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, 2011
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 12, 2011: 111,864,677 shares of common stock
WASTE CONNECTIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
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September 30, |
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December 31, |
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2011 |
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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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$ |
36,560 |
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$ |
9,873 |
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Accounts receivable, net of allowance for doubtful
accounts of $5,215 and $5,084 at September 30,
2011 and December 31, 2010, respectively |
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185,037 |
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152,156 |
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Deferred income taxes |
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18,923 |
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20,130 |
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Prepaid expenses and other current assets |
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30,438 |
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33,402 |
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Total current assets |
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270,958 |
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215,561 |
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Property and equipment, net |
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1,421,626 |
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1,337,476 |
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Goodwill |
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1,107,647 |
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927,852 |
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Intangible assets, net |
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454,475 |
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381,475 |
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Restricted assets |
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28,555 |
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30,441 |
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Other assets, net |
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28,744 |
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23,179 |
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$ |
3,312,005 |
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$ |
2,915,984 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
86,017 |
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$ |
85,252 |
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Book overdraft |
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11,459 |
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12,396 |
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Accrued liabilities |
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117,473 |
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99,075 |
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Deferred revenue |
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62,788 |
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54,157 |
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Current portion of long-term debt and notes payable |
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5,302 |
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2,657 |
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Total current liabilities |
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283,039 |
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253,537 |
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Long-term debt and notes payable |
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1,174,500 |
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909,978 |
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Other long-term liabilities |
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72,845 |
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47,637 |
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Deferred income taxes |
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381,500 |
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334,414 |
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Total liabilities |
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1,911,884 |
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1,545,566 |
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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: $0.01 par value per share; 250,000,000
and 150,000,000 shares authorized; 111,864,328 and
113,950,081 shares issued and outstanding at September
30, 2011 and December 31, 2010, respectively |
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1,119 |
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1,139 |
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Additional paid-in capital |
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437,096 |
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509,218 |
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Accumulated other comprehensive loss |
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(3,312 |
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(3,095 |
) |
Retained earnings |
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960,671 |
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858,887 |
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Total Waste Connections equity |
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1,395,574 |
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1,366,149 |
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Noncontrolling interest in subsidiaries |
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4,547 |
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4,269 |
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Total equity |
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1,400,121 |
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1,370,418 |
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$ |
3,312,005 |
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$ |
2,915,984 |
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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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2011 |
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2010 |
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2011 |
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2010 |
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Revenues |
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$ |
403,962 |
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$ |
345,785 |
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$ |
1,125,614 |
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$ |
983,802 |
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Operating expenses: |
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Cost of operations |
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228,561 |
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193,638 |
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637,499 |
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557,974 |
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Selling, general and
administrative |
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41,047 |
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38,455 |
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121,054 |
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110,465 |
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Depreciation |
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38,868 |
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34,441 |
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108,843 |
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99,349 |
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Amortization of intangibles |
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5,138 |
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3,616 |
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14,788 |
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10,800 |
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Loss (gain) on disposal of assets |
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1,034 |
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(50 |
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742 |
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572 |
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Operating income |
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89,314 |
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75,685 |
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242,688 |
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204,642 |
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Interest expense |
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(12,029 |
) |
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(9,419 |
) |
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(31,948 |
) |
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(30,842 |
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Interest income |
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132 |
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135 |
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408 |
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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 (expense), net |
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(899 |
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1,500 |
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(750 |
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1,970 |
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Income before income tax provision |
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76,518 |
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67,901 |
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210,398 |
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166,030 |
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Income tax provision |
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(29,934 |
) |
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(26,644 |
) |
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(82,415 |
) |
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(66,323 |
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Net income |
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46,584 |
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41,257 |
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127,983 |
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99,707 |
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Less: Net income attributable
to noncontrolling interests |
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(255 |
) |
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(271 |
) |
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(702 |
) |
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(748 |
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Net income attributable to Waste
Connections |
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$ |
46,329 |
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$ |
40,986 |
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$ |
127,281 |
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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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$ |
0.41 |
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$ |
0.35 |
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$ |
1.13 |
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$ |
0.85 |
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Diluted |
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$ |
0.41 |
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$ |
0.35 |
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$ |
1.12 |
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$ |
0.84 |
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Shares used in the per share
calculations: |
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Basic |
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112,327,410 |
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115,594,327 |
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113,130,314 |
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116,129,247 |
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Diluted |
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113,192,884 |
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116,778,853 |
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113,979,165 |
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117,421,698 |
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Cash dividends per common share |
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$ |
0.075 |
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$ |
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$ |
0.225 |
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$ |
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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, 2011
(Unaudited)
(In thousands, except share amounts)
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Waste Connections Equity |
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Accumulated |
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Additional |
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Other |
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Comprehensive |
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Common Stock |
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Paid-In |
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Comprehensive |
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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, 2010 |
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113,950,081 |
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$ |
1,139 |
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$ |
509,218 |
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$ |
(3,095 |
) |
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$ |
858,887 |
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$ |
4,269 |
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$ |
1,370,418 |
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Vesting of restricted stock units |
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538,878 |
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5 |
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(5 |
) |
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Tax withholdings related to net share settlements of
restricted stock units |
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(184,478 |
) |
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(1 |
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(5,435 |
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(5,436 |
) |
Equity-based compensation |
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8,906 |
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8,906 |
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Exercise of stock options and warrants |
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383,082 |
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4 |
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4,952 |
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4,956 |
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Excess tax benefit associated with equity-based compensation |
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4,500 |
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4,500 |
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Repurchase of common stock |
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(2,823,235 |
) |
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(28 |
) |
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(85,040 |
) |
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(85,068 |
) |
Cash dividends on common stock |
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(25,497 |
) |
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(25,497 |
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Amounts reclassified into earnings, net of taxes |
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|
900 |
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|
900 |
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Changes in fair value of swaps, net of taxes |
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(1,117 |
) |
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(1,117 |
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Distributions to noncontrolling interests |
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(675 |
) |
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(675 |
) |
Fair value of noncontrolling interest associated with
business acquired |
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|
251 |
|
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|
251 |
|
Net income |
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$ |
127,983 |
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|
|
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|
127,281 |
|
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|
702 |
|
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|
127,983 |
|
Other comprehensive loss |
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(350 |
) |
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Income tax effect of other comprehensive loss |
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|
133 |
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Comprehensive income |
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|
127,766 |
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Comprehensive income attributable to noncontrolling interests |
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|
(702 |
) |
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Comprehensive income attributable to Waste Connections |
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$ |
127,064 |
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Balances at September 30, 2011 |
|
|
|
|
|
|
111,864,328 |
|
|
$ |
1,119 |
|
|
$ |
437,096 |
|
|
$ |
(3,312 |
) |
|
$ |
960,671 |
|
|
$ |
4,547 |
|
|
$ |
1,400,121 |
|
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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, 2010
(Unaudited)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste Connections Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Retained |
|
|
Noncontrolling |
|
|
|
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Earnings |
|
|
Interests |
|
|
Total |
|
Balances at December 31, 2009 |
|
|
|
|
|
|
117,898,624 |
|
|
$ |
786 |
|
|
$ |
625,173 |
|
|
$ |
(4,892 |
) |
|
$ |
732,738 |
|
|
$ |
3,231 |
|
|
$ |
1,357,036 |
|
Vesting of restricted stock units |
|
|
|
|
|
|
505,808 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax withholdings related to net share settlements of
restricted stock units |
|
|
|
|
|
|
(173,583 |
) |
|
|
(1 |
) |
|
|
(3,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,724 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,488 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
1,893,913 |
|
|
|
12 |
|
|
|
23,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,244 |
|
Excess tax benefit associated with equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,935 |
|
Repurchase of common stock |
|
|
|
|
|
|
(5,020,666 |
) |
|
|
(33 |
) |
|
|
(116,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,285 |
) |
Reacquisition of equity component resulting from conversion
of 2026 Convertible Senior Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,295 |
) |
Issuance of shares in connection with conversion of 2026
Convertible Senior Notes |
|
|
|
|
|
|
32,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified into earnings, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,308 |
|
|
|
|
|
|
|
|
|
|
|
6,308 |
|
Changes in fair value of swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,530 |
) |
|
|
|
|
|
|
|
|
|
|
(8,530 |
) |
Net income |
|
$ |
99,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,959 |
|
|
|
748 |
|
|
|
99,707 |
|
Other comprehensive loss |
|
|
(3,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive loss |
|
|
1,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
97,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Waste Connections |
|
$ |
96,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2010 |
|
|
|
|
|
|
115,136,955 |
|
|
$ |
767 |
|
|
$ |
543,555 |
|
|
$ |
(7,114 |
) |
|
$ |
831,697 |
|
|
$ |
3,979 |
|
|
$ |
1,372,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
127,983 |
|
|
$ |
99,707 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Loss on disposal of assets |
|
|
742 |
|
|
|
572 |
|
Depreciation |
|
|
108,843 |
|
|
|
99,349 |
|
Amortization of intangibles |
|
|
14,788 |
|
|
|
10,800 |
|
Deferred income taxes, net of acquisitions |
|
|
36,960 |
|
|
|
15,925 |
|
Loss on redemption of 2026 Convertible Senior Notes, net of
make-whole payment |
|
|
|
|
|
|
2,255 |
|
Amortization of debt issuance costs |
|
|
1,005 |
|
|
|
1,332 |
|
Amortization of debt discount |
|
|
|
|
|
|
1,245 |
|
Equity-based compensation |
|
|
8,906 |
|
|
|
8,488 |
|
Interest income on restricted assets |
|
|
(355 |
) |
|
|
(397 |
) |
Closure and post-closure accretion |
|
|
1,451 |
|
|
|
1,323 |
|
Excess tax benefit associated with equity-based compensation |
|
|
(4,500 |
) |
|
|
(8,935 |
) |
Net change in operating assets and liabilities, net of acquisitions |
|
|
1,901 |
|
|
|
14,358 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
297,724 |
|
|
|
246,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash acquired |
|
|
(247,962 |
) |
|
|
(17,391 |
) |
Capital expenditures for property and equipment |
|
|
(84,051 |
) |
|
|
(86,121 |
) |
Proceeds from disposal of assets |
|
|
3,238 |
|
|
|
5,786 |
|
Decrease (increase) in restricted assets, net of interest income |
|
|
2,241 |
|
|
|
(1,048 |
) |
Increase in other assets |
|
|
(1,706 |
) |
|
|
(2,034 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(328,240 |
) |
|
|
(100,808 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
515,500 |
|
|
|
331,253 |
|
Principal payments on notes payable and long-term debt |
|
|
(343,726 |
) |
|
|
(384,346 |
) |
Change in book overdraft |
|
|
(937 |
) |
|
|
(374 |
) |
Proceeds from option and warrant exercises |
|
|
4,956 |
|
|
|
23,244 |
|
Excess tax benefit associated with equity-based compensation |
|
|
4,500 |
|
|
|
8,935 |
|
Payments for repurchase of common stock |
|
|
(85,068 |
) |
|
|
(116,285 |
) |
Payments for cash dividends |
|
|
(25,497 |
) |
|
|
|
|
Tax withholdings related to net share settlements of restricted
stock units |
|
|
(5,436 |
) |
|
|
(3,724 |
) |
Distributions to noncontrolling interests |
|
|
(675 |
) |
|
|
|
|
Debt issuance costs |
|
|
(6,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
57,203 |
|
|
|
(141,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents |
|
|
26,687 |
|
|
|
3,917 |
|
Cash and equivalents at beginning of period |
|
|
9,873 |
|
|
|
9,639 |
|
|
|
|
|
|
|
|
Cash and equivalents at end of period |
|
$ |
36,560 |
|
|
$ |
13,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activity: |
|
|
|
|
|
|
|
|
Liabilities assumed and notes payable issued to sellers of businesses
acquired |
|
$ |
144,386 |
|
|
$ |
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 three and nine month periods ended September
30, 2011 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, 2010.
