|
|
|
27.6
|
|
Intermodal,
recycling and other
|
|
|
20,125
|
|
|
9.3
|
|
|
|
19,758
|
|
|
8.0
|
|
|
|
58,829
|
|
|
9.6
|
|
|
|
57,082
|
|
|
8.2
|
|
Total
|
|
$
|
214,941
|
|
|
100.0
|
%
|
|
$
|
246,665
|
|
|
100.0
|
%
|
|
$
|
608,746
|
|
|
100.0
|
%
|
|
$
|
700,231
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
eliminations
|
|
$
|
26,196
|
|
|
|
|
|
$
|
30,118
|
|
|
|
|
|
$
|
75,292
|
|
|
|
|
|
$
|
86,545
|
|
|
|
|
Cost
of
operations includes labor and benefits, tipping fees paid to third-party
disposal facilities, vehicle and equipment maintenance, workers’ compensation,
vehicle and equipment insurance, employee group health insurance and claims
expense, third-party transportation expense, fuel, the cost of materials we
purchase for recycling, district and state taxes and host community fees and
royalties. Our significant costs of operations during the nine months ended
September 30, 2006 were labor, third-party disposal and transportation,
cost of vehicle and equipment maintenance, insurance, taxes and fees and fuel.
We use a number of programs to reduce overall cost of operations, including
increasing the use of automated routes to reduce labor and workers’ compensation
exposure, utilizing comprehensive maintenance and health and safety programs,
and increasing the use of transfer stations to further enhance internalization
rates. We carry high-deductible insurance for automobile liability, property,
general liability, workers’ compensation, and employer’s liability claims. If we
experience insurance claims or costs above or below our historically evaluated
levels, our estimates could be materially affected.
Selling,
general and administrative, or SG&A, expenses include management, sales
force, clerical and administrative employee compensation and benefits, legal,
accounting and other professional services, bad debt expense, and rent expense
for our corporate headquarters.
Depreciation
expense includes depreciation of equipment and fixed assets over their estimated
useful lives using the straight-line method. Depletion expense includes
depletion of landfill site costs and total future development costs as remaining
airspace of the landfill is consumed. Remaining airspace at our landfills
includes both permitted and expansion airspace. Amortization expense includes
the amortization of definite-lived intangible assets, consisting primarily
of
long-term franchise agreements and contracts and non-competition agreements,
over their estimated useful lives using the straight-line method. Goodwill
and
indefinite-lived intangible assets, consisting primarily of certain perpetual
rights to provide solid waste collection and transportation services in
specified territories, are not amortized.
At
January 1, 2006, we reclassified two landfills from life-of-site
classification to operated landfills. This reclassification is reflected in
all
landfill balances as of September 30, 2005 and 2006. At September 30,
2006, we had 378.5 million tons of permitted remaining airspace capacity
and 38.8 million tons of probable expansion airspace capacity at our
27 owned and operated landfills and landfills operated under life-of-site
operating agreements. We do not report remaining airspace capacity at the
eight landfills we operate under contracts with finite terms. Based on
remaining permitted capacity as of September 30, 2006, and projected annual
disposal volumes, the average remaining landfill life for our owned landfills
and landfills operated under life-of-site operating agreements is approximately
53 years. The operating agreements for which the contracted term is less
than the life of the landfill have expiration dates from 2007 to 2017.
The
disposal tonnage that we received in the nine months ended September 30,
2005 and 2006 at all of our landfills owned or operated during the respective
period is shown below (tons in thousands):
|
|
Nine
months ended September 30,
|
|
|
|
2005
|
|
2006
|
|
|
|
Number
of
Sites
|
|
Total
Tons
|
|
Number
of
Sites
|
|
Total
Tons
|
|
Owned
landfills or landfills operated under life-of-site
contracts
|
|
|
25
|
|
|
4,922
|
|
|
27
|
|
|
5,370
|
|
Landfill
classified as discontinued operations
|
|
|
1
|
|
|
54
|
|
|
-
|
|
|
-
|
|
Operated
landfills
|
|
|
8
|
|
|
743
|
|
|
8
|
|
|
793
|
|
|
|
|
34
|
|
|
5,719
|
|
|
35
|
|
|
6,163
|
|
We
capitalize some third-party expenditures related to pending acquisitions or
development projects, such as legal, engineering and interest expenses. We
expense indirect acquisition costs, such as executive and corporate overhead,
public relations and other corporate services, as we incur them. We charge
against net income any unamortized capitalized expenditures and advances (net
of
any portion that we believe we may recover through sale or otherwise) that
may
become impaired, such as those that relate to any operation that is permanently
shut down and any pending acquisition or landfill development project that
we
believe will not be completed. We routinely evaluate all capitalized costs,
and
expense those related to projects that we believe are not likely to succeed.
At
September 30, 2006, we had less than $0.1 million in capitalized
expenditures relating to pending acquisitions.
At
September 30, 2006, we had $8.3 million in capitalized expenditures
for a landfill project in Chaparral, New Mexico, with respect to which we had
obtained a permit to operate the landfill; on July 18, 2005, the Supreme
Court of New Mexico ordered the New Mexico Environment Department to conduct
an
additional limited hearing to consider evidence that landfill opponents claim
was wrongfully excluded. The hearing is scheduled for April 2007. If we are
not ultimately issued a permit to operate the New Mexico landfill, we will
be
required to expense in a future period the capitalized expenditures for this
project, less the recoverable value of the applicable property and any other
amounts recovered, which would likely have a material adverse effect on our
financial position and results of operations for that period.
