Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the quarterly period ended September 30, 2010
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to
Commission file number 1-31507
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3283464
(I.R.S. Employer Identification No.)
2295 Iron Point Road, Suite 200, Folsom, CA 95630
(Address of principal executive offices) (Zip code)
(916) 608-8200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act. (Check one):
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þ Large accelerated filer
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o Accelerated filer
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o Non-accelerated filer
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o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock:
As of October 15, 2010: 76,765,629 shares of common stock
WASTE CONNECTIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
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December 31, |
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September 30, |
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2009 |
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2010 |
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ASSETS |
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Current assets: |
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Cash and equivalents |
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$ |
9,639 |
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$ |
13,556 |
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Accounts receivable, net of allowance for doubtful
accounts of $4,058 and $4,241 at December 31, 2009
and September 30, 2010, respectively |
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138,972 |
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155,082 |
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Deferred income taxes |
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17,748 |
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18,554 |
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Prepaid expenses and other current assets |
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33,495 |
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27,372 |
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Total current assets |
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199,854 |
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214,564 |
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Property and equipment, net |
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1,308,392 |
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1,303,463 |
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Goodwill |
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906,710 |
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910,286 |
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Intangible assets, net |
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354,303 |
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344,690 |
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Restricted assets |
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27,377 |
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28,823 |
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Other assets, net |
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23,812 |
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22,237 |
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$ |
2,820,448 |
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$ |
2,824,063 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
86,669 |
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$ |
80,471 |
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Book overdraft |
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12,117 |
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11,743 |
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Accrued liabilities |
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93,380 |
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103,065 |
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Deferred revenue |
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50,138 |
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53,598 |
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Current portion of long-term debt and notes payable |
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2,609 |
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1,849 |
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Total current liabilities |
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244,913 |
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250,726 |
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Long-term debt and notes payable |
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867,554 |
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831,123 |
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Other long-term liabilities |
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45,013 |
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49,460 |
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Deferred income taxes |
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305,932 |
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319,870 |
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Total liabilities |
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1,463,412 |
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1,451,179 |
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Commitments and contingencies (Note 15) |
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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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Common stock: $0.01 par value per share;
150,000,000 shares authorized; 78,599,083 and
76,757,970 shares issued and outstanding at
December 31, 2009 and September 30, 2010, respectively |
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786 |
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767 |
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Additional paid-in capital |
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625,173 |
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543,555 |
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Accumulated other comprehensive loss |
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(4,892 |
) |
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(7,114 |
) |
Retained earnings |
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732,738 |
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831,697 |
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Total Waste Connections equity |
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1,353,805 |
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1,368,905 |
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Noncontrolling interests |
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3,231 |
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3,979 |
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Total equity |
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1,357,036 |
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1,372,884 |
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$ |
2,820,448 |
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$ |
2,824,063 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 1
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(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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2009 |
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2010 |
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2009 |
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2010 |
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Revenues |
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$ |
315,990 |
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$ |
345,785 |
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$ |
881,496 |
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$ |
983,802 |
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Operating expenses: |
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Cost of operations |
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180,440 |
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193,638 |
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510,830 |
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557,974 |
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Selling, general and
administrative |
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35,753 |
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38,455 |
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104,411 |
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110,465 |
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Depreciation |
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31,226 |
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34,441 |
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86,127 |
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99,349 |
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Amortization of intangibles |
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3,671 |
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3,616 |
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9,351 |
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10,800 |
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Loss (gain) on disposal of assets |
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139 |
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(50 |
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(1,037 |
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572 |
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Operating income |
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64,761 |
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75,685 |
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171,814 |
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204,642 |
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Interest expense |
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(12,259 |
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(9,419 |
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(36,817 |
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(30,842 |
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Interest income |
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134 |
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135 |
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1,275 |
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453 |
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Loss on extinguishment of debt |
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(10,193 |
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Other income, net |
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879 |
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1,500 |
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1,055 |
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1,970 |
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Income before income tax provision |
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53,515 |
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67,901 |
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137,327 |
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166,030 |
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Income tax provision |
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(19,252 |
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(26,644 |
) |
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(50,070 |
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(66,323 |
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Net income |
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34,263 |
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41,257 |
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87,257 |
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99,707 |
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Less: Net income attributable
to noncontrolling interests |
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(113 |
) |
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(271 |
) |
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(691 |
) |
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(748 |
) |
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Net income attributable to Waste
Connections |
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$ |
34,150 |
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$ |
40,986 |
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$ |
86,566 |
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$ |
98,959 |
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Earnings per common share
attributable to Waste Connections
common stockholders: |
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Basic |
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$ |
0.43 |
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$ |
0.53 |
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$ |
1.09 |
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$ |
1.28 |
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Diluted |
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$ |
0.43 |
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$ |
0.53 |
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$ |
1.08 |
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$ |
1.26 |
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Shares used in the per share
calculations: |
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Basic |
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78,837,984 |
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77,062,885 |
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79,618,566 |
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77,419,498 |
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Diluted |
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79,824,616 |
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77,852,569 |
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80,468,180 |
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78,281,132 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 2
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2010
(Unaudited)
(In thousands, except share amounts)
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Waste Connections Equity |
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Accumulated |
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Other |
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Additional |
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Comprehensive |
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Comprehensive |
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Common Stock |
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Paid-In |
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Income |
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Retained |
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Noncontrolling |
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Income |
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Shares |
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Amount |
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Capital |
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(Loss) |
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Earnings |
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Interests |
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Total |
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Balances at December 31, 2009 |
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78,599,083 |
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$ |
786 |
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$ |
625,173 |
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$ |
(4,892 |
) |
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$ |
732,738 |
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$ |
3,231 |
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$ |
1,357,036 |
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Vesting of restricted stock |
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337,205 |
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3 |
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(3 |
) |
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Shares withheld for payroll taxes for vesting of restricted stock and warrants |
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(115,722 |
) |
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(1 |
) |
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(3,723 |
) |
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(3,724 |
) |
Equity-based compensation |
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8,488 |
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8,488 |
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Exercise of stock options and warrants |
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1,262,609 |
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12 |
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|
23,232 |
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23,244 |
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Excess tax benefit associated with equity-based compensation |
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8,935 |
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8,935 |
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Repurchase of common stock |
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(3,347,111 |
) |
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(33 |
) |
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(116,252 |
) |
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(116,285 |
) |
Reacquisition of equity component resulting from conversion of 2026 Convertible Senior Notes |
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(2,295 |
) |
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(2,295 |
) |
Issuance of shares in connection with conversion of 2026 Convertible Senior Notes |
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21,906 |
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Amounts reclassified into earnings, net of taxes |
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6,308 |
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6,308 |
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Changes in fair value of swaps, net of taxes |
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(8,530 |
) |
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|
(8,530 |
) |
Net income |
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$ |
99,707 |
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|
|
|
|
|
|
|
|
|
|
|
|
98,959 |
|
|
|
748 |
|
|
|
99,707 |
|
Other comprehensive loss |
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(3,610 |
) |
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|
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Income tax effect of other comprehensive loss |
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|
1,388 |
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Comprehensive income |
|
|
97,485 |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Comprehensive income attributable to noncontrolling interests |
|
|
(748 |
) |
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Comprehensive income attributable to Waste Connections |
|
$ |
96,737 |
|
|
|
|
|
|
|
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|
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Balances at September 30, 2010 |
|
|
|
|
|
|
76,757,970 |
|
|
$ |
767 |
|
|
$ |
543,555 |
|
|
$ |
(7,114 |
) |
|
$ |
831,697 |
|
|
$ |
3,979 |
|
|
$ |
1,372,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)
(In thousands, except share amounts)
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|
Waste Connections Equity |
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Accumulated |
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Other |
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|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
Common Stock |
|
|
Paid-In |
|
|
Income |
|
|
Retained |
|
|
Noncontrolling |
|
|
|
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
(Loss) |
|
|
Earnings |
|
|
Interests |
|
|
Total |
|
Balances at December 31, 2008 |
|
|
|
|
|
|
79,842,239 |
|
|
$ |
798 |
|
|
$ |
661,555 |
|
|
$ |
(23,937 |
) |
|
$ |
622,913 |
|
|
$ |
668 |
|
|
$ |
1,261,997 |
|
Vesting of restricted stock |
|
|
|
|
|
|
269,165 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares withheld for payroll taxes for vesting of restricted stock and warrants |
|
|
|
|
|
|
(90,251 |
) |
|
|
(1 |
) |
|
|
(2,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,503 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,965 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
223,630 |
|
|
|
2 |
|
|
|
4,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,952 |
|
Excess tax benefit associated with equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696 |
|
Repurchase of common stock |
|
|
|
|
|
|
(1,557,628 |
) |
|
|
(15 |
) |
|
|
(40,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,168 |
) |
Amounts reclassified into earnings, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,929 |
|
|
|
|
|
|
|
|
|
|
|
11,929 |
|
Changes in fair value of swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,462 |
) |
|
|
|
|
|
|
|
|
|
|
(3,462 |
) |
Fair value of noncontrolling interest associated with business acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,514 |
|
|
|
1,514 |
|
Net income |
|
$ |
87,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,566 |
|
|
|
691 |
|
|
|
87,257 |
|
Other comprehensive income |
|
|
13,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive income |
|
|
(5,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
95,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Waste Connections |
|
$ |
95,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2009 |
|
|
|
|
|
|
78,687,155 |
|
|
$ |
787 |
|
|
$ |
631,508 |
|
|
$ |
(15,470 |
) |
|
$ |
709,479 |
|
|
$ |
2,873 |
|
|
$ |
1,329,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
87,257 |
|
|
$ |
99,707 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets |
|
|
(1,037 |
) |
|
|
572 |
|
Depreciation |
|
|
86,127 |
|
|
|
99,349 |
|
Amortization of intangibles |
|
|
9,351 |
|
|
|
10,800 |
|
Deferred income taxes, net of acquisitions |
|
|
28,605 |
|
|
|
15,925 |
|
Loss on redemption of 2026 Convertible Senior Notes, net of
make-whole payment |
|
|
|
|
|
|
2,255 |
|
Amortization of debt issuance costs |
|
|
1,455 |
|
|
|
1,332 |
|
Amortization of debt discount |
|
|
3,513 |
|
|
|
1,245 |
|
Equity-based compensation |
|
|
6,965 |
|
|
|
8,488 |
|
Interest income on restricted assets |
|
|
(369 |
) |
|
|
(397 |
) |
Closure and post-closure accretion |
|
|
1,496 |
|
|
|
1,323 |
|
Excess tax benefit associated with equity-based compensation |
|
|
(696 |
) |
|
|
(8,935 |
) |
Net change in operating assets and liabilities, net of acquisitions |
|
|
19,578 |
|
|
|
10,634 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
242,245 |
|
|
|
242,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash acquired |
|
|
(422,078 |
) |
|
|
(17,391 |
) |
Capital expenditures for property and equipment |
|
|
(84,289 |
) |
|
|
(86,121 |
) |
Proceeds from disposal of assets |
|
|
4,348 |
|
|
|
5,786 |
|
Increase in restricted assets, net of interest income |
|
|
(2,014 |
) |
|
|
(1,048 |
) |
Increase in other assets |
|
|
(887 |
) |
|
|
(2,034 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(504,920 |
) |
|
|
(100,808 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
217,000 |
|
|
|
331,253 |
|
Principal payments on notes payable and long-term debt |
|
|
(175,053 |
) |
|
|
(384,346 |
) |
Change in book overdraft |
|
|
47 |
|
|
|
(374 |
) |
Proceeds from option and warrant exercises |
|
|
4,952 |
|
|
|
23,244 |
|
Excess tax benefit associated with equity-based compensation |
|
|
696 |
|
|
|
8,935 |
|
Payments for repurchase of common stock |
|
|
(40,168 |
) |
|
|
(116,285 |
) |
Debt issuance costs |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
7,432 |
|
|
|
(137,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
(255,243 |
) |
|
|
3,917 |
|
Cash and equivalents at beginning of period |
|
|
265,264 |
|
|
|
9,639 |
|
|
|
|
|
|
|
|
Cash and equivalents at end of period |
|
$ |
10,021 |
|
|
$ |
13,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activity: |
|
|
|
|
|
|
|
|
Liabilities assumed and notes payable issued to sellers of businesses
acquired |
|
$ |
39,782 |
|
|
$ |
13,243 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage 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) for the nine month periods ended September 30, 2009
and 2010. In the opinion of management, the accompanying balance sheets and related interim
statements of income, cash flows and equity and comprehensive income include all adjustments,
consisting only of normal recurring items, necessary for their fair presentation in conformity with
U.S. generally accepted accounting principles (GAAP). 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,
income taxes, allocation of acquisition purchase price and asset impairments. An additional area
that involves estimation is when the Company estimates the amount of potential exposure it may have
with respect to litigation, claims and assessments in accordance with the accounting guidance on
contingencies. Actual results for all estimates could differ materially from the estimates and
assumptions that the Company uses in the preparation of its condensed consolidated financial
statements.
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 Managements
Discussion and Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2009.
2. NEW ACCOUNTING STANDARDS
Fair Value Measurements and Disclosures. In January 2010, the Financial Accounting
Standards Board (FASB) issued additional guidance on fair value disclosures. The new guidance
clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a
gross presentation of activities (purchases, sales, and settlements) within the Level 3
rollforward reconciliation, which will replace the net presentation format (previously, companies
could elect the gross or net presentation); and (2) detailed disclosures about the transfers in and
out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual
reporting period beginning after December 15, 2009, except for the gross presentation of the
Level 3 rollforward information, which is required for annual reporting periods beginning after
December 15, 2010, and for interim reporting periods within those years. Early application is
permitted. The Company adopted the fair value disclosures guidance on January 1, 2010. The
Company elected the gross presentation of activities within the Level 3 rollforward reconciliation
when it adopted the original fair value disclosure guidance so no change is required under this new
guidance (see Notes 10 and 12).
Page 6
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
3. STOCK-BASED COMPENSATION
A summary of activity related to restricted stock units under the Second Amended and Restated
2004 Equity Incentive Plan (as amended and restated), as of December 31, 2009, and changes during
the nine month period ended September 30, 2010, is presented below:
|
|
|
|
|
|
|
Unvested
Shares |
|
Outstanding at December 31, 2009 |
|
|
994,678 |
|
Granted |
|
|
389,367 |
|
Forfeited |
|
|
(24,962 |
) |
Vested |
|
|
(337,205 |
) |
|
|
|
|
Outstanding at September 30, 2010 |
|
|
1,021,878 |
|
|
|
|
|
The weighted average grant date fair value per share for the shares of common stock underlying
the restricted stock units granted during the nine month period ended September 30, 2010 was
$31.99. During the nine months ended September 30, 2009 and 2010, the Companys stock-based
compensation expense from restricted stock units was $6,450 and $8,172, respectively. Pursuant to
an amendment approved by our stockholders at our annual meeting of stockholders on May 7, 2010, the
plan referenced above became known as our Third Amended and Restated 2004 Equity Incentive Plan.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Companys financial instruments consist primarily of cash, trade receivables, restricted
assets, trade payables, debt instruments, interest rate swaps and fuel hedges. As of December 31,
2009 and September 30, 2010, the carrying values of cash, trade receivables, restricted assets, and
trade payables are considered to be representative of their respective fair values. The carrying
values of the Companys debt instruments, excluding the 3.75% Convertible Senior Notes due 2026
(the 2026 Notes), the 6.22% Senior Notes due 2015 (the 2015 Notes) and the 5.25% Senior Notes
due 2019 (the 2019 Notes), approximate their fair values as of December 31, 2009 and September
30, 2010, based on current borrowing rates for similar types of borrowing arrangements. The
Companys 2026 Notes had a carrying value of $193,754 and a fair value of approximately $218,234 at
December 31, 2009, based on the publicly quoted trading price of these notes. The Company redeemed
the $200,000 aggregate principle amount of its 2026 Notes on April 1, 2010. The Companys
2015 Notes had a carrying value of $175,000 and a fair value of approximately $188,895 and $203,192
at December 31, 2009 and September 30, 2010, respectively, based on quotes of bonds with similar
ratings in similar industries. The Companys 2019 Notes had a carrying value of $175,000 and a
fair value of approximately $170,538 and $191,905 at December 31, 2009 and September 30, 2010,
respectively, based on quotes of bonds with similar ratings in similar industries. For details on
the fair value of the Companys interest rate swaps and fuel hedges, refer to Note 12.
5. LANDFILL ACCOUNTING
At September 30, 2010, the Company owned 35 landfills, and operated, but did not own, three
landfills under life-of-site operating agreements and six landfills under limited-term operating
agreements. The Companys landfills had site costs with a net book value of $748,729 at September
30, 2010. With the exception of two owned landfills that only accept construction and demolition
and other non-putrescible waste, all landfills that the Company owns or operates are municipal
solid waste landfills. For the Companys six landfills operated under limited-term operating
agreements, the owner of the property (generally a municipality) usually owns the permit and the
Company operates the landfill for a contracted term, which may be the life of the landfill. Where
the contracted term is not the life of the landfill, the property owner 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.
Page 7
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The Companys internal and third-party engineers perform surveys at least annually to estimate
the remaining disposal capacity at its landfills. Many of the Companys existing landfills have
the potential for expanded disposal capacity beyond the amount currently permitted. The Companys
landfill depletion rates are based on the remaining disposal capacity, considering both permitted
and probable expansion airspace at the landfills it owns, and certain landfills it operates, but
does not own, under life-of-site agreements. Expansion airspace consists of additional disposal
capacity being pursued through means of an expansion that is not actually permitted. Expansion
airspace that meets certain internal criteria is included in the estimate of total landfill
airspace. The Companys landfill depletion rates are based on the terms of the operating
agreements at its operated landfills that have capitalized expenditures.
Based on remaining permitted capacity as of September 30, 2010, and projected annual disposal
volumes, the average remaining landfill life for the Companys owned landfills and landfills
operated under life-of-site operating agreements is estimated to be approximately 40 years. As of
September 30, 2010, the Company is seeking to expand permitted capacity at six 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 Companys owned landfills and landfills operated under life-of-site operating agreements is
50 years, with lives ranging from 1 to 199 years.
During the nine months ended September 30, 2009 and 2010, the Company expensed $23,195 and
$29,621, respectively, or an average of $2.93 and $3.00 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
by estimating the total obligation in current dollars, inflating the obligation based upon the
expected date of the expenditure and discounting the inflated total to its present value using a
credit-adjusted risk-free rate. Any changes in expectations that result in an upward revision to
the estimated undiscounted cash flows are treated as a new liability and are inflated and
discounted at rates reflecting current market conditions. Downward revisions (or if there are no
changes) to the estimated undiscounted cash flows are inflated and discounted at rates reflecting
the market conditions at the time the cash flows were originally estimated. This policy results in
the Companys capping, closure and post-closure liabilities being recorded in layers. At
January 1, 2010, the Company decreased its discount rate assumption for purposes of computing 2010
layers for final capping, closure and post-closure obligations from 9.25% to 6.5%, in order to
more accurately reflect the Companys long-term cost of borrowing as of the end of 2009.
Consistent with the prior year, the Companys inflation rate assumption is 2.5%. 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 landfills airspace is consumed. Interest
is accreted on the recorded liability using the corresponding discount rate. During the nine
months ended September 30, 2009 and 2010, the Company expensed $1,496 and $1,323, respectively, or
an average of $0.19 and $0.13 per ton consumed, respectively, related to final capping, closure and
post-closure accretion expense.
Page 8
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The following is a reconciliation of the Companys final capping, closure and post-closure
liability balance from December 31, 2009 to September 30, 2010:
|
|
|
|
|
Final capping, closure and post-closure liability at December 31,
2009 |
|
$ |
32,235 |
|
Adjustments to final capping, closure and post-closure liabilities |
|
|
(7,118 |
) |
Liabilities incurred |
|
|
2,030 |
|
Accretion expense |
|
|
1,323 |
|
Closure payments |
|
|
(474 |
) |
Assumption of closure liabilities from acquisitions |
|
|
146 |
|
|
|
|
|
Final capping, closure and post-closure liability at September
30, 2010 |
|
$ |
28,142 |
|
|
|
|
|
The adjustments to final capping, closure and post-closure liabilities primarily consisted of
increases in estimated airspace at certain landfills where expansions are being pursued, as well as
revisions in capping, closure and post-closure cost estimates and decreases in estimates of annual
tonnage consumption. The Company performs its annual review of its cost and capacity estimates in
the first quarter of each year.
At September 30, 2010, $26,441 of the Companys restricted assets balance was for purposes of
securing our performance of future final capping, closure and post-closure obligations.
6. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
Revolver under Credit Facility, bearing interest ranging from
0.85% to 3.25%* |
|
$ |
269,000 |
|
|
$ |
436,000 |
|
2026 Notes, bearing interest at 3.75%, net of discount of $6,246
as of December 31, 2009 |
|
|
193,754 |
|
|
|
|
|
2015 Notes, bearing interest at 6.22% |
|
|
175,000 |
|
|
|
175,000 |
|
2019 Notes, bearing interest at 5.25% |
|
|
175,000 |
|
|
|
175,000 |
|
Tax-exempt bonds, bearing interest ranging from 0.19% to 0.40%* |
|
|
50,615 |
|
|
|
39,420 |
|
Notes payable to sellers in connection with acquisitions, bearing
interest at 6.05% to 10.35%* |
|
|
4,872 |
|
|
|
4,244 |
|
Notes payable to third parties, bearing interest at 1.0% to 10.9%* |
|
|
1,922 |
|
|
|
3,308 |
|
|
|
|
|
|
|
|
|
|
|
870,163 |
|
|
|
832,972 |
|
Less current portion |
|
|
(2,609 |
) |
|
|
(1,849 |
) |
|
|
|
|
|
|
|
|
|
$ |
867,554 |
|
|
$ |
831,123 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Interest rates in the table above represent the range of interest rates incurred during the
nine month period ended September 30, 2010. |
In January 2010, the Company gave notice to redeem two of its tax-exempt bonds with a
remaining principal balance of $10,275. The Company paid the principal, accrued interest and call
premium on these bonds on March 1, 2010.
Page 9
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
In 2006, the Company issued its 2026 Notes with an aggregate principal amount of $200,000.
The 2026 Notes were convertible into cash and, if applicable, shares of the Companys common stock
based on an initial conversion rate of 29.4118 shares of common stock per $1 principal amount of
2026 Notes (which was equal to an initial conversion price of approximately $34 per share), subject
to adjustment, and only under certain circumstances. Upon a surrender of the 2026 Notes for
conversion, the Company was required to deliver cash equal to the lesser of the aggregate principal
amount of notes to be converted or its total conversion obligation.
On April 1, 2010, the Company redeemed the $200,000 aggregate principal amount of its
2026 Notes. Holders of the notes chose to convert a total of $22,700 principal amount of the
notes. In addition to paying the principal amount of these notes with proceeds from its credit
facility, the Company issued 21,906 shares of its common stock in connection with the conversion
and redemption. The Company redeemed the balance of $177,300 principal amount of the notes with
proceeds from its credit facility. All holders of the notes also received accrued interest of
$0.01875 per $1 principal amount of the notes and an interest make-whole payment of $0.037396 per
$1 principal amount of the notes. As a result of the redemption, the Company recognized $9,734 of
pre-tax expense ($6,035 net of taxes) in April 2010.
7. ACQUISITIONS
Acquisitions are accounted for under the acquisition method of accounting. The results of
operations of the acquired businesses have been included in the Companys consolidated financial
statements from their respective acquisition dates.
During the nine months ended September 30, 2009, the Company completed the acquisition of 100%
interests in certain operations from Republic Services, Inc. and some of its subsidiaries and
affiliates (Republic) as well as the acquisition of a 100% interest in Sanipac, Inc. (Sanipac),
which included acquiring a 75% interest in EcoSort, LLC. In addition to the acquisitions from
Republic and the acquisition of Sanipac, the Company acquired four individually immaterial
non-hazardous solid waste collection, disposal and recycling businesses during the nine months
ended September 30, 2009. During the nine months ended September 30, 2010, the Company acquired 13
individually immaterial non-hazardous solid waste collection, disposal and recycling businesses.
The acquisitions completed during the nine months ended September 30, 2009 and 2010, were not
material to the Companys results of operations, either individually or in the aggregate. As a
result, pro forma financial information has not been provided. The Company expects these acquired
businesses to contribute towards the achievement of the Companys strategy to expand through
acquisitions.
Page 10
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The following table summarizes the consideration transferred and the amounts of identified
assets acquired and liabilities assumed at the acquisition date for acquisitions consummated in the
nine months ended September 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
|
Acquisitions |
|
|
Acquisitions |
|
Fair value of consideration transferred: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
418,666 |
|
|
$ |
17,391 |
|
Debt assumed |
|
|
16,423 |
|
|
|
9,657 |
|
Contingent consideration |
|
|
4,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
439,363 |
|
|
|
27,048 |
|
|
|
|
|
|
|
|
Recognized amounts of identifiable
assets acquired and liabilities
assumed: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
15,355 |
|
|
|
1,187 |
|
Other current assets |
|
|
4,135 |
|
|
|
602 |
|
Property and equipment |
|
|
308,335 |
|
|
|
22,322 |
|
Long-term franchise agreements
and contracts |
|
|
9,325 |
|
|
|
175 |
|
Customer lists |
|
|
33,620 |
|
|
|
1,597 |
|
Other intangibles |
|
|
19,133 |
|
|
|
|
|
Other long-term assets |
|
|
500 |
|
|
|
|
|
Accounts payable |
|
|
(1,369 |
) |
|
|
|
|
Accrued liabilities |
|
|
(2,183 |
) |
|
|
(2,899 |
) |
Deferred revenue |
|
|
(4,754 |
) |
|
|
(541 |
) |
Noncontrolling interest |
|
|
(1,514 |
) |
|
|
|
|
Other long-term liabilities |
|
|
(8,489 |
) |
|
|
(146 |
) |
Deferred income taxes |
|
|
(5,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total identifiable net assets |
|
|
367,044 |
|
|
|
22,297 |
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
72,319 |
|
|
$ |
4,751 |
|
|
|
|
|
|
|
|
The goodwill is attributable to the synergies and ancillary growth opportunities expected to
arise after the Companys acquisition of these businesses. Goodwill acquired in the nine months
ended September 30, 2009, totaling $40,812, is expected to be deductible for tax purposes.
Substantially all of the goodwill acquired from acquisitions during the nine months ended September
30, 2010, is expected to be deductible for tax purposes.
The fair value of acquired working capital related to two acquisitions completed during the
last 12 months is provisional pending receipt of information from the acquiree to support the fair
value of the assets acquired and liabilities assumed. Any adjustments recorded relating to
finalizing the working capital for these two acquisitions are not expected to be material to the
Companys financial position.
The gross amount of trade receivables due under contracts acquired during the period ended
September 30, 2009, is $16,132, of which $777 is expected to be uncollectible. The gross amount of
trade receivables due under contracts acquired during the period ended September 30, 2010, is
$1,470, of which $284 is expected to be uncollectible. The Company did not acquire any other class
of receivable as a result of the acquisition of these businesses.
Page 11
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
A reconciliation of the Fair value of consideration transferred, as disclosed in the table
above, to Payments for acquisitions, net of cash acquired, as reported in the Condensed
Consolidated Statements of Cash Flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2009 |
|
|
2010 |
|
Cash consideration transferred |
|
$ |
418,666 |
|
|
$ |
17,391 |
|
Payment of contingent consideration |
|
|
2,000 |
|
|
|
|
|
Payment of acquisition-related liabilities |
|
|
1,412 |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash
acquired |
|
$ |
422,078 |
|
|
$ |
17,391 |
|
|
|
|
|
|
|
|
The $2,000 of contingent consideration paid during the nine months ended September 30, 2009,
represented additional purchase price for an acquisition closed in 2007. Acquisition-related
liabilities are liabilities paid in the period shown above that were accrued for in a previous
year.
During the nine month periods ended September 30, 2009 and 2010, the Company incurred $4,179
and $1,177, respectively, of third-party acquisition-related costs. These expenses are included in
Selling, general and administrative expenses in the Companys Condensed Consolidated Statements of
Income.
8. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consisted of the following at September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and
contracts |
|
$ |
186,455 |
|
|
$ |
(23,475 |
) |
|
$ |
162,980 |
|
Customer lists |
|
|
59,109 |
|
|
|
(16,148 |
) |
|
|
42,961 |
|
Non-competition agreements |
|
|
9,414 |
|
|
|
(5,852 |
) |
|
|
3,562 |
|
Other |
|
|
21,236 |
|
|
|
(2,209 |
) |
|
|
19,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276,214 |
|
|
|
(47,684 |
) |
|
|
228,530 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
116,160 |
|
|
|
|
|
|
|
116,160 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
392,374 |
|
|
$ |
(47,684 |
) |
|
$ |
344,690 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization periods of long-term franchise agreements and contracts, and
customer lists acquired during the nine months ended September 30, 2010, are 36.0 years and
7.6 years, respectively.
Page 12
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
Intangible assets, exclusive of goodwill, consisted of the following at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and
contracts |
|
$ |
187,105 |
|
|
$ |
(18,751 |
) |
|
$ |
168,354 |
|
Customer lists |
|
|
57,572 |
|
|
|
(11,265 |
) |
|
|
46,307 |
|
Non-competition agreements |
|
|
9,732 |
|
|
|
(5,740 |
) |
|
|
3,992 |
|
Other |
|
|
21,236 |
|
|
|
(1,746 |
) |
|
|
19,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,645 |
|
|
|
(37,502 |
) |
|
|
238,143 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
116,160 |
|
|
|
|
|
|
|
116,160 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
391,805 |
|
|
$ |
(37,502 |
) |
|
$ |
354,303 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization periods of long-term franchise agreements and contracts,
customer lists and other intangibles acquired during the year ended December 31, 2009, are
33.0 years, 9.7 years and 38.1 years, respectively.
Estimated future amortization expense for the next five years of amortizable intangible assets
is as follows:
|
|
|
|
|
For the year ending December 31, 2010 |
|
$ |
14,268 |
|
For the year ending December 31, 2011 |
|
$ |
14,281 |
|
For the year ending December 31, 2012 |
|
$ |
13,986 |
|
For the year ending December 31, 2013 |
|
$ |
12,570 |
|
For the year ending December 31, 2014 |
|
$ |
11,881 |
|
9. SEGMENT REPORTING
The Companys revenues are derived from one industry segment, which includes the collection,
transfer, recycling and disposal of non-hazardous solid waste. No single contract or customer
accounted for more than 10% of the Companys total revenues at the consolidated or reportable
segment level during the periods presented.
The Company manages its operations through three geographic operating segments (Western,
Central and Southern), which are also the Companys reportable segments. Each operating segment is
responsible for managing several vertically integrated operations, which are comprised of
districts. The segment information presented herein for 2009 and 2010 reflects the realignment of
certain of the Companys districts between operating segments in the first quarter of 2010.
The Companys Chief Operating Decision Maker (CODM) evaluates operating segment
profitability and determines resource allocations based on operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets. Operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets is not a measure of operating
income, operating performance or liquidity under GAAP and may not be comparable to similarly titled
measures reported by other companies. The Companys management uses operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets in the evaluation of segment
operating performance as it is a profit measure that is generally within the control of the
operating segments. A reconciliation of operating income before depreciation, amortization and
gain (loss) on disposal of assets to income before income tax provision is included at the end of
this Note 9.
Page 13
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
Summarized financial information concerning the Companys reportable segments for the three
and nine months ended September 30, 2009 and 2010, is shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Before |
|
Three Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, |
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
September 30, |
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
2009 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
189,726 |
|
|
$ |
(22,143 |
) |
|
$ |
167,583 |
|
|
$ |
50,987 |
|
Central |
|
|
81,406 |
|
|
|
(9,019 |
) |
|
|
72,387 |
|
|
|
23,906 |
|
Southern |
|
|
90,654 |
|
|
|
(14,634 |
) |
|
|
76,020 |
|
|
|
23,032 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
361,786 |
|
|
$ |
(45,796 |
) |
|
$ |
315,990 |
|
|
$ |
99,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
Three Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Depreciation, |
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
September 30, |
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
2010 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
212,262 |
|
|
$ |
(23,724 |
) |
|
$ |
188,538 |
|
|
$ |
60,500 |
|
Central |
|
|
86,247 |
|
|
|
(9,700 |
) |
|
|
76,547 |
|
|
|
25,561 |
|
Southern |
|
|
97,785 |
|
|
|
(17,085 |
) |
|
|
80,700 |
|
|
|
25,610 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
396,294 |
|
|
$ |
(50,509 |
) |
|
$ |
345,785 |
|
|
$ |
113,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Before |
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, |
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
September 30, |
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
2009 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
530,265 |
|
|
$ |
(62,969 |
) |
|
$ |
467,296 |
|
|
$ |
139,570 |
|
Central |
|
|
232,742 |
|
|
|
(25,970 |
) |
|
|
206,772 |
|
|
|
68,170 |
|
Southern |
|
|
246,362 |
|
|
|
(38,934 |
) |
|
|
207,428 |
|
|
|
66,298 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,009,369 |
|
|
$ |
(127,873 |
) |
|
$ |
881,496 |
|
|
$ |
266,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 14
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Depreciation, |
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
September 30, |
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
2010 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
600,111 |
|
|
$ |
(68,609 |
) |
|
$ |
531,502 |
|
|
$ |
164,737 |
|
Central |
|
|
244,509 |
|
|
|
(27,499 |
) |
|
|
217,010 |
|
|
|
71,292 |
|
Southern |
|
|
284,389 |
|
|
|
(49,099 |
) |
|
|
235,290 |
|
|
|
75,576 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,129,009 |
|
|
$ |
(145,207 |
) |
|
$ |
983,802 |
|
|
$ |
315,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate functions include accounting, legal, tax, treasury, information
technology, risk management, human resources, training and other administrative
functions. |
|
(b) |
|
Intercompany revenues reflect each segments total intercompany sales,
including intercompany sales within a segment and between segments. Transactions
within and between segments are generally made on a basis intended to reflect the
market value of the service. |
|
(c) |
|
For those items included in the determination of operating income (loss)
before depreciation, amortization and gain (loss) on disposal of assets, the
accounting policies of the segments are the same as those described in the Companys
most recent Annual Report on Form 10-K. |
The following tables show changes in goodwill during the nine months ended September 30, 2009
and 2010, by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western |
|
|
Central |
|
|
Southern |
|
|
Total |
|
Balance as of
December 31, 2008 |
|
$ |
257,560 |
|
|
$ |
313,145 |
|
|
$ |
266,225 |
|
|
$ |
836,930 |
|
Goodwill acquired |
|
|
34,748 |
|
|
|
215 |
|
|
|
37,356 |
|
|
|
72,319 |
|
Goodwill divested |
|
|
|
|
|
|
|
|
|
|
(1,526 |
) |
|
|
(1,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2009 |
|
$ |
292,308 |
|
|
$ |
313,360 |
|
|
$ |
302,055 |
|
|
$ |
907,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western |
|
|
Central |
|
|
Southern |
|
|
Total |
|
Balance as of
December 31, 2009 |
|
$ |
291,781 |
|
|
$ |
313,366 |
|
|
$ |
301,563 |
|
|
$ |
906,710 |
|
Goodwill transferred |
|
|
20,295 |
|
|
|
(20,295 |
) |
|
|
|
|
|
|
|
|
Goodwill acquired |
|
|
731 |
|
|
|
2,304 |
|
|
|
1,716 |
|
|
|
4,751 |
|
Goodwill divested |
|
|
|
|
|
|
(64 |
) |
|
|
(1,111 |
) |
|
|
(1,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2010 |
|
$ |
312,807 |
|
|
$ |
295,311 |
|
|
$ |
302,168 |
|
|
$ |
910,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2010, the Company realigned certain of the Companys districts
between operating segments. This realignment resulted in the reallocation of goodwill among its
segments which is reflected in the Goodwill transferred line item in the above table. The
Company has no accumulated impairment losses associated with goodwill.
Page 15
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
A reconciliation of the Companys primary measure of segment profitability (operating income
before depreciation, amortization and gain (loss) on disposal of assets for reportable segments) to
Income before income tax provision in the Condensed Consolidated Statements of Income is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Operating income before
depreciation, amortization and
gain (loss) on disposal of
assets |
|
$ |
99,797 |
|
|
$ |
113,692 |
|
|
$ |
266,255 |
|
|
$ |
315,363 |
|
Depreciation |
|
|
(31,226 |
) |
|
|
(34,441 |
) |
|
|
(86,127 |
) |
|
|
(99,349 |
) |
Amortization of intangibles |
|
|
(3,671 |
) |
|
|
(3,616 |
) |
|
|
(9,351 |
) |
|
|
(10,800 |
) |
Gain (loss) on disposal of assets |
|
|
(139 |
) |
|
|
50 |
|
|
|
1,037 |
|
|
|
(572 |
) |
Interest expense |
|
|
(12,259 |
) |
|
|
(9,419 |
) |
|
|
(36,817 |
) |
|
|
(30,842 |
) |
Interest income |
|
|
134 |
|
|
|
135 |
|
|
|
1,275 |
|
|
|
453 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,193 |
) |
Other income, net |
|
|
879 |
|
|
|
1,500 |
|
|
|
1,055 |
|
|
|
1,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
provision |
|
$ |
53,515 |
|
|
$ |
67,901 |
|
|
$ |
137,327 |
|
|
$ |
166,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows, for the periods indicated, the Companys total revenues by service
line and with intercompany eliminations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Collection |
|
$ |
235,735 |
|
|
$ |
244,936 |
|
|
$ |
672,030 |
|
|
$ |
712,114 |
|
Disposal and transfer |
|
|
107,438 |
|
|
|
125,473 |
|
|
|
289,021 |
|
|
|
342,390 |
|
Intermodal, recycling and other |
|
|
18,613 |
|
|
|
25,885 |
|
|
|
48,318 |
|
|
|
74,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361,786 |
|
|
|
396,294 |
|
|
|
1,009,369 |
|
|
|
1,129,009 |
|
Less: intercompany elimination |
|
|
(45,796 |
) |
|
|
(50,509 |
) |
|
|
(127,873 |
) |
|
|
(145,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
315,990 |
|
|
$ |
345,785 |
|
|
$ |
881,496 |
|
|
$ |
983,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. DERIVATIVE FINANCIAL INSTRUMENTS
The Company recognizes all derivatives on the balance sheet at fair value. All of the
Companys derivatives have been designated as cash flow hedges; therefore, the effective portion of
the changes in the fair value of derivatives will be recognized in accumulated other comprehensive
income (loss) until the hedged item is recognized in earnings. The ineffective portion of the
changes in the fair value of derivatives will be immediately recognized in earnings. The Company
classifies cash inflows and outflows from derivatives within operating activities in the Condensed
Consolidated Statements of Cash Flows.
One of the Companys objectives for utilizing derivative instruments is to reduce its exposure
to fluctuations in cash flows due to changes in the variable interest rates of certain borrowings
issued under its credit facility. The Companys strategy to achieve that objective involves
entering into interest rate swaps that are specifically designated to the Companys credit facility
and accounted for as cash flow hedges.
Page 16
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
At September 30, 2010, the Companys derivative instruments included five interest rate swap
agreements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
Notional |
|
|
Interest |
|
|
Interest Rate |
|
|
|
|
Date Entered |
|
Amount |
|
|
Rate Paid* |
|
|
Received |
|
Effective Date |
|
Expiration Date |
November 2007 |
|
$ |
50,000 |
|
|
|
4.37 |
% |
|
1-month LIBOR |
|
February 2009 |
|
February 2011 |
November 2007 |
|
$ |
50,000 |
|
|
|
4.37 |
% |
|
1-month LIBOR |
|
February 2009 |
|
February 2011 |
November 2007 |
|
$ |
75,000 |
|
|
|
4.37 |
% |
|
1-month LIBOR |
|
February 2009 |
|
February 2011 |
November 2007 |
|
$ |
50,000 |
|
|
|
4.29 |
% |
|
1-month LIBOR |
|
June 2009 |
|
June 2011 |
March 2009 |
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR |
|
February 2011 |
|
February 2014 |
|
|
|
* |
|
Plus applicable margin. |
Another of the Companys objectives for utilizing derivative instruments is to reduce its
exposure to fluctuations in cash flows due to changes in the price of diesel fuel. The Companys
strategy to achieve that objective involves entering into fuel hedges that are specifically
designated to certain forecasted diesel fuel purchases and accounted for as cash flow hedges.