2. RECLASSIFICATION
Certain amounts reported in the Companys prior periods financial statements have been
reclassified to conform with the 2011 presentation.
3. NEW ACCOUNTING STANDARDS
Fair Value Measurement. In May 2011, the Financial Accounting Standards Board
(FASB) issued additional guidance on fair value disclosures. This guidance contains certain
updates to the measurement guidance as well as enhanced disclosure requirements. The most
significant change in disclosures is an expansion of the information required for Level 3
measurements including enhanced disclosure for: (1) the valuation processes used by the reporting
entity; and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and
the interrelationships between those unobservable inputs, if any. This guidance is effective for
interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited.
This guidance will only impact the Companys Level 3 disclosures.
Presentation of Comprehensive Income. In September 2011, the FASB issued guidance on
the presentation of comprehensive income. This guidance eliminates the current option to report
other comprehensive income and its components in the statement of changes in equity. The guidance
allows two presentation alternatives: (1) present items of net income and other comprehensive
income in one continuous statement, referred to as the statement of comprehensive income; or (2) in
two separate, but consecutive, statements of net income and other comprehensive income. This
guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011.
Early adoption is permitted, but full retrospective application is required under both sets of
accounting standards. Upon adoption, the Company will elect to present items of net income and
other comprehensive income in one continuous statement, the statement of comprehensive income.
Multiemployer Pension Plans. In September 2011, the FASB issued guidance requiring
companies to provide additional disclosures related to multiemployer pension plans. The
disclosures are required to be made on an annual basis for all individually material plans.
Retrospective application of the disclosures is required.
This guidance is effective for fiscal years ending after December 15, 2011, with early
adoption permitted. The Company is currently evaluating the impact of this guidance on its
multiemployer plan disclosures.
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)
Goodwill Impairment. In September 2011, the FASB issued guidance on testing goodwill
for impairment. The guidance provides entities an option to perform a qualitative assessment to
determine whether further impairment testing is necessary. This guidance is effective for annual
and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
However, an entity can choose to early adopt, provided that the entity has not yet performed its
2011 annual impairment test or issued its financial statements. The Company has elected to early
adopt the guidance and will perform a qualitative assessment when it performs its goodwill
impairment test in the fourth quarter of 2011.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Companys financial instruments consist primarily of cash and equivalents, trade
receivables, restricted assets, trade payables, debt instruments, interest rate swaps and fuel
hedges. As of September 30, 2011 and December 31, 2010, the carrying values of cash and
equivalents, 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 certain notes as listed in the table below, approximate their fair values as
of September 30, 2011 and December 31, 2010, based on current borrowing rates for similar types of
borrowing arrangements. The carrying values and fair values of the Companys debt instruments
where the carrying values do not approximate their fair values as of September 30, 2011 and
December 31, 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at |
|
|
Fair Value* at |
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
6.22% Senior Notes due 2015 |
|
$ |
175,000 |
|
|
$ |
175,000 |
|
|
$ |
200,517 |
|
|
$ |
198,300 |
|
3.30% Senior Notes due 2016 |
|
$ |
100,000 |
|
|
$ |
|
|
|
$ |
101,890 |
|
|
$ |
|
|
4.00% Senior Notes due 2018 |
|
$ |
50,000 |
|
|
$ |
|
|
|
$ |
53,386 |
|
|
$ |
|
|
5.25% Senior Notes due 2019 |
|
$ |
175,000 |
|
|
$ |
175,000 |
|
|
$ |
198,905 |
|
|
$ |
191,316 |
|
4.64% Senior Notes due 2021 |
|
$ |
100,000 |
|
|
$ |
|
|
|
$ |
107,007 |
|
|
$ |
|
|
|
|
|
* |
|
Fair value 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, 2011, the Company owned 35 landfills, and operated, but did not own, five
landfills under life-of-site operating agreements and five landfills under limited-term operating
agreements. The Companys landfills had site costs with a net book value of $802,855 at September
30, 2011. 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 landfills operated under limited-term operating
agreements and life-of-site operating agreements, the owner of the property (generally a
municipality) usually owns the permit and the Company operates the landfill for a contracted term.
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 at four of the five 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 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, 2011, 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 38 years. As of
September 30, 2011, the Company is seeking to expand permitted capacity at seven of its owned
landfills and two landfills that it operates under life-of-site operating agreements, and considers
the achievement of these expansions to be probable. Although the Company cannot be certain that
all future expansions will be permitted as designed, the average remaining life, when considering
remaining permitted capacity, probable expansion capacity and projected annual disposal volume, of
the Companys owned landfills and landfills operated under
life-of-site operating agreements is 48
years, with lives ranging from 1 to 189 years.
During the nine months ended September 30, 2011 and 2010, the Company expensed $31,712 and
$29,621, respectively, or an average of $2.94 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. Any changes in expectations that result
in a downward revision (or no revision) to the estimated undiscounted cash flows result in a
liability that is inflated and discounted at rates reflecting the market conditions at the time the
cash flows were originally estimated. This policy results in the Companys final capping, closure
and post-closure liabilities being recorded in layers. At January 1, 2011, the Company decreased
its discount rate assumption for purposes of computing 2011 layers for final capping, closure and
post-closure obligations from 6.5% to 5.75%, in order to reflect the Companys long-term cost of
borrowing as of the end of 2010. The Companys inflation rate assumption is 2.5% for the years
ending December 31, 2011 and 2010. The resulting final capping, closure and post-closure
obligations are recorded on the balance sheet along with an offsetting addition to site costs which
is 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, 2011 and 2010, the Company expensed $1,451 and $1,323, respectively, or an average of
$0.13 per ton consumed in each period, 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, 2010 to September 30, 2011:
|
|
|
|
|
Final capping, closure and post-closure liability at December 31,
2010 |
|
$ |
28,537 |
|
Adjustments to final capping, closure and post-closure liabilities |
|
|
(1,160 |
) |
Liabilities incurred |
|
|
1,544 |
|
Accretion expense |
|
|
1,451 |
|
Closure payments |
|
|
(2,055 |
) |
Assumption of closure liabilities from acquisitions |
|
|
1,429 |
|
|
|
|
|
Final capping, closure and post-closure liability at September
30, 2011 |
|
$ |
29,746 |
|
|
|
|
|
The adjustments to final capping, closure and post-closure liabilities primarily consisted of
an increase in estimated airspace at one of the Companys landfills at which an expansion is being
pursued. The Company performs its annual review of its cost and capacity estimates in the first
quarter of each year.
At September 30, 2011, $26,206 of the Companys restricted assets balance was for purposes of
securing its performance of future final capping, closure and post-closure obligations.
6. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Revolver under credit facility, bearing interest ranging from
0.81% to 3.65%* |
|
$ |
519,000 |
|
|
$ |
511,000 |
|
2015 Notes, bearing interest at 6.22% |
|
|
175,000 |
|
|
|
175,000 |
|
2016 Notes, bearing interest at 3.30% |
|
|
100,000 |
|
|
|
|
|
2018 Notes, bearing interest at 4.00% |
|
|
50,000 |
|
|
|
|
|
2019 Notes, bearing interest at 5.25% |
|
|
175,000 |
|
|
|
175,000 |
|
2021 Notes, bearing interest at 4.64% |
|
|
100,000 |
|
|
|
|
|
Tax-exempt bonds, bearing interest ranging from 0.08% to 0.42%* |
|
|
38,460 |
|
|
|
39,420 |
|
Notes payable to sellers in connection with acquisitions, bearing
interest at 2.50% to 10.35%* |
|
|
19,446 |
|
|
|
9,159 |
|
Notes payable to third parties, bearing interest at 6.7% to 10.9%* |
|
|
2,896 |
|
|
|
3,056 |
|
|
|
|
|
|
|
|
|
|
|
1,179,802 |
|
|
|
912,635 |
|
Less current portion |
|
|
(5,302 |
) |
|
|
(2,657 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,174,500 |
|
|
$ |
909,978 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Interest rates in the table above represent the range of interest rates incurred
during the nine month period ended September 30, 2011. |
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)
On April 1, 2011, the Company entered into a Second Supplement to Master Note Purchase
Agreement with certain accredited institutional investors (the Second Supplement), pursuant to
which the Company issued and sold to the investors on that date $250,000 of senior uncollateralized
notes at fixed interest rates with
interest payable in arrears semi-annually on October 1 and April 1 beginning on October 1,
2011 in a private placement. Of these notes, $100,000 will mature on April 1, 2016 with an annual
interest rate of 3.30% (the 2016 Notes), $50,000 will mature on April 1, 2018 with an annual
interest rate of 4.00% (the 2018 Notes), and $100,000 will mature on April 1, 2021 with an annual
interest rate of 4.64% (the 2021 Notes). The 2016 Notes, 2018 Notes and 2021 Notes are
uncollateralized obligations and rank equally in right of payment with the 2015 Notes, the 2019
Notes and obligations under the Companys credit agreement. The 2016 Notes, 2018 Notes and 2021
Notes are subject to representations, warranties, covenants and events of default. Upon the
occurrence of an event of default, payment of the 2016 Notes, 2018 Notes and 2021 Notes may be
accelerated by the holders of the respective notes. The 2016 Notes, 2018 Notes and 2021 Notes may
also be prepaid by the Company at any time at par plus a make-whole amount determined in respect of
the remaining scheduled interest payments on the respective notes, using a discount rate of the
then current market standard for United States treasury bills plus 0.50%. In addition, the Company
will be required to offer to prepay the 2016 Notes, 2018 Notes and 2021 Notes upon certain changes
in control.
The Company may issue additional series of senior uncollateralized notes pursuant to the terms
and conditions of the Master Note Agreement, provided that the purchasers of the outstanding notes,
including the 2016 Notes, 2018 Notes and 2021 Notes, shall not have any obligation to purchase any
additional notes issued pursuant to the Master Note Agreement and the aggregate principal amount of
the outstanding notes and any additional notes issued pursuant to the Master Note Agreement shall
not exceed $750,000. The Company currently has $600,000 of Notes outstanding under the Master Note
Agreement.
The Company used the proceeds from the sale of the 2016 Notes, 2018 Notes, and 2021 Notes to
fund a portion of the purchase price for the County Waste acquisition, which is described in Note
7.
On July 11, 2011, the Company and certain of its subsidiaries entered into an Amended and
Restated Credit Agreement (the credit agreement) with Bank of America, N.A. and the other banks
and lending institutions party thereto, as lenders, Bank of America, N.A., as administrative agent,
and J.P. Morgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication
agents.
The Companys credit agreement is comprised of a $1,200,000 revolving credit facility (the
credit facility) which matures on July 11, 2016. The Company has the ability under the credit
agreement to increase commitments under the revolving credit facility from $1,200,000 to
$1,500,000, subject to conditions including that no default, as defined in the credit agreement,
has occurred, although no existing lender has any obligation to increase its commitment. The
Company used proceeds from the credit agreement in order to refinance its previous $845,000 credit
facility, which had a maturity of September 27, 2012.
Under the credit agreement, there is no maximum amount of standby letters of credit that can
be issued; however, the issuance of standby letters of credit reduces the amount of total
borrowings available. The credit agreement requires the Company to pay a commitment fee ranging
from 0.200% per annum to 0.350% per annum of the unused portion of the facility. The borrowings
under the credit agreement bear interest, at the Companys option, at either the base rate plus the
applicable base rate margin on base rate loans, or the LIBOR rate plus the applicable LIBOR margin
on LIBOR loans. The base rate for any day is a fluctuating rate per annum equal to the highest of:
(1) the federal funds rate plus one half of one percent (0.500%); (2) the LIBOR rate plus one
percent (1.000%), and (3) the rate of interest in effect for such day as publicly announced from
time to time by Bank of America as its prime rate. The LIBOR rate is determined by the
administrative agent pursuant to a formula in the credit agreement. The applicable margins under
the credit agreement vary depending on the Companys leverage ratio, as defined in the credit
agreement, and range from 1.150% per annum to 2.000% per annum for LIBOR loans and 0.150% per annum
to 1.000% per annum for base rate loans. The interest rate applicable under the credit agreement
is currently the LIBOR rate plus 1.400% per annum, a
0.775% per annum increase in the corresponding interest rate under the Companys previous
credit facility. The borrowings under the credit agreement are not collateralized.
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 credit agreement contains representations and warranties and places certain business,
financial and operating restrictions on the Company relating to, among other things, indebtedness,
liens and other encumbrances, investments, mergers and acquisitions, asset sales, sale and
leaseback transactions, and dividends, distributions and redemptions of capital stock. The credit
agreement requires that the Company maintain specified financial ratios. The Company expects to
use the credit agreement for acquisitions, capital expenditures, working capital, standby letters
of credit and general corporate purposes.
7. ACQUISITIONS
On April 1, 2011, the Company completed the acquisition of a 100% interest in Hudson Valley
Waste Holding, Inc., and its wholly-owned subsidiary, County Waste and Recycling Service, Inc.
(collectively, County Waste). As part of this acquisition, the Company acquired a 50% interest
in Russell Sweepers, LLC, a provider of sweeper services, resulting in a 50% noncontrolling
interest that was recognized at fair value on the purchase date. The operations include six
collection operations, three transfer stations and one recycling facility across six markets:
Orange County, New York; Greater Albany, New York; Springfield, Massachusetts; Fulton County, New
York; Warrant and Washington Counties, New York; and Greene, Columbia and Ulster Counties, New
York. The Company paid $299,000 for the purchased operations plus amounts paid for the purchase of
accounts receivable and other prepaid assets and estimated working capital, which amounts are
subject to post-closing adjustments. No other consideration, including contingent consideration,
was transferred by the Company to acquire these operations. Total revenues for the six months
ended September 30, 2011, generated from the County Waste operations and included within
consolidated revenues were $63,693. Total pre-tax earnings for the six months ended September 30,
2011, generated from the County Waste operations and included within consolidated income before
income taxes were $5,917.
In August 2011, the
Companys subsidiary, Capital Region Landfills, Inc. (CRL), entered into an agreement with the Town of Colonie, a municipal
corporation of the state of New York, to operate a municipal solid waste disposal facility (the
Colonie Landfill) for an initial term of 25 years. The agreement became effective on September 19, 2011. As
consideration for operating equipment and the right to operate the Colonie Landfill, CRL
remitted an initial payment of $23,860. CRL is also required to remit up to $55,470 of
additional consideration over the term of the agreement, comprised of $11,500 payable over a
five-year period ending September 2016 and up to $43,970 payable over the term of the agreement if
certain expansion criteria are met and certain annual tonnage targets are exceeded as specified in
the operating agreement. CRL is also responsible for all final capping, closure and
post-closure liabilities and estimates the total obligation in current dollars to be $21,287, the
net present value of which is $1,429. This obligation was recorded in Other long-term liabilities and is
provisional pending final completion of the calculations of the amounts and timing of capping,
closure and post-closure payments. CRL computed the present value of the additional
consideration using a probability-weighted discounted cash flow methodology, resulting in a total
obligation recognized at the effective date of $32,928, which consisted of $10,656 recorded as Notes
issued to sellers and $22,272 recorded as contingent consideration in Other long-term liabilities. Any changes in the fair
value of the contingent consideration subsequent to the acquisition date will be charged or
credited to income until the contingency is settled.
In addition to the County Waste acquisition and Colonie Landfill transaction, the Company
acquired seven individually immaterial non-hazardous solid waste collection businesses
during the nine months ended September 30, 2011. During the nine months ended September 30, 2010,
the Company acquired 13 individually immaterial non-hazardous solid waste collection, disposal and
recycling 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)
In August 2011, the Company announced that it has entered into agreements to acquire the
operations of Alaska Pacific Environmental Services Anchorage, LLC and Alaska Green Waste
Solutions, LLC (together,
Alaska Waste). Alaska Waste provides solid waste collection, recycling and composting
services in Anchorage, the Mat-Su Valley, Fairbanks, the Kenai Peninsula and Kodiak Island. The
Company expects the total purchase price to be between $115,000 and
$125,000 for the Alaska Waste acquisition. The
transaction remains subject to closing conditions, including regulatory approval and receipt of
certain governmental consents. The acquisition is expected to close in the first quarter of 2012.
The acquisitions completed during the nine months ended September 30, 2011 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 results of operations of the
acquired businesses have been included in the Companys consolidated financial statements from
their respective acquisition dates. The Company expects these acquired businesses to contribute
towards the achievement of the Companys strategy to expand through acquisitions.
