t15454_10q.htm
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM 10-Q
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(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,
2007
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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
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Commission
file number 1-31507
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WASTE
CONNECTIONS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of incorporation or
organization)
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94-3283464
(I.R.S.
Employer Identification No.)
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35
Iron Point Circle, Suite 200, Folsom,
CA 95630
(Address
of principal executive
offices) (Zip
code)
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(916)
608-8200
(Registrant’s
telephone number, including area code)
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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.
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Yes þ No ¨
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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):
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Large
accelerated filer þ Accelerated
filer £ Non-accelerated
filer £
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Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act).
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Yes ¨ No þ
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Indicate
the number of shares outstanding of each of the issuer's classes
of common
stock:
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As
of October 15,
2007: 67,967,043 shares of
common stock
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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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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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16
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27
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29
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PART II
– OTHER INFORMATION
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30
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31
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32
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33
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34
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PART I
– FINANCIAL INFORMATION
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share and per share amounts)
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December 31,
2006
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September 30,
2007
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ASSETS
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Current
assets:
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Cash
and equivalents
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$ |
34,949
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$ |
13,089
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Accounts
receivable, net of allowance for doubtful accounts of $3,489 and
$4,098 at
December 31, 2006 and September 30, 2007,
respectively
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100,269
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124,616
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Deferred
income taxes
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9,373
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12,645
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Prepaid
expenses and other current assets
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15,642
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14,726
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Total
current
assets
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160,233
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165,076
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Property
and equipment, net
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736,428
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855,872
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Goodwill
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750,397
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784,948
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Intangible
assets, net
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86,098
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90,252
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Restricted
assets
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15,917
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16,999
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Other
assets, net
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24,818
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22,129
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$ |
1,773,891
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$ |
1,935,276
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$ |
53,010
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$ |
58,498
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Book
overdraft
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-
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6,495
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Accrued
liabilities
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57,810
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70,250
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Deferred
revenue
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32,161
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41,620
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Current
portion of long-term debt and notes payable
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6,884
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12,098
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Total
current
liabilities
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149,865
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188,961
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Long-term
debt and notes payable
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637,308
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687,595
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Other
long-term liabilities
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16,712
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30,759
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Deferred
income taxes
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205,532
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212,348
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Total
liabilities
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1,009,417
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1,119,663
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Commitments
and contingencies (Note 12)
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Minority
interests
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27,992
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28,700
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Stockholders’
equity:
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Preferred
stock: $0.01 par value per share; 7,500,000 shares authorized;
none issued
and outstanding
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-
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-
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Common
stock: $0.01 par value per share; 150,000,000 shares authorized;
68,266,038 and 67,882,968 shares issued and outstanding
at
December 31,
2006 and September 30, 2007, respectively
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455
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679
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Additional
paid-in capital
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310,229
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284,326
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Retained
earnings
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422,731
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501,727
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Accumulated
other comprehensive income
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3,067
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181
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Total
stockholders’
equity
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736,482
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786,913
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$ |
1,773,891
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$ |
1,935,276
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share and per share amounts)
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Three
months ended September 30,
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Nine
months ended September 30,
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2006
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2007
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2006
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2007
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Revenues
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$ |
216,547
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$ |
250,775
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$ |
613,686
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$ |
710,811
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Operating
expenses:
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Cost
of operations
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128,709
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145,790
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368,346
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416,234
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Selling,
general and administrative
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21,424
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25,782
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61,846
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74,482
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Depreciation
and amortization
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19,072
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22,196
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56,040
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62,716
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Loss
(gain) on disposal of assets
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(189 |
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(97 |
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(35 |
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95
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Operating
income
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47,531
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57,104
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127,489
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157,284
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Interest
expense
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(7,572 |
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(8,717 |
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(21,685 |
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(24,830 |
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Other
income (expense), net
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141
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(174 |
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(3,840 |
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243
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Income
before income taxes and minority interests
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40,100
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48,213
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101,964
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132,697
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Minority
interests
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(3,719 |
) |
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(4,175 |
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(9,748 |
) |
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(11,145 |
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Income
from operations before income taxes
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36,381
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44,038
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92,216
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121,552
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Income
tax provision
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(14,508 |
) |
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(15,356 |
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(35,420 |
) |
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(45,225 |
) |
Net
income
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$ |
21,873
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$ |
28,682
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$ |
56,796
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$ |
76,327
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Basic
earnings per common share
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$ |
0.32
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$ |
0.42
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$ |
0.83
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$ |
1.12
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Diluted
earnings per common share
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$ |
0.31
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$ |
0.41
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$ |
0.81
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$ |
1.08
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Shares
used in calculating basic income per share
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68,235,948
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68,022,587
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68,166,312
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68,358,534
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Shares