We
periodically evaluate our intangible assets for potential impairment indicators.
If any impairment indicators are present, a test of recoverability is performed
by comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows. If the carrying values are in excess of undiscounted
expected future cash flows, impairment is measured by comparing the fair value
of the asset to its carrying value. If the fair value of an asset is determined
to be less than the carrying amount of the asset or asset group, an impairment
in the amount of the difference is recorded in the period that the impairment
indicator occurs. As of September 30, 2006, there have been no adjustments
to the carrying amounts of intangibles resulting from these evaluations.
Additionally, we test goodwill and indefinite-lived intangible assets for
impairment annually. During the nine months ended September 30, 2006, there
have been no adjustments to the carrying amounts of goodwill or indefinite-lived
intangible assets. As of September 30, 2006, goodwill and other intangible
assets represented 48.0% of total assets and 118.1% of stockholders’ equity.
NEW
ACCOUNTING PRONOUNCEMENTS
For
a
description of the new accounting standards that affect us, see Note 2 to
our Condensed Consolidated Financial Statements included under Part I,
Item 1 of this Form 10-Q.
RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
2006
The
following table sets forth items in our condensed consolidated statements of
income as a percentage of revenues for the periods indicated.
|
|
Three
months ended
September 30,
|
|
Nine
months ended
September 30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of operations
|
|
|
57.2
|
|
|
59.4
|
|
|
57.4
|
|
|
60.0
|
|
Selling,
general and administrative
|
|
|
9.4
|
|
|
9.9
|
|
|
9.7
|
|
|
10.1
|
|
Depreciation
and amortization expense
|
|
|
8.9
|
|
|
8.8
|
|
|
8.9
|
|
|
9.1
|
|
Gain
on disposal of assets
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
-
|
|
Operating
income
|
|
|
24.6
|
|
|
22.0
|
|
|
24.1
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(3.2
|
)
|
|
(3.5
|
)
|
|
(3.1
|
)
|
|
(3.5
|
)
|
Other
income (expense)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.6
|
)
|
Minority
interests
|
|
|
(1.6
|
)
|
|
(1.7
|
)
|
|
(1.7
|
)
|
|
(1.6
|
)
|
Income
tax expense
|
|
|
(6.8
|
)
|
|
(6.7
|
)
|
|
(7.0
|
)
|
|
(5.8
|
)
|
Loss
on discontinued operations, net of tax
|
|
|
-
|
|
|
-
|
|
|
(0.1
|
)
|
|
-
|
|
Net
income
|
|
|
13.0
|
%
|
|
10.1
|
%
|
|
12.2
|
%
|
|
9.3
|
%
|
Revenues.
Total
revenues increased $27.8 million, or 14.7%, to $216.5 million for the
three months ended September 30, 2006, from $188.7 million for the
three months ended September 30, 2005. Acquisitions closed during, or
subsequent to, the three months ended September 30, 2005, increased
revenues by approximately $14.1 million. During the three months ended
September 30, 2006, increased prices charged to our customers and volume
changes in our existing business resulted in a net revenue increase of
approximately $14.8 million. Decreases in intermodal services due to lower
cargo volume and lower recyclable commodity prices and volume during the three
months ended September 30, 2006, decreased revenues by $1.1 million.
Total
revenues increased $80.2 million, or 15.0%, to $613.7 million for the
nine months ended September 30, 2006, from $533.5 million for the nine
months ended September 30, 2005. Acquisitions closed during, or subsequent
to, the nine months ended September 30, 2005, increased revenues by
approximately $40.0 million. During the nine months ended
September 30, 2006, increased prices charged to our customers and volume
changes in our existing business resulted in a net revenue increase of
approximately $43.1 million. Decreases in intermodal services due to lower
cargo volume and lower recyclable commodity prices and volume during the nine
months ended September 30, 2006, decreased revenues by $2.9 million.
Cost
of Operations.
Total
cost of operations increased $20.7 million, or 19.1%, to
$128.7 million for the three months ended September 30, 2006, from
$108.0 million for the three months ended September 30, 2005. Total
cost of operations increased $62.5 million, or 20.4%, to
$368.3 million for the nine months ended September 30, 2006, from
$305.8 million for the nine months ended September 30, 2005. The
increases were attributable to operating costs associated with acquisitions
closed during, or subsequent to, the nine months ended September 30, 2005,
higher fuel costs resulting from market price changes in fuel and the expiration
of our fixed-price fuel supply contract, increased insurance expenses due to
increases in both total claims and average settlement rates per claim, increased
franchise and landfill taxes, increased labor expenses, increased operating
expenses at three new landfills
opened
during December 2005 and January 2006, and increased third party
transportation costs and equipment maintenance costs associated with higher
collection and disposal volumes. During the nine months ended September 30,
2006, we accrued additional development costs for insurance claims of
approximately $3.8 million. The increase was based on actuarially projected
losses on open claims determined by our third party administrator’s review and a
third party actuarial review of our estimated insurance liability, both of
which
are updated on a quarterly basis and reviewed by us.
In
2005,
we benefited from a fixed-price fuel supply contract that we entered into in
late 2003 that fixed diesel prices on approximately 13 million gallons
purchased during the year. This amount represented about 75% of our fuel
consumption in 2005. We estimate that this contract saved us approximately
$4.2 million and $9.7 million on a pre-tax basis compared to market
prices paid during the three and nine months ended September 30, 2005,
respectively.