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)
The following table summarizes the consideration transferred to acquire these businesses and
the amounts of identified assets acquired, liabilities assumed and noncontrolling interests
associated with businesses acquired at the acquisition date for acquisitions consummated in the
nine months ended September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
Acquisitions |
|
|
Acquisitions |
|
Fair value of consideration transferred: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
247,862 |
|
|
$ |
17,391 |
|
Debt assumed* |
|
|
84,737 |
|
|
|
9,657 |
|
Notes issued to sellers |
|
|
10,656 |
|
|
|
|
|
Contingent consideration |
|
|
22,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
365,527 |
|
|
|
27,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable
assets acquired, liabilities assumed
and noncontrolling interests associated
with businesses acquired: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
9,412 |
|
|
|
1,187 |
|
Other current assets |
|
|
1,056 |
|
|
|
602 |
|
Property and equipment |
|
|
112,088 |
|
|
|
22,322 |
|
Long-term franchise agreements
and contracts |
|
|
3,269 |
|
|
|
175 |
|
Customer lists |
|
|
33,978 |
|
|
|
1,597 |
|
Indefinite-lived intangibles |
|
|
42,283 |
|
|
|
|
|
Other intangibles |
|
|
10,367 |
|
|
|
|
|
Accounts payable |
|
|
(6,183 |
) |
|
|
|
|
Accrued liabilities |
|
|
(1,206 |
) |
|
|
(2,899 |
) |
Noncontrolling interests |
|
|
(251 |
) |
|
|
|
|
Deferred revenue |
|
|
(6,186 |
) |
|
|
(541 |
) |
Other long-term liabilities |
|
|
(1,429 |
) |
|
|
(146 |
) |
Deferred taxes |
|
|
(11,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total identifiable net assets |
|
|
185,732 |
|
|
|
22,297 |
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
179,795 |
|
|
$ |
4,751 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Debt paid at close of acquisition. |
The goodwill is attributable to the synergies and ancillary growth opportunities expected
to arise after the Companys acquisition of these businesses. Goodwill acquired during the nine
months ended September 30, 2011 and 2010, totaling $16,739 and $4,382, respectively, 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.
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)
The gross amount of trade receivables due under contracts acquired during the period ended
September 30, 2011, is $10,019, of which $607 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.
A reconciliation of the Fair value of consideration transferred to Payments for acquisitions,
net of cash acquired, as reported in the Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2011 and 2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
Acquisitions |
|
|
Acquisitions |
|
Cash consideration transferred |
|
$ |
247,862 |
|
|
$ |
17,391 |
|
Payment of contingent consideration |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash
acquired |
|
$ |
247,962 |
|
|
$ |
17,391 |
|
|
|
|
|
|
|
|
During the nine month periods ended September 30, 2011 and 2010, the Company incurred $1,278
and $1,177, respectively, of 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, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and
contracts |
|
$ |
190,696 |
|
|
$ |
(29,873 |
) |
|
$ |
160,823 |
|
Customer lists |
|
|
96,017 |
|
|
|
(25,312 |
) |
|
|
70,705 |
|
Non-competition agreements |
|
|
9,414 |
|
|
|
(6,317 |
) |
|
|
3,097 |
|
Other |
|
|
31,604 |
|
|
|
(2,956 |
) |
|
|
28,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,731 |
|
|
|
(64,458 |
) |
|
|
263,273 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
191,202 |
|
|
|
|
|
|
|
191,202 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
518,933 |
|
|
$ |
(64,458 |
) |
|
$ |
454,475 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization period of long-term franchise agreements and contracts
acquired during the nine months ended September 30, 2011 was 22.3 years. The weighted-average
amortization period of customer lists acquired during the nine months ended September 30, 2011 was
6.9 years. The weighted average amortization period of other intangibles acquired during the nine months ended September 30, 2011 was 40.0 years.
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)
Intangible assets, exclusive of goodwill, consisted of the following at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and
contracts |
|
$ |
190,489 |
|
|
$ |
(25,255 |
) |
|
$ |
165,234 |
|
Customer lists |
|
|
62,885 |
|
|
|
(17,867 |
) |
|
|
45,018 |
|
Non-competition agreements |
|
|
9,414 |
|
|
|
(5,982 |
) |
|
|
3,432 |
|
Other |
|
|
21,236 |
|
|
|
(2,364 |
) |
|
|
18,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284,024 |
|
|
|
(51,468 |
) |
|
|
232,556 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
148,919 |
|
|
|
|
|
|
|
148,919 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
432,943 |
|
|
$ |
(51,468 |
) |
|
$ |
381,475 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization period of long-term franchise agreements and contracts
acquired during the year ended December 31, 2010 was 9.1 years. The weighted-average amortization
period of customer lists acquired during the year ended December 31, 2010 was 6.4 years.
Estimated future amortization expense for the next five years of amortizable intangible assets
is as follows:
|
|
|
|
|
For the year ending December 31, 2011 |
|
$ |
20,008 |
|
For the year ending December 31, 2012 |
|
$ |
20,906 |
|
For the year ending December 31, 2013 |
|
$ |
19,903 |
|
For the year ending December 31, 2014 |
|
$ |
18,688 |
|
For the year ending December 31, 2015 |
|
$ |
18,117 |
|
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, which are also
the Companys reportable segments. Each operating segment is responsible for managing several
vertically integrated operations, which are comprised of districts. During the first quarter of
2010, the Company realigned certain of the Companys districts between operating segments. In
April 2011, as a result of the County Waste acquisition described in Note 7, the Company realigned
its reporting structure and changed its three geographic operating segments from Western, Central
and Southern to Western, Central and Eastern. As part of this realignment, the states of Arizona,
Louisiana, New Mexico and Texas, which were previously part of the Southern region, are now
included in the Central region. Also as part of this realignment, the state of Michigan, which was
previously part of the Central region, is now included in the Eastern region (previously referred
to as the Southern region). Additionally, the states of New York and Massachusetts, which the
Company now operates in as a result of the County Waste acquisition, are included in the Eastern
region. The segment information presented herein reflects the realignment of these districts.
Under the current orientation, the Companys Western Region is comprised of operating locations in
California, Idaho, Montana, Nevada, Oregon, Washington and western Wyoming; the Companys Central
Region is comprised of operating locations in Arizona, Colorado, Kansas, Louisiana, Minnesota,
Nebraska, New Mexico, Oklahoma, South Dakota, Texas, Utah and eastern Wyoming; and the Companys
Eastern Region is comprised of operating locations in Alabama, Illinois, Iowa, Kentucky,
Massachusetts, Michigan, Mississippi, New York, North Carolina, South Carolina and Tennessee.
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)
The Companys Chief Operating Decision Maker (CODM) evaluates operating segment
profitability and determines resource allocations based on operating income before depreciation,
amortization and gain (loss) on disposal of assets. Operating income 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 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.
Summarized financial information concerning the Companys reportable segments for the three
and nine months ended September 30, 2011 and 2010, is shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Depreciation, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
|
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
Three Months Ended September 30, 2011 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
223,156 |
|
|
$ |
(25,896 |
) |
|
$ |
197,260 |
|
|
$ |
65,306 |
|
Central |
|
|
126,389 |
|
|
|
(13,538 |
) |
|
|
112,851 |
|
|
|
40,174 |
|
Eastern |
|
|
112,140 |
|
|
|
(18,289 |
) |
|
|
93,851 |
|
|
|
27,179 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
461,685 |
|
|
$ |
(57,723 |
) |
|
$ |
403,962 |
|
|
$ |
134,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Depreciation, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
|
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
Three Months Ended September 30, 2010 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
212,262 |
|
|
$ |
(23,724 |
) |
|
$ |
188,538 |
|
|
$ |
60,500 |
|
Central |
|
|
113,963 |
|
|
|
(13,384 |
) |
|
|
100,579 |
|
|
|
33,792 |
|
Eastern |
|
|
70,069 |
|
|
|
(13,401 |
) |
|
|
56,668 |
|
|
|
17,379 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
396,294 |
|
|
$ |
(50,509 |
) |
|
$ |
345,785 |
|
|
$ |
113,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Depreciation, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
|
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
Nine Months Ended September 30, 2011 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
633,784 |
|
|
$ |
(74,407 |
) |
|
$ |
559,377 |
|
|
$ |
177,593 |
|
Central |
|
|
362,351 |
|
|
|
(38,589 |
) |
|
|
323,762 |
|
|
|
115,261 |
|
Eastern |
|
|
291,910 |
|
|
|
(49,435 |
) |
|
|
242,475 |
|
|
|
70,856 |
|
Corporate(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,288,045 |
|
|
$ |
(162,431 |
) |
|
$ |
1,125,614 |
|
|
$ |
367,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Depreciation, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and |
|
|
|
Gross |
|
|
Intercompany |
|
|
Net |
|
|
Gain (Loss) on |
|
Nine Months Ended September 30, 2010 |
|
Revenues |
|
|
Revenues(b) |
|
|
Revenues |
|
|
Disposal of Assets(c) |
|
Western |
|
$ |
600,111 |
|
|
$ |
(68,609 |
) |
|
$ |
531,502 |
|
|
$ |
164,737 |
|
Central |
|
|
322,891 |
|
|
|
(37,599 |
) |
|
|
285,292 |
|
|
|
94,794 |
|
Eastern |
|
|
206,007 |
|
|
|
(38,999 |
) |
|
|
167,008 |
|
|
|
52,074 |
|
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 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. |
Total assets for each of the Companys reportable segments at September 30, 2011 and
December 31, 2010, based on region alignments as of those dates, were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Western |
|
$ |
1,363,025 |
|
|
$ |
1,378,920 |
|
Central |
|
|
1,031,345 |
|
|
|
654,854 |
|
Eastern |
|
|
827,874 |
|
|
|
818,648 |
|
Corporate |
|
|
89,761 |
|
|
|
63,562 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,312,005 |
|
|
$ |
2,915,984 |
|
|
|
|
|
|
|
|
The following tables show changes in goodwill during the nine months ended September 30,
2011 and 2010, by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western |
|
|
Central |
|
|
Eastern |
|
|
Total |
|
Balance as of
December 31, 2010 |
|
$ |
313,038 |
|
|
$ |
305,774 |
|
|
$ |
309,040 |
|
|
$ |
927,852 |
|
Goodwill transferred |
|
|
|
|
|
|
111,806 |
|
|
|
(111,806 |
) |
|
|
|
|
Goodwill acquired |
|
|
|
|
|
|
6,638 |
|
|
|
173,157 |
|
|
|
179,795 |
|
Goodwill divested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2011 |
|
$ |
313,038 |
|
|
$ |
424,218 |
|
|
$ |
370,391 |
|
|
$ |
1,107,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western |
|
|
Central |
|
|
Eastern |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Company has no accumulated impairment losses associated with goodwill.