used in calculating diluted income per share
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69,895,736
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69,868,793
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70,404,437
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70,350,770
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WASTE
CONNECTIONS, INC.
Nine
months ended September 30, 2007
(Unaudited)
(In
thousands, except share amounts)
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STOCKHOLDERS’
EQUITY
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Accumulated
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Common
Stock
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Additional
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Other
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Comprehensive
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Paid-In
|
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Comprehensive
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Retained
|
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Income
|
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Earnings
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Total
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Balances
at December 31, 2006
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|
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|
68,266,038
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$ |
455
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$ |
310,229
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$ |
3,067
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$ |
422,731
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$ |
736,482
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Stock
split
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|
-
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|
228
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-
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-
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(228 |
) |
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-
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Vesting
of restricted stock
|
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|
112,148
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|
1
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|
(1 |
) |
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|
-
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|
-
|
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|
-
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Cancellation
of unvested restricted stock
|
|
|
|
-
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|
-
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|
(1,577 |
) |
|
|
-
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|
-
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|
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|
(1,577 |
) |
Stock-based
compensation
|
|
|
|
-
|
|
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|
-
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|
4,636
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|
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|
-
|
|
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|
-
|
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|
4,636
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|
Exercise
of stock options and warrants
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|
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|
1,603,112
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|
16
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|
24,813
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|
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|
-
|
|
|
|
-
|
|
|
|
24,829
|
|
Excess
tax benefit associated with equity-based compensation
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,190
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|
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|
-
|
|
|
|
-
|
|
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|
10,190
|
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Repurchase
of common stock
|
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|
(2,098,330 |
) |
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(21 |
) |
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|
(64,017 |
) |
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|
-
|
|
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|
-
|
|
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|
(64,038 |
) |
Issuance
of common stock warrants to consultants
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|
-
|
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|
-
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|
53
|
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|
-
|
|
|
|
-
|
|
|
|
53
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|
Cumulative
change from adoption of accounting policy
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,897
|
|
|
|
2,897
|
|
Amounts
reclassified into earnings, net of taxes
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,989 |
) |
|
|
-
|
|
|
|
(1,989 |
) |
Change
in fair value of interest rate swaps, net of taxes
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(897 |
) |
|
|
-
|
|
|
|
(897 |
) |
Net
income
|
|
$ |
76,327
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,327
|
|
|
|
76,327
|
|
Other
comprehensive loss
|
|
|
(4,687 |
) |
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income
tax effect of other comprehensive loss
|
|
|
1,801
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Comprehensive
income
|
|
$ |
73,441
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances
at September 30, 2007
|
|
|
|
|
67,882,968
|
|
|
$ |
679
|
|
|
$ |
284,326
|
|
|
$ |
181
|
|
|
$ |
501,727
|
|
|
$ |
786,913
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands)
|
|
Nine
months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
56,796
|
|
|
$ |
76,327
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Loss
(gain) on disposal of assets
|
|
|
(35 |
) |
|
|
95
|
|
Depreciation
|
|
|
52,990
|
|
|
|
59,553
|
|
Amortization
of intangibles
|
|
|
3,050
|
|
|
|
3,163
|
|
Deferred
income taxes, net of acquisitions
|
|
|
11,524
|
|
|
|
7,984
|
|
Minority
interests
|
|
|
9,748
|
|
|
|
11,145
|
|
Amortization
of debt issuance costs
|
|
|
5,758
|
|
|
|
1,695
|
|
Stock-based
compensation
|
|
|
2,562
|
|
|
|
4,636
|
|
Interest
income on restricted assets
|
|
|
(462 |
) |
|
|
(332 |
) |
Closure
and post-closure accretion
|
|
|
476
|
|
|
|
769
|
|
Excess
tax benefit associated with equity-based compensation
|
|
|
(5,660 |
) |
|
|
(10,190 |
) |
Net
change in operating assets and liabilities, net of
acquisitions
|
|
|
15,593
|
|
|
|
15,220
|
|
Net
cash provided by operating activities
|
|
|
152,340
|
|
|
|
170,065
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments
for acquisitions, net of cash acquired
|
|
|
(35,948 |
) |
|
|
(85,652 |
) |
Capital
expenditures for property and equipment
|
|
|
(73,482 |
) |
|
|
(96,106 |
) |
Proceeds
from disposal of assets
|
|
|
1,950
|
|
|
|
955
|
|
Increase
in restricted assets, net of interest income
|
|
|
(792 |
) |
|
|
(750 |
) |
Increase
in other assets
|
|
|
(321 |
) |
|
|
(512 |
) |
Net
cash used in investing activities
|
|
|
(108,593 |
) |
|
|
(182,065 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
655,996
|
|
|
|
574,000
|
|
Principal
payments on notes payable and long-term debt
|
|
|
(608,141 |
) |
|
|
(549,748 |
) |
Change
in book overdraft
|
|
|
(6,143 |
) |
|
|
6,495
|
|
Proceeds
from option and warrant exercises
|
|
|
26,048
|
|
|
|
24,829
|
|
Excess
tax benefit associated with equity-based compensation
|
|
|
5,660
|
|
|
|
10,190
|
|
Distributions
to minority interest holders
|
|
|
(7,840 |
) |
|
|
(10,437 |
) |
Payments
for repurchase of common stock
|
|
|
(100,245 |
) |
|
|
(64,038 |
) |
Debt
issuance costs
|
|
|
(6,069 |
) |
|
|
(1,151 |
) |
Net
cash used in financing activities
|
|
|
(40,734 |
) |
|
|
(9,860 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and equivalents
|
|
|
3,013
|
|
|
|
(21,860 |
) |
Cash
and equivalents at beginning of period
|
|
|
7,514
|
|
|
|
34,949
|
|
Cash
and equivalents at end of period
|
|
$ |
10,527
|
|
|
$ |
13,089
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activity:
|
|
|
|
|
|
|
|
|
Liabilities
assumed and notes payable issued to sellers of businesses
acquired
|
|
$ |
1,213
|
|
|
$ |
44,861
|
|
The
accompanying notes are an integral part of these condensed 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, 2007 and for the three and nine month periods ended
September 30, 2006 and 2007. In the opinion of management, the
accompanying balance sheets and related interim statements of income, cash
flows
and stockholders’ equity include all adjustments, consisting only of normal
recurring items, necessary for their fair presentation in conformity with U.S.
generally accepted accounting principles. The Company’s condensed
consolidated balance sheet as of December 31, 2006 was derived from audited
financial statements, but does not include all disclosures required by U.S.
generally accepted accounting principles. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses. Examples include
accounting for landfills, self-insurance, deferred taxes, effective tax rate,
allocation of acquisition purchase price and asset impairments. Other
areas that involve estimation are the amount of potential exposure the Company
may have with respect to litigation, claims and assessments in accordance with
FASB Statement No. 5, Accounting for Contingencies, and the
potential outcome of future tax consequences of events that have been recognized
in the Company’s financial statements or tax returns. Actual results and
outcomes may differ from management’s estimates and
assumptions.
Interim
results are not necessarily indicative of results for a full year. The
information included in this Quarterly Report on Form 10-Q should be read
in conjunction with Management’s Discussion and Analysis and the financial
statements and notes thereto included in the Company’s 2006 Annual Report on
Form 10-K.
2. NEW
ACCOUNTING STANDARDS
FSP
EITF 00-19-2. In December 2006, the Financial Accounting
Standards Board (the “FASB”) issued FASB Staff Position EITF 00-19-2,
Accounting for Registration Payment Arrangements (“FSP
EITF 00-19-2”), which provides guidance on the accounting for registration
payment arrangements. FSP EITF 00-19-2 specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or
other
agreement, should be separately recognized and measured in accordance with
FASB
Statement No. 5, Accounting for Contingencies. The adoption
of FSP EITF 00-19-2 on January 1, 2007 did not have an impact on the
Company’s financial position or results of operations.
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 U.S. 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, as the FASB 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.
SFAS 159.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of
FASB
Statement No. 115 (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value that are not currently required to be measured at fair
value. SFAS 159 permits all entities to choose, at specified
election dates, to measure eligible items at fair value (the “fair value
option”). A business entity shall report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date. Upfront costs and fees related to items for
which the fair value option is elected are recognized in earnings as incurred
and not deferred. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities
that
choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. The Company is
currently evaluating whether to adopt the fair value option permitted under
this
statement, including assessing the impact that the fair value option would
have
on the Company's financial position and results of operations if
adopted.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
3. STOCK-BASED
COMPENSATION
A
summary
of outstanding restricted stock and restricted stock units under the 2002
Restricted Stock Plan and the Second Amended and Restated 2004 Equity Incentive
Plan at December 31, 2006 and September 30, 2007, and changes during
the nine month period ended September 30, 2007, is presented
below:
|
|
Unvested
Shares
|
|
|
Outstanding
at December 31, 2006
|
|
568,940
|
|
|
Granted
|
|
421,602
|
|
|
Forfeited
|
|
(17,382
|
) |
|
Vested
|
|
(165,651
|
) |
|
Outstanding
at September 30, 2007
|
|
807,509
|
|
|
The
weighted average grant date fair value per share for the 421,602 shares of
common stock underlying restricted stock units granted during the nine month
period ended September 30, 2007 was $29.04. During the nine
months ended September 30, 2006 and 2007, the Company's stock-based
compensation expense from restricted stock and restricted stock units was $2,138
and $4,139, respectively.
4. LANDFILL
ACCOUNTING
At
September 30, 2007, the Company owned 27 landfills, and operated, but
did not own, three landfills under life-of-site operating agreements and
seven landfills under limited-term operating agreements. The
Company’s landfills have site costs with a net book value of $482,923 at
September 30, 2007. 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 seven landfills operated under limited-term operating agreements,
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. At its owned landfills and landfills operated
under life-of-site operating agreements, the Company’s landfill depletion rates
are based on the remaining disposal capacity, considering both permitted and
expansion airspace. At its landfills operated under limited-term operating
agreements that have capitalized expenditures, the Company’s landfill depletion
rates are based on the term of the operating agreement. 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.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
Based
on
remaining permitted capacity as of September 30, 2007, 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 47 years. The Company is currently seeking to expand
permitted capacity at four of its owned landfills and one landfill that it
operates under a life-of-site operating agreement, 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 51 years,
with lives ranging from 6 to 206 years.
During
the nine months ended September 30, 2006 and 2007, the Company expensed
approximately $13,314 and $15,436, respectively, or an average of $2.48 and
$2.53 per ton consumed, respectively, related to landfill depletion at
owned landfills and landfills operated under life-of-site
agreements.