At September 30, 2010, the Companys derivative instruments included nine fuel hedge
agreements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel |
|
|
|
|
|
|
|
|
|
Notional |
|
|
Rate |
|
|
|
|
|
|
|
|
|
Amount |
|
|
Paid |
|
|
|
|
|
|
|
|
|
(in gallons |
|
|
Fixed |
|
|
Diesel Rate Received |
|
|
|
|
Date Entered |
|
per month) |
|
|
(per gallon) |
|
|
Variable |
|
Effective Date |
|
Expiration Date |
October 2008 |
|
|
250,000 |
|
|
$ |
3.750 |
|
|
DOE Diesel Fuel Index |
* |
January 2009 |
|
December 2010 |
October 2008 |
|
|
100,000 |
|
|
$ |
3.745 |
|
|
DOE Diesel Fuel Index |
* |
January 2009 |
|
December 2010 |
October 2008 |
|
|
250,000 |
|
|
$ |
3.500 |
|
|
DOE Diesel Fuel Index |
* |
January 2009 |
|
December 2010 |
December 2008 |
|
|
100,000 |
|
|
$ |
3.000 |
|
|
DOE Diesel Fuel Index |
* |
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
$ |
3.000 |
|
|
DOE Diesel Fuel Index |
* |
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
$ |
2.820 |
|
|
DOE Diesel Fuel Index |
* |
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
$ |
2.700 |
|
|
DOE Diesel Fuel Index |
* |
January 2010 |
|
December 2010 |
December 2008 |
|
|
400,000 |
|
|
$ |
2.950 |
|
|
DOE Diesel Fuel Index |
* |
January 2011 |
|
December 2011 |
December 2008 |
|
|
400,000 |
|
|
$ |
3.030 |
|
|
DOE Diesel Fuel Index |
* |
January 2012 |
|
December 2012 |
|
|
|
* |
|
If the national U.S. on-highway average price for a gallon of diesel fuel (average
price), as published by the Department of Energy, exceeds the contract price per gallon, the
Company receives the difference between the average price and the contract price (multiplied by
the notional number of gallons) from the counterparty. If the average price is less than the
contract price per gallon, the Company pays the difference to the counterparty. |
Page 17
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The fair values of derivative instruments designated as cash flow hedges as of September 30,
2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
Designated as Cash |
|
Asset Derivatives |
|
|
Liability Derivatives |
|
Flow Hedges |
|
Balance Sheet Location |
|
Fair Value |
|
|
Balance Sheet Location |
|
Fair Value |
|
Interest rate swaps |
|
|
|
$ |
|
|
|
Accrued liabilities(a) |
|
$ |
(6,340 |
) |
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
(7,292 |
) |
Fuel hedges |
|
Prepaid expenses and other current assets(b) |
|
|
1,367 |
|
|
Prepaid expenses and other current assets(b) |
|
|
(874 |
) |
|
|
Other assets, net |
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
designated as cash
flow hedges |
|
|
|
$ |
3,031 |
|
|
|
|
$ |
(14,506 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the estimated amount of the existing unrealized losses on interest rate
swaps as of September 30, 2010 (based on the interest rate yield curve at that date), included
in accumulated other comprehensive loss expected to be reclassified into pre-tax earnings
within the next 12 months. The actual amounts reclassified into earnings are dependent on
future movements in interest rates. |
|
(b) |
|
The net balance of $493 represents the estimated amount of the existing unrealized
gains on fuel hedges as of September 30, 2010 (based on the forward DOE diesel fuel index curve
at that date), included in accumulated other comprehensive loss expected to be reclassified
into pre-tax earnings within the next 12 months. The actual amounts reclassified into earnings
are dependent on future movements in diesel fuel prices. |
The fair values of derivative instruments designated as cash flow hedges as of December 31,
2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
Designated as Cash |
|
Asset Derivatives |
|
|
Liability Derivatives |
|
Flow Hedges |
|
Balance Sheet Location |
|
Fair Value |
|
|
Balance Sheet Location |
|
Fair Value |
|
Interest rate swaps |
|
Other assets, net |
|
$ |
1,647 |
|
|
Accrued liabilities |
|
$ |
(8,235 |
) |
|
|
|
|
|
|
|
|
Other assets, net |
|
|
(1,173 |
) |
Fuel hedges |
|
Accrued liabilities |
|
|
1,406 |
|
|
Accrued liabilities |
|
|
(3,884 |
) |
|
|
Other assets, net |
|
|
2,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
designated as cash
flow hedges |
|
|
|
$ |
5,427 |
|
|
|
|
$ |
(13,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the impact of the Companys cash flow hedges on the results of
operations, comprehensive income and accumulated other comprehensive loss (AOCL) for the three
months ended September 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
|
|
Amount of (Gain) or Loss |
|
Derivatives |
|
Recognized in AOCL on |
|
|
Statement of |
|
Reclassified from AOCL into |
|
Designated as Cash |
|
Derivatives, |
|
|
Income |
|
Earnings, Net of Tax |
|
Flow Hedges |
|
Net of Tax (Effective Portion) |
|
|
Classification |
|
(Effective Portion) |
|
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
2009 |
|
|
2010 |
|
Interest rate swaps |
|
$ |
(3,540 |
) |
|
$ |
(2,342 |
) |
|
Interest expense |
|
$ |
2,567 |
|
|
$ |
1,283 |
|
Fuel hedges |
|
|
(1,603 |
) |
|
|
1,164 |
|
|
Cost of operations |
|
|
1,480 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(5,143 |
) |
|
$ |
(1,178 |
) |
|
|
|
$ |
4,047 |
|
|
$ |
1,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 18
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The following table summarizes the impact of the Companys cash flow hedges on the results of
operations, comprehensive income and AOCL for the nine months ended September 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
|
|
Amount of (Gain) or Loss |
|
Derivatives |
|
Recognized in AOCL on |
|
|
Statement of |
|
Reclassified from AOCL into |
|
Designated as Cash |
|
Derivatives, |
|
|
Income |
|
Earnings, Net of Tax |
|
Flow Hedges |
|
Net of Tax (Effective Portion) |
|
|
Classification |
|
(Effective Portion) |
|
|
|
Nine Months Ended |
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
2009 |
|
|
2010 |
|
Interest rate swaps |
|
$ |
(2,564 |
) |
|
$ |
(7,776 |
) |
|
Interest expense |
|
$ |
7,654 |
|
|
$ |
4,152 |
|
Fuel hedges |
|
|
(898 |
) |
|
|
(754 |
) |
|
Cost of operations |
|
|
4,275 |
|
|
|
2,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(3,462 |
) |
|
$ |
(8,530 |
) |
|
|
|
$ |
11,929 |
|
|
$ |
6,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the derivatives and hedging guidance, the effective portions of the changes
in fair values of interest rate swaps and fuel hedges have been recorded in equity as a component
of AOCL. As the critical terms of the interest rate swaps match the underlying debt being hedged,
no ineffectiveness is recognized on these swaps and, therefore, all unrealized changes in fair
value are recorded in AOCL. Because changes in the actual price of diesel fuel and changes in the
DOE index price do not offset exactly each reporting period, the Company assesses whether the fuel
hedges are highly effective using the cumulative dollar offset approach.
Amounts reclassified from AOCL into earnings related to realized gains and losses on interest
rate swaps are recognized when interest payments or receipts occur related to the swap contracts,
which correspond to when interest payments are made on the Companys hedged debt. Amounts
reclassified from AOCL into earnings related to realized gains and losses on fuel hedges are
recognized when settlement payments or receipts occur related to the swap contracts, which
correspond to when the underlying fuel is consumed.
The Company measures and records ineffectiveness on the fuel hedges in Cost of operations in
the Condensed Consolidated Statements of Income on a monthly basis based on the difference between
the DOE index price and the actual price of diesel fuel purchased, multiplied by the notional
number of gallons on the contracts. There was no significant ineffectiveness recognized on the
fuel hedges during the nine months ended September 30, 2009 and 2010.
See Note 13 for further discussion on the impact of the Companys hedge accounting to its
consolidated Comprehensive income and AOCL.
Page 19
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
11. NET INCOME PER SHARE INFORMATION
The following table sets forth the calculation of the numerator and denominator used in the
computation of basic and diluted net income per common share attributable to the Companys common
stockholders for the three and nine months ended September 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable
to Waste Connections for
basic and diluted
earnings per share |
|
$ |
34,150 |
|
|
$ |
40,986 |
|
|
$ |
86,566 |
|
|
$ |
98,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding |
|
|
78,837,984 |
|
|
|
77,062,885 |
|
|
|
79,618,566 |
|
|
|
77,419,498 |
|
Dilutive effect of stock
options and warrants |
|
|
812,514 |
|
|
|
487,842 |
|
|
|
746,769 |
|
|
|
620,498 |
|
Dilutive effect of
restricted stock |
|
|
174,118 |
|
|
|
301,842 |
|
|
|
102,845 |
|
|
|
241,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding |
|
|
79,824,616 |
|
|
|
77,852,569 |
|
|
|
80,468,180 |
|
|
|
78,281,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009 and 2010, stock options and warrants to purchase
25,018 and 852 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, 2009 and
2010, stock options and warrants to purchase 41,578 and 1,458 shares of common stock, respectively,
were excluded from the computation of diluted earnings per share as they were anti-dilutive. The
2026 Notes were not dilutive during the three months ended September 30, 2009, or the nine months
ended September 30, 2009 and 2010. On April 1, 2010, the Company redeemed the aggregate principal
amount of its 2026 Notes.
12. FAIR VALUE MEASUREMENTS
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and
liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured
at fair value on a non-recurring basis, in periods subsequent to their initial measurement. These
tiers include: Level 1, defined as quoted market prices in active markets for identical assets or
liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that
are not active, model-based valuation techniques for which all significant assumptions are
observable in the market, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities; and Level 3, defined as
unobservable inputs that are not corroborated by market data.
Page 20
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The Companys financial assets and liabilities recorded at fair value on a recurring basis
include derivative instruments and restricted assets. The Companys derivative instruments are
pay-fixed, receive-variable interest rate swaps and pay-fixed, receive-variable diesel fuel
hedges. The Companys interest rate swaps are recorded at their estimated fair values based on
quotes received from financial institutions that trade these contracts. The Company verifies the
reasonableness of these quotes using similar quotes from another financial institution as of each
date for which financial statements are prepared. The Company uses a discounted cash flow (DCF)
model to determine the estimated fair values of the diesel fuel hedges. The assumptions used
in preparing the DCF model include: (i) estimates for the forward DOE index curve; and (ii) the
discount rate based on risk-free interest rates over the term of the agreements. The DOE index
curve used in the DCF model was obtained from financial institutions that trade these contracts.
For the Companys interest rate swaps and fuel hedges, the Company also considers the Companys
creditworthiness in its determination of the fair value measurement of these instruments in a net
liability position and the banks creditworthiness in its determination of the fair value
measurement of these instruments in a net asset position. The Companys restricted assets are
valued at quoted market prices in active markets for identical assets, which the Company receives
from the financial institutions that hold such investments on its behalf. The Companys restricted
assets measured at fair value are invested primarily in U.S. government and agency securities.
The Companys assets and liabilities measured at fair value on a recurring basis at
December 31, 2009 and September 30, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2009 Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Interest rate swap
derivative
instruments net
liability position |
|
$ |
(7,761 |
) |
|
$ |
|
|
|
$ |
(7,761 |
) |
|
$ |
|
|
Fuel hedge
derivative
instruments net
liability position |
|
$ |
(104 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(104 |
) |
Restricted assets |
|
$ |
27,617 |
|
|
$ |
27,617 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at September 30, 2010 Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Interest rate swap
derivative
instruments net
liability position |
|
$ |
(13,632 |
) |
|
$ |
|
|
|
$ |
(13,632 |
) |
|
$ |
|
|
Fuel hedge
derivative
instruments net
asset position |
|
$ |
2,157 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,157 |
|
Restricted assets |
|
$ |
29,351 |
|
|
$ |
29,351 |
|
|
$ |
|
|
|
$ |
|
|
During the nine months ended September 30, 2010, there were no fair value measurements of
assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial
recognition.
Page 21
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The following table summarizes the change in the fair value for Level 3 derivatives for the
nine months ended September 30, 2009:
|
|
|
|
|
|
|
Level 3 |
|
|
|
Derivatives |
|
Balance as of December 31, 2008 |
|
$ |
(10,812 |
) |
Realized losses included in earnings |
|
|
6,874 |
|
Unrealized gains included in AOCL |
|
|
(1,409 |
) |
|
|
|
|
Balance as of September 30, 2009 |
|
$ |
(5,347 |
) |
|
|
|
|
The following table summarizes the change in the fair value for Level 3 derivatives for the
nine months ended September 30, 2010:
|
|
|
|
|
|
|
Level 3 |
|
|
|
Derivatives |
|
Balance as of December 31, 2009 |
|
$ |
(104 |
) |
Realized losses included in earnings |
|
|
3,478 |
|
Unrealized gains included in AOCL |
|
|
(1,217 |
) |
|
|
|
|
Balance as of September 30, 2010 |
|
$ |
2,157 |
|
|
|
|
|
Page 22
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
13. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate swaps and fuel hedges
that qualify for hedge accounting. The components of other comprehensive income (loss) and related
tax effects for the three and nine month periods ended September 30, 2009 and 2010, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts
reclassified into interest expense |
|
$ |
4,127 |
|
|
$ |
(1,560 |
) |
|
$ |
2,567 |
|
Fuel hedge amounts reclassified
into cost of operations |
|
|
2,379 |
|
|
|
(899 |
) |
|
|
1,480 |
|
Changes in fair value of interest
rate swaps |
|
|
(5,692 |
) |
|
|
2,152 |
|
|
|
(3,540 |
) |
Changes in fair value of fuel hedges |
|
|
(2,577 |
) |
|
|
974 |
|
|
|
(1,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,763 |
) |
|
$ |
667 |
|
|
$ |
(1,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2010 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts
reclassified into interest expense |
|
$ |
2,069 |
|
|
$ |
(786 |
) |
|
$ |
1,283 |
|
Fuel hedge amounts reclassified
into cost of operations |
|
|
1,154 |
|
|
|
(438 |
) |
|
|
716 |
|
Changes in fair value of interest
rate swaps |
|
|
(3,777 |
) |
|
|
1,435 |
|
|
|
(2,342 |
) |
Changes in fair value of fuel hedges |
|
|
1,878 |
|
|
|
(714 |
) |
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,324 |
|
|
$ |
(503 |
) |
|
$ |
821 |
|
|
|
|
|
|
|
|
|
|
|
Page 23
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
Total comprehensive income for the three months ended September 30, 2009 and 2010 was $33,167
and $42,078, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts
reclassified into interest expense |
|
$ |
12,305 |
|
|
$ |
(4,651 |
) |
|
$ |
7,654 |
|
Fuel hedge amounts reclassified
into cost of operations |
|
|
6,874 |
|
|
|
(2,599 |
) |
|
|
4,275 |
|
Changes in fair value of interest
rate swaps |
|
|
(4,033 |
) |
|
|
1,469 |
|
|
|
(2,564 |
) |
Changes in fair value of fuel hedges |
|
|
(1,409 |
) |
|
|
511 |
|
|
|
(898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,737 |
|
|
$ |
(5,270 |
) |
|
$ |
8,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts
reclassified into interest expense |
|
$ |
6,697 |
|
|
$ |
(2,545 |
) |
|
$ |
4,152 |
|
Fuel hedge amounts reclassified
into cost of operations |
|
|
3,478 |
|
|
|
(1,322 |
) |
|
|
2,156 |
|
Changes in fair value of interest
rate swaps |
|
|
(12,568 |
) |
|
|
4,792 |
|
|
|
(7,776 |
) |
Changes in fair value of fuel hedges |
|
|
(1,217 |
) |
|
|
463 |
|
|
|
(754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,610 |
) |
|
$ |
1,388 |
|
|
$ |
(2,222 |
) |
|
|
|
|
|
|
|
|
|
|
A rollforward of the amounts included in AOCL, net of taxes, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
Interest |
|
|
Comprehensive |
|
|
|
Fuel Hedges |
|
|
Rate Swaps |
|
|
Loss |
|
Balance at December 31, 2009 |
|
$ |
(66 |
) |
|
$ |
(4,826 |
) |
|
$ |
(4,892 |
) |
Amounts reclassified into earnings |
|
|
2,156 |
|
|
|
4,152 |
|
|
|
6,308 |
|
Change in fair value |
|
|
(754 |
) |
|
|
(7,776 |
) |
|
|
(8,530 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
1,336 |
|
|
$ |
(8,450 |
) |
|
$ |
(7,114 |
) |
|
|
|
|
|
|
|
|
|
|
See Note 10 for further discussion on the Companys derivative instruments.
14. SHARE REPURCHASE PROGRAM
The Companys Board of Directors has authorized a common stock repurchase program for the
repurchase of up to $800,000 of common stock through December 31, 2012. Under the program, stock
repurchases may be made in the open market or in privately negotiated transactions from time to
time at managements discretion. The timing and amounts of any repurchases will depend on many
factors, including the Companys capital structure, the market price of the common stock and
overall market conditions. During the nine months ended September 30, 2009 and 2010, the Company
repurchased 1,557,628 and 3,347,111 shares, respectively, of its common stock under this program at
a cost of $40,168 and $116,285, respectively. As of September 30, 2010, the remaining maximum
dollar value of shares available for repurchase under the program was approximately $201,308.
Subsequent to September 30, 2010 and through October 15, 2010, the Company repurchased
431,379 shares of its common stock under this program at a cost of $17,319. The Companys policy
related to repurchases of its common stock is to charge any excess of cost over par value entirely
to additional paid-in capital.
Page 24
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
15. COMMITMENTS AND CONTINGENCIES
The Companys subsidiary, High Desert Solid Waste Facility, Inc. (formerly known as Rhino
Solid Waste, Inc.) (HDSWF), 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 Departments 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 communitys quality of
life. In July 2007, the Department, CDC, the Company and Otero County signed a stipulation
requesting a postponement of the limited public hearing to allow the Company time to explore a
possible relocation of the landfill to a new site. Since 2007, the Department has issued several
postponements orders for the limited public hearing, currently scheduled for November 2010, as
HDSWF has continued to evaluate the suitability of the new site. In July 2009, HDSWF purchased
approximately 325 acres of undeveloped land comprising the new site from the State of New Mexico.
HDSWF filed a formal landfill permit application for the new site with the Department on September
17, 2010, and the Department is evaluating that application. At September 30, 2010, the Company
had $11,576 of capitalized expenditures related to this landfill development project. If the
Company is not ultimately issued a permit to operate the landfill at one of the two sites, the
Company will be required to expense in a future period the $11,576 of capitalized expenditures,
less the recoverable value of the undeveloped properties and other amounts recovered, which would
likely have a material adverse effect on the Companys results of operations 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. The landfill has operated continuously since that time. On
October 3, 2005, landfill opponents filed a suit (Board of Commrs of Sumner County, Kansas,
Tri-County Concerned Citizens and Dalton Holland v. Roderick Bremby, Secy of the Kansas Dept of
Health and Envt, et al.) in the District Court of Shawnee County, Kansas, seeking a judicial
review of KDHEs decision to issue the permit, alleging that a site analysis prepared for the
Company and submitted to 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. The Company intervened in this lawsuit shortly after it was filed. On April 7, 2006,
the District Court issued an order denying the plaintiffs request for judicial review on the
grounds that they lacked standing to bring the action. The plaintiffs appealed that decision to
the Kansas Court of Appeals, and on October 12, 2007, the Court of Appeals issued an opinion
reversing and remanding the District Courts decision. The Company appealed the decision to the
Kansas Supreme Court, and on July 25, 2008, the Supreme Court affirmed the decision of the Court of
Appeals and remanded the case to the District Court for further proceedings on the merits.
Plaintiffs filed a second amended petition on October 22, 2008, and the Company filed a motion to
strike various allegations contained within the second amended petition. On July 2, 2009, the
District Court granted in part and denied in part the Companys motion to strike. The District
Court also set a new briefing schedule, and the parties completed the briefing earlier this year.
Oral argument in the case occurred on September 27, 2010. There is no scheduled time limit within
which the District Court has to decide this administrative appeal. While the Company believes that
it will prevail in this case, the District Court could remand the matter back to KDHE for
additional review of its decision or could revoke the permit. An order of remand to KDHE would not
necessarily affect the Companys continued operation of the landfill. Only in the event that a
final adverse determination with respect to the permit is received would there likely be a material
adverse effect on the Companys reported results of operations in the future. The Company
cannot estimate the amount of any such material adverse effect.