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Operating income before
depreciation, amortization and
gain (loss) on disposal of
assets |
|
$ |
134,354 |
|
|
$ |
113,692 |
|
|
$ |
367,061 |
|
|
$ |
315,363 |
|
Depreciation |
|
|
(38,868 |
) |
|
|
(34,441 |
) |
|
|
(108,843 |
) |
|
|
(99,349 |
) |
Amortization of intangibles |
|
|
(5,138 |
) |
|
|
(3,616 |
) |
|
|
(14,788 |
) |
|
|
(10,800 |
) |
Gain (loss) on disposal of assets |
|
|
(1,034 |
) |
|
|
50 |
|
|
|
(742 |
) |
|
|
(572 |
) |
Interest expense |
|
|
(12,029 |
) |
|
|
(9,419 |
) |
|
|
(31,948 |
) |
|
|
(30,842 |
) |
Interest income |
|
|
132 |
|
|
|
135 |
|
|
|
408 |
|
|
|
453 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,193 |
) |
Other income (expense), net |
|
|
(899 |
) |
|
|
1,500 |
|
|
|
(750 |
) |
|
|
1,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
provision |
|
$ |
76,518 |
|
|
$ |
67,901 |
|
|
$ |
210,398 |
|
|
$ |
166,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows, for the periods indicated, the Companys total reported revenues by
service line and with intercompany eliminations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Collection |
|
$ |
282,176 |
|
|
$ |
244,936 |
|
|
$ |
796,783 |
|
|
$ |
712,114 |
|
Disposal and transfer |
|
|
138,680 |
|
|
|
125,473 |
|
|
|
381,961 |
|
|
|
342,390 |
|
Intermodal, recycling and other |
|
|
40,829 |
|
|
|
25,885 |
|
|
|
109,301 |
|
|
|
74,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
461,685 |
|
|
|
396,294 |
|
|
|
1,288,045 |
|
|
|
1,129,009 |
|
Less: intercompany elimination |
|
|
(57,723 |
) |
|
|
(50,509 |
) |
|
|
(162,431 |
) |
|
|
(145,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
403,962 |
|
|
$ |
345,785 |
|
|
$ |
1,125,614 |
|
|
$ |
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
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 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)
At September 30, 2011, the Companys derivative instruments included two interest rate swap
agreements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
|
|
|
Notional |
|
|
Interest |
|
|
Interest Rate |
|
|
|
|
|
|
|
Date Entered |
|
Amount |
|
|
Rate Paid* |
|
|
Received |
|
Effective Date |
|
|
Expiration Date |
|
March 2009 |
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR |
|
February 2011 |
|
February 2014 |
August 2011 |
|
$ |
150,000 |
|
|
|
0.7975 |
% |
|
1-month LIBOR |
|
April 2012 |
|
January 2015 |
|
|
|
* |
|
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, 2011, the Companys derivative instruments included two fuel hedge agreements
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in gallons |
|
|
(per |
|
|
Diesel Rate Received |
|
|
|
|
|
|
Expiration |
|
Date Entered |
|
per month) |
|
|
gallon) |
|
|
Variable |
|
Effective Date |
|
|
Date |
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. |
The fair values of derivative instruments designated as cash flow hedges as of September
30, 2011, 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 |
|
$ |
64 |
|
|
Accrued liabilities(a) |
|
$ |
(4,510 |
) |
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
(5,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel hedges |
|
Prepaid expenses and other current assets(b) |
|
|
3,757 |
|
|
|
|
|
|
|
|
|
|
|
Other assets, net |
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as cash flow hedges |
|
|
|
|
|
$ |
4,487 |
|
|
|
|
|
|
$ |
(9,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the estimated amount of the existing unrealized losses on interest rate
swaps as of September 30, 2011 (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) |
|
Represents the estimated amount of the existing unrealized gains on fuel hedges as of
September 30, 2011 (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. |
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)
The fair values of derivative instruments designated as cash flow hedges as of December
31, 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 |
|
$ |
(4,988 |
) |
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
(4,734 |
) |
Fuel hedges |
|
Prepaid expenses and other current assets |
|
$ |
2,469 |
|
|
|
|
|
|
|
|
|
|
|
Other assets, net |
|
|
2,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
designated as cash flow hedges |
|
|
|
|
|
$ |
4,730 |
|
|
|
|
|
|
$ |
(9,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarizes the impact of the Companys cash flow hedges on the
results of operations, comprehensive income and accumulated other comprehensive loss (AOCL) as of
and for the three and nine months ended September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
|
|
|
|
|
|
|
|
Recognized in AOCL on |
|
|
|
|
|
|
Amount of (Gain) or Loss |
|
Derivatives |
|
Derivatives, |
|
|
|
|
|
|
Reclassified from AOCL into |
|
Designated as Cash |
|
Net of Tax (Effective |
|
|
Statement of Income |
|
|
Earnings, Net of Tax (Effective |
|
Flow Hedges |
|
Portion)(a) |
|
|
Classification |
|
|
Portion) (b),(c) |
|
|
|
Three Months Ended |
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Interest rate swaps |
|
$ |
(1,290 |
) |
|
$ |
(2,342 |
) |
|
Interest expense |
|
$ |
735 |
|
|
$ |
1,283 |
|
Fuel hedges |
|
|
(646 |
) |
|
|
1,164 |
|
|
Cost of operations |
|
|
(683 |
) |
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,936 |
) |
|
$ |
(1,178 |
) |
|
|
|
|
|
$ |
52 |
|
|
$ |
1,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
|
|
|
|
|
|
|
|
Recognized in AOCL on |
|
|
|
|
|
|
Amount of (Gain) or Loss |
|
Derivatives |
|
Derivatives, |
|
|
|
|
|
|
Reclassified from AOCL into |
|
Designated as Cash |
|
Net of Tax (Effective |
|
|
Statement of Income |
|
|
Earnings, Net of Tax (Effective |
|
Flow Hedges |
|
Portion)(a) |
|
|
Classification |
|
|
Portion) (b),(c) |
|
|
|
Nine Months Ended |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Interest rate swaps |
|
$ |
(2,904 |
) |
|
$ |
(7,776 |
) |
|
Interest expense |
|
$ |
2,877 |
|
|
$ |
4,152 |
|
Fuel hedges |
|
|
1,787 |
|
|
|
(754 |
) |
|
Cost of operations |
|
|
(1,977 |
) |
|
|
2,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,117 |
) |
|
$ |
(8,530 |
) |
|
|
|
|
|
$ |
900 |
|
|
$ |
6,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
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. |
|
(b) |
|
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. |
|
(c) |
|
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 hedge
contracts, which correspond to when the underlying fuel is consumed. |
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 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, 2011 and 2010.
See Note 13 for further discussion on the impact of the Companys hedge accounting to its
consolidated Comprehensive income and AOCL.
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, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable
to Waste Connections for
basic and diluted
earnings per share |
|
$ |
46,329 |
|
|
$ |
40,986 |
|
|
$ |
127,281 |
|
|
$ |
98,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding |
|
|
112,327,410 |
|
|
|
115,594,327 |
|
|
|
113,130,314 |
|
|
|
116,129,247 |
|
Dilutive effect of stock
options and warrants |
|
|
407,555 |
|
|
|
731,763 |
|
|
|
445,117 |
|
|
|
930,747 |
|
Dilutive effect of
restricted stock units |
|
|
457,919 |
|
|
|
452,763 |
|
|
|
403,734 |
|
|
|
361,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding |
|
|
113,192,884 |
|
|
|
116,778,853 |
|
|
|
113,979,165 |
|
|
|
117,421,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2011, all outstanding stock options and warrants were
dilutive and included in the computation of diluted earnings per share. For the three months ended
September 30, 2010, stock options and warrants to purchase 1,278 shares of common stock were
excluded from the computation of diluted earnings per share as they were anti-dilutive. For the
nine months ended September 30, 2011 and 2010, stock options and warrants to purchase 1,312 and
2,187 shares of common stock, respectively, were excluded from the computation of diluted earnings
per share as they were anti-dilutive. The Companys 2026
Convertible Senior Notes were not dilutive
during the nine months ended September 30, 2010. On April 1, 2010, the Company redeemed the
aggregate principal amount of its 2026 Convertible Senior 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 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 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 September
30, 2011 and December 31, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at September 30, 2011 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 |
|
$ |
(9,766 |
) |
|
$ |
|
|
|
$ |
(9,766 |
) |
|
$ |
|
|
Fuel hedge
derivative
instruments net
asset position |
|
$ |
4,423 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,423 |
|
Restricted assets |
|
$ |
27,206 |
|
|
$ |
27,206 |
|
|
$ |
|
|
|
$ |
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 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 |
|
$ |
(9,722 |
) |
|
$ |
|
|
|
$ |
(9,722 |
) |
|
$ |
|
|
Fuel hedge
derivative
instruments net
asset position |
|
$ |
4,730 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,730 |
|
Restricted assets |
|
$ |
30,791 |
|
|
$ |
30,791 |
|
|
$ |
|
|
|
$ |
|
|
During the nine months ended September 30, 2011, there were no fair value measurements of
assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial
recognition.