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
2007 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, 2006 and 2007, the Company expensed approximately $476
and $769, respectively, or an average of $0.09 and $0.13 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, 2006 to September 30,
2007:
Final
capping, closure and post-closure liability at December 31,
2006
|
|
$
|
11,638
|
|
|
Adjustments
to final capping, closure and post-closure liabilities
|
|
|
1,223
|
|
|
Assumption
of closure liabilities from acquisitions
|
|
|
3,404
|
|
|
Liabilities
incurred
|
|
|
955
|
|
|
Accretion
expense
|
|
|
769
|
|
|
Closure
expenditures
|
|
|
(955
|
) |
|
Final
capping, closure and post-closure liability at September 30,
2007
|
|
$
|
17,034
|
|
|
The
Company recorded adjustments to its final capping, closure and post-closure
liabilities due to revisions in cost estimates, a decrease in the expansion
airspace at a landfill for which an expansion is being pursued, and estimated
increases in annual volume at an owned landfill, causing the remaining life,
in
years, of the landfill to decrease. The Company performs its annual review
of its cost and capacity estimates in the first quarter of each
year.
At
September 30, 2007, $14,836 of the Company’s restricted assets balance was
for purposes of settling future final capping, closure and post-closure
liabilities.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
5. LONG-TERM
DEBT
Long-term
debt consists of the following:
|
|
December 31,
2006
|
|
|
September 30,
2007
|
|
Revolver
under Credit Facility, bearing interest ranging from 5.75% to
8.25%*
|
|
$ |
400,000
|
|
|
$ |
445,000
|
|
2026
Senior Convertible Notes, bearing interest at 3.75%
|
|
|
200,000
|
|
|
|
200,000
|
|
2001
Wasco Bonds, bearing interest from 7.0% to
7.25%*
|
|
|
11,740
|
|
|
|
11,285
|
|
California
Tax-Exempt Bonds, bearing interest ranging from 3.49% to
3.97%*
|
|
|
20,090
|
|
|
|
33,225
|
|
Notes
payable to sellers in connection with acquisitions, bearing interest
at
5.5% to 7.5%*
|
|
|
4,867
|
|
|
|
4,050
|
|
Notes
payable to third parties, bearing interest at 5.1% to
11.0%*
|
|
|
7,495
|
|
|
|
6,133
|
|
|
|
|
644,192
|
|
|
|
699,693
|
|
Less – current
portion
|
|
|
(6,884 |
) |
|
|
(12,098 |
) |
|
|
$ |
637,308
|
|
|
$ |
687,595
|
|
* Interest
rates in the table above represent the range of interest rates incurred during
the nine month period ended September 30, 2007.
In
July
2007, the Company completed a $15,500 tax-exempt bond financing to fund the
costs of acquisition of trucks and other solid waste vehicles and equipment
and
to pay certain costs associated with the issuance of the bonds. The bonds
mature on August 1, 2018, and bear interest at variable rates based on
market conditions for California tax-exempt bonds. The bonds are
collateralized by a letter of credit issued by Bank of America under the
Company’s credit facility for $15,678.
On
September 27, 2007, the Company refinanced its existing revolving credit
facility and entered into an uncollateralized Revolving Credit Agreement with
a
syndicate of banks for which Bank of America acted as agent. The Company’s
previous senior collateralized credit facility included a $750,000 senior
revolving credit facility, maturing on January 12, 2012, with a syndicate
of banks for which Bank of America acted as agent. In addition to being
uncollateralized, the new credit agreement reduces the Company’s interest rate
margins from those under its previous credit facility, increases the capacity
of
the credit facility to $800,000, and extends the maturity date for the revolving
credit facility to September 27, 2012. The Company retains under the
new credit agreement the ability to increase borrowings under the revolving
credit facility from $800,000 to $1,000,000, subject to certain conditions
including that no default, as defined in the agreement, has occurred, although
no existing lender has any obligation to increase its commitment. The
interest rate applicable under the revolving credit facility of the new credit
agreement is currently the Eurodollar rate plus 0.625%, a 0.25% reduction in
the
corresponding interest rate under the Company’s previous credit
facility.
6. ACQUISITIONS
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, 2007, the Company acquired eight
non-hazardous solid waste collection, transfer, disposal and recycling
businesses. Aggregate consideration for the acquisitions consisted of
$84,889 in cash (net of cash acquired), common stock warrants valued at $53
and
the assumption of debt totaling $35,442. During the nine months ended
September 30, 2007, the Company paid or adjusted $763 of
acquisition-related liabilities accrued at December 31, 2006.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
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. Substantially
all of the goodwill is expected to be deductible for tax
purposes. 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, 2007, the Company had four 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 preliminary purchase price allocations for acquisitions consummated
in
the nine months ended September 30, 2007 is as follows:
|
|
2007
Acquisitions
|
|
|
Acquired
Assets:
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
5,338
|
|
|
Prepaid
expenses and other current assets
|
|
|
683
|
|
|
Property
and equipment
|
|
|
81,913
|
|
|
Goodwill
|
|
|
34,552
|
|
|
Long-term
franchise agreements and contracts
|
|
|
2,921
|
|
|
Other
intangibles
|
|
|
540
|
|
|
Non-competition
agreements
|
|
|
3,856
|
|
|
Assumed
Liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
|
(2,009
|
) |
|
Accrued
liabilities
|
|
|
(2,926
|
) |
|
Debt
and other liabilities assumed
|
|
|
(35,442
|
) |
|
Deferred
revenue
|
|
|
(3,649
|
) |
|
Deferred
taxes
|
|
|
(835
|
) |
|
Total
consideration, net
|
|
$
|
84,942
|
|
|
The
acquisitions completed during the nine months ended September 30, 2007,
were not material to the Company's results of operations.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
7. 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, 2006 and 2007:
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for basic and diluted earnings per share
|
|
$ |
21,873
|
|
|
$ |
28,682
|
|
|
$ |
56,796
|
|
|
$ |
76,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares outstanding
|
|
|
68,235,948
|
|
|
|
68,022,587
|
|
|
|
68,166,312
|
|
|
|
68,358,534
|
|
Dilutive
effect of 2022 Convertible Subordinated Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
393,026
|
|
|
|
-
|
|
Dilutive
effect of stock options and warrants
|
|
|
1,522,161
|
|
|
|
1,483,459
|
|
|
|
1,729,809
|
|
|
|
1,662,071
|
|
Dilutive
effect of restricted stock
|
|
|
137,627
|
|
|
|
362,747
|
|
|
|
115,290
|
|
|
|
330,165
|
|
Diluted
shares outstanding
|
|
|
69,895,736
|
|
|
|
69,868,793
|
|
|
|
70,404,437
|
|
|
|
70,350,770
|
|
The
Company’s Floating Rate Convertible Subordinated Notes due 2022 (the
“2022 Notes”) were convertible, under certain circumstances, into a maximum
of 8,137,002 shares of common stock until they were redeemed in May and June
2006. The 2022 Notes 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 (“EITF 04-8”), the Company has included the
dilutive effect of the conversion value in excess of the principal value of
the
notes.