Page 25
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
One of the Companys subsidiaries, El Paso Disposal, LP (EPD), is a party to administrative
proceedings before the National Labor Relations Board (NLRB). In these proceedings, the union
has alleged various unfair labor practices relating to the failure to reach agreement on first
contracts and the resultant strike by, and the replacement of and a failure to recall, previous
employees. On April 29, 2009, following a hearing, an administrative law judge issued a
recommended Decision and Order finding violations of the National Labor Relations Act by EPD and
recommended to the NLRB that EPD take remedial actions, including reinstating certain employees and
their previous terms and conditions of employment, refraining from certain conduct, returning to
the bargaining table and providing a make whole remedy. EPD filed exceptions to the
administrative law judges recommendations on June 30, 2009. Thereafter, the parties exchanged
answers and response briefs, and the matter is currently before the NLRB on review. On July 27,
2009, the NLRBs regional office in Phoenix, Arizona filed a petition in federal court seeking an
injunction to reinstate the previous employees and order the parties to return to bargaining while
the review is pending. The hearing on the injunction was held on August 19, 2009, and on
October 30, 2009, the court granted the requested relief. EPD has appealed the courts order to
the Fifth Circuit Court of Appeals, and a hearing on the appeal occurred on August 2, 2010. The
Fifth Circuit is expected to issue its decision on the appeal in the near future. Several related
unfair labor practice charges alleging failure to bargain and improper recall were subsequently
filed against EPD. The charges were heard by an administrative law judge the week of August 24,
2009, and on December 2, 2009, the administrative law judge issued his recommended Decision and
Order granting part of the requested relief, while denying part, but the issues were effectively
subsumed by the interim injunction. Both parties filed exceptions to the judges recommendations,
exchanged answers and response briefs, and that matter is also currently under review by the NLRB.
On January 22, 2010 and March 5, 2010, the union filed new unfair labor practice charges
concerning events relating to the ongoing contract negotiations process. On May 28, 2010, the NLRB
issued a complaint alleging unfair labor practices, including alleged unlawful threats and coercive
statements, refusal to provide striking employees with full and unconditional reinstatement,
reduction of earning opportunities for striking employees, implementation of new routes for
drivers, implementation of a new longevity bonus plan, use of video footage captured by
surveillance camera to discipline employees, change to the driver training program, change to the
uniform practice and bargaining proposals that were predictably unacceptable to the union. EPD
filed an answer denying any wrongdoing. Further, EPD believes it has resolved many of these
allegations through negotiations with the union. A hearing on this complaint is scheduled for
November 2, 2010. EPD intends to continue to defend these proceedings vigorously.
Most recently, on June 11, 2010, June, 24, 2010, and June 30, 2010, the union filed new unfair
labor practice charges alleging that EPD has unlawfully failed to provide relevant information
requested by the union, and unilaterally changed terms and working conditions of employment (by
unspecified acts) resulting in a reduced size of the bargaining unit, implementing new work
schedules, suspending an employee with pay due to an accident, reassigning and/or changing work
assignments among bargaining unit employees and intimidating and coercing employees by suspending
strikers involved in accidents and by following drivers excessively while performing their duties.
The NLRB has included these new allegations in its complaint to be heard on November 2, 2010. EPD
intends to defend these allegations vigorously.
On August 10, 2010, the NLRB filed a motion for contempt and other civil relief before the
United States District Court for the Western District of Texas, alleging that EPD violated the
courts October 30, 2009 injunction order by failing or refusing to implement the interim relief
directed by the court (e.g., to restore changed employment terms, reinstate former strikers to
their prior positions, and not commit future purported unfair labor practices). A hearing on the
NLRBs motion is scheduled for November 10, 2010. EPD intends to
defend these allegations vigorously, and believes that many of the matters asserted by the
NLRB in its petition have already been resolved with the union. At this point, the Company is not
able to determine the likelihood of any outcome in these matters related to EPD, nor is it able to
estimate the amount or range of loss or the impact on the Company or its financial condition in the
event of an unfavorable outcome.
Page 26
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
The Company and Potrero Hills Landfill, Inc. (PHLF), which the Company purchased from
Republic Services, Inc. in April 2009, were named as real parties in interest in an amended
complaint captioned Sustainability, Parks, Recycling and Wildlife Legal Defense Fund v. County of
Solano, which was filed in the Superior Court of California, County of Solano, on July 9, 2009 (the
original complaint was filed on June 12, 2009). This lawsuit seeks to compel Solano County to
comply with Measure E, a ballot initiative and County ordinance passed in 1984 that the County has
not enforced against PHLF for at least 18 years. Measure E directs in part that Solano County
shall not allow the importation into the County of any solid waste which originated or was
collected outside the County in excess of 95,000 tons per year. PHLF disposes of approximately
870,000 tons of solid waste annually, approximately 650,000 tons of which originate from sources
outside of Solano County. The Sustainability, Parks, Recycling and Wildlife Legal Defense Fund
(SPRAWLDEF) lawsuit also seeks to overturn Solano Countys approval of the use permit for the
expansion of the Potrero Hills Landfill and the related Environmental Impact Report (EIR),
arguing that both violate Measure E and that the EIR violates the California Environmental Quality
Act (CEQA). Two similar actions seeking to enforce Measure E, captioned Northern California
Recycling Association v. County of Solano and Sierra Club v. County of Solano, were filed in the
same court on June 10, 2009, and August 10, 2009, respectively. The Northern California Recycling
Association (NCRA) case does not name the Company or any of its subsidiaries as parties and does
not contain any CEQA claims. The Sierra Club case names PHLF as a real party in interest, and
seeks to overturn the conditional use permit for the expansion of the landfill on Measure E grounds
(but does not raise CEQA claims). These lawsuits follow a previous lawsuit concerning Measure E
that NCRA filed against PHLF in the same court on July 22, 2008, prior to the Companys acquisition
of PHLF, but which NCRA later dismissed.
In December 2009, the Company and PHLF filed briefs vigorously opposing enforcement of
Measure E on Constitutional and other grounds. The Companys position is supported by Solano
County, a co-defendant in the Measure E litigation. It is also supported by the Attorney General
of the State of California, the National Solid Wastes Management Association and the California
Refuse Recycling Council, each of which filed supporting friend of court briefs or letters. In
addition, numerous waste hauling companies in California, Oregon and Nevada have intervened on the
Companys side in the state cases, subsequent to their participation in the federal action
challenging Measure E discussed below. A hearing on the merits for all three Measure E state cases
was held on February 18, 2010.
On May 12, 2010, the Solano County Superior Court issued a written opinion addressing
all three cases. The Court upheld Measure E in part by judicially rewriting the law, and then
issued a writ of mandamus directing Solano County to enforce Measure E as rewritten. The Court
decided that it could cure the laws discrimination against out-of-county waste by revising Measure
E to only limit the importation of waste into Solano County from other counties in California, but
not from other states. In the same opinion, the Court rejected the requests from petitioners in
the cases for a writ of administrative mandamus to overturn the permit approved by Solano County in
June 2009 for the expansion of PHLFs landfill, thereby leaving the expansion permit in place.
Petitioners Sierra Club and SPRAWLDEF filed motions to reconsider in which they asked the Court to
issue a writ of administrative mandamus and void PHLFs expansion permit. The County, the Company
and PHLF opposed the motions to reconsider and a hearing was held on June 25, 2010. On August 30,
the Court denied the motions to reconsider and reaffirmed its ruling denying the petitions for
writs to overturn PHLFs expansion permit. On September 17, 2010, the Court denied PHLFs and the
Companys administrative motion to consolidate the three Measure E cases into one proceeding.
Page 27
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
It is expected that the Court will soon enter final judgments and writs of mandamus in the
three cases, which can then be appealed. The Company will appeal the judgments to the California
Court of Appeal, and the Company understands that Solano County also intends to appeal the
judgments. Once the County notices an appeal, the judgments and writs will be stayed as a matter
of law pending the outcome of the appeal. At this point, the Company is not able to determine the
likelihood of any outcome in this matter, nor is it able to estimate the amount or range of loss or
the impact on the Company or its financial condition in the event of an unfavorable outcome.
In response to the pending three state court actions to enforce Measure E described above, the
Company, PHLF and other waste hauling companies in California, Oregon and Nevada that are damaged
by Measure E and would be further damaged if Measure E was enforced, filed a federal lawsuit to
enjoin Measure E and have it declared unconstitutional. On September 8, 2009, the coalition
brought suit in the United States District Court for the Eastern District of California in
Sacramento challenging Measure E under the Commerce Clause of the United States Constitution,
captioned Potrero Hills Landfill, Inc. et al. v. County of Solano. In response, SPRAWLDEF, Sierra
Club and NCRA intervened in the federal case to defend Measure E and filed motions to dismiss the
federal suit, or in the alternative, for the court to abstain from hearing the case in light of the
pending state court Measure E actions. On December 23, 2009, the federal court abstained and
declined to accept jurisdiction over the Companys case, holding that Measure E raised unique state
issues that should be resolved by the pending state court litigation, and granted the motions to
dismiss. The Company filed a notice of appeal to the courts ruling on January 22, 2010, and the
Company and its co-appellants filed their opening brief in the United States Court of Appeals for
the Ninth Circuit on September 20, 2010. The opposing brief of the three intervenor-appellees is
due on November 3, 2010.
Individual members of SPRAWLDEF were also plaintiffs in a lawsuit filed in the same court on
October 13, 2005, captioned Protect the Marsh, et al. v. County of Solano, et al., challenging the
EIR that Solano County certified in connection with its approval of the expansion of the Potrero
Hills Landfill on September 13, 2005. A motion to discharge the Superior Courts writ of mandate
directing the County to vacate and set aside its certification of the EIR was heard in August
2009. On November 3, 2009, the Superior Court upheld the Countys certification of the EIR and the
related permit approval actions. In response, the plaintiffs in Protect the Marsh filed a notice
of appeal to the courts order on December 31, 2009. On October 8, 2010, the California Court of
Appeal dismissed Plaintiffs appeal for lack of standing. At this point, the Company is not able
to determine the likelihood of any outcome in this matter, nor is it able to estimate the amount or
range of loss or the impact on the Company or its financial condition in the event of an
unfavorable outcome.
The Colorado Department of Public Health and Environment (CDPHE) submitted to the Company a
proposed Compliance Order on Consent (Proposed Consent Order) in November 2009 in connection with
notices of violation CDPHE issued to Denver Regional Landfill, Fountain Landfill and Southside
Landfill located in Erie, Fountain, and Pueblo, Colorado, respectively. The Proposed Consent Order
is a settlement document intended to address and correct alleged violations at the facilities. In
October 2010, three of the Companys subsidiaries, Broadacre Landfill, Inc., Waste Connections of
Colorado, Inc. and Denver Regional Landfill, Inc., settled with CDPHE without admitting any
violations of law or regulations and entered into a final Compliance Order on Consent, pursuant to
which the companies agreed to pay CDPHE an aggregate settlement fee equal to $171, subject to
additional amounts based on any similar future violations during the proceeding two-year period.
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.
Page 28
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except share, per share, per gallon, tonnage and per ton amounts)
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, 2010, there is no current proceeding or
litigation involving the Company or of which any of its property is the subject that the Company
believes will have a material adverse impact on its business, financial condition, results of
operations or cash flows.
16. SUBSEQUENT EVENTS
On October 19, 2010, the Companys Board of Directors authorized a three-for-two split of its
common stock, in the form of a 50% stock dividend, payable November 12, 2010, to stockholders of
record as of the close of business on October 29, 2010. To effect the three-for-two stock split,
one additional share of the Companys common stock will be issued on November 12, 2010 for every
two shares of common stock held by stockholders of record as of the close of business on October
29, 2010. The Companys stock will begin trading at the split-adjusted price on November 15, 2010.
Fractional share amounts will be paid in cash based on the closing market price of the Companys
common stock on the record date. The Company has not restated any share or per share amounts as a
result of this stock split within this report.
In addition, on October 19, 2010, the Companys Board of Directors authorized the initiation
of a quarterly cash dividend of $0.075 per share, as adjusted for the three-for-two stock split
described above. The initial quarterly cash dividend will be paid on November 12, 2010 to the
stockholders of record as of the close of business on October 29, 2010. The Board will review the
cash dividend periodically, with a long-term objective of increasing the amount of the dividend.
No assurance can be given as to the amounts or timing of future dividends.
Page 29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q are forward-looking in
nature, including statements related to our ability to provide adequate cash to fund our operating
activities, our ability to draw on our credit facility or raise additional capital, the impact of
global economic conditions on our volume, business and results of operations, the effects of
landfill special waste projects on volume results, the effects of seasonality on our business and
results of operations, demand for recyclable commodities and recyclable commodity pricing, our
expectations with respect to capital expenditures, and our expectations with respect to the
purchase of fuel and fuel prices. These statements can be identified by the use of forward-looking
terminology such as believes, expects, may, will, should, or anticipates, or the
negative thereof or comparable terminology, or by discussions of strategy.
Our business and operations are subject to a variety of risks and uncertainties and,
consequently, actual results may differ materially from those projected by any forward-looking
statements. Factors that could cause actual results to differ from those projected include, but
are not limited to, the following:
|
|
|
Our acquisitions may not be successful, resulting in changes in strategy, operating
losses or a loss on sale of the business acquired; |
|
|
|
A portion of our growth and future financial performance depends on our ability to
integrate acquired businesses into our organization and operations; |
|
|
|
Downturns in the worldwide economy adversely affect operating results; |
|
|
|
Our results are vulnerable to economic conditions and seasonal factors affecting the
regions in which we operate; |
|
|
|
We may be subject in the normal course of business to judicial, administrative or other
third party proceedings that could interrupt or limit our operations, require expensive
remediation, result in adverse judgments, settlements or fines and create negative
publicity; |
|
|
|
We may be unable to compete effectively with larger and better capitalized companies
and governmental service providers; |
|
|
|
We may lose contracts through competitive bidding, early termination or governmental
action; |
|
|
|
Price increases may not be adequate to offset the impact of increased costs or may
cause us to lose volume; |
|
|
|
Increases in the price of fuel may adversely affect our business and reduce our
operating margins; |
|
|
|
Increases in labor and disposal and related transportation costs could impact our
financial results; |
|
|
|
Efforts by labor unions could divert management attention and adversely affect
operating results; |
|
|
|
We could face significant withdrawal liability if we withdraw from participation in one
or more multiemployer pension plans in which we participate; |
|
|
|
Increases in insurance costs and the amount that we self-insure for various risks could
reduce our operating margins and reported earnings; |
Page 30
|
|
|
Competition for acquisition candidates, consolidation within the waste industry and
economic and market conditions may limit our ability to grow through acquisitions; |
|
|
|
Our indebtedness could adversely affect our financial condition; we may incur
substantially more debt in the future; |
|
|
|
Each business that we acquire or have acquired may have liabilities or risks that we
fail or are unable to discover, including environmental liabilities; |
|
|
|
Liabilities for environmental damage may adversely affect our financial condition,
business and earnings; |
|
|
|
Our accruals for our landfill site closure and post-closure costs may be inadequate; |
|
|
|
The financial soundness of our customers could affect our business and operating
results; |
|
|
|
We depend significantly on the services of the members of our senior, regional and
district management team, and the departure of any of those persons could cause our
operating results to suffer; |
|
|
|
Our decentralized decision-making structure could allow local managers to make
decisions that adversely affect our operating results; |
|
|
|
We may incur additional charges related to capitalized expenditures of landfill
development projects, which would decrease our earnings; |
|
|
|
Because we depend on railroads for our intermodal operations, our operating results and
financial condition are likely to be adversely affected by any reduction or deterioration
in rail service; |
|
|
|
Our financial results are based upon estimates and assumptions that may differ from
actual results; |
|
|
|
The adoption of new accounting standards or interpretations could adversely affect our
financial results; |
|
|
|
Our financial and operating performance may be affected by the inability to renew
landfill operating permits, obtain new landfills and expand existing ones; |
|
|
|
Future changes in laws or renewed enforcement of laws regulating the flow of solid
waste in interstate commerce could adversely affect our operating results; |
|
|
|
Extensive and evolving environmental and health and safety laws and regulations may
restrict our operations and growth and increase our costs; |
|
|
|
Climate change regulations may adversely affect operating results; |
|
|
|
Extensive regulations that govern the design, operation and closure of landfills may
restrict our landfill operations or increase our costs of operating landfills; |
|
|
|
Alternatives to landfill disposal may cause our revenues and operating results to
decline; |
|
|
|
Fluctuations in prices for recycled commodities that we sell and rebates we offer to
customers may cause our revenues and operating results to decline; and |
|
|
|
Unusually adverse weather conditions may interfere with our operations, harming our
operating results. |
Page 31
These risks and uncertainties, as well as others, are discussed in greater detail in this
Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, or
SEC, including our most recent Annual Report on Form 10-K. There may be additional risks of which
we are not presently aware or that we currently believe are immaterial which could have an adverse
impact on our business. We make no commitment to revise or update any forward-looking statements
in order to reflect events or circumstances that may change.
OVERVIEW
The solid waste industry is a local and highly competitive business, requiring substantial
labor and capital resources. The participants compete for collection accounts primarily on the
basis of price and, to a lesser extent, the quality of service, and compete for landfill business
on the basis of tipping fees, geographic location and quality of operations. The solid waste
industry has been consolidating and continues to consolidate as a result of a number of factors,
including the increasing costs and complexity associated with waste management operations and
regulatory compliance. Many small independent operators and municipalities lack the capital
resources, management, operating skills and technical expertise necessary to operate effectively in
such an environment. The consolidation trend has caused solid waste companies to operate larger
landfills that have complementary collection routes that can use company-owned disposal capacity.
Controlling the point of transfer from haulers to landfills has become increasingly important as
landfills continue to close and disposal capacity moves farther from collection markets.
Generally, the most profitable industry operators are those companies that are vertically
integrated or enter into long-term collection contracts. A vertically integrated operator will
benefit from: (1) the internalization of waste, which is bringing waste to a company-owned
landfill; (2) the ability to charge third-party haulers tipping fees either at landfills or at
transfer stations; and (3) the efficiencies gained by being able to aggregate and process waste at
a transfer station prior to landfilling.
We are an integrated solid waste services company that provides solid waste collection,
transfer, disposal and recycling services in mostly secondary markets in the Western and Southern
U.S. We also provide intermodal services for the rail haul movement of cargo and solid waste
containers in the Pacific Northwest through a network of 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, 2010, we served approximately two million residential,
commercial and industrial customers from a network of operations in 27 states: Alabama, Arizona,
California, Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota,
Mississippi, Montana, Nebraska, Nevada, New Mexico, North Carolina, Oklahoma, Oregon, South
Carolina, South Dakota, Tennessee, Texas, Utah, Washington and Wyoming. As of that date, we owned
or operated a network of 133 solid waste collection operations, 55 transfer stations,
six intermodal facilities, 38 recycling operations, 42 municipal solid waste landfills and two
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. Such critical accounting estimates and assumptions are applicable to our reportable
segments. Refer to our most recent Annual Report on Form 10-K for a complete description of our
critical accounting estimates and assumptions.
Page 32
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.
GENERAL
Our revenues are derived from one industry segment, which includes the collection, transfer,
recycling and disposal of non-hazardous solid waste. No single contract or customer accounted for
more than 10% of our total revenues at the consolidated or reportable segment level during the
periods presented. The 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, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Collection |
|
$ |
235,735 |
|
|
|
65.2 |
% |
|
$ |
244,936 |
|
|
|
61.8 |
% |
|
$ |
672,030 |
|
|
|
66.6 |
% |
|
$ |
712,114 |
|
|
|
63.1 |
% |
Disposal and
transfer |
|
|
107,438 |
|
|
|
29.7 |
|
|
|
125,473 |
|
|
|
31.7 |
|
|
|
289,021 |
|
|
|
28.6 |
|
|
|
342,390 |
|
|
|
30.3 |
|
Recycling and other |
|
|
18,613 |
|
|
|
5.1 |
|
|
|
25,885 |
|
|
|
6.5 |
|
|
|
48,318 |
|
|
|
4.8 |
|
|
|
74,505 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361,786 |
|
|
|
100.0 |
% |
|
|
396,294 |
|
|
|
100.0 |
% |
|
|
1,009,369 |
|
|
|
100.0 |
% |
|
|
1,129,009 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: intercompany
elimination |
|
|
(45,796 |
) |
|
|
|
|
|
|
(50,509 |
) |
|
|
|
|
|
|
(127,873 |
) |
|
|
|
|
|
|
(145,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
315,990 |
|
|
|
|
|
|
$ |
345,785 |
|
|
|
|
|
|
$ |
881,496 |
|
|
|
|
|
|
$ |
983,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Chief Operating Decision Maker evaluates performance and determines resource allocations
based on several factors, of which the primary financial measure is operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets. Operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets is not a measure of operating
income, operating performance or liquidity under GAAP and may not be comparable to similarly titled
measures reported by other companies. Our management uses operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets in the evaluation of segment
operating performance as it is a profit measure that is generally within the control of the
operating segments.