Cost
of
operations as a percentage of revenues increased 2.2 percentage points to
59.4% for the three months ended September 30, 2006, from 57.2% for the
three months ended September 30, 2005. Cost of operations as a percentage
of revenues increased 2.6 percentage points to 60.0% for the nine months
ended September 30, 2006, from 57.4% for the nine months ended
September 30, 2005. The increases as a percentage of revenues were
primarily attributable to increased fuel costs, increased insurance costs,
increased franchise and landfill taxes, third party transportation costs,
maintenance and repair expenses, and acquisitions closed during, or subsequent
to, the nine months ended September 30, 2005, having operating margins
below our company average, partially offset by a decrease in disposal expenses
resulting from increased internalization of collected waste volumes.
SG&A.
SG&A expenses increased $3.7 million, or 21.1%, to $21.4 million
for the three months ended September 30, 2006, from $17.7 million for
the three months ended September 30, 2005. SG&A expenses increased
$9.9 million, or 19.1%, to $61.8 million for the nine months ended
September 30, 2006, from $51.9 million for the nine months ended
September 30, 2005. The increases in SG&A expenses were primarily the
result of additional personnel from acquisitions closed during, or subsequent
to, the nine months ended September 30, 2005, increased payroll expense due
to increased headcount to support our base operations and increased salaries,
increased equity compensation expense resulting from the expensing of stock
options and the increased use of restricted stock units to provide long-term
compensation to our employees, and increased legal and other professional fees.
SG&A
expenses as a percentage of revenues increased 0.5 percentage points to
9.9% for the three months ended September 30, 2006, from 9.4% for the three
months ended September 30, 2005. SG&A expenses as a percentage of
revenues increased 0.4 percentage points to 10.1% for the nine months ended
September 30, 2006, from 9.7% for the nine months ended September 30,
2005. The increases as a percentage of revenue were primarily attributable
to
increased equity compensation expense, cash compensation increases and higher
legal and professional fees.
Depreciation
and Amortization.
Depreciation and amortization expense increased $2.4 million, or 14.0%, to
$19.1 million for the three months ended September 30, 2006, from
$16.7 million for the three months ended September 30, 2005.
Depreciation and amortization expense increased $8.7 million, or 18.5%, to
$56.0 million for the nine months ended September 30, 2006, from
$47.3 million for the nine months ended September 30, 2005. The
increases were primarily attributable to depreciation associated with
acquisitions closed during, or subsequent to, the nine months ended
September 30, 2005, increased depletion expenses resulting from increases
in disposal volumes at our landfills, and increased depreciation expense
resulting from new facilities, fleet and equipment acquired subsequent to
September 30, 2005, to support our base operations.
Depreciation
and amortization expense as a percentage of revenues decreased 0.1 percentage
points to 8.8% for the three months ended September 30, 2006, from 8.9% for
the three months ended September 30, 2005. Depreciation and amortization
expense as a percentage of revenues increased 0.2 percentage points to 9.1%
for the nine months ended September 30, 2006, from 8.9% for the nine months
ended September 30, 2005, due to depreciation expense associated with
facilities, fleet and equipment upgrades, and increased depletion expense
resulting from increases in disposal volumes at our landfills.
Operating
Income.
Operating income increased $1.0 million, or 2.3%, to $47.5 million for
the three months ended September 30, 2006, from $46.5 million for the
three months ended September 30, 2005. The increase was primarily due to
increased revenues, partially offset by increased operating costs, increased
SG&A expenses to support the revenue growth and increased depreciation and
amortization expenses. Operating income decreased $1.3 million, or 1.0%, to
$127.5 million for the nine months ended September 30, 2006, from
$128.8 million for the nine months ended September 30, 2005. The
decrease was primarily attributable to increased operating costs, increased
insurance expenses resulting from higher projected losses on open claims,
increased SG&A expenses to support the revenue growth, and increased
depreciation and amortization expenses, partially offset by the growth in
revenues.
Operating
income as a percentage of revenues decreased 2.6 percentage points to 22.0%
for
the three months ended September 30, 2006, from 24.6% for the three months
ended September 30, 2005. Operating income as a percentage of revenues
decreased 3.3 percentage
points to 20.8% for the nine months ended September 30, 2006, from 24.1%
for the nine months ended September 30, 2005. The decreases were due to the
aforementioned percentage of revenue increases in cost of operations, additional
insurance expense recorded, SG&A expense, and depreciation and amortization
expenses.
Interest
Expense.
Interest expense increased $1.6 million, or 25.5%, to $7.6 million for
the three months ended September 30, 2006, from $6.0 million for the
three months ended September 30, 2005. The increase was attributable to
higher average debt balances and increased interest rates on floating rate
debt
not fixed under our swap agreements. Interest expense increased
$5.2 million, or 31.1%, to $21.7 million for the nine months ended
September 30, 2006, from $16.5 million for the nine months ended
September 30, 2005. The increase was attributable to higher average debt
balances and increased interest rates on floating rate debt not fixed under
our
swap agreements, partially offset by a $1.0 million reduction of interest
expense on our $175 million Floating Rate Convertible Subordinated Notes
due 2022 (the “2022 Notes”) as a result of the timing of the conversion of
the 2022 Notes into common stock by the note holders after we called the
notes for redemption. The 2022 Notes converted into common stock prior to
redemption were not entitled to receive interest accrued after May 1, 2006.