The
Company’s 3.75% Convertible Senior Notes due 2026 (the “2026 Notes”) are
convertible, under certain circumstances, into a maximum of 5,882,354 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 three and nine months ended
September 30, 2006 and 2007 because the conversion value was not in excess
of the principal value of the notes. In addition, the conversion feature
of the 2026 Notes meets 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, 2006 and 2007, stock options and warrants
to purchase 27,170 and zero shares of common stock, respectively, were excluded
from the computation of diluted earnings per share as they were
anti-dilutive. For the nine months ended September 30, 2006 and 2007,
stock options and warrants to purchase 24,188 and 4,608 shares of common
stock, respectively, were excluded from the computation of diluted earnings
per
share as they were anti-dilutive.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
8. 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, 2006 and 2007 is
as follows:
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Net
income
|
|
$ |
21,873
|
|
|
$ |
28,682
|
|
|
$ |
56,796
|
|
|
$ |
76,327
|
|
Unrealized
loss on interest rate swaps, net of tax benefit of $2,682 and $1,761
for
the three months ended September 30, 2006 and 2007, respectively, and
$725 and $1,801 for the nine months ended September 30, 2006 and
2007, respectively
|
|
|
(4,651 |
) |
|
|
(2,789 |
) |
|
|
(1,318 |
) |
|
|
(2,886 |
) |
Comprehensive
income
|
|
$ |
17,222
|
|
|
$ |
25,893
|
|
|
$ |
55,478
|
|
|
$ |
73,441
|
|
The
components of other comprehensive income and related tax effects for the three
and nine months ended September 30, 2006 and 2007 are as
follows:
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2007
|
|
|
|
Gross
|
|
Tax
effect
|
|
Net
of tax
|
|
|
Amounts
reclassified into earnings
|
$
|
(987 |
) |
$
|
382
|
|
$
|
(605 |
) |
|
Changes
in fair value of interest rate swaps
|
|
(3,563 |
) |
|
1,379
|
|
|
(2,184 |
) |
|
|
$
|
(4,550 |
) |
$
|
1,761
|
|
$
|
(2,789 |
) |
|
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
|
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 |
) |
|
|
|
|
|
|
|
|
Nine months
ended
September 30, 2007
|
|
|
Gross
|
|
Tax
effect
|
|
Net
of tax
|
|
Amounts
reclassified into earnings
|
|
$ |
(3,245 |
) |
|
$ |
1,256
|
|
|
|
$ |
(1,989 |
) |
Changes
in fair value of interest rate swaps
|
|
|
(1,442 |
) |
|
|
545
|
|
|
|
|
(897 |
) |
|
|
$ |
(4,687 |
) |
|
$ |
1,801
|
|
|
|
$ |
(2,886 |
) |
The
estimated amount of the existing unrealized gains as of September 30, 2007
(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 $1,016. The timing of actual amounts
reclassified into earnings is dependent on future movements in interest
rates.
9. INCOME
TAXES
The
Company adopted FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”), at the beginning of fiscal year 2007.
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. As a result of the
implementation of FIN 48, the changes to the Company’s reserve for
uncertain tax positions was accounted for as a $2,897 adjustment to increase
the
beginning balance of retained earnings on the Company’s balance sheet. At
the beginning of 2007, the Company had approximately $6,702 of total gross
unrecognized tax benefits. Of this total, $2,618 (net of the federal
benefit on state issues) represents the amount of unrecognized tax benefits
that, if recognized, would favorably affect the effective income tax rate in
any
future periods.
The
Company and its subsidiaries are subject to U.S. federal income tax as well
as
to income tax of multiple state jurisdictions. The Company has concluded
all U.S. federal income tax matters for years through 2003. The 2004 U.S.
federal income tax return has been under examination by the Internal Revenue
Service. The Company has received preliminary notice from the Internal
Revenue Service that no changes are proposed as a result of such
examination. All material state and local income tax
matters have been concluded for years through 2002.
The
Company’s continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense. The Company had approximately
$453 accrued for interest, net of tax, and no accrual for penalties at the
beginning of fiscal year 2007. The Company does not anticipate the total
amount of unrecognized tax benefits will significantly change by
September 30, 2008.
During
the three and nine months ended September 30, 2007, the Company recorded
adjustments to income tax expense resulting from the reconciliation of its
current and deferred income tax liability accounts, the reversal of certain
tax
contingencies that expired in 2007, and the reconciliation of the income tax
provision to the 2006 federal tax return, which was filed in September
2007. The net impact of these adjustments was a decrease in income tax
expense of $2,000 and $2,229 for the three and nine months ended
September 30, 2007, respectively.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
10. STOCK
SPLIT
On
February 12, 2007, the Company announced that its Board of Directors had
authorized a three-for-two stock split of its common stock, in the form of
a 50%
stock dividend, payable to stockholders of record as of February 27,
2007. Shares resulting from the split were issued on March 13,
2007. In connection therewith, the Company transferred $228 from retained
earnings to common stock, representing the par value of additional shares
issued. All share and per share amounts for all periods presented have
been adjusted to reflect the stock split.
11. SHARE
REPURCHASE PROGRAM
The
Company’s Board of Directors has authorized a common stock repurchase program
for the repurchase of up to $500,000 of its common stock through
December 31, 2008. 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 common stock and overall market conditions. During the nine
months ended September 30, 2006 and 2007, the Company repurchased 4,023,000
and 2,098,330 shares, respectively, of its common stock under this program
at a cost of $100,245 and $64,038, respectively. Additionally, as a result
of the stock split, fractional shares equal to 3,040 whole shares were
repurchased at a price of $132. As of September 30, 2007, the
remaining maximum dollar value of shares available for purchase under the
program is approximately $158,035. The Company’s policy related to
repurchases of its common stock is to charge any excess of cost over par value
entirely to additional paid-in capital.
12. 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 (the “Department”)
approved the permit for the facility on January 30, 2002. Colonias
Development Council (“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 parties have agreed to
reschedule the hearing for July 2008 to allow the Company time to explore a
possible relocation of the landfill. At September 30, 2007, the
Company had $8,882 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 $8,882 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. 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 KDHE 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. 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 appealed this decision
to the Kansas Court of Appeals. Oral arguments were held on June 7,
2007, and on October 12, 2007, the Court of Appeals issued an opinion
reversing and remanding the District Court's decision. The Company is
considering appealing the decision to the Kansas Supreme Court. While the
Company believes that it will prevail in this case, 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. The Company cannot
estimate the amount of any such material adverse effect.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
On
October 25, 2006, a purported shareholder derivative complaint captioned
Travis v. Mittelstaedt, et al. was filed in the United States District
Court for the Eastern District of California, naming certain of the Company’s
directors and officers as defendants, and naming the Company as a nominal
defendant. On January 30, 2007, a similar purported derivative
action, captioned Pierce and Banister v. Mittelstaedt, et al., was
filed in the same federal court as the Travis case. The
Travis and Pierce and Banister cases have been
consolidated. The consolidated complaint in the action alleges violations
of various federal and California securities laws, breach of fiduciary duty,
waste, and related claims in connection with the timing of certain stock option
grants. The consolidated complaint names as defendants certain of the
Company’s current and former directors and officers, and names the Company as a
nominal defendant. On June 22, 2007, the Company and the individual
defendants filed motions to dismiss the consolidated action. The motions
are pending.
On
October 30, 2006, the Company was served with another purported shareholder
derivative complaint, naming certain of the Company’s current and former
directors and officers as defendants, and 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 consolidated federal action described
above. On April 3, 2007, a fourth purported derivative action,
captioned Priest v. Mittelstaedt, et al., was filed in the Superior
Court of California, County of Sacramento, and contains allegations
substantially similar to the consolidated federal action and the
Nichols suit. The Nichols and Priest suits have
been stayed pending the outcome of the consolidated federal action. The
Company has completed a review of its historical stock option granting
practices, including all option grants since its initial public offering in
May
1998, and reported the results of the review to the Audit Committee of its
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 Company’s
current and historical financial statements, 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, nor can it estimate the amount of any losses that might
result.