We manage our operations through three geographic operating segments (Western, Central and
Southern), which are also our reportable segments. Each operating segment is responsible for
managing several vertically integrated operations, which are comprised of districts. The segment
information presented herein reflects the realignment of certain of our districts between operating
segments in the first quarter of 2010.
Page 33
Revenues, net of intercompany eliminations, for our reportable segments are shown in the
following table for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Western |
|
$ |
167,583 |
|
|
$ |
188,538 |
|
|
$ |
467,296 |
|
|
$ |
531,502 |
|
Central |
|
|
72,387 |
|
|
|
76,547 |
|
|
|
206,772 |
|
|
|
217,010 |
|
Southern |
|
|
76,020 |
|
|
|
80,700 |
|
|
|
207,428 |
|
|
|
235,290 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
315,990 |
|
|
$ |
345,785 |
|
|
$ |
881,496 |
|
|
$ |
983,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate functions include accounting, legal, tax, treasury, information
technology, risk management, human resources, training and other administrative functions. |
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets for our reportable segments is shown in the following table for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Western |
|
$ |
50,987 |
|
|
$ |
60,500 |
|
|
$ |
139,570 |
|
|
$ |
164,737 |
|
Central |
|
|
23,906 |
|
|
|
25,561 |
|
|
|
68,170 |
|
|
|
71,292 |
|
Southern |
|
|
23,032 |
|
|
|
25,610 |
|
|
|
66,298 |
|
|
|
75,576 |
|
Corporate(a) |
|
|
1,872 |
|
|
|
2,021 |
|
|
|
(7,783 |
) |
|
|
3,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
99,797 |
|
|
$ |
113,692 |
|
|
$ |
266,255 |
|
|
$ |
315,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate functions include accounting, legal, tax, treasury, information
technology, risk management, human resources, training and other administrative functions. |
A reconciliation of Operating income (loss) before depreciation, amortization and gain
(loss) on disposal of assets to Income before income tax provision is included in Note 9 to the
Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
Significant changes in revenue and operating income (loss) before depreciation, amortization
and gain (loss) on disposal of assets for our reportable segments for the three and nine month
periods ended September 30, 2010, compared to the three and nine month periods ended September 30,
2009, are discussed below:
Segment Revenue
Revenue in our Western segment increased $20.9 million, or 12.5%, to $188.5 million for the
three months ended September 30, 2010, from $167.6 million for the three months ended September 30,
2009, and increased $64.2 million, or 13.7%, to $531.5 million for the nine months ended September
30, 2010, from $467.3 million for the nine months ended September 30, 2009. For the three months
ended September 30, 2010, the components of the increase consisted of volume increases of $9.9
million, revenue acquired from acquisitions closed during, or subsequent to, the three months ended
September 30, 2009, of $1.9 million, net price increases of $3.4 million, recyclable commodity
sales increases of $4.6 million and other revenue increases of $1.1 million. For the nine months
ended September 30, 2010, the components of the increase consisted of volume increases of $4.0
million, revenue acquired from acquisitions closed during, or subsequent to, the nine months ended
September 30, 2009, of $30.3 million, net price increases of $9.9 million, recyclable commodity
sales increases of $15.1 million and other revenue increases of $4.9 million.
Page 34
Revenue in our Central segment increased $4.1 million, or 5.7%, to $76.5 million for the three
months ended September 30, 2010, from $72.4 million for the three months ended September 30, 2009,
and increased $10.2 million, or 5.0%, to $217.0 million for the nine months ended September 30,
2010, from $206.8 million for the nine months ended September 30, 2009. For the three months ended
September 30, 2010, the components of the increase consisted of volume increases of $0.4 million,
revenue acquired from acquisitions closed during, or subsequent to, the three months ended
September 30, 2009, of $0.3 million, net price increases of $2.8 million, recyclable commodity
sales increases of $0.5 million and other revenue increases of $0.1 million. For the nine months
ended September 30, 2010, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the nine months ended September 30, 2009, of
$3.3 million, net price increases of $7.6 million, recyclable commodity sales increases of
$2.4 million and other revenue increases of $0.3 million, partially offset by volume decreases of
$3.4 million.
Revenue in our Southern segment increased $4.7 million, or 6.2%, to $80.7 million for the
three months ended September 30, 2010, from $76.0 million for the three months ended September 30,
2009, and increased $27.9 million, or 13.4%, to $235.3 million for the nine months ended September
30, 2010, from $207.4 million for the nine months ended September 30, 2009. For the three months
ended September 30, 2010, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the
three months ended September 30, 2009, of $1.9 million, net price increases of $2.8 million
and recyclable commodity sales increases of $0.3 million, partially offset by volume decreases of
$0.2 million and other revenue decreases of $0.1 million. For the nine months ended September 30,
2010, the components of the increase consisted of revenue acquired from acquisitions closed during,
or subsequent to, the nine months ended September 30, 2009, of $22.8 million, net price increases
of $7.9 million and recyclable commodity sales increases of $0.8 million, partially offset by
volume decreases of $2.8 million and other revenue decreases of $0.8 million.
Segment Operating Income (Loss) before Depreciation, Amortization and Gain (Loss) on Disposal
of Assets
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Western segment increased $9.5 million, or 18.7%, to $60.5 million for the three
months ended September 30, 2010, from $51.0 million for the three months ended September 30, 2009.
The increase was primarily due to income generated from acquisitions closed during, or subsequent
to, the three and nine months ended September 30, 2009, and the following changes at operations
owned in the comparable periods in 2009 and 2010: increased revenues and decreased auto and
workers compensation insurance expenses, partially offset by increased disposal expenses,
increased rail transportation expenses at our intermodal operations, increased third party trucking
expenses, increased franchise fees and taxes on revenues, increased expenses associated with the
cost of purchasing recyclable commodities and increased equipment and container repair expenses.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Western segment increased $25.1 million, or 18.0%, to $164.7 million for the nine
months ended September 30, 2010, from $139.6 million for the nine months ended September 30, 2009.
The increase was primarily due to income generated from acquisitions closed during, or subsequent
to, the three and nine months ended September 30, 2009, and the following changes at operations
owned in the comparable periods in 2009 and 2010: increased revenues, decreased labor expenses and
decreased legal expenses, partially offset by increased disposal expenses, increased rail
transportation expenses at our intermodal operations, increased franchise fees and taxes on
revenues, increased expenses associated with the cost of purchasing recyclable commodities and
increased property taxes.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Central segment increased $1.7 million, or 6.9%, to $25.6 million for the three
months ended September 30, 2010, from $23.9 million for the three months ended September 30, 2009,
and increased $3.1 million, or 4.6%, to $71.3 million for the nine months ended September 30, 2010,
from $68.2 million for the nine months ended September 30, 2009. The increases were primarily due
to the following changes at operations owned in the comparable periods in 2009 and 2010: increased
revenues, partially offset by increased third party trucking and transportation expenses, increased
labor expenses, increased taxes on revenues and increased advertising expenses.
Page 35
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Southern segment increased $2.6 million, or 11.2%, to $25.6 million for the three
months ended September 30, 2010, from $23.0 million for the three months ended September 30, 2009.
The increase was primarily due to income generated from acquisitions closed during, or subsequent
to, the three months ended September 30, 2009 and the following changes at operations owned in
comparable periods in 2009 and 2010: increased revenues, decreased disposal expenses and decreased
auto and workers compensation expenses, partially offset by increased third party trucking and
transportation expenses, increased taxes on revenues, increased labor expenses and increased
container repair expenses.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Southern segment increased $9.3 million, or 14.0%, to $75.6 million for the nine
months ended September 30, 2010, from $66.3 million for the nine months ended September 30, 2009.
The increase was primarily due to income generated from acquisitions closed during, or subsequent
to, the nine months ended September 30, 2009 and the following changes at operations owned in
comparable periods in 2009 and 2010: increased revenues and decreased auto and workers
compensation expenses, partially offset by increased third party trucking and transportation
expenses, increased disposal expenses, increased taxes on revenues, increased labor expenses and
increased container repair expenses.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets at Corporate increased $0.1 million, to $2.0 million for the three months ended September
30, 2010, from $1.9 million for the three months ended September 30, 2009. Operating income (loss)
before depreciation, amortization and gain (loss) on disposal of assets at Corporate increased
$11.6 million, to an income total of $3.8 million for the nine months ended September 30, 2010,
from a loss total of $7.8 million for the nine months ended September 30, 2009. Our estimated
recurring corporate expenses, which can vary from the actual amount of incurred corporate expenses,
are allocated to our three geographic operating segments. The increase for the nine months ended
September 30, 2010 was primarily due to decreased expenses associated with our prior corporate
office facilities, decreased direct acquisition expenses, a decrease in the amount of realized
losses on fuel hedges, decreased legal expenses and a decrease in auto and workers compensation
expense under our high deductible insurance program due to a reduction in projected losses on open
claims, partially offset by increased cash and stock-based incentive compensation expense.
Page 36
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2010
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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of operations |
|
|
57.1 |
|
|
|
56.0 |
|
|
|
57.9 |
|
|
|
56.7 |
|
Selling, general and
administrative |
|
|
11.3 |
|
|
|
11.1 |
|
|
|
11.8 |
|
|
|
11.2 |
|
Depreciation |
|
|
9.9 |
|
|
|
10.0 |
|
|
|
9.8 |
|
|
|
10.1 |
|
Amortization of intangibles |
|
|
1.2 |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
1.1 |
|
Loss (gain) on disposal of assets |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
20.5 |
|
|
|
21.9 |
|
|
|
19.5 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(3.9 |
) |
|
|
(2.7 |
) |
|
|
(4.2 |
) |
|
|
(3.1 |
) |
Interest income |
|
|
|
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0 |
) |
Other income (expense) |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.2 |
|
Income tax provision |
|
|
(6.1 |
) |
|
|
(7.7 |
) |
|
|
(5.7 |
) |
|
|
(6.7 |
) |
Net income attributable to
noncontrolling interests |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waste
Connections |
|
|
10.8 |
% |
|
|
11.9 |
% |
|
|
9.8 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Total revenues increased $29.8 million, or 9.4%, to $345.8 million for the
three months ended September 30, 2010, from $316.0 million for the three months ended September 30,
2009.
Acquisitions closed during, or subsequent to, the three months ended September 30, 2009,
increased revenues by approximately $4.1 million.
During the three months ended September 30, 2010, the net increase in prices charged to our
customers was $9.0 million, consisting of $8.0 million of core price increases and $1.0 million of
fuel, materials and environmental surcharges.
Volume increases in our existing business during the three months ended September 30, 2010,
increased revenues by approximately $10.1 million. The net increase in volume was primarily
attributable to increases in disposal and roll off activity for operations owned in the comparable
periods.
Increased recyclable commodity volumes collected and increased recyclable commodity prices
during the three months ended September 30, 2010, increased revenues by $5.4 million. The increase
in recyclable commodity prices was primarily a result of increased overseas demand for recyclable
commodities.
Other revenues increased by $1.2 million during the three months ended September 30, 2010,
primarily due to an increase in cargo volume at our intermodal operations.
Total revenues increased $102.3 million, or 11.6%, to $983.8 million for the nine months ended
September 30, 2010, from $881.5 million for the nine months ended September 30, 2009.
Page 37
Acquisitions closed during, or subsequent to, the nine months ended September 30, 2009,
increased revenues by approximately $56.3 million.
During the nine months ended September 30, 2010, the net increase in prices charged to our
customers was $25.3 million, consisting of $23.8 million of core price increases and $1.5 million
of fuel, materials and environmental surcharges.
Volume decreases in our existing business during the nine months ended September 30, 2010,
reduced revenues by approximately $2.2 million. The net decrease in volume was primarily
attributable to declines in commercial activity, roll off activity and transfer station volumes,
partially offset by increases in landfill volumes for operations owned in the comparable periods.
Our volume declines improved from a negative $10.4 million and negative $1.9 million during the
three months ended March 31, 2010 and June 30, 2010, respectively, to a positive $10.1 million
during the three months ended September 30, 2010, as a result of increased stability in our
operating markets and the timing of landfill special waste projects. We believe that our volume in
the quarter ending December 31, 2010, will remain positive, but will decline as compared to our
volume results for the three months ended September 30, 2010, due to a reduction in landfill
special waste projects.
Increased recyclable commodity volumes collected and increased recyclable commodity prices
during the nine months ended September 30, 2010, increased revenues by $18.4 million. The increase
in recyclable commodity prices was primarily a result of increased overseas demand for recyclable
commodities and reflects a recovery of recyclable commodity prices, which decreased significantly
in 2009.
Other revenues increased by $4.5 million during the nine months ended September 30, 2010,
primarily due to an increase in cargo volume at our intermodal operations.
Cost of Operations. Total cost of operations increased $13.2 million, or 7.3%, to
$193.6 million for the three months ended September 30, 2010, from $180.4 million for the three
months ended September 30, 2009. The increase was primarily attributable to operating costs
associated with acquisitions closed during, or subsequent to, the three and nine months ended
September 30, 2009, increased rail transportation expenses at our intermodal operations, increased
third party trucking and transportation expenses due to increased waste disposal internalization
and outsourcing these services, increased franchise fees and taxes on revenues due to increased tax
rates and increased landfill volumes, increased expenses associated with the cost of purchasing
recyclable commodities due to recyclable commodity pricing increases, increased labor expenses,
increased employee medical benefit expenses resulting from increased claims cost and severity,
increased equipment and container repair expenses, partially offset by a decrease in auto and
workers compensation expense under our high deductible insurance program due to a reduction in
projected losses on open claims and a decrease in general liability insurance expenses due to
reduced claims severity.
Total cost of operations increased $47.2 million, or 9.2%, to $558.0 million for the nine
months ended September 30, 2010, from $510.8 million for the nine months ended September 30, 2009.
The increase was primarily attributable to operating costs associated with acquisitions closed
during, or subsequent to, the three and nine months ended September 30, 2009, increased rail
transportation expenses at our intermodal operations, increased third party trucking and
transportation expenses due to increased waste disposal internalization and outsourcing these
services, increased disposal expenses due to increased disposal rates, increased franchise fees and
taxes on revenues due to increased tax rates and increased landfill volumes, increased expenses
associated with the cost of purchasing recyclable commodities due to recyclable commodity pricing
increases, increased labor expenses, increased equipment and container repair expenses, increased
property taxes and increased facility repairs, partially offset by decreased diesel fuel expense
resulting from lower volumes consumed and lower prices, a decrease in auto and workers
compensation expense under our high deductible insurance program due to a reduction in projected
losses on open claims and a decrease in general liability insurance expenses due to reduced claims
severity.
Page 38
Cost of operations as a percentage of revenues decreased 1.1 percentage points to 56.0% for
the three months ended September 30, 2010, from 57.1% for the three months ended September 30,
2009. The decrease as a percentage of revenues was primarily attributable to decreased auto and
workers compensation expense,
decreased general liability insurance expenses, price increases charged to our customers being
higher, on a percentage basis, than certain expense increases recognized during the three months
ended September 30, 2010, and leveraging existing personnel and equipment to service increases in
landfill revenue resulting from higher volumes, partially offset by increased third party trucking
and transportation expenses, increased employee medical benefit expenses and increased taxes on
revenues.
Cost of operations as a percentage of revenues decreased 1.2 percentage points to 56.7% for
the nine months ended September 30, 2010, from 57.9% for the nine months ended September 30, 2009.
The decrease as a percentage of revenues was primarily attributable to decreased fuel expense,
decreased auto and workers compensation expense, decreased general liability insurance expenses
and price increases charged to our customers being higher, on a percentage basis, than certain
expense increases recognized during the nine months ended September 30, 2010, partially offset by
increased third party trucking and transportation expenses and increased rail transportation
expenses.
SG&A. SG&A expenses increased $2.7 million, or 7.6%, to $38.5 million for the three
months ended September 30, 2010, from $35.8 million for the three months ended September 30, 2009.
The increase was primarily the result of additional personnel from acquisitions closed during, or
subsequent to, the three months ended September 30, 2009, increased payroll and payroll-related
expenses, increased cash and stock-based incentive compensation expense and increased advertising
expenses, partially offset by a decrease in bad debt expense.
SG&A expenses increased $6.1 million, or 5.8%, to $110.5 million for the nine months ended
September 30, 2010, from $104.4 million for the nine months ended September 30, 2009. The increase
was primarily the result of additional personnel from acquisitions closed during, or subsequent to,
the nine months ended September 30, 2009, increased payroll and payroll-related expenses, increased
cash and stock-based incentive compensation expense and increased advertising expenses, partially
offset by a decrease in legal expenses, decreased direct acquisition expenses and decreased
expenses associated with our prior corporate office facilities. During the nine months ended
September 30, 2009, we incurred higher direct acquisition expenses due primarily to our acquisition
of certain operations from Republic Services, Inc.
SG&A expenses as a percentage of revenues decreased 0.2 percentage points to 11.1% for the
three months ended September 30, 2010, from 11.3% for the three months ended September 30, 2009.
The decrease as a percentage of revenues was primarily attributable to leveraging existing SG&A to
service increases in landfill revenue resulting from higher volumes.
SG&A expenses as a percentage of revenues decreased 0.6 percentage points to 11.2% for the
nine months ended September 30, 2010, from 11.8% for the nine months ended September 30, 2009. The
decrease as a percentage of revenues was primarily attributable to declines in the aforementioned
charges for our prior corporate office facilities and direct acquisition expenses.
Depreciation. Depreciation expense increased $3.2 million, or 10.3%, to $34.4 million
for the three months ended September 30, 2010, from $31.2 million for the three months ended
September 30, 2009. Depreciation expense increased $13.2 million, or 15.4%, to $99.3 million for
the nine months ended September 30, 2010, from $86.1 million for the nine months ended September
30, 2009. The increases were primarily attributable to depreciation and depletion associated with
acquisitions closed during, or subsequent to, the three and nine months ended September 30, 2009,
increased depletion expense at existing operations and increased depreciation expense associated
with additions to our fleet and equipment purchased to support our existing operations.
Depreciation expense as a percentage of revenues increased 0.1 percentage points to 10.0% for
the three months ended September 30, 2010, from 9.9% for the three months ended September 30, 2009,
due primarily to increased depletion expense attributable to higher landfill volumes, partially
offset by leveraging existing equipment to service increases in landfill revenue.
Page 39
Depreciation expense as a percentage of revenues increased 0.3 percentage points to 10.1% for
the nine months ended September 30, 2010, from 9.8% for the nine months ended September 30, 2009,
due primarily to increased depletion expense at acquired operations.
Amortization of Intangibles. Amortization of intangibles expense decreased
$0.1 million, or 1.5%, to $3.6 million for the three months ended September 30, 2010, from
$3.7 million for the three months ended September 30, 2009, due to certain intangible assets
becoming fully amortized subsequent to September 30, 2009.
Amortization of intangibles expense increased $1.4 million, or 15.5%, to $10.8 million for the
nine months ended September 30, 2010, from $9.4 million for the nine months ended September 30,
2009, due primarily to amortization on contracts, customer lists and other intangibles acquired
during, or subsequent to, the nine months ended September 30, 2009.
Amortization of intangibles expense as a percentage of revenues decreased 0.2 percentage
points to 1.0% for the three months ended September 30, 2010, from 1.2% for the three months ended
September 30, 2009. Amortization of intangibles expense as a percentage of revenues was 1.1% for
the nine months ended September 30, 2010 and 2009.
Loss (Gain) on Disposal of Assets. Loss (gain) on disposal of assets decreased $0.2
million, to a gain of $0.1 million for the three months ended September 30, 2010, from a loss of
$0.1 million for the three months ended September 30, 2009. Loss (gain) on disposal of assets
increased $1.6 million, to a loss of $0.6 million for the nine months ended September 30, 2010,
from a gain of $1.0 million for the nine months ended September 30, 2009. During the nine months
ended September 30, 2009, we recorded a $1.7 million gain associated with the disposal of a hauling
operation in our Southern Region.
Operating Income. Operating income increased $10.9 million, or 16.9%, to
$75.7 million for the three months ended September 30, 2010, from $64.8 million for the three
months ended September 30, 2009. Operating income increased $32.8 million, or 19.1%, to
$204.6 million for the nine months ended September 30, 2010, from $171.8 million for the nine
months ended September 30, 2009. The increases were primarily attributable to increased revenues,
partially offset by increased operating costs, increased SG&A expense, and increased depreciation
expense and amortization of intangibles expense.