The following table summarizes the change in the fair value for Level 3 derivatives for the
nine months ended September 30, 2011:
|
|
|
|
|
|
|
Level 3 |
|
|
|
Derivatives |
|
Balance as of December 31, 2010 |
|
$ |
4,730 |
|
Realized gains included in earnings |
|
|
(3,189 |
) |
Unrealized gains included in AOCL |
|
|
2,882 |
|
|
|
|
|
Balance as of September 30, 2011 |
|
$ |
4,423 |
|
|
|
|
|
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 losses included in AOCL |
|
|
(1,217 |
) |
|
|
|
|
Balance as of September 30, 2010 |
|
$ |
2,157 |
|
|
|
|
|
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)
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, 2011 and 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2011 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts
reclassified into interest expense |
|
$ |
1,186 |
|
|
$ |
(451 |
) |
|
$ |
735 |
|
Fuel hedge amounts reclassified
into cost of operations |
|
|
(1,101 |
) |
|
|
418 |
|
|
|
(683 |
) |
Changes in fair value of interest
rate swaps |
|
|
(2,081 |
) |
|
|
791 |
|
|
|
(1,290 |
) |
Changes in fair value of fuel hedges |
|
|
(1,042 |
) |
|
|
396 |
|
|
|
(646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,038 |
) |
|
$ |
1,154 |
|
|
$ |
(1,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income for the three months ended September 30, 2011 and 2010 was $44,700
and $42,078, respectively.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2011 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts
reclassified into interest expense |
|
$ |
4,641 |
|
|
$ |
(1,764 |
) |
|
$ |
2,877 |
|
Fuel hedge amounts reclassified
into cost of operations |
|
|
(3,189 |
) |
|
|
1,212 |
|
|
|
(1,977 |
) |
Changes in fair value of interest
rate swaps |
|
|
(4,684 |
) |
|
|
1,780 |
|
|
|
(2,904 |
) |
Changes in fair value of fuel hedges |
|
|
2,882 |
|
|
|
(1,095 |
) |
|
|
1,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(350 |
) |
|
$ |
133 |
|
|
$ |
(217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010 |
|
$ |
2,931 |
|
|
$ |
(6,026 |
) |
|
$ |
(3,095 |
) |
Amounts reclassified into earnings |
|
|
(1,977 |
) |
|
|
2,877 |
|
|
|
900 |
|
Change in fair value |
|
|
1,787 |
|
|
|
(2,904 |
) |
|
|
(1,117 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011 |
|
$ |
2,741 |
|
|
$ |
(6,053 |
) |
|
$ |
(3,312 |
) |
|
|
|
|
|
|
|
|
|
|
See Note 10 for further discussion on the Companys derivative instruments.
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)
14. STOCKHOLDERS EQUITY
Stock-Based Compensation
A summary of activity related to restricted stock units under the Third Amended and Restated
2004 Equity Incentive Plan, as of December 31, 2010, and changes during the nine month period ended
September 30, 2011, is presented below:
|
|
|
|
|
|
|
Unvested |
|
|
|
Shares |
|
Outstanding at December 31, 2010 |
|
|
1,514,459 |
|
Granted |
|
|
499,310 |
|
Forfeited |
|
|
(35,385 |
) |
Vested and
Issued |
|
|
(538,878 |
) |
Vested and
Unissued |
|
|
(31,606 |
) |
|
|
|
|
Outstanding at September 30, 2011 |
|
|
1,407,900 |
|
|
|
|
|
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, 2011 was
$29.28. During the nine months ended September 30, 2011 and 2010, the Companys stock-based
compensation expense from restricted stock units was $8,873 and $8,172, respectively.
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, 2011 and 2010, the Company
repurchased 2,823,235 and 5,020,666 shares, respectively, of its common stock under this program at
a cost of $85,068 and $116,285, respectively. As of September 30, 2011, the remaining maximum
dollar value of shares available for repurchase under the program was approximately $66,306. 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.
Stock Split
On October 19, 2010, the Companys Board of Directors declared a three-for-two split of its
common stock, in the form of a 50% stock dividend, payable to stockholders of record as of October
29, 2010. Shares resulting from the split were issued on November 12, 2010. In connection
therewith, the Company transferred $394 from retained earnings to common stock, representing the
par value of additional shares issued. As a result of the stock split, fractional shares equal to
2,479 whole shares were repurchased for $101. All share and per share amounts for all periods
presented have been retroactively adjusted to reflect the stock split.
Cash Dividend
On October 19, 2010, the Companys Board of Directors declared 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 totaling $8,561 was paid on November 12, 2010. The Company
also paid a quarterly cash dividend of
$0.075 per share on its common stock, totaling $8,515, $8,526 and $8,456 on March 1, 2011, May
20, 2011 and August 17, 2011, respectively.
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)
15. COMMITMENTS AND CONTINGENCIES
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 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 special interest
or other groups, adjacent landowners or residents in connection with the permitting and licensing
of landfills and transfer stations, or alleging environmental damage or violations of the permits
and licenses pursuant to which the Company operates.
In addition, the Company is a party to various claims and suits pending for alleged damages to
persons and property, alleged violations of certain laws and alleged liabilities arising out of
matters occurring during the normal operation of the waste management business. Except as noted in
the legal cases described below, as of September 30, 2011, there is no current proceeding or
litigation involving the Company or its property that the Company believes could have a material
adverse impact on its business, financial condition, results of operations or cash flows.
Chaparral, New Mexico Landfill Permit Litigation
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 claimed 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
orders postponing the limited public hearing, currently scheduled for November 2012, as HDSWF has
continued to evaluate the suitability of a new site. In July 2009, HDSWF purchased approximately
325 acres of undeveloped land comprising a proposed 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. On September 12, 2011, the Department deemed the permit application complete, but the
Department has not yet set a hearing date. If the Department denies the landfill permit
application for the new site, HDSWF intends to actively resume its efforts to enforce the
previously issued landfill permit for the original site in Chaparral. At September 30, 2011, the
Company had $11,772 of capitalized expenditures related to this landfill development project. If
the Company is ultimately issued a permit to operate the landfill at the new site purchased in July
2009, the Company will be required to expense in a future period $10,318 of capitalized
expenditures related to the original Chaparral property, less the recoverable value of that
undeveloped property and other amounts recovered, which would likely have a material adverse effect
on the Companys results of operations for that period. If the Company instead is ultimately
issued a permit to operate the landfill at the original Chaparral property, the Company will be
required to expense in a future period $1,454 of capitalized expenditures related to the new site
purchased in July 2009, less the recoverable value of that undeveloped
property and other amounts recovered. If the Company is not ultimately issued a permit to
operate the landfill at either one of the two sites, the Company will be required to expense in a
future period the $11,772 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.
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)
Harper County, Kansas Landfill Permit Litigation
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 during the first
half of 2010. 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, materially 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. If as a result of this litigation, after exhausting all appeals, the Company was unable to
continue to operate the landfill, the Company estimates that it would be required to record a
pre-tax impairment charge of approximately $15,000 to reduce the carrying value of the landfill to
its estimated fair value. In addition, the Company estimates the current annual impact to its
pre-tax earnings that would result if it was unable to continue to operate the landfill would be
approximately $4,000 per year.
El Paso, Texas Labor Union Disputes
One of the Companys subsidiaries, El Paso Disposal, LP (EPD), was a party to administrative
proceedings before the National Labor Relations Board (NLRB). In these proceedings, the union
alleged various unfair labor practices relating to the parties failure to reach agreement on
initial labor contracts and the resultant strike by, and the replacement of and a failure to
recall, union-represented 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, continuing to bargain collectively and providing a make whole remedy. EPD filed
exceptions to the administrative law judges recommendations on June 30, 2009. These exceptions
were
under review by the NLRB, but pursuant to the settlement agreement described below they were
withdrawn and this matter is now closed upon compliance.
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)
On July 27, 2009, the Regional Director of the NLRB filed a petition in the United States
District Court for the Western District of Texas seeking an injunction to reinstate the replaced
employees, order EPD to continue collective bargaining while the NLRBs review is pending, and to
refrain from further alleged unfair labor practices. A hearing on the injunction was held on
August 19, 2009; and on October 30, 2009, the District Court granted the NLRBs requested relief.
EPD appealed the District Courts order to the United States Court of Appeals for the Fifth
Circuit, and a hearing on the appeal occurred on August 2, 2010. On November 4, 2010, the Fifth
Circuit affirmed the District Courts injunction order.
Several related unfair labor practice charges alleging failure to bargain and failure to
appropriately recall union-represented employees subsequently were filed against EPD. The charges
were heard by an administrative law judge during the week of August 24, 2009. On December 2, 2009,
the administrative law judge issued a recommended Decision and Order granting part of the NLRBs
requested relief, while denying part, but the issues were effectively subsumed by the District
Courts injunction. Both EPD and the NLRBs General Counsel filed exceptions to the administrative
law judges recommendations with the NLRB. These exceptions also were under review by the NLRB,
but pursuant to the settlement agreement described below they were withdrawn and this matter is now
closed upon compliance.
On January 22, 2010 and March 5, 2010, the union filed new unfair labor practice charges
against EPD concerning events relating to the ongoing contract negotiation process. On May 28,
2010, the NLRB issued a complaint against EPD 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, and believed it had
resolved many of these allegations through negotiations with the union. A hearing on this
complaint was scheduled for November 2, 2010, but subsequently was postponed indefinitely by the
NLRB in anticipation of a comprehensive settlement of outstanding matters between EPD and the
union. Pursuant to the settlement agreement described below, on September 9, 2011, the Regional
Director of the NLRB granted the unions request to withdraw all of its pending charges that were
the subject of this complaint, which resulted in the dismissal of the complaint.
On June 11, 2010, June, 24, 2010, and June 30, 2010, the union filed new unfair labor practice
charges alleging that EPD had 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 included these new
allegations in its complaint to be heard on November 2, 2010, which was postponed indefinitely by
the NLRB in anticipation of a comprehensive settlement between EPD and the union. Pursuant to the
settlement agreement described below, on September 9, 2011, the Regional Director of the NLRB
granted the unions request to withdraw all of its pending charges that were the subject of this
complaint, which resulted in the dismissal of the complaint.