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, 2007, 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.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
13. REVENUE
BY SERVICE TYPE
The
following table shows the Company’s total reported revenues by service line and
intercompany eliminations:
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Collection
|
|
$ |
157,891
|
|
|
$ |
180,333
|
|
|
$ |
449,541
|
|
|
$ |
512,886
|
|
Disposal
and transfer
|
|
|
69,016
|
|
|
|
78,861
|
|
|
|
193,608
|
|
|
|
224,072
|
|
Recycling
and other
|
|
|
19,758
|
|
|
|
24,605
|
|
|
|
57,082
|
|
|
|
69,765
|
|
Total
|
|
$ |
246,665
|
|
|
$ |
283,799
|
|
|
$ |
700,231
|
|
|
$ |
806,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
elimination
|
|
$ |
30,118
|
|
|
$ |
33,024
|
|
|
$ |
86,545
|
|
|
$ |
95,912
|
|
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) increases in insurance costs and the amount that we self-insure for
various risks could reduce our operating margins and reported earnings;
(5) our financial results are based upon estimates and assumptions that may
differ from actual results; (6) efforts by labor unions could divert
management attention and adversely affect operating results; (7) we may
lose contracts or permits through competitive bidding, early termination or
governmental action; (8) our results are vulnerable to economic conditions
and seasonal factors affecting the regions in which we operate; (9) we may
be subject in the normal course of business to judicial and administrative
proceedings that could interrupt our operations, require expensive remediation
and create negative publicity; (10) competition for acquisition candidates,
consolidation within the waste industry and economic and market conditions
may
limit our ability to grow through acquisitions; (11) our growth and future
financial performance depend significantly on our ability to integrate acquired
businesses into our organization and operations; (12) our acquisitions may
not be successful, resulting in changes in strategy, operating losses or a
loss
on sale of the business acquired; (13) 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; (14) 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;
(15) 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; (16) our decentralized
decision-making structure could result in local managers making decisions that
adversely affect our operating results; (17) we may incur additional
charges related to capitalized expenditures, which would decrease our earnings;
(18) each business that we acquire or have acquired may have liabilities
that we fail or are unable to discover, including environmental liabilities;
(19) liabilities for environmental damage may adversely affect our business
and earnings; and (20) 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, or SEC, including
our most recent Annual Report on Form 10-K. There may be additional
risks of which we are not presently aware or that we currently believe are
immaterial which could have an adverse impact on our business. We make no
commitment to revise or update any forward-looking statements in order to
reflect events or circumstances that may change.
OVERVIEW
The
solid
waste industry is a local and highly competitive business, requiring substantial
labor and capital resources. The participants compete for collection
accounts primarily on the basis of price and, to a lesser extent, the quality
of
service, and compete for landfill business on the basis of tipping fees,
geographic location and quality of operations. The solid waste industry
has been consolidating and continues to consolidate as a result of a number
of
factors, including the increasing costs and complexity associated with waste
management operations and regulatory compliance. Many small independent
operators and municipalities lack the capital resources, management, operating
skills and technical expertise necessary to operate effectively in such an
environment. The consolidation trend has caused solid waste companies to
operate larger landfills that have complementary collection routes that can
use
company-owned disposal capacity. Controlling the point of transfer from
haulers to landfills has become increasingly important as landfills continue
to
close and disposal capacity moves further from collection
markets.
Generally,
the most profitable industry operators are those companies that are vertically
integrated or enter into long-term collection contracts. A vertically
integrated operator will benefit from: (1) the internalization
of waste (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 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, 2007, we served more than
one million residential, commercial and industrial customers from a network
of operations in 23 states: Alabama, Arizona, California,
Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Minnesota, Mississippi,
Montana, Nebraska, Nevada, New Mexico, Oklahoma, Oregon, South Dakota,
Tennessee, Texas, Utah, Washington and Wyoming. As of that date, we owned
or operated a network of 125 solid waste collection operations,
47 transfer stations, 29 recycling operations, 34 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 SEC, critical accounting estimates and
assumptions are those that may be material due to the levels of subjectivity
and
judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change, and that have a material impact on the financial
condition or operating performance of a company. There was one change to
our critical accounting estimates and assumptions in the nine months ended
September 30, 2007, which is described below. Refer to our most
recent Annual Report on Form 10-K for a complete description of our
critical accounting estimates and assumptions.
FIN
48. On July 13, 2006, the Financial Accounting Standards Board,
or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, or 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. 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 impact of our
reassessment of our tax positions in accordance with FIN 48 did not have a
material impact on our results of operations, financial condition or
liquidity. For additional information regarding the adoption of
FIN 48, see Note 9, Income Taxes, of the Notes to Condensed
Consolidated Financial Statements in Part I of this Quarterly Report on
Form 10-Q.
GENERAL
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,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Collection
|
|
$ |
157,891
|
|
|
|
64.0 |
% |
|
$ |
180,333
|
|
|
|
63.5 |
% |
|
$ |
449,541
|
|
|
|
64.2 |
% |
|
$ |
512,886
|
|
|
|
63.6 |
% |
Disposal
and transfer
|
|
|
69,016
|
|
|
|
28.0
|
|
|
|
78,861
|
|
|
|
27.8
|
|
|
|
193,608
|
|
|
|
27.6
|
|
|
|
224,072
|
|
|
|
27.8
|
|
Recycling
and other
|
|
|
19,758
|
|
|
|
8.0
|
|
|
|
24,605
|
|
|
|
8.7
|
|
|
|
57,082
|
|
|
|
8.2
|
|
|
|
69,765
|
|
|
|
8.6
|
|
Total
|
|
$ |
246,665
|
|
|
|
100.0 |
% |
|
$ |
283,799
|
|
|
|
100.0 |
% |
|
$ |
700,231
|
|
|
|
100.0 |
% |
|
$ |
806,723
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
elimination
|
|
$ |
30,118
|
|
|
|
|
|
|
$ |
33,024
|
|
|
|
|
|
|
$ |
86,545
|
|
|
|
|
|
|
$ |
95,912
|
|
|
|
|
|
The
disposal tonnage that we received in the nine months ended September 30,
2006 and 2007, at all of our landfills during the respective period, is shown
below (tons in thousands):
|
|
Nine
months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
Number
of
Sites
|
|
|
Total
Tons
|
|
|
Number
of
Sites
|
|
|
Total
Tons
|
|
Owned
landfills and landfills operated under life-of-site
agreements
|
|
|
27
|
|
|
|
5,370
|
|
|
|
30
|
|
|
|
6,102
|
|
Operated
landfills
|
|
|
8
|
|
|
|
793
|
|
|
|
7
|
|
|
|
750
|
|
|
|
|
35
|
|
|
|
6,163
|
|
|
|
37
|
|
|
|
6,852
|
|
NEW
ACCOUNTING PRONOUNCEMENTS
For
a
description of the new accounting standards that affect us, see Note 2 to
our Condensed Consolidated Financial Statements included under Part I,
Item 1 of this Quarterly Report on Form 10-Q.
RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
2007
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,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of operations
|
|
|
59.4
|
|
|
|
58.1
|
|
|
|
60.0
|
|
|
|
58.6
|
|
Selling,
general and administrative
|
|
|
9.9
|
|
|
|
10.3
|
|
|
|
10.1
|
|
|
|
10.5
|
|
Depreciation
and amortization
|
|
|
8.8
|
|
|
|
8.8
|
|
|
|
9.1
|
|
|
|
8.8
|
|
Loss
(gain) on disposal of assets
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating
income
|
|
|
22.0
|
|
|
|
22.8
|
|
|
|
20.8
|
|
|
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(3.5 |
) |
|
|
(3.5 |
) |
|
|
(3.5 |
) |
|
|
(3.5 |
) |
Other
income (expense)
|
|
|
-
|
|
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
0.1
|
|
Minority
interests
|
|
|
(1.7 |
) |
|
|
(1.7 |
) |
|
|
(1.6 |
) |
|
|
(1.6 |
) |
Income
tax expense
|
|
|
(6.7 |
) |
|
|
(6.1 |
) |
|
|
(5.8 |
) |
|
|
(6.4 |
) |
Net
income
|
|
|
10.1 |
% |
|
|
11.4 |
% |
|
|
9.3 |
% |
|
|
10.7 |
% |
Revenues.
Total revenues increased $34.3 million, or 15.8%, to $250.8 million
for the three months ended September 30, 2007, from $216.5 million for
the three months ended September 30, 2006. Acquisitions closed
during, or subsequent to, the three months ended September 30, 2006,
increased revenues by approximately $10.7 million. Operating
locations disposed of during and subsequent to September 30, 2006
contributed $0.7 million of revenues during the three months ended
September 30, 2006. During the three months ended September 30,
2007, increased prices charged to our customers, increased volume in our
existing business, and revenues generated from two long-term contracts that
commenced in 2007 resulted in net revenue increases of approximately
$9.0 million, $4.7 million and $6.1 million, respectively.