Operating income as a percentage of revenues increased 1.4 percentage points to 21.9% for the
three months ended September 30, 2010, from 20.5% for the three months ended September 30, 2009.
The increase as a percentage of revenues was due to the previously described 1.1 percentage point
decrease in cost of operations, 0.2 percentage point decrease in SG&A expense and 0.2 percentage
point decrease in amortization expense, partially offset by the 0.1 percentage point increase in
depreciation expense.
Operating income as a percentage of revenues increased 1.3 percentage points to 20.8% for the
nine months ended September 30, 2010, from 19.5% for the nine months ended September 30, 2009. The
increase as a percentage of revenues was due to the previously described 1.2 percentage point
decrease in cost of operations and 0.6 percentage point decrease in SG&A expense, partially offset
by the 0.3 percentage point increase in depreciation expense and 0.2 percentage point increase in
loss (gain) on disposal of assets.
Interest Expense. Interest expense decreased $2.9 million, or 23.2%, to $9.4 million
for the three months ended September 30, 2010, from $12.3 million for the three months ended
September 30, 2009. The decrease was primarily attributable to a reduction in our total average
outstanding borrowings, funding the redemption of our 2026 Notes with borrowings under our credit
facility at lower interest rates and a reduction in the amortization of our debt discount on the
redeemed 2026 Notes.
Interest expense decreased $6.0 million, or 16.2%, to $30.8 million for the nine months ended
September 30, 2010, from $36.8 million for the nine months ended September 30, 2009. The decrease
was primarily attributable to funding the redemption of our 2026 Notes with borrowings under our
credit facility at lower interest rates, a reduction in the amortization of our debt discount on
the redeemed 2026 Notes and reduced
average borrowing rates on the portion of our credit facility borrowings not fixed under
interest rate swap agreements.
Page 40
Interest Income. Interest income was $0.1 million for the three months ended
September 30, 2010 and 2009. Interest income decreased $0.8 million to $0.5 million for the nine
months ended September 30, 2010, from $1.3 million for the nine months ended September 30, 2009,
due to lower average cash balances. We maintained higher cash balances, primarily between January
2009 and April 2009, in order to fund acquisitions that closed during the second quarter of 2009.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the nine months
ended September 30, 2010, consisted of an expense charge of $9.7 million associated with the
redemption of our 2026 Notes and a charge of $0.5 million associated with the redemption of our
Wasco Bonds.
Income Tax Provision. Income taxes increased $7.3 million, or 38.4%, to $26.6 million
for the three months ended September 30, 2010, from $19.3 million for the three months ended
September 30, 2009. Income taxes increased $16.2 million, or 32.5%, to $66.3 million for the nine
months ended September 30, 2010, from $50.1 million for the nine months ended September 30, 2009.
Our effective tax rates for the three months ended September 30, 2009 and 2010, were 36.0% and
39.2%, respectively. Our effective tax rates for the nine months ended September 30, 2009 and
2010, were 36.5% and 40.0%, respectively.
During the three and nine months ended September 30, 2010, we recorded a $1.2 million increase
in the income tax provision associated with the reconciliation of the income tax provision to the
2009 federal and certain state tax returns, which were filed in the third quarter of 2010. We also
recorded a reduction to the liability for uncertain tax positions of approximately $0.6 million due
to the expiration of certain statutes of limitations, which was recorded as a reduction to income
tax expense. Additionally, during the nine months ended September 30, 2010, we recorded a $1.5
million increase in the income tax provision associated with an adjustment in deferred tax
liabilities resulting from a voter-approved increase in Oregon state income tax rates and changes
to the geographic apportionment of our state income taxes and a $0.4 million increase in the income
tax provision associated with the disposal of certain assets that had no tax basis.
During the three and nine months ended September 30, 2009, we recorded a reduction to income
tax expense of $0.4 million and $1.6 million, respectively, resulting from changes to the
geographical apportionment of our state income taxes due to acquisitions closed in the current year
and from current year changes to the state apportionment formulas used in certain states, and the
reconciliation of the income tax provision to the 2008 federal tax return, which was filed in
September 2009. Additionally, during the three and nine months ended September 30, 2009, we
recorded a reduction to the liability for uncertain tax positions of approximately $0.8 million due
to the expiration of certain statutes of limitations, which was recorded as a reduction to income
tax expense.
Net Income Attributable to Noncontrolling Interests. Net income attributable to
noncontrolling interests increased $0.2 million to $0.3 million for the three months ended
September 30, 2010, from $0.1 million for the three months ended September 30, 2009, due to
increased earnings at our majority-owned subsidiaries. Net income attributable to noncontrolling
interests was $0.7 million for the nine months ended September 30, 2010 and 2009.
Page 41
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain cash flow information for the nine month periods ended
September 30, 2009 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
Net cash provided by operating activities |
|
$ |
242,245 |
|
|
$ |
242,298 |
|
Net cash used in investing activities |
|
|
(504,920 |
) |
|
|
(100,808 |
) |
Net cash provided by (used in) financing activities |
|
|
7,432 |
|
|
|
(137,573 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and equivalents |
|
|
(255,243 |
) |
|
|
3,917 |
|
Cash and equivalents at beginning of period |
|
|
265,264 |
|
|
|
9,639 |
|
|
|
|
|
|
|
|
Cash and equivalents at end of period |
|
$ |
10,021 |
|
|
$ |
13,556 |
|
|
|
|
|
|
|
|
Operating Activities Cash Flows
For the nine months ended September 30, 2010, net cash provided by operating activities was
$242.3 million. For the nine months ended September 30, 2009, net cash provided by operating
activities was $242.2 million. The $0.1 million net increase in cash provided by operating
activities was due primarily to the following:
|
1) |
|
An increase in net income of $12.4 million; |
|
|
2) |
|
An increase in depreciation and amortization expense of $14.7 million; |
|
|
3) |
|
An increase in equity-based compensation expense of $1.5 million; less |
|
|
4) |
|
A decrease of $8.2 million attributable to an increase in the excess tax benefit
associated with equity-based compensation, due to an increase in stock option exercises
resulting in increased taxable income recognized by employees that is tax deductible to
us; |
|
|
5) |
|
A decrease in deferred taxes of $12.7 million due primarily to the recognition during
the nine months ended September 30, 2009, of tax benefits associated with a change in our
tax method for deducting depreciation expense for certain landfills; and |
|
|
6) |
|
A decrease in cash flows from operating assets and liabilities, net of effects from
acquisitions, of $9.0 million to cash provided by operating activities of $10.6 million
for the nine months ended September 30, 2010, from cash provided by operating activities
of $19.6 million for the nine months ended September 30, 2009. The significant components
of the $10.6 million in cash inflows from changes in operating assets and liabilities for
the nine months ended September 30, 2010, include the following: |
|
a) |
|
an increase from accrued liabilities of $16.4 million due primarily to
increased liabilities for payroll, property taxes, interest and auto and workers
compensation claims; |
|
|
b) |
|
an increase from prepaid expenses and other current assets of $7.2 million
due primarily to decreases in prepaid income taxes and the amortization of prepaid
license and permit costs; |
|
|
c) |
|
an increase from deferred revenue of $2.9 million due primarily to increased
revenues and the timing of billing for services; less |
|
|
d) |
|
a decrease from accounts receivable of $14.9 million due to increased
revenues; less, |
|
|
e) |
|
a decrease from accounts payable of $1.7 million due primarily to the timing
of payments for capital expenditures and operating expenses. |
Page 42
As of September 30, 2010, we had a working capital deficit of $36.2 million, including cash
and equivalents of $13.6 million. Our working capital deficit decreased $8.9 million from
$45.1 million at December 31, 2009. To date, we have experienced no loss or lack of access to our
cash or cash equivalents; however, we can provide no assurances that access to our cash and cash
equivalents will not be impacted by adverse conditions in the financial markets. Our strategy in
managing our working capital is generally to apply the cash generated from our operations that
remains after satisfying our working capital and capital expenditure requirements to reduce our
indebtedness under our credit facility and to minimize our cash balances.
Investing Activities Cash Flows
Net cash used in investing activities decreased $404.1 million to $100.8 million for the nine
months ended September 30, 2010, from $504.9 million for the nine months ended September 30, 2009.
The significant components of the decrease include the following:
|
1) |
|
A decrease in payments for acquisitions of $404.7 million; |
|
|
2) |
|
An increase in cash proceeds from the disposal of assets of $1.4 million, due
primarily to the disposal of various operations; less |
|
|
3) |
|
An increase in capital expenditures for property and equipment of $1.8 million due to
increases in site costs for various landfills and construction of buildings and purchase
of containers, partially offset by a decrease in truck and equipment purchases. |
Financing Activities Cash Flows
Net cash flows used in financing activities increased $145.0 million to $137.6 million for the
nine months ended September 30, 2010, from a net cash provided by financing activities total of
$7.4 million for the nine months ended September 30, 2009. The significant components of the
increase include the following:
|
1) |
|
An increase in payments to repurchase our common stock of $76.1 million; |
|
|
2) |
|
A decrease in net long-term borrowings of $95.0 million due to an increase in
long-term borrowings in the nine month period ended September 30, 2009 to fund
acquisitions; less |
|
|
3) |
|
An increase in proceeds from option and warrant exercises of $18.3 million due to an
increase in the number of options and warrants exercised in the nine month period ended
September 30, 2010; less |
|
|
4) |
|
An increase in the excess tax benefit associated with equity-based compensation of
$8.2 million, due to the aforementioned increase in options and warrants exercised in the
nine month period ended September 30, 2010, which resulted in increased taxable income,
recognized by employees, that is tax deductible by us. |
Our business is capital intensive. Our capital requirements include acquisitions and fixed
asset purchases. We will also make capital expenditures for landfill cell construction, landfill
development, landfill closure activities and intermodal facility construction in the future.
Our Board of Directors has authorized a common stock repurchase program for the repurchase of
up to $800.0 million of our common stock through December 31, 2012. Under the program, stock
repurchases may be made in the open market or in privately negotiated transactions from time to
time at managements discretion. The timing and amounts of any repurchases will depend on many
factors, including our capital structure, the market price of the common stock and overall market
conditions. During the nine months ended September 30 2010, we repurchased 3,347,111 shares of our
common stock under this program at a cost of $116.3 million. As of September 30, 2010, the
remaining maximum dollar value of shares available for repurchase under the program was
approximately $201.3 million. Subsequent to September 30, 2010 and
through October 15, 2010, the Company repurchased 431,379 shares of its common stock under
this program at a cost of $17,319.
Page 43
On October 19, 2010, our Board of Directors authorized a three-for-two split of our common
stock, in the form of a 50% stock dividend, payable November 12, 2010, to stockholders of record as
of the close of business on October 29, 2010. To effect the three-for-two stock split, one
additional share of our common stock will be issued on November 12, 2010 for every two shares of
common stock held by stockholders of record as of the close of business on October 29, 2010.
Fractional share amounts will be paid in cash based on the closing market price of our common stock
on the record date.
In addition, on October 19, 2010, our Board of Directors authorized the initiation of a
quarterly cash dividend of $0.075 per share, as adjusted for the three-for-two stock split
described above. The initial quarterly cash dividend will be paid on November 12, 2010 to the
stockholders of record as of the close of business on October 29, 2010. We intend to fund the
dividend payment out of cash on hand and cash generated by operating activities. The Board will
review the cash dividend periodically, with a long-term objective of increasing the amount of the
dividend. No assurance can be given as to the amounts or timing of future dividends.
We made $86.1 million in capital expenditures during the nine months ended September 30,
2010. We expect to make capital expenditures between $120 million and $125 million in 2010 in
connection with our existing business. We intend to fund our planned 2010 capital expenditures
principally through internally generated funds and borrowings under our 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
cash and equivalents, 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.
However, disruptions in the capital and credit markets could adversely affect our ability to draw
on our credit facility or raise other capital. Our access to funds under the credit facility is
dependent on the ability of the banks that are parties to the facility to meet their funding
commitments. Those banks may not be able to meet their funding commitments if they experience
shortages of capital and liquidity or if they experience excessive volumes of borrowing requests
within a short period of time.
As of September 30, 2010, we had $436.0 million outstanding under our credit facility,
exclusive of outstanding stand-by letters of credit of $84.3 million. As of September 30, 2010, we
were in compliance with all applicable covenants in our credit facility.
On April 1, 2010, we redeemed the $200.0 million aggregate principal amount of our
2026 Notes. Holders of the notes chose to convert a total of $22.7 million principal amount of the
notes. In addition to paying the principal amount of these notes with proceeds from our credit
facility, we issued 21,906 shares of our common stock in connection with the conversion and
redemption. We redeemed the balance of $177.3 million principal amount of the notes with proceeds
from our credit facility. All holders of the notes also received accrued interest and an interest
make-whole payment. As a result of the redemption, we recognized $9.7 million of pre-tax expense
($6.0 million net of taxes) in April 2010.
Page 44
As of September 30, 2010, we had the following contractual obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
Over 5 |
|
Recorded Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Long-term debt |
|
$ |
832,972 |
|
|
$ |
1,849 |
|
|
$ |
438,714 |
|
|
$ |
3,105 |
|
|
$ |
389,304 |
|
Cash interest payments |
|
$ |
176,106 |
|
|
$ |
32,922 |
|
|
$ |
51,139 |
|
|
$ |
41,242 |
|
|
$ |
50,803 |
|
|
|
|
|
|
Long-term debt payments include: |
|
1) |
|
$436.0 million in principal payments due 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 3.25% at September 30, 2010) on base rate loans, or the
Eurodollar rate plus the applicable Eurodollar margin (approximately 0.88% at September
30, 2010) on Eurodollar loans. As of September 30, 2010, our credit facility allowed us
to borrow up to $845 million. |
|
|
2) |
|
$175.0 million in principal payments due 2019 related to our 2019 Notes. Holders of
the 2019 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2019 Notes plus accrued and unpaid interest, if any, upon a
change in control, as defined in the Master Note Purchase Agreement. The 2019 Notes bear
interest at a rate of 5.25%. |
|
|
3) |
|
$175.0 million in principal payments due 2015 related to our 2015 Notes. Holders of
the 2015 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2015 Notes plus accrued and unpaid interest, if any, upon a
change in control, as defined in the Master Note Purchase Agreement. The 2015 Notes bear
interest at a rate of 6.22%. |
|
|
4) |
|
$39.4 million in principal payments related to our tax-exempt bonds, which bear
interest at variable rates (between 0.30% and 0.33%) at September 30, 2010. The
tax-exempt bonds have maturity dates ranging from 2012 to 2033. |
|
|
5) |
|
$4.2 million in principal payments related to our notes payable to sellers. Our
notes payable to sellers bear interest at rates between 6.05% and 10.35% at September 30,
2010, and have maturity dates ranging from 2010 to 2036. |
|
|
6) |
|
$3.3 million in principal payments related to our notes payable to third parties.
Our notes payable to third parties bear interest at rates between 1.0% and 10.9% at
September 30, 2010, and have maturity dates ranging from 2010 to 2019. |
The following assumptions were made in calculating cash interest payments:
|
1) |
|
We calculated cash interest payments on the credit facility using the Eurodollar rate
plus the applicable Eurodollar margin at September 30, 2010. We assumed the credit
facility is paid off when the credit facility matures in 2012. |
|
|
2) |
|
We calculated cash interest payments on our interest rate swaps using the stated
interest rate in the swap agreement less the Eurodollar rate through the term of the
swaps. |
The total liability for uncertain tax positions at September 30, 2010, was approximately $0.4
million. 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 this
liability within the next year.
Page 45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
Over 5 |
|
Unrecorded Obligations(1) |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Operating leases |
|
$ |
80,417 |
|
|
$ |
10,252 |
|
|
$ |
19,143 |
|
|
$ |
15,823 |
|
|
$ |
35,199 |
|
|
|
|
(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 nine months ended September 30, 2010, nor are they expected to have a material
impact on our future financial position, results of operations or liquidity. |
We have obtained financial surety bonds, primarily to support our financial assurance
needs and landfill operations. We provided customers and various regulatory authorities with
surety bonds in the aggregate amounts of approximately $273.1 million and $281.2 million at
December 31, 2009 and September 30, 2010, respectively. These arrangements have not materially
affected our financial position, results of operations or liquidity during the nine months ended
September 30, 2010, nor are they expected to have a material impact on our future financial
position, results of operations or liquidity.
From time to time, we evaluate our existing operations and their strategic importance to us.
If we determine that a given operating unit does not have future strategic importance, we may sell
or otherwise dispose of those operations. Although we believe our reporting units would not be
impaired by such dispositions, we could incur losses on them.
The disposal tonnage that we received in the nine month periods ended September 30, 2009 and
2010, at all of our landfills during the respective period, is shown below (tons in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
|
Number of |
|
|
Total |
|
|
Number of |
|
|
Total |
|
|
|
Sites |
|
|
Tons |
|
|
Sites |
|
|
Tons |
|
Owned landfills and
landfills operated
under life-of-site
agreements |
|
|
37 |
|
|
|
7,922 |
|
|
|
38 |
|
|
|
9,875 |
|
Operated landfills |
|
|
7 |
|
|
|
591 |
|
|
|
6 |
|
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
8,513 |
|
|
|
44 |
|
|
|
10,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 46
FREE CASH FLOW
Free cash flow, a non-GAAP financial measure, is provided supplementally because it is widely
used by investors as a valuation and liquidity measure in the solid waste industry. We define free
cash flow as net cash provided by operating activities, plus proceeds from disposal of assets, plus
or minus change in book overdraft, plus excess tax benefit associated with equity-based
compensation, less capital expenditures for property and equipment and distributions to
noncontrolling interests. This measure is not a substitute for, and should be used in conjunction
with, GAAP liquidity or financial measures. Management uses free cash flow as one of the principal
measures to evaluate and monitor the ongoing financial performance of our operations. Other
companies may calculate free cash flow differently. Our free cash flow for the nine month periods
ended September 30, 2009 and 2010, is calculated as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
Net cash provided by operating activities |
|
$ |
242,245 |
|
|
$ |
242,298 |
|
Plus/less: Change in book overdraft |
|
|
47 |
|
|
|
(374 |
) |
Plus: Proceeds from disposal of assets |
|
|
4,348 |
|
|
|
5,786 |
|
Plus: Excess tax benefit associated with
equity-based compensation |
|
|
696 |
|
|
|
8,935 |
|
Less: Capital expenditures for property and equipment |
|
|
(84,289 |
) |
|
|
(86,121 |
) |
|
|
|
|
|
|
|
Free cash flow |
|
$ |
163,047 |
|
|
$ |
170,524 |
|
|
|
|
|
|
|
|
Page 47
ADJUSTED OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION
Adjusted operating income before depreciation and amortization, a non-GAAP financial measure,
is provided supplementally because it is widely used by investors as a performance and valuation
measure in the solid waste industry. We define adjusted operating income before depreciation and
amortization as operating income, plus depreciation and amortization expense, plus closure and
post-closure accretion expense, plus or minus any gain or loss on disposal of assets. We further
adjust this calculation to exclude the effects of items management believes impact the ability to
assess the operating performance of our business. This measure is not a substitute for, and should
be used in conjunction with, GAAP financial measures. Management uses adjusted operating income
before depreciation and amortization as one of the principal measures to evaluate and monitor the
ongoing financial performance of our operations. Other companies may calculate adjusted operating
income before depreciation and amortization differently. Our adjusted operating income before
depreciation and amortization for the three and nine month periods ended September 30, 2009 and
2010, is calculated as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Operating income |
|
$ |
64,761 |
|
|
$ |
75,685 |
|
|
$ |
171,814 |
|
|
$ |
204,642 |
|
Plus: Depreciation and
amortization |
|
|
34,897 |
|
|
|
38,057 |
|
|
|
95,478 |
|
|
|
110,149 |
|
Plus: Closure and
post-closure accretion |
|
|
584 |
|
|
|
443 |
|
|
|
1,496 |
|
|
|
1,323 |
|
Plus/less: Loss (gain)
on disposal of assets |
|
|
139 |
|
|
|
(50 |
) |
|
|
(1,037 |
) |
|
|
572 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Acquisition-related
transaction costs (a) |
|
|
897 |
|
|
|
782 |
|
|
|
4,179 |
|
|
|
1,177 |
|
Plus: Loss on prior
corporate office lease
(b) |
|
|
|
|
|
|
|
|
|
|
1,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
income before
depreciation and
amortization |
|
$ |
101,278 |
|
|
$ |
114,917 |
|
|
$ |
273,551 |
|
|
$ |
317,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the addback of acquisition-related costs expensed due to the
implementation of new accounting guidance for business combinations effective January 1, 2009. |
|
(b) |
|
Reflects the addback of a loss on our prior corporate office lease due to the
relocation of our corporate offices. |
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 exceed the average rate of inflation. Managements
estimates associated with inflation have an impact on our accounting for landfill liabilities.