Page 29
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)
On August 10, 2010, the NLRB filed a petition for contempt and other civil relief before the
United States District Court for the Western District of Texas, alleging that EPD violated the
District 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). EPD filed an answer denying any wrongdoing. A hearing
on the NLRBs petition was scheduled for November 10, 2010, but was postponed indefinitely by the
NLRB in anticipation of a comprehensive settlement between EPD and the union. On July 21, 2011,
the court granted the NLRBs motion to withdraw its petition for contempt and other civil relief,
which the NLRB had filed pursuant to the settlement agreement described below.
In December 2010, the union ratified a comprehensive settlement reached with EPD as to all
outstanding unfair labor practice charges and related liability issues. The terms of the
settlement include: agreement on collective bargaining agreements for the two EPD bargaining units;
withdrawal by the union of all of its unfair labor practice charges; and the payment by EPD of 60%
of net back pay, without interest, for all alleged discriminatees for the back pay period in
question, which ended in 2009. In May 2011, EPD and the union reached agreement on the backpay
amounts for all of the alleged discriminatees. Notwithstanding the settlement, EPD continues to
deny that any wrongdoing occurred. The parties have implemented the settlement terms, pursuant to
which, in December 2010, the union filed a request with the NLRB to withdraw all of its unfair
labor practice charges. This request was recently approved by the NLRB in all respects.
Specifically: (1) on July 21, 2011, the Court granted the NLRBs motion to withdraw its petition
for contempt and other civil relief, which the NLRB had filed pursuant to the settlement agreement;
(2) on August 11, 2011, the NLRB issued an Order granting the parties joint motion to withdraw
exceptions and cross-exceptions and remanded the two cases involving the administrative law judges
recommended Decisions and Orders to the Regional Director of the NLRB to confirm compliance with
the settlement agreement; (3) on September 9, 2011, the Regional Director of the NLRB granted the
unions request to withdraw all of its pending charges that were the subject of the NLRBs pending
complaint described above, which resulted in the dismissal of the complaint; and (4) on September
20 and 21, 2011, the Regional Director of the NLRB closed upon
compliance the two cases described in subparagraph
(2) above. As a result, the comprehensive settlement of these matters is now
final.
Solano County, California Measure E/Landfill Expansion Litigation
The Company and one of its subsidiaries, Potrero Hills Landfill, Inc. (PHLF), 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 since at least 1992.
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 670,800 tons of solid waste annually, approximately 562,300 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 in April 2009, but which NCRA later dismissed.
Page 30
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 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 (NSWMA) and the California
Refuse Recycling Council (CRRC), 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, 2010, the
Court denied the motions to reconsider and reaffirmed its ruling denying the petitions for writs to
overturn PHLFs expansion permit.
In December 2010, the Court entered final judgments and writs of mandamus in the three cases,
and Solano County, the Company, PHLF and the waste hauling company intervenors filed notices of
appeal, which stayed the judgments and writs pending the outcome of the appeal. Petitioners Sierra
Club and SPRAWLDEF cross-appealed the Courts ruling denying their petitions for writs to overturn
PHLFs expansion permit. The appeals and cross-appeals were consolidated and the parties entered
into a stipulated briefing schedule that was completed in August 2011. In addition, seventeen
separate entities filed friend of court briefs on behalf of the Company and Solano County in
September 2011, including the California Attorney General on behalf of the California Department
of Resources Recycling and Recovery; the City and County of San Francisco; solid waste joint powers
authorities serving the areas of Napa County, the City of Vallejo, the South Lake Tahoe Basin,
Central Costa Contra County and the Salinas Valley; the California Association of Sanitation
Agencies; sanitation districts serving Los Angeles County and Orange County; the NSWMA; the
National Association of Manufacturers; the CRRC; the Los Angeles County Waste Management
Association; the Solid Waste Association of Orange County; the Inland Empire Disposal Association;
and the California Manufacturers and Technology Association. Sierra Club and SPRAWLDEF filed
responses to these briefs in October 2011. No friend of court briefs were filed on behalf of the
petitioners. The case is now fully briefed and all parties have requested oral argument.
As part of the final judgments, the Solano County Superior Court retained jurisdiction over
any motions for attorneys fees under Californias Private Attorney General statute. Petitioners
NCRA, SPRAWLDEF and Sierra Club each filed a bill of costs and a motion for attorney fees totaling
$771. The Company vigorously opposed the award of attorney fees. The motions were heard in March
2011. On May 31, 2011, the court issued a final order awarding petitioners $452 in attorneys
fees, $411 of which relates to the SPRAWLDEF and Sierra Club cases in which the Company or PHLF is
a named party. The court allocated 50% of the fee amount to PHLF, none of which the Company
recorded as a liability at September 30, 2011. The Company and Solano County appealed this
attorneys fees order in July 2011. Once procedural steps are completed, the Company will request
a stay of this appeal until the merits of the underlying Measure E cases have been finally
determined. If the Company prevails on the appeals of the three underlying cases, then none of the
Petitioners would be entitled to attorneys fees and costs. If the Company is unsuccessful on
these appeals and its future appeals of the attorneys fees judgment, PHLF and the County would
each ultimately be severally liable for
$206 in attorneys fees for the SPRAWLDEF and Sierra Club cases. However, in all three cases,
the Company may reimburse the County for any such attorneys fees under the indemnification
provision in PHLFs land use permit.
Page 31
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 this point, the Company is not able to determine the likelihood of any outcome in this
matter. However, in the event that after all appeals are exhausted the Superior Courts writ of
mandamus enforcing Measure E as rewritten is upheld, the Company estimates that the current annual
impact to its pre-tax earnings resulting from the restriction on imports into Solano County would
be approximately $6,000 per year. The Companys estimate could be impacted by various factors,
including the Countys allocation of the 95,000 tons per year import restriction among PHLF and the
other disposal and composting facilities in Solano County. In addition, if the final rulings on
Measure E do not limit the importation of waste into Solano County from other states, the Company
could potentially offset a portion of the estimated reduction to its pre-tax earnings by
internalizing waste for disposal at PHLF from other states in which the Company operates, or by
accepting waste volumes from third party haulers operating outside of California.
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 appealed this ruling and on September 23, 2011, the Ninth Circuit Court of
Appeals reversed the district courts decision. The district court will now consider other
arguments the intervening parties made for dismissing the case, but no schedule has yet been set
for these proceedings.
Individual members of SPRAWLDEF were also plaintiffs in a lawsuit filed in the Solano County
Superior 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.
SPRAWLDEF subsequently filed a petition for review of this decision with the California Supreme
Court. On December 21, 2010, the Supreme Court denied the petition, concluding this litigation in
favor of the County and the Company.
SPRAWLDEF additionally filed a lawsuit seeking a writ of mandate in Sacramento County Superior
Court on August 20, 2009, captioned SPRAWLDEF v. California Integrated Waste Management Board
(CIWMB), County of Solano, et al., challenging a CIWMB decision to dismiss SPRAWLDEFs administrative appeal to the
CIWMB seeking to set aside a 2006 solid waste facilities permit issued to Potrero Hills Landfill by
the Solano County Local Enforcement Agency.
The case names the Company and PHLF as real parties in interest.
The appeal was dismissed by the CIWMB for failure to
raise a substantial issue. The 2006 facilities permit authorizes operational modifications and
enhanced environmental control measures. The case was tried in Sacramento County Superior Court in October 2010,
and the Superior Court rejected all of SPRAWLDEFs claims and ordered the writ petition dismissed.
SPRAWLDEF appealed the dismissal to the Third District Court
of Appeal. The case has been fully briefed and a decision from the Court of Appeal is pending.
While the Company believes that the respondent agencies will prevail in this case, in the unlikely event that the 2006 permit was set
aside, PHLF would revert to operating the Potrero Hills Landfill under the sites 1996 solid waste facilities permit.
Page 32
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)
On December 17, 2010, SPRAWLDEF and one its members filed a petition for writ of mandate in
San Francisco Superior Court seeking to overturn the October 2010 approval of the marsh development
permit issued by the San Francisco Bay Conservation and Development Commission (BCDC) for PHLFs
landfill expansion, alleging that the approval is contrary to the Marsh Act and Measure E. The
petition, captioned SPRAWLDEF v. San Francisco Bay Conservation and Development Commission, names
BCDC as a respondent and the Company as the real party in interest. Petitioners seek a declaration
that the law does not allow BCDC to approve a marsh development permit beyond the footprint and
operational levels originally approved for PHLF in 1984, and that the approval violates Measure E.
BCDC has prepared the administrative record for its permit decision. Once the record has been
certified by BCDC and lodged with the court, responses to the petition will be due 30 days
thereafter. The parties are in the process of developing a briefing schedule and securing a
hearing date from the court. At this point the Company is not able to determine the likelihood of
any outcome in this matter.
On June 10, 2011, June Guidotti, a property owner adjacent to PHLF, and SPRAWLDEF and one of
its members, each filed administrative petitions for review with the State Water Resources Control
Board (State Board) seeking to overturn a May 11, 2011 Order No. 2166-(a) approving waste
discharge requirements issued by the San Francisco Bay Regional Water Quality Control Board
(Regional Board) for PHLFs landfill expansion, alleging that the order is contrary to the State
Boards Title 27 regulations authorizing waste discharge requirements for landfills, and in the
case of the SPRAWLDEF petition, further alleging that the Regional Boards issuance of a Clean
Water Act section 401 certification is not supported by an adequate alternatives analysis as
required by the federal Clean Water Act. The Regional Board is preparing the administrative record
of its decision to issue Order 2166-(a) to be filed with the State Board as well as its response to
the petitions for review. It is anticipated that the Regional Board will vigorously defend its
actions and seek dismissal of the petitions for review. A hearing date has not yet been set on
either petition, and the State Board has held the Guidotti petition in abeyance for now at
petitioners request. At this point the Company is not able to determine the likelihood of any
outcome in this matter.