Increased recyclable commodity prices and volume during the three months ended
September 30, 2007, increased revenues by $3.6 million. Other
revenues increased by $0.9 million during the three months ended
September 30, 2007.
Total
revenues increased $97.1 million, or 15.8%, to $710.8 million for the
nine months ended September 30, 2007, from $613.7 million for the nine
months ended September 30, 2006. Acquisitions closed during, or
subsequent to, the nine months ended September 30, 2006, increased revenues
by approximately $36.0 million. Operating locations disposed of
during and subsequent to September 30, 2006, contributed $3.1 million
of revenues during the nine months ended September 30, 2006. During
the nine months ended September 30, 2007, increased prices charged to our
customers, increased volume in our existing business, and revenues generated
from two long-term contracts that commenced in 2007 resulted in net revenue
increases of approximately $28.5 million, $11.2 million and
$14.2 million, respectively. Increased recyclable commodity prices
and volume during the nine months ended September 30, 2007, increased
revenues by $9.1 million. Other revenues increased by
$1.2 million during the nine months ended September 30,
2007.
Cost
of Operations. Total cost of operations increased $17.1 million,
or 13.3%, to $145.8 million for the three months ended September 30,
2007, from $128.7 million for the three months ended September 30,
2006. The increase was attributable to operating costs associated with
acquisitions closed during, or subsequent to, the three months ended
September 30, 2006, operating costs incurred to support two long-term
contracts that commenced in 2007, increased labor expenses resulting from
employee pay rate increases, increased employee medical benefit expenses
resulting from an increase in medical claims severity, increased vehicle and
equipment maintenance and repair costs, and increased franchise taxes, landfill
taxes, third party trucking expenses and increased disposal expenses resulting
from higher disposal volumes, partially offset by a decrease in auto and
workers’ compensation claims under our high deductible insurance
program. The reduction in auto and workers’ compensation insurance
claims expense was based on a decrease in 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.
Total
cost of operations increased $47.9 million, or 13.0%, to
$416.2 million for the nine months ended September 30, 2007, from
$368.3 million for the nine months ended September 30, 2006. The
increase was attributable to operating costs associated with acquisitions closed
during, or subsequent to, the nine months ended September 30, 2006,
operating costs incurred to support two long-term contracts that commenced
in
2007, increased labor expenses resulting from employee pay rate increases,
increased vehicle and equipment maintenance and repair costs, increased
franchise taxes, landfill taxes, third party trucking expenses and increased
disposal expenses resulting from higher disposal volumes, partially offset
by
the aforementioned decrease in auto and workers’ compensation claims
under our high deductible insurance program.
Cost
of
operations as a percentage of revenues decreased 1.3 percentage points to
58.1% for the three months ended September 30, 2007, from 59.4% for the
three months ended September 30, 2006. Cost of operations as a
percentage of revenues decreased 1.4 percentage points to 58.6% for the
nine months ended September 30, 2007, from 60.0% for the three months ended
September 30, 2006. The decreases as a percentage of revenues were
primarily attributable to leveraging existing personnel to support increased
collection and disposal volumes, the reversal of previously accrued costs for
auto and workers’ compensation insurance claims, and increased prices charged to
our customers being higher, on a percentage basis, than the majority of expense
increases recognized subsequent to September 30, 2006. These
decreases were partially offset by acquisitions closed during, or subsequent
to,
the nine months ended September 30, 2006, and two long-term contracts that
commenced in 2007, which have operating margins below our company
average.
SG&A.
SG&A expenses increased $4.4 million, or 20.3%, to $25.8 million
for the three months ended September 30, 2007, from $21.4 million for
the three months ended September 30, 2006. SG&A expenses
increased $12.7 million, or 20.4%, to $74.5 million for the nine
months ended September 30, 2007, from $61.8 million for the nine
months ended September 30, 2006. 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, 2006,
SG&A costs incurred to support two long-term contracts that commenced in
2007, increased payroll expense due to increased headcount to support our base
operations, increased equity compensation expense, cash compensation increases
and increased bonus compensation expense based on the results of operations
during the nine months ended September 30, 2007.
SG&A
expenses as a percentage of revenues increased 0.4 percentage points to
10.3% for the three months ended September 30, 2007, from 9.9% for the
three months ended September 30, 2006. SG&A expenses as a
percentage of revenues increased 0.4 percentage points to 10.5% for the
nine months ended September 30, 2007, from 10.1% for the nine months ended
September 30, 2006. The increases as a percentage of revenue were
primarily attributable to increased equity compensation expense and increased
bonus compensation expense.
Depreciation
and Amortization. Depreciation and amortization expense increased
$3.1 million, or 16.4%, to $22.2 million for the three months ended
September 30, 2007, from $19.1 million for the three months ended
September 30, 2006. Depreciation and amortization expense increased
$6.7 million, or 11.9%, to $62.7 million for the nine months ended
September 30, 2007, from $56.0 million for the nine months ended
September 30, 2006. The increases were primarily attributable to
depreciation and amortization associated with acquisitions closed during, or
subsequent to, the nine months ended September 30, 2006, higher landfill
depletion expense due to increased disposal volumes at our landfills, and
depreciation expense resulting from facilities, fleet and equipment purchased
to
support two long-term contracts that commenced in 2007.
Depreciation
and amortization expense as a percentage of revenues decreased
0.3 percentage points to 8.8% for the nine months ended September 30,
2007, from 9.1% for the nine months ended September 30, 2006. The
decrease in depreciation and amortization expense as a percentage of revenues
for the nine months ended September 30, 2007 was the result of leveraging our
existing fleet and equipment to support increases in collection and landfill
volumes.
Operating
Income. Operating income increased $9.6 million, or 20.1%, to
$57.1 million for the three months ended September 30, 2007, from
$47.5 million for the three months ended September 30, 2006.
Operating income increased $29.8 million, or 23.4%, to $157.3 million
for the nine months ended September 30, 2007, from $127.5 million for
the nine months ended September 30, 2006. The increases were
primarily attributable to increased revenues, offset by increased operating
costs, increased SG&A expenses to support the revenue growth and increased
depreciation and amortization expenses.
Operating
income as a percentage of revenues increased 0.8 percentage points to 22.8%
for the three months ended September 30, 2007, from 22.0% for the three
months ended September 30, 2006. The increase as a percentage of
revenues was due to the previously described decrease in cost of operations
as a
percentage of revenue, partially offset by increased depreciation and
amortization expenses and increased SG&A expense. Operating
income as a percentage of revenues increased 1.3 percentage points to 22.1%
for the nine months ended September 30, 2007, from 20.8% for the nine
months ended September 30, 2006. The increase as a percentage of
the revenues was due to the previously described decreases in cost of operations
and depreciation and amortization expenses as a percentage of revenue, partially
offset by increased SG&A expense.
Interest
Expense. Interest expense increased $1.1 million, or 15.1%, to
$8.7 million for the three months ended September 30, 2007, from
$7.6 million for the three months ended September 30, 2006.
Interest expense increased $3.1 million, or 14.5%, to $24.8 million
for the nine months ended September 30, 2007, from $21.7 million for
the nine months ended September 30, 2006. The increases were
attributable to higher average borrowing rates on our credit facility, higher
average debt balances and a $1.0 million reduction of interest expense for
the nine months ended September 30, 2006 on our 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, partially offset by
interest income on increased cash balances, and a reduction in our average
interest rate on debt incurred outside of our credit facility resulting from
completing our offering of the 2026 Notes on March 20, 2006. The
higher average borrowing rates on our credit facility were the result of the
expiration in the first quarter of 2007 of $250.0 million of interest rate
swap agreements with a weighted-average fixed borrowing cost of 2.55%, which
we
were a party to during the three and nine months ended September 30,
2006. Upon the expiration of these interest rate swaps, we entered into
$250.0 million of new interest rate swaps with a weighted-average fixed
borrowing cost of 4.33%, plus applicable margin.