We paid approximately $175 million in cash and issued 961,175 shares of our
common stock in connection with the conversion and redemption of the 2022 Notes.
Other
Income (Expense).
Other
income (expense) changed to an expense total of $3.8 million for the nine
months ended September 30, 2006, from an income total of $0.2 million
for the nine months ended September 30, 2005. Other expense in the nine
months ended September 30, 2006, primarily consists of $4.2 million of
costs associated with the write-off of the unamortized debt issuance costs
associated with our 2022 Notes.
Provision
for Income Taxes.
Income
taxes increased $1.6 million, or 12.7%, to $14.5 million for the three
months ended September 30, 2006, from $12.9 million for the three
months ended September 30, 2005. Income taxes decreased $2.0 million,
or 5.2%, to $35.4 million for the nine months ended September 30,
2006, from $37.4 million for the nine months ended September 30, 2005.
Our effective tax rates for the three months ended September 30, 2005 and
2006 were 34.5% and 39.9%, respectively, and 36.2% and 38.4% for the nine months
ended September 30, 2005 and 2006, respectively. The increases in our
effective tax rates for the three and nine months ended September 30, 2006,
were
primarily due to an increase in our estimated effective current and deferred
state tax rates as a result of the geographical apportionment of our state
taxes, partially offset by tax planning strategies. The tax rate increases
resulted in a $2.6 million adjustment to our deferred tax account balances
and a corresponding increase to income tax expense. Our tax rate for the nine
months ended September 30, 2006, was also increased from the recognition of
an initial deferred tax liability from the impact of implementing the new Texas
margin tax. The Texas margin tax is an income tax on revenues generated from
services provided in the state of Texas.
Net
Income.
Net
income decreased $2.6 million, or 10.6%, to $21.9 million for the
three months ended September 30, 2006, from $24.5 million for the
three months ended September 30, 2005. The decrease was primarily
attributable to increased interest expense, increased minority interests expense
and increased income tax expense, partially offset by increased operating
income. Net income decreased $8.4 million, or 12.9%, to $56.8 million
for the nine months ended September 30, 2006, from $65.2 million for
the nine months ended September 30, 2005. The decrease was primarily
attributable to decreased operating income, increased interest expense,
increased minority interests expense and the write off of $4.2 million of
unamortized debt issuance costs associated with our 2022 Notes, partially
offset by decreased income tax expense.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business is capital intensive. Our capital requirements include acquisitions
and
fixed asset purchases. We expect that we will also make capital expenditures
for
landfill cell construction, landfill development, landfill closure activities
and intermodal facility construction in the future. We plan to meet our capital
needs through various financing sources, including internally generated funds,
and debt and equity financings.
As
of
September 30, 2006, we had a working capital deficit of $27.2 million,
including cash and equivalents of $10.5 million. Our working capital
deficit increased $1.6 million from $25.6 million at December 31,
2005. 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 to reduce our indebtedness under
our credit facility and to minimize our cash balances. The increase in our
working capital deficit from December 31, 2005, resulted primarily from an
increase in accrued liabilities, slightly offset by an increase in accounts
receivable and a decrease in book overdraft.
For
the
nine months ended September 30, 2006, net cash provided by operating
activities was $152.3 million, including $15.6 million provided by
working capital for the period. The primary components of the reconciliation
of
net income to net cash provided by operating activities for the nine months
ended September 30, 2006, consist of non-cash expenses, including
$56.0 million of depreciation and amortization, $9.7 million of
minority interests expense, $5.8 million of debt issuance cost
amortization, a $11.5 million increase in net deferred tax liabilities, and
$2.6 million of stock compensation expense, less $5.7 million of
excess tax benefit from stock option exercises reclassified to cash flows from
financing activities due to the adoption of SFAS 123(R).
For
the
nine months ended September 30, 2005, net cash provided by operating
activities was $149.8 million. The primary components of the reconciliation
of net income to net cash provided by operating activities for the nine months
ended September 30, 2005, consist of non-cash expenses, including
$47.5 million of depreciation and amortization, $23.5 million provided
by changes in working capital for the period, $9.3 million of minority
interests expense, $7.0 million of tax benefit from stock option exercises,
less a $4.8 million decrease in deferred tax liabilities.
For
the
nine months ended September 30, 2006, net cash used in investing activities
was $108.6 million. Of this, $35.9 million was used to fund the cash
portion of acquisitions and to pay a portion of acquisition costs that were
included as a component of accrued liabilities at December 31, 2005. Cash
used for capital expenditures was $73.5 million, which was primarily for
investments in fixed assets, consisting of trucks, containers, other equipment
and landfill development. The increase in capital expenditures of
$12.1 million for the nine months ended September 30, 2006, as
compared to the nine months ended September 30, 2005, is due primarily to
the costs of initial construction and operating equipment purchased for two
new
landfills that opened in 2006, new heavy equipment purchased at existing
landfills, and the construction costs associated with a new transfer station
and
a new operating facility in the state of Washington.
For
the
nine months ended September 30, 2005, net cash used in investing activities
was $130.0 million. Of this amount, $73.5 million was used to fund the
cash portion of acquisitions and to pay a portion of acquisition costs that
were
included as a component of accrued liabilities at December 31, 2004. Cash
used for capital expenditures was $61.4 million, which was primarily for
investments in fixed assets, consisting of trucks, containers, other equipment
and landfill development. Cash provided by investing activities primarily
included $4.4 million of proceeds from the disposal of assets and
$1.1 million of net reductions of restricted assets.