SEASONALITY
We expect our operating results to vary seasonally, with revenues typically lowest in the
first quarter, higher in the second and third quarters and lower in the fourth quarter than in the
second and third quarters. This seasonality reflects 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. We expect the
fluctuation in our revenues between our highest and lowest quarters to be approximately 7% to
10%. 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.
Page 48
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 and fuel prices. 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 over the
unhedged fuel and variable rate debt positions.
At September 30, 2010, our derivative instruments included five 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Interest |
|
|
Interest Rate |
|
|
|
|
|
|
Expiration |
|
Date Entered |
|
Amount |
|
|
Rate Paid* |
|
|
Received |
|
Effective Date |
|
Date |
November 2007 |
|
$ |
50,000 |
|
|
|
4.37 |
% |
|
1-month LIBOR |
|
February 2009 |
|
February 2011 |
November 2007 |
|
$ |
50,000 |
|
|
|
4.37 |
% |
|
1-month LIBOR |
|
February 2009 |
|
February 2011 |
November 2007 |
|
$ |
75,000 |
|
|
|
4.37 |
% |
|
1-month LIBOR |
|
February 2009 |
|
February 2011 |
November 2007 |
|
$ |
50,000 |
|
|
|
4.29 |
% |
|
1-month LIBOR |
|
June 2009 |
|
June 2011 |
March 2009 |
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR |
|
February 2011 |
|
February 2014 |
|
|
|
* |
|
plus applicable margin. |
Under derivatives and hedging guidance, all the interest rate swap agreements are
considered 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 unhedged floating rate 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, 2009 and September 30, 2010, of $84.3 million and
$250.4 million, respectively, including floating rate debt under our credit facility and floating
rate municipal bond obligations. A one percent increase in interest rates on our variable-rate
debt as of December 31, 2009 and September 30, 2010, would decrease our annual pre-tax income by
approximately $0.8 million and $2.5 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, subject to counterparty default risk.
The market price of diesel fuel is unpredictable and can fluctuate significantly. We purchase
approximately 25 million gallons of diesel fuel per year; therefore, a significant increase in the
price of fuel could adversely affect our business and reduce our operating margins. To manage a
portion of this risk, in 2008, we entered into multiple fuel hedge agreements related to forecasted
diesel fuel purchases.
Page 49
At September 30, 2010, our derivative instruments included nine fuel hedge agreements as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Diesel |
|
|
|
|
|
|
|
|
|
(in gallons |
|
|
Rate |
|
|
|
|
|
|
|
|
|
per |
|
|
Paid |
|
|
Diesel Rate Received |
|
Effective |
|
Expiration |
Date Entered |
|
month) |
|
|
Fixed |
|
|
Variable |
|
Date |
|
Date |
October 2008 |
|
|
250,000 |
|
|
$ |
3.750 |
|
|
DOE Diesel Fuel Index* |
|
January 2009 |
|
December 2010 |
October 2008 |
|
|
100,000 |
|
|
$ |
3.745 |
|
|
DOE Diesel Fuel Index* |
|
January 2009 |
|
December 2010 |
October 2008 |
|
|
250,000 |
|
|
$ |
3.500 |
|
|
DOE Diesel Fuel Index* |
|
January 2009 |
|
December 2010 |
December 2008 |
|
|
100,000 |
|
|
$ |
3.000 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
$ |
3.000 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
$ |
2.820 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
$ |
2.700 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
400,000 |
|
|
$ |
2.950 |
|
|
DOE Diesel Fuel Index* |
|
January 2011 |
|
December 2011 |
December 2008 |
|
|
400,000 |
|
|
$ |
3.030 |
|
|
DOE Diesel Fuel Index* |
|
January 2012 |
|
December 2012 |
|
|
|
* |
|
If the national U.S. on-highway average price for a gallon of diesel fuel
(average price), as published by the Department of Energy, exceeds the contract
price per gallon, we receive the difference between the average price and the contract
price (multiplied by the notional number of gallons) from the counterparty. If the
average price is less than the contract price per gallon, we pay the difference to the
counterparty. |
Under derivatives and hedging guidance, all the fuel hedges are considered cash flow
hedges for a portion of our forecasted diesel fuel purchases, and we apply hedge accounting to
account for these instruments.
We have performed sensitivity analyses to determine how market rate changes will affect the
fair value of our unhedged diesel fuel purchases. 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.
For the year ending December 31, 2010, we expect to purchase approximately 25 million gallons of
diesel fuel, of which 11.2 million gallons will be purchased at market prices and 13.8 million
gallons will be purchased at prices that are fixed under our fuel hedges. During the three month
period of October 1, 2010 to December 31, 2010, we expect to purchase approximately 2.8 million
gallons of unhedged diesel fuel at market prices; therefore, a $0.10 per gallon increase in the
price of fuel over the remaining three months in 2010 would decrease our pre-tax income during this
period by approximately $0.3 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 38 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. In the event of a decline in recycled commodity prices, a 10% decrease in average
recycled commodity prices from the average prices that were in effect during the nine months ended
September 30, 2009 and 2010, would have had a $1.8 million and $3.6 million impact on revenues for
the nine months ended September 30, 2009 and 2010, respectively.
Page 50
Item 4. Controls and Procedures
As required by Rule 13a-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 Rule 13a-15(e) under the Exchange Act) as of the end of the fiscal quarter covered by
this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and
procedures, our management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives,
and our management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as
of September 30, 2010, 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 SECs 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, 2010, 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.
Page 51
PART II OTHER INFORMATION
Item 1. Legal Proceedings
No material developments occurred during the quarterly period ended September 30, 2010, in the
legal proceeding involving Colonias Dev. Council v. Rhino Envtl. Servs., Inc. (In re Rhino Envtl.
Servs.) described in our Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2010, except that on September 17, 2010, HDSWF filed a formal landfill permit application for the
new landfill site with the New Mexico Environment Department, which is evaluating that
application. Refer to Note 15 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 occurred during the quarterly period ended September 30, 2010, in the
legal proceeding involving Board of Commrs of Sumner County, Kansas, Tri-County Concerned Citizens
and Dalton Holland v. Roderick Bremby, Secy of the Kansas Dept of Health and Envt, et al.
described in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, except
that oral argument in the case occurred on September 27, 2010. Refer to Note 15 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 occurred during the quarterly period ended September 30, 2010, in the
legal proceeding involving the April 29, 2009, administrative law judge recommended Decision and
Order finding violations of the National Labor Relations Act by one of our subsidiaries, El Paso
Disposal, LP, or EPD, described in our Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2010, except that a hearing in the Fifth Circuit Court of Appeals on EPDs appeal of the
injunction was held on August 2, 2010, and the hearing related to the unfair labor practice charges
filed by the union on January 22, 2010, March 5, 2010, June 11, 2010, June, 24, 2010, and June 30,
2010, and the complaint filed by the NLRB on May 28, 2010, was rescheduled for November 2, 2010.
In addition, on August 10, 2010, the NLRB filed a motion for contempt and other civil relief before
the United States District Court for the Western District of Texas, alleging that EPD violated the
courts October 30, 2009 injunction order by failing or refusing to implement the interim relief
directed by the court. A hearing on the NLRBs motion is scheduled for November 10, 2010. Refer
to Note 15 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 occurred during the quarterly period ended September 30, 2010, in the
legal proceedings in state court involving the Measure E and CEQA litigation related to our
subsidiary, Potrero Hills Landfill, Inc., or PHLF, described in our Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2010, except that on August 30, the Solano County Superior
Court denied the plaintiffs motions to reconsider and reaffirmed its ruling denying the petitions
for writs to overturn PHLFs expansion permit. In addition, on September 17, 2010, the Court
denied PHLFs and our administrative motion to consolidate the three Measure E cases into one
proceeding. We filed a notice of appeal to the federal courts abstention ruling on January 22,
2010, and, along with our co-appellants, we filed our opening brief in the United States Court of
Appeals for the Ninth Circuit on September 20, 2010. The opposing brief of the three
intervenor-appellees is due on November 3, 2010. Finally, on October 8, 2010, the California Court
of Appeal dismissed plaintiffs appeal in Protect the Marsh, et al. v. County of Solano, et al.,
for lack of standing. Refer to Note 15 of the Notes to Condensed Consolidated Financial Statements
in Part I of this Quarterly Report on Form 10-Q for a description of the state and federal legal
proceedings related to the Potrero Hills Landfill.
In October 2010, we settled, without admitting any violations of law or regulations, the legal
proceeding involving the proposed Compliance Order on Consent we received from the Colorado
Department of Public Health and Environment in November 2009, described in our Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2010. Three of our subsidiaries, Broadacre
Landfill, Inc., Waste Connections of Colorado, Inc. and Denver Regional Landfill, Inc., entered
into a final Compliance Order on Consent, pursuant to which the companies agreed to pay CDPHE an
aggregate settlement fee equal to $171,500, subject to additional amounts based on any similar
future violations during the proceeding two-year period. Refer to Note 15 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.
Page 52
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 15 of the Notes to Condensed Consolidated Financial
Statements in Part I of this Quarterly Report on Form 10-Q, as of September 30, 2010, there is no
current proceeding or litigation involving us or of which any of our property is the subject that
we believe will have a material adverse impact on our business, financial condition, results of
operations or cash flows.
Page 53
Item 1A. Risk Factors
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, or anticipates, or the negative thereof or
comparable terminology, or by discussions of strategy. Our business and operations are subject to
a variety of risks and uncertainties and, consequently, actual results may differ materially from
those projected by any forward-looking statements. Factors that could cause actual results to
differ from those projected include, but are not limited to, those listed below and elsewhere in
this report and in our other filings with the 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.
Risks Related to Our Business
Our acquisitions may not be successful, resulting in changes in strategy, operating losses or a
loss on sale of the business acquired.
Even if we are able to make acquisitions on advantageous terms and are able to integrate them
successfully into our operations and organization, some acquisitions may not fulfill our objectives
in a given market due to factors that we cannot control, such as market position, customer base,
third party legal challenges or governmental actions. As a result, operating margins could be less
than we originally anticipated when we made those acquisitions. In addition, we may change our
strategy with respect to that market or those businesses and decide to sell the operations at a
loss, or keep those operations and recognize an impairment of goodwill and/or intangible assets.
A portion of our growth and future financial performance depends on our ability to integrate
acquired businesses into our organization and operations.
A component of our growth strategy involves achieving economies of scale and operating
efficiencies by growing through acquisitions. We may not achieve these goals unless we effectively
combine the operations of acquired businesses with our existing operations. In addition, we are
not always able to control the timing of our acquisitions. Our inability to complete acquisitions
within the time frames that we expect may cause our operating results to be less favorable than
expected, which could cause our stock price to decline.
Downturns in the worldwide economy adversely affect operating results.
The general economic downturn in late 2008 and 2009 had a negative effect on our operating
results, including decreases in volume generally associated with the construction industry, reduced
personal consumption and declines in recycled commodity prices. In an economic slowdown, we also
experience the negative effects of increased competitive pricing pressure, customer turnover, and
reductions in customer service requirements. Worsening economic conditions or a prolonged or
recurring economic recession could adversely affect our operating results and expected seasonal
fluctuations. Further, we cannot assure you that an improvement in economic conditions after such
a downturn will result in an immediate, if at all positive, improvement in our operating results or
cash flows.
Our results are vulnerable to economic conditions and seasonal factors affecting the regions in
which we operate.
Our business and financial results would be harmed by downturns in the general economy of the
regions in which we operate and other factors affecting those regions, such as state regulations
affecting the solid waste services industry and severe weather conditions. 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 7% to 10%. 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 the winter months. 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. Because of these factors, we expect operating
income to be generally lower in the winter months, and our stock price may be negatively affected
by these variations.
Page 54
We may be subject in the normal course of business to judicial, administrative or other third
party proceedings that could interrupt or limit our operations, require expensive remediation,
result in adverse judgments, settlements or fines and create negative publicity.
Governmental agencies may, among other things, impose fines or penalties on us relating to the
conduct of our business, attempt to revoke or deny renewal of our operating permits, franchises or
licenses for violations or alleged violations of environmental laws or regulations or as a result
of third party challenges, require us to install additional pollution control equipment or require
us to remediate potential environmental problems relating to any real property that we or our
predecessors ever owned, leased or operated or any waste that we or our predecessors ever
collected, transported, disposed of or stored. Individuals, citizens groups, trade associations or
environmental activists may also bring actions against us in connection with our operations that
could interrupt or limit the scope of our business. Any adverse outcome in such proceedings could
harm our operations and financial results and create negative publicity, which could damage our
reputation, competitive position and stock price.
We may be unable to compete effectively with larger and better capitalized companies and
governmental service providers.
Our industry is highly competitive and requires substantial labor and capital resources. Some
of the markets in which we compete or will likely compete are served by one or more large, national
companies, as well as by regional and local companies of varying sizes and resources, some of which
we believe have accumulated substantial goodwill in their markets. Some of our competitors may
also be better capitalized than we are, have greater name recognition than we do, or be able to
provide or be willing to bid their services at a lower price than we may be willing to offer. Our
inability to compete effectively could hinder our growth or negatively impact our operating
results.
We also compete with counties, municipalities and solid waste districts that maintain or could
in the future choose to maintain their own waste collection and disposal operations, including
through the implementation of flow control ordinances or similar legislation. These operators may
have financial advantages over us because of their access to user fees and similar charges, tax
revenues and tax-exempt financing.
We may lose contracts through competitive bidding, early termination or governmental
action.
We derive a significant portion of our revenues from market areas where we have exclusive
arrangements, including franchise agreements, municipal contracts and G Certificates. Many
franchise agreements and municipal contracts are for a specified term and are or will be subject to
competitive bidding in the future. Although we intend to bid on additional municipal contracts and
franchise agreements, we may not be the successful bidder. In addition, some of our customers may
terminate their contracts with us before the end of the contract term.
Governmental action may also affect our exclusive arrangements. Municipalities may annex
unincorporated areas within counties where we provide collection services. As a result, our
customers in annexed areas may be required to obtain services from competitors that have been
franchised by the annexing municipalities to provide those services. In addition, municipalities
in which services are currently provided on a competitive basis may elect to franchise collection
services. Unless we are awarded franchises by these municipalities, we will lose customers.
Municipalities may also decide to provide services to their residents themselves, on an optional or
mandatory basis, causing us to lose customers. Municipalities in Washington
may, by law, annex any unincorporated territory, which could remove such territory from an
area covered by a G Certificate issued to us by the WUTC. Such occurrences could subject more of
our Washington operations to competitive bidding. Moreover, legislative action could amend or
repeal the laws governing WUTC regulation, which could harm our competitive position by subjecting
more areas to competitive bidding and/or overlapping service. If we are not able to replace
revenues from contracts lost through competitive bidding or early termination or from the
renegotiation of existing contracts with other revenues within a reasonable time period, our
revenues could decline.
Page 55
Price increases may not be adequate to offset the impact of increased costs or may cause us to
lose volume.
We seek to secure price increases necessary to offset increased costs, to improve operating
margins and to obtain adequate returns on our deployed capital. Contractual, general economic or
market-specific conditions may limit our ability to raise prices. As a result of these factors, we
may be unable to offset increases in costs, improve operating margins and obtain adequate
investment returns through price increases. We may also lose volume to lower-cost competitors.
Increases in the price of fuel may adversely affect our business and reduce our operating
margins.
The market price of fuel is volatile and rose substantially in recent years before falling
with the general economic downturn in late 2008, but again rose during 2009 and 2010. We generally
purchase diesel fuel at market prices, and such prices have fluctuated significantly. A
significant increase in our fuel cost could adversely affect our business and reduce our operating
margins and reported earnings. To manage a portion of this risk, we have entered into multiple
fuel hedge agreements related to forecasted diesel fuel purchases as well as fixed-price fuel
purchase contracts. During periods of falling diesel fuel prices, our hedge payable positions may
increase and it may become more expensive to purchase fuel under our fixed-price fuel purchase
contracts than at market prices.
Increases in labor and disposal and related transportation costs could impact our financial
results.
Our continued success will depend on our ability to attract and retain qualified personnel.
We compete with other businesses in our markets for qualified employees. From time to time, the
labor supply is tight in some of our markets. A shortage of qualified employees would require us
to enhance our wage and benefits packages to compete more effectively for employees, to hire more
expensive temporary employees or to contract for services with more expensive third-party vendors.
Labor is one of our highest costs and relatively small increases in labor costs per employee could
materially affect our cost structure. If we fail to attract and retain qualified employees,
control our labor costs during periods of declining volumes, or recover any increased labor costs
through increased prices we charge for our services or otherwise offset such increases with cost
savings in other areas, our operating margins could suffer. Disposal and related transportation
costs are our second highest cost category. If we incur increased disposal and related
transportation costs to dispose of solid waste, and if, in either case, we are unable to pass these
costs on to our customers, our operating results would suffer.
Efforts by labor unions could divert management attention and adversely affect operating
results.
From time to time, labor unions attempt to organize our employees. Some groups of our
employees are represented by unions, and we have negotiated collective bargaining agreements with
most of these groups. We are currently engaged in negotiations with other groups of employees
represented by unions. Additional groups of employees may seek union representation in the
future. As a result of these activities, we may be subjected to unfair labor practice charges,
complaints and other legal and administrative proceedings initiated against us by unions or the
National Labor Relations Board, which could negatively impact our operating results. Negotiating
collective bargaining agreements with these groups could divert management attention, which could
also adversely affect operating results. If we are unable to negotiate acceptable collective
bargaining agreements, we might have to wait through cooling off periods, which are often
followed by union-initiated work stoppages, including strikes. Furthermore, any significant work
stoppage or slowdown at ports or by railroad workers could reduce or interrupt the flow of cargo
containers through our intermodal facilities.
Depending on the type and duration of any labor disruptions, our operating expenses could
increase significantly, which could adversely affect our financial condition, results of operations
and cash flows.
Page 56
We could face significant withdrawal liability if we withdraw from participation in one or more
multiemployer pension plans in which we participate.
We participate in various multiemployer pension plans administered by employee and union
trustees. We make periodic contributions to these plans to allow them to meet their pension
benefit obligations to their participants. In the event that we withdraw from participation in one
of these plans, then applicable law could require us to make an additional lump-sum contribution to
the plan, and we would have to reflect that as an expense in our consolidated statement of
operations and as a liability on our consolidated balance sheet. Our withdrawal liability for any
multiemployer plan would depend on the extent of the plans funding of vested benefits. In the
ordinary course of our renegotiation of collective bargaining agreements with labor unions that
participate in these plans, we may decide to discontinue participation in a plan, and in that
event, we could face a withdrawal liability. Some multiemployer plans in which we participate may
have significant underfunded liabilities. Such underfunding could increase the size of our
potential withdrawal liability.
Increases in insurance costs and the amount that we self-insure for various risks could reduce
our operating margins and reported earnings.
We maintain insurance policies for automobile, general, employers, environmental and
directors and officers liability as well as for employee group health insurance, property
insurance and workers compensation. We carry high deductible insurance policies for automobile
liability, property, general liability, workers compensation, employers liability and employee
group health insurance. We carry umbrella policies for certain types of claims to provide excess
coverage over the underlying policies and per incident deductibles. The amounts that we
self-insure could cause significant volatility in our operating margins and reported earnings based
on the occurrence and claim costs of incidents, accidents and injuries. Our insurance accruals are
based on claims filed and estimates of claims incurred but not reported and are developed by our
management with assistance from our third-party actuary and our third-party claims administrator.
To the extent these estimates are inaccurate, we may recognize substantial additional expenses in
future periods that would reduce operating margins and reported earnings. From time to time,
actions filed against us include claims for punitive damages, which are generally excluded from
coverage under all of our liability insurance policies. A punitive damage award could have an
adverse effect on our reported earnings in the period in which it occurs. Significant increases in
premiums on insurance that we retain also could reduce our margins.
Competition for acquisition candidates, consolidation within the waste industry and economic
and market conditions may limit our ability to grow through acquisitions.
Most of our growth since our inception has been through acquisitions. Although we have
identified numerous acquisition candidates that we believe are suitable, we may not be able to
acquire them at prices or on terms and conditions favorable to us.
Other companies have adopted or may in the future adopt our strategy of acquiring and
consolidating regional and local businesses. We expect that increased consolidation in the solid
waste services industry will continue to reduce the number of attractive acquisition candidates.