Other
Income (Expense). Other income (expense) changed to an income total of
$0.2 million for the nine months ended September 30, 2007, from an
expense total of $3.8 million for the nine months ended September 30,
2006. Other expense in the nine months ended September 30, 2006,
primarily consisted of $4.2 million of costs associated with the write-off
of the unamortized debt issuance costs associated with our
2022 Notes.
Minority
Interests. Minority interests increased $0.5 million, or 12.3%,
to $4.2 million for the three months ended September 30, 2007, from
$3.7 million for the three months ended September 30, 2006.
Minority interests increased $1.4 million, or 14.3%, to $11.1 million
for the nine months ended September 30, 2007, from $9.7 million for
the nine months ended September 30, 2006. The increases in
minority interests were due to increased earnings by our majority-owned
subsidiaries.
Income
Tax Provision. Income taxes increased $0.9 million, or 5.8%, to
$15.4 million for the three months ended September 30, 2007, from
$14.5 million for the three months ended September 30, 2006.
Income taxes increased $9.8 million, or 27.7%, to $45.2 million for
the nine months ended September 30, 2007, from $35.4 million for the
nine months ended September 30, 2006.
Our
effective tax rates for the three months ended September 30, 2006 and 2007,
were 39.9% and 34.9%, respectively, and 38.4% and 37.2% for the nine months
ended September 30, 2006 and 2007, respectively.
Our
effective tax rates for the three and nine months ended September 30, 2006
were
affected by 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.
During
the three and nine months ended September 30, 2007, we recorded adjustments
to income tax expense of $2.0 million and $2.2 million, respectively,
resulting from the reconciliation of our current and deferred income tax
liability accounts, the reversal of certain tax contingencies that expired
in
2007, and the reconciliation of the income tax provision to the 2006 federal
tax
return, which was filed in September 2007.
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, 2007, we had a working capital deficit of $23.9 million,
including cash and equivalents of $13.1 million. Our working capital
decreased $34.3 million from a positive balance of $10.4 million at
December 31, 2006. 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 decrease in our working capital position from
December 31, 2006, to September 30, 2007, resulted primarily from a
decrease in our cash balances and an increase in current liabilities, partially
offset by an increase in accounts receivable. For additional information
regarding the changes in our cash balances, see the Condensed Consolidated
Statements of Cash Flows in Part I of this Quarterly Report on
Form 10-Q.
For
the
nine months ended September 30, 2007, net cash provided by operating
activities was $170.1 million, including $15.2 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, 2007, consist of non-cash expenses,
including $62.7 million of depreciation and amortization,
$11.1 million of minority interests expense, $1.7 million of debt
issuance cost amortization, an $8.0 million increase in net deferred tax
liabilities, and $4.6 million of stock compensation expense, less
$10.2 million of excess tax benefit associated with equity-based
compensation reclassified to cash flows from financing
activities.
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, an $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 associated with equity-based compensation reclassified to
cash flows from financing activities.
For
the
nine months ended September 30, 2007, net cash used in investing activities
was $182.1 million. Of this amount, $85.7 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,
2006. Cash used for capital expenditures was $96.1 million, which was
primarily for investments in fixed assets, consisting of trucks, containers,
other equipment and landfill development. The increase in capital
expenditures of $22.6 million for the nine months ended September 30,
2007, as compared to the nine months ended September 30, 2006, is due
primarily to capital expenditures associated with a new long-term contract
in
California as well as capital required to support the continued growth of our
existing business.
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, 2007, net cash used in financing activities
was $9.9 million, which included $24.8 million of proceeds from stock
option and warrant exercises, a $6.5 million change in book overdraft,
$10.2 million of excess tax benefit associated with equity-based
compensation, and $24.3 million of net proceeds under our various debt
arrangements, less $10.4 million of cash distributions to minority interest
holders, and $64.0 million of repurchases of our common
stock.
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 associated with
equity-based compensation, less $7.8 million of cash distributions to
minority interest holders, a $6.1 million change in book overdraft,
$6.1 million of debt issuance costs, and $100.2 million of repurchases
of our common stock.
We
made
$96.1 million in capital expenditures during the nine months ended
September 30, 2007. We expect to make capital expenditures of
approximately $120.0 million in 2007 in connection with our existing
business. We intend to fund our planned 2007 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.
As
of
September 30, 2007, we had $445.0 million outstanding under our credit
facility, exclusive of outstanding stand-by letters of credit of
$68.2 million. As of September 30, 2006 and 2007, we were in
compliance with all applicable covenants in our credit
facility.
As
of
September 30, 2007, we had the following contractual obligations (in
thousands):
|
|
Payments
Due by Period
|
|
Recorded
Obligations
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
3
to 5
Years
|
|
|
Over
5
Years
|
|
Long-term
debt
|
|
$ |
699,693
|
|
|
$ |
12,098
|
|
|
$ |
9,578
|
|
|
$ |
648,818
|
|
|
$ |
29,199
|
|
Long-term
debt payments include:
|
(1)
|
$445.0 million
in principal payments due in 2012 related to our credit facility.
Our credit facility bears interest, at our option, at either the
base rate
plus the applicable base rate margin (approximately 7.75% at
September 30, 2007) on base rate loans, or the Eurodollar rate plus
the applicable Eurodollar margin (approximately 5.75% at
September 30, 2007) on Eurodollar loans. As of
September 30, 2007, our credit facility allowed us to borrow up to
$800.0 million.
|
|
(2)
|
$200.0 million
in principal payments due in 2026 related to our 2026 Notes. Holders
of the 2026 Notes may require us to purchase their notes in cash at a
purchase price of 100% of the principal amount of the 2026 Notes plus
accrued and unpaid interest, if any, upon a change in control, as
defined
in the indenture, or, for the first time, on April 1, 2011. The
2026 Notes bear interest at a rate of
3.75%.
|
|
(3)
|
$11.3 million
in principal payments related to our 2001 Wasco bonds. Our 2001
Wasco bonds consist of $2.8 million of bonds that bear interest at a
rate of 7.0% and mature on March 1, 2012, and $8.5 million of
bonds that bear interest at a rate of 7.25% and mature on March 1,
2021.
|
|
(4)
|
$33.2 million
in principal payments related to our California tax-exempt bonds.
Our California tax-exempt bonds bear interest at variable rates (3.8%
at
September 30, 2007) and have maturity dates ranging from 2008 to
2018.
|
|
(5)
|
$4.1 million
in principal payments related to our notes payable to sellers. Our
notes payable to sellers bear interest at rates between 5.5% and
7.5% at
September 30, 2007, and have maturity dates ranging from 2010 to
2036.
|
|
(6)
|
$6.1 million
in principal payments related to our notes payable to third parties.
Our notes payable to third parties bear interest at rates between
5.1% and
11.0% at September 30, 2007, and have maturity dates ranging from
2007 to 2010.
|
In
July
2007, we completed a $15.5 million tax-exempt bond financing to fund the
costs of acquisition of trucks and other solid waste vehicles and equipment
and
to pay certain costs associated with the issuance of the bonds. The bonds
mature on August 1, 2018, and bear interest at variable rates based on
market conditions for California tax-exempt bonds. The bonds are
collateralized by a letter of credit issued by Bank of America under our credit
facility for $15.7 million.
On
September 27, 2007, we refinanced our existing revolving credit facility
and entered into an uncollateralized Revolving Credit Agreement with a syndicate
of banks for which Bank of America acted as agent. Our previous senior
collateralized credit facility included a $750 million senior revolving credit
facility, maturing on January 12, 2012, with a syndicate of banks for which
Bank of America acted as agent. In addition to being uncollateralized, our
new credit agreement reduces our interest rate margins from those under our
previous credit facility, increases to $800 million the revolving credit
facility available to us, and extends the maturity date for the revolving credit
facility to September 27, 2012. We retain under our new credit
agreement the ability to increase borrowings under the revolving credit facility
from $800 million to $1.0 billion, subject to certain conditions
including that no default, as defined in the agreement, has occurred, although
no existing lender has any obligation to increase its commitment. The
interest rate applicable under the revolving credit facility of our new credit
agreement is currently the Eurodollar rate plus 0.625%, a 0.25% reduction in
the
corresponding interest rate under our previous credit
facility.