For
the
nine months ended September 30, 2006, net cash used in financing activities
was $40.7 million, which included $47.9 million of net borrowings
under our various debt arrangements for the funding of capital expenditures
and
acquisitions, $26.0 million of proceeds from stock option and warrant
exercises, and $5.7 million of excess tax benefit from stock option
exercises, less $7.8 million of cash distributions to minority interest
holders, $6.1 million change in book overdraft, $6.1 million of debt
issuance costs, and $100.2 million of repurchases of our common stock.
For
the
nine months ended September 30, 2005, net cash used in financing activities
was $16.6 million, which primarily included $62.2 million of net
borrowings under our various debt arrangements for the funding of capital
expenditures and acquisitions, $25.2 million of proceeds from stock option
and warrant exercises, less $91.9 million to repurchase shares of our
common stock, $3.5 million change in book overdraft and $8.5 million
of cash distributions to minority interest holders.
We
made
$73.5 million in capital expenditures during the nine months ended
September 30, 2006. We expect to make capital expenditures of approximately
$95 million in 2006 in connection with our existing business. We intend to
fund our planned 2006 capital expenditures principally through existing cash,
internally generated funds, and borrowings under our existing credit facility.
In addition, we may make substantial additional capital expenditures in
acquiring solid waste collection and disposal 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 credit facility 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.
On
March 20, 2006, we completed our offering of $200 million aggregate
principal amount of 3.75% Convertible Senior Notes due 2026 (the “2026 Notes”),
pursuant to a private placement. The terms and conditions of the 2026 Notes
are set forth in the Indenture, dated as of March 20, 2006, between us and
U.S. Bank National Association, as trustee. The 2026 Notes rank equally in
right
of payment to all of our other existing and future senior uncollateralized
and
unsubordinated indebtedness. The 2026 Notes rank senior in right of payment
to
all of our existing and future subordinated indebtedness and are subordinated
in
right of payment to our collateralized obligations to the extent of the assets
collateralizing such obligations. The 2026 Notes bear interest at 3.75% per
annum payable semi-annually in arrears on April 1 and October 1 of
each year, beginning on October 1, 2006, until the maturity date of
April 1, 2026. Our obligations under the 2026 Notes are not guaranteed by
any third party.
The
2026
Notes are convertible into cash and, if applicable, shares of common stock
based
on an initial conversion rate of 19.6078 shares of common stock per $1,000
principal amount of 2026 Notes (which is equal to an initial conversion price
of
approximately $51.00 per share), subject to adjustment, and only under certain
circumstances. The holders of the 2026 Notes who convert their notes in
connection with a change in control (as defined in the Indenture) may be
entitled to a make-whole premium in the form of an increase in the conversion
rate.
Beginning
on April 1, 2010, we may redeem in cash all or part of the 2026 Notes at a
price equal to 100% of the principal amount plus accrued and unpaid interest,
including additional interest, if any, and, if redeemed prior to April 1,
2011, an interest make-whole payment. The holders of the 2026 Notes have the
ability to require us to repurchase all or a part of the 2026 Notes in cash
on
each of April 1, 2011, 2016 and 2021, and in the event of a change of
control, at a purchase price of 100% of the principal amount of the 2026 Notes
plus any accrued and unpaid interest, including additional interest, if any.
In
April
2006 we called for redemption $87.5 million of the $175 million
aggregate principal amount of our 2022 Notes on May 8, 2006, and the
remaining $87.5 million on June 5, 2006. Holders of the
2022 Notes had the right to convert their notes at any time prior to
5:00 p.m., New York City time, on the day that was two business days
immediately preceding the corresponding redemption date. Notes converted into
common stock prior to the corresponding redemption date were not entitled to
receive interest accrued from May 1, 2006. Unless earlier converted, we
were obligated to redeem the 2022 Notes at a price of $1,020 per
$1,000 principal amount of the 2022 Notes, together with accrued and
unpaid interest to the corresponding redemption date. After that date, interest
ceased to accrue on the redeemed 2022 Notes. We paid approximately $175
million in cash and issued 961,175 shares of our
common
stock in connection with the conversion and redemption. We funded the conversion
and redemption with borrowings under our senior secured revolving credit
facility. Due to our closing stock price meeting the 2022 Notes’ conversion
threshold in the first quarter of 2006 of trading at more than 110% of the
conversion price per share for at least 20 trading days in a period of
30 consecutive trading days, we recorded a non-cash, pre-tax charge of
$4.2 million ($2.6 million net of taxes) in other income (expense) for
the write-off of unamortized debt issuance costs associated with the full
$175 million aggregate principal amount of the notes called for redemption.
As
of
September 30, 2006, we had $400.0 million outstanding under our senior
secured revolving credit facility, exclusive of outstanding stand-by letters
of
credit of $53.5 million. The $33.0 million increase in outstanding
borrowings under our credit facility during the nine months ended
September 30, 2006, was primarily due to funding repurchases of our common
stock, new acquisitions, capital expenditures, and the conversion and redemption
of our 2022 Notes, partially offset by net proceeds from the issuance of
our 2026 Notes, cash generated from operations, and the proceeds from stock
option exercises. As of September 30, 2005 and 2006, we were in compliance
with all applicable covenants in our credit facility.