Moreover, general economic conditions and the environment for attractive investments may affect the
desire of the owners of acquisition candidates to sell their companies. As a result, fewer
acquisition opportunities may become available to us, which could cause us to reduce our rate of
growth from acquisitions or make acquisitions on less attractive terms than we have in the past,
such as at higher purchase prices.
Our ability to access the capital markets may be severely restricted at a time when we would
like, or need, to do so. While we expect we will be able to fund some of our acquisitions with our
existing resources, additional financing to pursue additional acquisitions may be required.
However, if market conditions deteriorate, we may be unable to secure additional financing or any
such additional financing may be available to us on unfavorable terms, which could have an impact
on our flexibility to pursue additional acquisition
opportunities and maintain our desired level of revenue growth in the future. In addition,
disruptions in the capital and credit markets could adversely affect our ability to draw on our
credit facility. Our access to funds under the credit facility is dependent on the ability of the
banks that are parties to the facility to meet their funding commitments. Those banks may not be
able to meet their funding commitments if they experience shortages of capital and liquidity or if
they experience excessive volumes of borrowing requests within a short period of time.
Page 57
Our indebtedness could adversely affect our financial condition; we may incur substantially
more debt in the future.
As of September 30, 2010, we had $833.0 million of total indebtedness outstanding. We may
incur substantial additional debt in the future. The incurrence of substantial additional
indebtedness could have important consequences to you. For example, it could:
|
|
|
increase our vulnerability to general adverse economic and industry conditions; |
|
|
|
|
limit our ability to obtain additional financing or refinancings at attractive rates; |
|
|
|
|
require the dedication of a substantial portion of our cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund our growth strategy, working capital, capital
expenditures and other general corporate purposes; |
|
|
|
|
limit our flexibility in planning for, or reacting to, changes in our business and the
industry; and |
|
|
|
|
place us at a competitive disadvantage relative to our competitors with less debt. |
Each business that we acquire or have acquired may have liabilities or risks that we fail or
are unable to discover, including environmental liabilities.
It is possible that the corporate entities or sites we have acquired, or which we may acquire
in the future, have liabilities in respect of former or existing operations or properties, or
otherwise, which we have not been able to identify and assess through our due diligence
investigations. As a successor owner, we may be legally responsible for those liabilities that
arise from businesses that we acquire. Even if we obtain legally enforceable representations,
warranties and indemnities from the sellers of such businesses, they may not cover the liabilities
fully or the sellers may not have sufficient funds to perform their obligations. Some
environmental liabilities, even if we do not expressly assume them, may be imposed on us under
various regulatory schemes and other applicable laws. In addition, our insurance program may not
cover such sites and will not cover liabilities associated with some environmental issues that may
exist prior to attachment of coverage. A successful uninsured claim against us could harm our
financial condition or operating results. Additionally, there may be other risks of which we are
unaware that could have an adverse affect on businesses that we acquire or have acquired. For
example, interested parties may bring actions against us in connection with operations that we
acquire or have acquired. Any adverse outcome in such proceedings could harm our operations and
financial results and create negative publicity, which could damage our reputation, competitive
position and stock price.
Liabilities for environmental damage may adversely affect our financial condition, business and
earnings.
We may be liable for any environmental damage that our current or former facilities cause,
including damage to neighboring landowners or residents, particularly as a result of the
contamination of soil, groundwater or surface water, and especially drinking water, or to natural
resources. We may be liable for damage resulting from conditions existing before we acquired these
facilities. We may also be liable for any on-site environmental contamination caused by pollutants
or hazardous substances whose transportation, treatment or disposal we or our predecessors arranged
or conducted. If we were to incur liability for environmental damage, environmental cleanups,
corrective action or damage not covered by insurance or in excess of the amount of our coverage,
our financial condition or operating results could be materially adversely affected.
Page 58
Our accruals for our landfill site closure and post-closure costs may be inadequate.
We are required to pay capping, closure and post-closure maintenance costs for landfill sites
that we own or operate. Our obligations to pay closure or post-closure costs may exceed the amount
we have accrued and reserved and other amounts available from funds or reserves established to pay
such costs. In addition, the completion or closure of a landfill site does not end our
environmental obligations. After completion or closure of a landfill site there exists the
potential for unforeseen environmental problems to occur that could result in substantial
remediation costs. Paying additional amounts for closure or post-closure costs and/or for
environmental remediation could harm our financial condition or operating results.
The financial soundness of our customers could affect our business and operating results.
As a result of the disruptions in the financial markets and other macro-economic challenges
currently affecting the economy of the United States and other parts of the world, our customers
may experience cash flow concerns. As a result, if customers operating and financial performance
deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not
be able to pay, or may delay payment of, accounts receivable owed to us. Any inability of current
and/or potential customers to pay us for services may adversely affect our financial condition,
results of operations and cash flows.
We depend significantly on the services of the members of our senior, regional and district
management team, and the departure of any of those persons could cause our operating results to
suffer.
Our success depends significantly on the continued individual and collective contributions of
our senior, regional and district management team. Key members of our management have entered into
employment agreements, but we may not be able to enforce these agreements. The loss of the
services of any member of our senior, regional or district management or the inability to hire and
retain experienced management personnel could harm our operating results.
Our decentralized decision-making structure could allow local managers to make decisions that
adversely affect our operating results.
We manage our operations on a decentralized basis. Local managers have the authority to make
many decisions concerning their operations without obtaining prior approval from executive
officers, subject to compliance with general company-wide policies. Poor decisions by local
managers could result in the loss of customers or increases in costs, in either case adversely
affecting operating results.
We may incur additional charges related to capitalized expenditures of landfill development
projects, which would decrease our earnings.
In accordance with U.S. generally accepted accounting principles, we capitalize some
expenditures and advances relating to landfill development projects. We expense indirect costs
such as executive salaries, general corporate overhead and other corporate services as we incur
those costs. We charge against earnings any unamortized capitalized expenditures and advances (net
of any amount that we estimate we will recover, through sale or otherwise) that relate to any
operation that is permanently shut down or determined to be impaired and any landfill development
project that we do not expect to complete. For example, if we are unsuccessful in our attempts to
obtain or defend permits that we are seeking or have been awarded to operate landfills, we will be
required to expense in a future period the amount of capitalized expenditures, less the recoverable
value of the property and other amounts recovered. Any such charges could have a material adverse
effect on our results of operations for that period and could decrease our stock price.
Page 59
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.
We depend on two major railroads for the intermodal services we provide the Burlington
Northern Santa Fe and Union Pacific. Consequently, a reduction in, or elimination of, rail service
to a particular market is
likely to adversely affect our ability to provide intermodal transportation services to some
of our customers. In addition, the railroads are relatively free to adjust shipping rates up or
down as market conditions permit when existing contracts expire. Rate increases would result in
higher intermodal transportation costs, reducing the attractiveness of intermodal transportation
compared to solely trucking or other transportation modes, which could cause a decrease in demand
for our services. Our business could also be adversely affected by harsh weather conditions or
other factors that hinder the railroads ability to provide reliable transportation services.
Our financial results are based upon estimates and assumptions that may differ from actual
results.
In preparing our consolidated financial statements in accordance with U.S. generally accepted
accounting principles, several estimates and assumptions are made that affect the accounting for
and recognition of assets, liabilities, revenues and expenses. These estimates and assumptions
must be made because certain information that is used in the preparation of our financial
statements is dependent on future events, cannot be calculated with a high degree of precision from
data available or is not capable of being readily calculated based on generally accepted
methodologies. In some cases, these estimates are particularly difficult to determine and we must
exercise significant judgment. The estimates and the assumptions having the greatest amount of
uncertainty, subjectivity and complexity are related to our accounting for landfills,
self-insurance, intangibles, allocation of acquisition purchase price, income taxes, asset
impairments and litigation, claims and assessments. Actual results for all estimates could differ
materially from the estimates and assumptions that we use, which could have an adverse effect on
our financial condition and results of operations.
The adoption of new accounting standards or interpretations could adversely affect our
financial results.
Our implementation of and compliance with changes in accounting rules and interpretations
could adversely affect our operating results or cause unanticipated fluctuations in our results in
future periods. The accounting rules and regulations that we must comply with are complex and
continually changing. Recent actions and public comments from the SEC have focused on the
integrity of financial reporting generally. The Financial Accounting Standards Board, or FASB, has
recently introduced several new or proposed accounting standards, or is developing new proposed
standards, which would represent a significant change from current industry practices. For
example, the new business combinations pronouncement, which became effective for us on January 1,
2009, changes how the purchase price is calculated and fair values are determined in connection
with an acquisition and also requires acquisition-related transaction and restructuring costs to be
expensed rather than treated as part of the cost of the acquisition. Another example, the new
convertible debt pronouncement, which became effective for us on January 1, 2009, changes the
accounting for convertible debt and requires the liability and equity components to be accounted
for separately in a manner that will reflect the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. In addition, many companies accounting
policies are being subjected to heightened scrutiny by regulators and the public. While we believe
that our financial statements have been prepared in accordance with U.S. generally accepted
accounting principles, we cannot predict the impact of future changes to accounting principles or
our accounting policies on our financial statements going forward.
Risks Related to Our Industry
Our financial and operating performance may be affected by the inability to renew landfill
operating permits, obtain new landfills and expand existing ones.
We currently own and/or operate 44 landfills. Our ability to meet our financial and operating
objectives may depend in part on our ability to renew landfill operating permits, acquire, lease
and expand existing landfills and develop new landfill sites. It has become increasingly difficult
and expensive to obtain required permits and approvals to build, operate and expand solid waste
management facilities, including landfills and transfer stations. Operating permits for landfills
in states where we operate must generally be renewed every five to ten years, although some permits
are required to be renewed more frequently. These operating permits often must be renewed several
times during the permitted life of a landfill. The permit and approval process is often time
consuming, requires numerous hearings and compliance with zoning, environmental and other
requirements, is frequently challenged by citizens, public interest and other groups, and may
result in the denial
of a permit or renewal, the award of a permit or renewal for a shorter duration than we
believed was otherwise required by law, or burdensome terms and conditions being imposed on our
operations. We may not be able to obtain new landfill sites or expand the permitted capacity of
our landfills when necessary. Obtaining new landfill sites is important to our expansion into new,
non-exclusive markets. If we do not believe that we can obtain a landfill site in a non-exclusive
market, we may choose not to enter that market. Expanding existing landfill sites is important in
those markets where the remaining lives of our landfills are relatively short. We may choose to
forego acquisitions and internal growth in these markets because increased volumes would further
shorten the lives of these landfills. Any of these circumstances could adversely affect our
operating results.
Page 60
Future changes in laws or renewed enforcement of laws regulating the flow of solid waste in
interstate commerce could adversely affect our operating results.
Various states and local governments have enacted, or are considering enacting, laws and
regulations that restrict the disposal within the jurisdiction of solid waste generated outside the
jurisdiction. In addition, some state and local governments have promulgated, or are considering
promulgating, laws and regulations which govern the flow of waste generated within their respective
jurisdictions. These flow control laws and regulations typically require that waste generated
within the jurisdiction be directed to specified facilities for disposal or processing, which could
limit or prohibit the disposal or processing of waste in our transfer stations and landfills. Such
flow control laws and regulations could also require us to deliver waste collected by us within a
particular jurisdiction to facilities not owned or controlled by us, which could increase our costs
and reduce our revenues. In addition, such laws and regulations could require us to obtain
additional costly licenses or authorizations to be deemed an authorized hauler or disposal
facility. For example, in August 2010, the City of El Paso, Texas adopted an ordinance requiring
waste collected within the Citys jurisdiction to be hauled only by permitted haulers and delivered
only to facilities designated or authorized by the City. We intend to challenge this ordinance as
a violation of our contractual relationship with the City, but if we are unsuccessful, our business
and results of operations could suffer.
Additionally, public interest and pressure from competing industry segments has caused some
trade associations and environmental activists to seek enforcement of laws regulating the flow of
solid waste that have not been recently enforced and which, in at least one case, we believe are
unconstitutional or otherwise unlawful. See discussion regarding the Potrero Hills Landfill in
Part I, Item 3, Legal Proceedings. If successful, these groups may advocate for the enactment of
similar laws in neighboring jurisdictions through local ballot initiatives or otherwise. All such
waste disposal laws and regulations are subject to judicial interpretation and review. Court
decisions, congressional legislation, and state and local regulation in the waste disposal area
could adversely affect our operations.
Extensive and evolving environmental and health and safety laws and regulations may restrict
our operations and growth and increase our costs.
Existing environmental laws and regulations have become more stringently enforced in recent
years. Competing industry segments and other interested parties have sought enforcement of laws
that local jurisdictions have not recently enforced and which, in at least one case, we believe are
unconstitutional or otherwise unlawful. See discussion regarding the Potrero Hills Landfill in
Part I, Item 3, Legal Proceedings. If successful, such groups may advocate for the enactment of
similar laws in neighboring jurisdictions through local ballot initiatives or otherwise. In
addition, our industry is subject to regular enactment of new or amended federal, state and local
environmental and health and safety statutes, regulations and ballot initiatives, as well as
judicial decisions interpreting these requirements. These requirements impose substantial capital
and operating costs and operational limitations on us and may adversely affect our business. In
addition, federal, state and local governments may change the rights they grant to, the
restrictions they impose on, or the laws and regulations they enforce against, solid waste services
companies, and those changes could restrict our operations and growth.
Page 61
Climate change regulations may adversely affect operating results.
Governmental authorities and various interest groups have promoted laws and regulations that
could limit greenhouse gas, or GHG, emissions due to concerns that GHGs are contributing to climate
change. The State of California has already adopted a climate change law, and other states in
which we operate are considering similar actions. For example, California enacted AB 32, the
Global Warming Solutions Act of 2006, which established the first statewide program in the United
States to limit GHG emissions and impose penalties for non-compliance. Since then, the California
Air Resources Board has taken and plans to take various actions to implement the program, including
the approval on December 11, 2008, of an AB 32 Scoping Plan summarizing the main GHG-reduction
strategies for California. Because landfill and collection operations emit GHGs, our operations in
California are subject to regulations issued under AB 32. These regulations increase our costs for
those operations and adversely affect our operating results. Californias AB 32 Scoping Plan
recommends a GHG cap and trade system in conjunction with the Western Climate Initiative, which
currently includes seven states, all of which we operate in, and four Canadian provinces. In
addition, the EPA made an endangerment finding in 2009 allowing certain GHGs to be regulated under
the Clean Air Act. This finding allows the EPA to create regulations that will impact our
operationsincluding by imposing emission reporting, permitting, control technology installation,
and monitoring requirements, although the materiality of the impacts will not be known until all
regulations are finalized. EPA has already finalized its GHG reporting rule, which requires that
municipal solid waste landfills monitor and report GHG emissions. EPA has also finalized its
tailoring rule, which imposes certain permitting and control technology requirements, under the
Clean Air Act New Source Review Prevention of Significant Deterioration and Title V permitting
programs, to newly-constructed or modified facilities which emit GHGs over a certain threshold.
Notably, landfills may become subject to Prevention of Significant Deterioration or Title V
permitting requirements under the tailoring rule based on their GHG emissions even if their
emission of other regulated pollutants would not otherwise trigger permitting requirements.
Extensive regulations that govern the design, operation and closure of landfills may restrict
our landfill operations or increase our costs of operating landfills.
Regulations that govern landfill design, operation, closure and financial assurances include
the regulations that establish minimum federal requirements adopted by the EPA in October 1991
under Subtitle D of RCRA. If we fail to comply with these regulations or their state counterparts,
we could be required to undertake investigatory or remedial activities, curtail operations or close
landfills temporarily or permanently. Future changes to these regulations may require us to
modify, supplement or replace equipment or facilities at substantial costs. If regulatory agencies
fail to enforce these regulations vigorously or consistently, our competitors whose facilities are
not forced to comply with the Subtitle D regulations or their state counterparts may obtain an
advantage over us. Our financial obligations arising from any failure to comply with these
regulations could harm our business and operating results.
Alternatives to landfill disposal may cause our revenues and operating results to decline.
Counties and municipalities in which we operate landfills may be required to formulate and
implement comprehensive plans to reduce the volume of solid waste deposited in landfills through
waste planning, composting, recycling or other programs. Some state and local governments prohibit
the disposal of certain types of wastes, such as yard waste, at landfills. Although such actions
are useful to protect our environment, these actions, as well as the actions of our customers to
reduce waste or seek disposal alternatives, have reduced and may in the future further reduce the
volume of waste going to landfills in certain areas, which may affect our ability to operate our
landfills at full capacity and could adversely affect our operating results.
Page 62
Fluctuations in prices for recycled commodities that we sell and rebates we offer to customers
may cause our revenues and operating results to decline.
We provide recycling services to some of our customers. The majority of the recyclables we
process for sale are paper products that are shipped to customers in Asia. The sale prices of and
demands for recyclable commodities, particularly paper products, are frequently volatile and when
they decline, our revenues, operating
results and cash flows will be affected. Our recycling operations offer rebates to suppliers,
based on the market prices of commodities we buy to process for resale. Therefore, if we recognize
increased revenues resulting from higher prices for recyclable commodities, the rebates we pay to
suppliers will also increase, which also may impact our operating results.
Unusually adverse weather conditions may interfere with our operations, harming our operating
results.
Our operations could be adversely affected, beyond the normal seasonal variations described
above, by unusually long periods of inclement weather, which could interfere with collection,
landfill and intermodal operations, reduce the volume of waste generated by our customers, delay
the development of landfill capacity, and increase the costs we incur in connection with the
construction of landfills and other facilities. Periods of particularly harsh weather may force us
to temporarily suspend some of our operations.
Page 63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors has authorized a common stock repurchase program for the repurchase of
up to $800 million of our common stock through December 31, 2012. Under the program, stock
repurchases may be made in the open market or in privately negotiated transactions from time to
time at managements 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, 2010, we have repurchased approximately 22.4 million shares of our
common stock at a cost of $598.7 million. The table below reflects repurchases we have made for
the three months ended September 30, 2010 (in thousands, except share and per share amounts):
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Maximum |
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Total Number of |
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Approximate Dollar |
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Shares Purchased |
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Value of Shares that |
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Total Number |
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Average |
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as Part of Publicly |
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May Yet Be |
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of Shares |
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Price Paid |
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Announced |
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Purchased Under |
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Period |
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Purchased |
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Per Share(1) |
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Program |
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the Program |
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7/1/10 7/31/10 |
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18,800 |
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$ |
34.52 |
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18,800 |
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$ |
233,279 |
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8/1/10 8/31/10 |
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821,237 |
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38.19 |
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821,237 |
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201,912 |
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9/1/10 9/30/10 |
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16,000 |
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37.76 |
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16,000 |
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201,308 |
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856,037 |
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38.11 |
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856,037 |
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This amount represents the weighted average price paid per common share. This price
includes a per share commission paid for all repurchases. |
Page 64
Item 6. Exhibits
See Exhibit Index immediately following the signature page of this Quarterly Report on Form
10-Q.
Page 65
SIGNATURES
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.
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WASTE CONNECTIONS, INC.
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Date: October 20, 2010 |
BY: |
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/s/ Ronald J. Mittelstaedt
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Ronald J. Mittelstaedt, |
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Chief Executive Officer |
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Date: October 20, 2010 |
BY: |
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/s/ Worthing F. Jackman
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Worthing F. Jackman, |
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Executive Vice President and
Chief Financial Officer |
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Page 66
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Exhibit Number |
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Description of Exhibits |
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3.1 |
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Amended and Restated Certificate of Incorporation of
the Registrant (incorporated by reference to the
exhibit filed with the Registrants Form 10-Q filed on
July 24, 2007) |
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3.2 |
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Third Amended and Restated Bylaws of the Registrant,
effective May 15, 2009 (incorporated by reference to
the exhibit filed with the Registrants Form 8-K filed
on April 23, 2009) |
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31.1 |
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Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14(a)/15d-14(a) |
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31.2 |
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Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14(a)/15d-14(a) |
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32.1 |
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Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. §1350 |
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101 |
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The following materials from Waste Connections, Inc.s
Quarterly Report on Form 10-Q for the period ended
September 30, 2010, formatted in XBRL (Extensible
Business Reporting Language): (i) the Condensed
Consolidated Balance Sheets; (ii) the Condensed
Consolidated Statements of Income; (iii) the Condensed
Consolidated Statements of Equity and Comprehensive
Income; (iv) the Condensed Consolidated Statements of
Cash Flows; and (v) the Notes to Condensed Consolidated
Financial Statements, tagged as blocks of text. In
accordance with Regulation S-T, the XBRL-formatted
interactive data files that comprise this Exhibit 101
shall be deemed furnished and not filed. |
Page 67