The
total
liability for uncertain tax positions under FIN 48 at September 30,
2007 is $6.6 million (refer to Note 9 of the Notes to Condensed
Consolidated Financial Statements, in Part I of this Quarterly Report on
Form 10-Q). We are not able to reasonably estimate the amount by
which the liability will increase or decrease over time; however, at this time,
we do not expect a significant payment related to these obligations within
the
next year.
|
|
Amount
of Commitment Expiration Per Period
|
|
|
|
(amounts
in thousands)
|
|
|
|
|
|
Unrecorded
Obligations
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
3
to 5
Years
|
|
|
Over
5
Years
|
|
Operating
leases(1)
|
|
$ |
47,112
|
|
|
$ |
6,222
|
|
|
$ |
10,009
|
|
|
$ |
8,146
|
|
|
$ |
22,735
|
|
|
(1)
|
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
three
and nine months ended September 30, 2007, 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 $153.7 million and $172.0 million
at December 31, 2006 and September 30, 2007, respectively. These
arrangements have not materially affected our financial position, results of
operations or liquidity during the nine months ended September 30, 2007,
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 ours 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, 2007, the minority
interests holders' pro rata share of the subsidiary's fair market value is
estimated to be worth between $91.0 million and $107.8 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 U.S. generally
accepted accounting principles 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 associated with equity-based compensation, 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, 2006 and 2007, is calculated as follows (amounts
in thousands):
|
|
Nine
months ended
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
Net
cash provided by operating activities
|
|
$ |
152,340
|
|
|
$ |
170,065
|
|
Change
in book overdraft
|
|
|
(6,143 |
) |
|
|
6,495
|
|
Plus:
Proceeds from disposal of assets
|
|
|
1,950
|
|
|
|
955
|
|
Plus:
Excess tax benefit associated with equity-based
compensation
|
|
|
5,660
|
|
|
|
10,190
|
|
Less:
Capital expenditures for property and equipment
|
|
|
(73,482 |
) |
|
|
(96,106 |
) |
Less:
Distributions to minority interest holders
|
|
|
(7,840 |
) |
|
|
(10,437 |
) |
Free
cash flow
|
|
$ |
72,485
|
|
|
$ |
81,162
|
|
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, 2007, our derivative instruments consisted of three interest
rate swap agreements that effectively fix the interest rate on the applicable
notional amounts of our variable rate debt as follows (dollars in
thousands):
Date
Entered
|
|
Notional
Amount
|
|
Fixed
Interest
Rate
Paid*
|
|
Variable
Interest
Rate
Received
|
|
Effective
Date
|
|
Expiration
Date
|
September
2005
|
|
$ 175,000
|
|
4.33%
|
|
|
1-month
LIBOR
|
|
February
2007
|
|
February
2009
|
September
2005
|
|
$ 75,000
|
|
4.34%
|
|
|
1-month
LIBOR
|
|
March
2007
|
|
March
2009
|
December
2005
|
|
$ 150,000
|
|
4.76%
|
|
|
1-month
LIBOR
|
|
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 unhedged floating
rate balances owed at December 31, 2006, and September 30, 2007, of
$24.1 million and $81.3 million, respectively, including floating rate
debt under our credit facility, various floating rate notes payable to third
parties and floating rate municipal bond obligations. A one percent
increase in interest rates on our variable-rate debt as of December 31,
2006, and September 30, 2007, would decrease our annual pre-tax income by
approximately $0.2 million and $0.8 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.
A significant increase 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 $2.1 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 29 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, 2006 and 2007, would have
resulted in a decrease in revenues of $1.8 million and $2.8 million,
respectively, for the nine months ended September 30, 2006 and
2007.
As
required by Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act
of 1934, as amended, or the Exchange Act, 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, 2007, 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, 2007, 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
No
material developments have occurred 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, 2006, except that the parties have agreed to reschedule
the hearing to be conducted by the New Mexico Environmental Department for
July
2008, to allow us time to explore a possible relocation of the landfill.
Refer to Note 12 of the Notes to Condensed Consolidated Financial
Statements in Part I of this Quarterly Report on Form 10-Q for a
description of this legal proceeding.
No
material developments have occurred 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, 2006, except that the oral arguments
on
the plaintiffs’ appeal were held on June 7, 2007, and on October 12,
2007, the Kansas Court of Appeals issued an opinion reversing and remanding
the
District Court’s decision. Refer to Note 12 of the Notes to Condensed
Consolidated Financial Statements in Part I of this Quarterly Report on
Form 10-Q for a description of this legal proceeding.
No
material developments have occurred in the purported derivative actions
captioned Travis v. Mittelstaedt, et al. and Pierce and Banister v.
Mittelstaedt, et al., described in our Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2007, except that the actions have
been consolidated and the plaintiffs have filed a consolidated
complaint. In addition, on June 22, 2007, we and the individual
defendants filed motions to dismiss the consolidated action. The motions are
pending. No material developments have occurred in the purported
derivative actions captioned Nichols v. Mittelstaedt, et al. and
Priest v. Mittelstaedt, et al., described in our Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2007, except that
the suits have been stayed pending the outcome of the consolidated federal
action. Refer to Note 12 of the Notes to Condensed Consolidated
Financial Statements in Part I of this Quarterly Report on Form 10-Q
for a description of these legal proceedings.
In
the
normal course of our business and as a result of the extensive governmental
regulation of the solid waste industry, we are 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 us or to revoke
or
deny renewal of an operating permit held by us. From time to time we 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 we operate.
In
addition, we are 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, and in Note 12 of the Notes to Condensed Consolidated Financial
Statements in Part I of this Quarterly Report on Form 10-Q, as of
September 30, 2007, there is no current proceeding or litigation involving
us that we believe will have a material adverse impact on our business,
financial condition, results of operations or cash flows.
Item 2.
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, stock repurchases may be made in the open market
or in privately negotiated transactions from time to time at management's
discretion. The timing and amounts of any repurchases will depend on many
factors, including our capital structure, the market price of our common stock
and overall market conditions. As of September 30, 2007, we have
repurchased 10.5 million shares of our common stock at a cost of
$350.9 million, $342.0 million of which was under the program.
The table below reflects repurchases we have made for the three months ended
September 30, 2007 (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
|
|
7/1/07
– 7/31/07
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
$ |
170,179
|
|
8/1/07
– 8/31/07
|
|
|
328,700
|
|
|
|
29.84
|
|
|
|
328,700
|
|
|
|
160,370
|
|
9/1/07
– 9/30/07
|
|
|
79,200
|
|
|
|
29.48
|
|
|
|
79,200
|
|
|
|
158,035
|
|
|
|
|
407,900
|
|
|
|
29.77
|
|
|
|
407,900
|
|
|
|
|
|
|
(1)
|
This
amount represents the weighted average price paid per common share.
This price includes a per share commission paid for all
repurchases.
|
See
Exhibit Index immediately following the signature page of this Quarterly Report
on Form 10-Q.
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: October 23,
2007
|
BY:
|
/s/
Ronald J. Mittelstaedt
|
|
|
Ronald
J. Mittelstaedt,
|
|
|
Chief
Executive Officer
|
Date: October 23,
2007
|
BY:
|
/s/
Worthing F. Jackman
|
|
|
Worthing
F. Jackman,
|
|
|
Executive
Vice President and
Chief
Financial Officer
|
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 10-Q
filed on July 24, 2007)
|
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)
|
4.1
|
|
Revolving
Credit Agreement, dated as of September 27, 2007 (incorporated by
reference to the exhibit filed with the Registrant's Form 8-K filed
on October 3, 2007)
|
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
|
Page
34