As
of
September 30, 2006, we had the following contractual obligations (in
thousands):
|
|
Payments
Due by Period
|
|
Recorded
Obligations
|
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
2
to 3
Years
|
|
|
4
to 5
Years
|
|
|
Over
5
Years
|
|
Long-term
debt (1),
(2)
|
|
$
|
645,120
|
|
$
|
7,078
|
|
$
|
18,307
|
|
$
|
404,058
|
|
$
|
215,677
|
|
(1) |
Long-term
debt payments include $400 million in principal payments due 2011
related to our senior secured revolving credit facility. As of
September 30, 2006, our credit facility allowed us to borrow up to
$850 million, including stand-by letters of credit.
|
(2) |
Holders
of the 2026 Notes may require us to purchase their notes in cash at a
price of par plus accrued interest, if any, upon a change in control
of
the Company, as defined in the indenture, or, for the first time,
on
April 1, 2011. Under certain conditions, the 2026 Notes could be
earlier converted.
|
|
|
Amount
of Commitment Expiration Per Period
|
|
Unrecorded
Obligations
|
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
2
to 3
Years
|
|
|
4
to 5
Years
|
|
|
Over
5
Years
|
|
Operating
leases(3)
|
|
$
|
51,389
|
|
$
|
6,747
|
|
$
|
10,361
|
|
$
|
8,145
|
|
$
|
26,136
|
|
(3) |
We
are party to operating lease agreements. These lease agreements are
established in the ordinary course of our business and are designed
to
provide us with access to facilities at competitive, market-driven
prices.
These arrangements have not materially affected our financial position,
results of operations or liquidity during the nine months ended
September 30, 2006, nor are they expected to have a material impact
on our future financial position, results of operations or liquidity.
|
We
have
obtained stand-by letters of credit and financial surety bonds, primarily to
support our financial assurance needs and landfill operations. We had provided
customers and various regulatory authorities with surety bonds in the aggregate
amounts of approximately $126.1 million and $142.0 million at
December 31, 2005 and September 30, 2006, respectively. These
arrangements have not materially affected our financial position, results of
operations or liquidity during the nine months ended September 30, 2006,
nor are they expected to have a material impact on our future financial
position, results of operations or liquidity.
The
minority interests holders of a majority-owned subsidiary of Waste Connections
have a currently exercisable put option to require us to complete the
acquisition of this majority-owned subsidiary by purchasing their minority
ownership interests for fair market value. The put option calculates the fair
market value of the subsidiary based on its current operating income before
depreciation and amortization, as defined in the put option agreement. The
put
option does not have a stated termination date. At September 30, 2006, the
minority interests holders' pro rata share of the subsidiary's fair market
value
is estimated to be worth between $81 million and $96 million. Because
the put is calculated at fair market value, no amounts have been accrued
relative to the put option. In the event the minority interests holders elect
to
exercise the put option, we intend to fund the transaction using borrowings
from
our credit facility.
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 operations would not be impaired by such dispositions, we could
incur losses on them.
FREE
CASH
FLOW
We
are
providing free cash flow, a non-GAAP financial measure, because it is widely
used by investors as a valuation and liquidity measure in the solid waste
industry. This measure should be used in conjunction with GAAP financial
measures. Management uses free cash flow as one of the principal measures to
evaluate and monitor the ongoing financial performance of our operations. We
define free cash flow as net cash provided by operating activities plus proceeds
from disposal of assets and excess tax benefit on the exercise of stock options,
plus or minus change in book overdraft, less capital expenditures for property
and equipment and distributions to minority interest holders. Other companies
may calculate free cash flow differently. Our free cash flow for the nine months
ended September 30, 2005 and 2006, as revised and amended, is calculated as
follows (amounts in thousands):
|
|
Nine
months ended
September 30,
|
|
|
|
2005
|
|
2006
|
|
Net
cash provided by operating activities
|
|
$
|
149,796
|
|
$
|
152,340
|
|
Change
in book overdraft
|
|
|
(3,514
|
)
|
|
(6,143
|
)
|
Plus:
Proceeds from disposal of assets
|
|
|
4,420
|
|
|
1,950
|
|
Plus:
Excess tax benefit on the exercise of stock options
|
|
|
-
|
|
|
5,660
|
|
Less:
Capital expenditures for property and equipment
|
|
|
(61,418
|
)
|
|
(73,482
|
)
|
Less:
Distributions to minority interest holders
|
|
|
(8,526
|
)
|
|
(7,840
|
)
|
Free
cash flow
|
|
$
|
80,758
|
|
$
|
72,485
|
|
INFLATION
Other
than volatility in fuel prices, inflation has not materially affected our
operations. 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,
such
as recent increases in the price of fuel, exceed the average rate of inflation.
Management's estimates associated with inflation have an impact on our
accounting for landfill liabilities.
SEASONALITY
Based
on
historic trends, 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.
We expect the fluctuation in our revenues between our highest and lowest
quarters to be approximately 10% to 12%. This seasonality reflects 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. 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 waste, resulting in higher disposal
costs, which are calculated on a per ton basis.
In
the
normal course of business, we are exposed to market risk, including changes
in
interest rates and prices of certain commodities. We use hedge agreements to
manage a portion of our risks related to interest rates. While we are exposed
to
credit risk in the event of non-performance by counterparties to our hedge
agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue
derivative financial instruments for trading purposes. We monitor our hedge
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
At
September 30, 2006, our derivative instruments consisted of seven interest
rate swap agreements that effectively fix the interest rate on the applicable
notional amounts of our variable rate debt as follows:
Date
Entered
|
|
Notional
Amount
|
|
Interest
Rate*
|
|
Effective
Date
|
|
Expiration
Date
|
|
|
May
2003
|
|
$
|
87,500
|
|
|
2.67%
|
|
|
February
2004
|
|
|
February
2007
|
|
|
May
2003
|
|
$
|
87,500
|
|
|
2.68%
|
|
|
February
2004
|
|
|
February
2007
|
|
|
March
2004
|
|
$
|
37,500
|
|
|
2.25%
|
|
|
March
2004
|
|
|
March
2007
|
|
|
March
2004
|
|
$
|
37,500
|
|
|
2.25%
|
|
|
March
2004
|
|
|
March
2007
|
|
|
September
2005
|
|
$
|
175,000
|
|
|
4.33%
|
|
|
February
2007
|
|
|
February
2009
|
|
|
September
2005
|
|
$
|
75,000
|
|
|
4.34%
|
|
|
March
2007
|
|
|
March
2009
|
|
|
December
2005
|
|
$
|
150,000
|
|
|
4.76%
|
|
|
June
2006
|
|
|
June
2009
|
|
|
*
plus
applicable margin.
All
the
interest rate swap agreements are considered highly effective as cash flow
hedges for a portion of our variable rate debt, and we apply hedge accounting
to
account for these instruments. The notional amounts and all other significant
terms of the swap agreements are matched to the provisions and terms of the
variable rate debt being hedged.
We
have
performed sensitivity analyses to determine how market rate changes will affect
the fair value of our market risk sensitive hedge positions and all other debt.
Such an analysis is inherently limited in that it reflects a singular,
hypothetical set of assumptions. Actual market movements may vary significantly
from our assumptions. Fair value sensitivity is not necessarily indicative
of
the ultimate cash flow or earnings effect we would recognize from the assumed
market rate movements. We are exposed to cash flow risk due to changes in
interest rates with respect to the net floating rate balances owed at
December 31, 2005, and September 30, 2006, of $321.4 million and
$24.4 million, respectively, including floating rate debt under our credit
facility, our 2022 Notes (redeemed as of September 30, 2006), various
floating rate notes payable to third parties and floating rate municipal bond
obligations, offset by our debt effectively fixed under interest rate swap
agreements. A one percent increase in interest rates on our variable-rate debt
as of December 31, 2005, and September 30, 2006, would decrease our
annual pre-tax income by approximately $3.2 million and $0.2 million,
respectively. All of our remaining debt instruments are at fixed rates, or
effectively fixed under the interest rate swap agreements described above;
therefore, changes in market interest rates under these instruments would not
significantly impact our cash flows or results of operations.
Although
fuel and energy costs account for a relatively small portion of our total
revenues, the market price of diesel fuel is unpredictable and can fluctuate
significantly. We purchase a majority of our fuel at market prices. Continued
increases in the price of fuel could adversely affect our business and reduce
our operating margins. A $0.10 per gallon increase in the price of fuel over
a
one-year period would decrease our annual pre-tax income by approximately
$2.0 million.
We
market
a variety of recyclable materials, including cardboard, office paper, plastic
containers, glass bottles and ferrous and aluminum metals. We own and operate
26 recycling processing operations and sell other collected recyclable
materials to third parties for processing before resale. Certain of our
municipal recycling contracts in the state of Washington specify benchmark
resale prices for recycled commodities. If the prices we actually receive for
the processed recycled commodities collected under the contract exceed the
prices specified in the contract, we share the excess with the municipality,
after recovering any previous shortfalls resulting from actual market prices
falling below the prices specified in the contract. To reduce our exposure
to
commodity price risk with respect to recycled materials, we have adopted a
pricing strategy of charging collection and processing fees for recycling volume
collected from third parties. Although there can be no assurance of market
recoveries, in the event of a decline in recycled commodity prices, a 10%
decrease in average recycled commodity prices from the prices that were in
effect at September 30, 2005 and 2006 would have had a $1.8 million
impact on revenues for the nine months ended September 30, 2005 and 2006.
As
required by Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act
of 1934, as amended, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined
in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
fiscal quarter covered by this quarterly report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
as
of September 30, 2006, that our disclosure controls and procedures were
effective at the reasonable assurance level such that information required
to be
disclosed in our Exchange Act reports: (1) is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms;
and
(2) is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
During
the quarter ended September 30, 2006, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART
II -
OTHER INFORMATION
There
have not been any material developments in the legal proceeding involving
Colonias
Dev. Council v. Rhino Envtl. Servs., Inc. (In re Rhino Envtl.
Servs.)
described in our annual report on Form 10-K for the fiscal year ended December
31, 2005, and our quarterly report on Form 10-Q for the fiscal quarter ended
March 31, 2006. Refer to Note 13 of the Notes to Condensed Consolidated
Financial Statements in Part I of this Report on Form 10-Q for a description
of
this legal proceeding.
There
have not been any material developments in the legal proceeding involving
Board
of Commissioners of Sumner County, Kansas, Tri-County Concerned Citizens and
Dalton Holland v. Roderick Bremby, Secretary of the Kansas Department of Health
and Environment, et al.)
described in our annual report on Form 10-K for the fiscal year ended December
31, 2005, and our quarterly report on Form 10-Q for the fiscal quarter ended
March 31, 2006. Refer to Note 13 of the Notes to Condensed Consolidated
Financial Statements in Part I of this Report on Form 10-Q for a description
of
this legal proceeding.
There
have not been any material developments in the legal proceeding involving
Resourceful
Environmental Services, Inc. v. Waste Connections, et al.
described in our annual report on Form 10-K for the fiscal year ended December
31, 2005. Refer to Note 13 of the Notes to Condensed Consolidated Financial
Statements in Part I of this Report on Form 10-Q for a description of this
legal proceeding.
On
August 24, 2006, a purported shareholder derivative complaint was filed in
the Superior Court of California, County of Sacramento, naming certain of
our
current and former directors and officers as defendants, and naming us as
a
nominal defendant. The plaintiff in this suit purports to be one of our
stockholders who seeks to bring claims on behalf of the Company against the
defendants. The suit, captioned
Banister v. Mittelstaedt, et al.,
alleges
breach of fiduciary duty and related claims based on alleged wrongdoing in
connection with the timing of certain stock option grants. The complaint
seeks to recover unspecified damages and other relief on behalf of ourselves,
as
well as payment of costs and attorneys fees. On October 25, 2006, a
second purported shareholder derivative complaint was filed, naming us as
a
nominal defendant. The suit, captioned
Travis v. Mittelstaedt, et al.
and
filed in the United States District Court for the Eastern District of
California, alleges violations of various federal and California securities
laws, breach of fiduciary duty, and related claims in connection with the
timing
of certain stock option grants. On October 30, 2006, we were served
with a third purported shareholder derivative complaint, naming us as a nominal
defendant. The suit, captioned
Nichols v. Mittelstaedt et al.
and
filed in the Superior Court of California, County of Sacramento, contains
allegations substantially similar to the earlier suits. We have been
informed that on October 30, 2006, a fourth purported shareholder
derivative suit, captioned Pierce
v. Mittelstaedt et al.,
was
filed in the Superior Court of California, County of Sacramento. This suit
contains allegations substantially similar to the earlier suits. As
is typical in this type of litigation, additional suits containing substantially
similar allegations may be filed in the future. We have completed a review
of our historical stock option granting practices, including all option
grants since our initial public offering in May 1998, and reported the
results of the review to the Audit Committee of our Board of Directors.
The review identified a small number of immaterial exceptions to non-cash
compensation expense attributable to administrative and clerical errors.
These
exceptions are not material to our current and historical financial
statements, and the Audit Committee concluded that no further action was
necessary. As with any litigation proceeding, we cannot predict with
certainty the eventual outcome of this pending litigation.
Additionally,
we are a party to various legal and administrative proceedings resulting from
the ordinary course of business and the extensive governmental regulation of
the
solid waste industry. Our management does not believe that these proceedings,
either individually or in the aggregate, are likely to have a material adverse
effect on our business, financial condition, operating results or cash flows.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
On
May 3, 2004, we announced that our Board of Directors authorized a common
stock repurchase program for the repurchase of up to $200 million of our
common stock over a two-year period. On July 25, 2005, we announced that
our Board of Directors approved an increase in, and extension of, the common
stock repurchase program. On October 23, 2006, we announced that our Board
of Directors authorized an additional increase in, and extension of, the common
stock repurchase program. We are now authorized to purchase up to
$500 million of our common stock through December 31, 2008. Under the
program, we may repurchase stock 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 our common stock and overall market conditions.
As of September 30, 2006, we have repurchased 8.4 million shares of
our common stock at a cost of $287.0 million, $278.1 million of which
was under the program. The table below reflects repurchases we have made for
the
three months ended September 30, 2006:
(In
thousands, except share and per share amounts)
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
Per
Share(1)
|
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program
|
|
Maximum
Approximate
Dollar
Value
of Shares that
May
Yet Be
Purchased
Under
the
Program(2)
|
|
7/1/06
- 7/31/06
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
234,442
|
|
8/1/06
- 8/31/06
|
|
|
87,900
|
|
|
36.15
|
|
|
87,900
|
|
|
231,265
|
|
9/1/06
- 9/30/06
|
|
|
260,000
|
|
|
35.86
|
|
|
260,000
|
|
|
221,941
|
|
|
|
|
347,900
|
|
|
35.93
|
|
|
347,900
|
|
|
|
|
|
(1) |
This
amount represents the weighted average price paid per common share.
This
price includes a per share commission paid for all repurchases.
|
|
(2) |
Gives
effect to increase in authorization under the program announced on
October 23, 2006.
|
Exhibit
Number
|
|
Description
of Exhibits
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the Registrant (incorporated
by reference to the exhibit filed with the
Registrant’s
Form T-3 filed on June 16, 2004)
|
3.2
|
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference
to the
exhibit filed with the Registrant’s Form 10-Q
filed
on July 22,
2004)
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rules
13a-14(a)/15d-14(a)
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rules
13a-14(a)/15d-14(a)
|
32.1
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. §1350
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
November 14, 2006
|
BY:
|
/s/ Ronald J. Mittelstaedt
|
|
|
Ronald
J. Mittelstaedt,
|
|
|
Chief
Executive Officer
|
Date:
November 14, 2006
|
BY:
|
/s/ Worthing F. Jackman
|
|
|
Worthing
F. Jackman,
|
|
|
Executive
Vice President and
Chief
Financial Officer
|
Page
43