If as a result of any of the matters described above, after exhausting all appeals, PHLF is
unable to secure an expansion permit, and the Superior Courts writ of mandamus enforcing Measure E
as rewritten is ultimately upheld, the Company estimates that it would be required to recognize a
pre-tax impairment charge of approximately $39,000 to reduce the carrying value of PHLF to its
estimated fair value. If PHLF is unable to secure an expansion permit but Measure E is ultimately
ruled to be unenforceable, the Company estimates that it would be required to recognize a pre-tax
impairment charge of approximately $24,000 to reduce the carrying value of PHLF to its estimated
fair value.
El Paso, Texas Breach of Contract/Flow Control Litigation
On November 15, 2010, the Company filed a petition in the County Court at Law No. 3, El Paso
County, Texas, captioned Waste Connections, Inc., Camino Real Environmental Center, Inc. and El
Paso Disposal, LP v. The City of El Paso, Texas, John F. Cook, in his capacity as El Paso Mayor,
and Joyce Wilson, in her capacity as El Paso City Manager (No. 2010-4476), which was transferred to
the 168th Judicial District Court of El Paso County, Texas on April 5, 2011. The
lawsuit related to the Solid Waste Disposal and Operating Agreement, dated April 27, 2004, by and
among the City of El Paso, Texas (the City) and the Company (the 2004 Agreement), and Ordinance
017380, as adopted by the City Council on August 24, 2010 (the Ordinance).
Page 33
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 2004 Agreement grants the Company and its subsidiaries (Camino Real and El Paso Disposal)
the non-exclusive right to do business in the City, and to provide commercial and industrial solid
waste collection and disposal services to customers within the territorial and extra-territorial
jurisdiction of the City, for a period of ten years from April 27, 2004. In addition, the 2004
Agreement provides that during the ten-year period the City shall not modify solid waste hauler
fees for the Company or any of its subsidiaries. The City also agreed in the 2004 Agreement that,
until April 27, 2014, it would not provide private roll-off services or otherwise become a
competitor to private solid waste companies in providing these services.
The Company believed that the Ordinance violated the law and was contrary to the 2004
Agreement in numerous respects, including because it originally required that waste collected
within the Citys jurisdiction be hauled only by permitted haulers who entered into franchise
agreements with the City, and that such haulers could only dispose of such waste at facilities
designated or authorized by the City, a concept also referred to as flow control. The lawsuit
sought to require the City to specifically perform the 2004 Agreement, and to enjoin temporarily
and permanently the Citys enforcement of the Ordinance to the extent such enforcement would breach
the 2004 Agreement. The lawsuit also sought a declaratory judgment that: (1) the Ordinance
violated the Contracts Clauses of the Texas and United States Constitutions, and constituted an
improper taking and an inverse condemnation under the Texas Constitution; (2) the City and its
Mayor and City Manager must prospectively comply with the 2004 Agreement; and (3) the 2004
Agreement is valid, enforceable and complies with Texas law. The Company also sought costs of suit
and such other relief at law or in equity to which it may be entitled. The Company did not seek
money damages.
The Company and the City have negotiated and reached an agreed resolution to their
differences. As a result of these efforts, on December 21, 2010, the El Paso City Council approved
a series of amendments to the Ordinance to address certain concerns of the Company and other
haulers that operate within the Citys jurisdiction. On March 29, 2011, the El Paso City Council
approved an amendment to the Ordinance that postponed the effective date of the requirement that
haulers enter into franchise agreements with the City until September 1, 2011. In addition, on
July 19, 2011, the El Paso City Council amended the Ordinance to postpone the effective date of its
flow control provisions from September 1, 2011, to September 1, 2014. On August 9, 2011, the El
Paso City Council adopted an ordinance entering into a Franchise Agreement with the Companys
subsidiary, El Paso Disposal. The Franchise Agreement grants El Paso Disposal a franchise to
provide solid waste collection services within the Citys jurisdiction for forty (40) months from
September 1, 2011. The Franchise Agreement expressly recognizes the existence of the 2004
Agreement and provides that the rights, defenses and claims of the Company and its subsidiaries
lawfully existing and enforceable under or arising from the 2004 Agreement are independent of and
not superseded by the Franchise Agreement. On August 24, 2011, the Company and its subsidiaries
filed a motion pursuant to Texas Rule of Civil Procedure 162 to non-suit without prejudice the
lawsuit, expressly reserving their rights at law, under the Franchise Agreement, the 2004 Agreement
or otherwise. On August 31, 2011, the trial court signed an order dismissing the lawsuit without
prejudice. The order of dismissal became a final order on September 30, 2011, by operation of law.
Page 34
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)
Colonie, New York Landfill Privatization Litigation
One of the Companys wholly-owned subsidiaries, Capital Region Landfills, Inc. (CRL) and the
Town of Colonie, New York (Colonie), entered into a Solid Waste Facility Operating Agreement,
dated August 4, 2011 (Agreement). CRL was selected to operate the Towns solid waste management
operations, which include a landfill, pursuant to a request for proposals initiated by Colonie
pursuant to New York State General Municipal Law section 120-w. CRL commenced operating the Towns solid
waste management operations pursuant to the Agreement on September 19, 2011. By notice of petition
and petition, dated September 29, 2011, filed in New York State Supreme Court for the County of
Albany, seven individuals commenced a proceeding pursuant to Article 78 of the Civil Practice Law
and Rules of the State of New York against Colonie, its Town Board and its Supervisor, Paula A.
Mahan. The case is captioned, Conners, et al. v. Town of Colonie, et al., Index No.
006312/2011 (Sup. Ct., Albany Co.). The Petitioners are: Michael Conners, II, Anna M. Denney,
Derrick D. Denney, Kirk E. Denney, Amy Steenburgh, Brian D. Steenburgh and Mary Lou Swatling. On October 17, 2011, an amended petition, dated October 11, 2011, was served on the Town, naming CRL and the Company as additional Respondents. The
petition alleges that the Petitioners are residents of Colonie, and own or reside on property
abutting or in close proximity to the landfill, or which is affected by the Agreement. Petitioners
claim that the Agreement is the functional equivalent of a lease and therefore should be subject to
the permissive referendum requirements of New York State Town Law sections 64(2) and 90. The
petition asserts that Respondents failed, within ten days of the Town Boards adoption of a July
28, 2011 resolution authorizing Colonie to enter into the Agreement with CRL, to post and publish
notice setting forth the date of adoption of the resolution, an abstract of the Town Boards action
and a statement that the resolution was adopted subject to a permissive referendum. Petitioners
seek judgment (i) annulling and setting aside the resolution, (ii) declaring the Agreement invalid,
unlawful and unenforceable, (iii) restraining and enjoining Respondents from attempting to
enforce the resolution or the Agreement, and (iv) awarding Petitioners costs, disbursements and attorneys' fees incurred in connection with this proceeding; and such other and further relief as the Court deems just and proper. At this early stage, the Company is not able to determine
the likelihood of any outcome in this matter.
If, however, as a result of this litigation, after the parties have exhausted all appeals, the Agreement is nullified and CRL is unable to
continue to operate the Colonie Landfill, the Agreement requires Colonie to repay to CRL an amount equal to a prorated amount of $23,000 of
the initial payment made by CRL to Colonie plus the amount of any capital that CRL has invested in the Colonie Landfill. The prorated amount
owed to CRL by Colonie would be calculated by dividing the $23,000 plus the amount of invested capital by the number of years of remaining airspace
at the Colonie Landfill, as measured from the effective date of the Agreement, and then multiplying the result by the number of years of
remaining airspace at the Colonie Landfill, as measured from the date the Agreement is nullified. Furthermore, if the Agreement is nullified
as a result of the litigation, Colonie would resume responsibility for all final capping, closure and post-closure liabilities for the
Colonie Landfill.
16. SUBSEQUENT EVENT
On October 18, 2011, the Company announced that its Board of Directors increased its regular
quarterly cash dividend by $0.015, from $0.075 to $0.09, and then declared a regular quarterly cash
dividend of $0.09 per share on the Companys common stock. The dividend will be paid on November
16, 2011, to stockholders of record on the close of business on November 2, 2011.
Page 35
|
|
|
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, our expectations with respect to our ability to
obtain expansions of permitted landfill capacity, our expectations with respect to future dividend
payments, our expectations with respect to the outcomes of our legal proceedings and our
expectations with respect to the purchase of fuel and fuel prices. These statements can be
identified by the use of forward-looking terminology such as believes, expects, may, will,
should, or anticipates, or the negative thereof or comparable terminology, or by discussions of
strategy.
Our business and operations are subject to a variety of risks and uncertainties and,
consequently, actual results may differ materially from those projected by any forward-looking
statements. Factors that could cause actual results to differ from those projected include, but
are not limited to, the following:
|
|
|
Our acquisitions may not be successful, 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 underfunded 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 36
|
|
|
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 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; |
|
|
|
Fluctuations in prices for recycled commodities that we sell and rebates we offer to
customers may cause our revenues and operating results to decline; |
|
|
|
Extensive and evolving environmental, health, safety and employment laws and
regulations may restrict our operations and growth and increase our costs; |
|
|
|
Climate change regulations may adversely affect operating results; |
|
|
|
Extensive regulations that govern the design, operation and closure of landfills may
restrict our landfill operations or increase our costs of operating landfills; |
|
|
|
Alternatives to landfill disposal may cause our revenues and operating results to
decline; and |
|
|
|
Unusually adverse weather conditions may interfere with our operations, harming our
operating results. |
Page 37
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 exclusive and secondary markets. We also
provide intermodal services for the rail haul movement of cargo and solid waste containers in the
Pacific Northwest through a network of intermodal facilities. We also treat and dispose of
non-hazardous waste that is generated in the exploration and production of oil and natural gas
primarily at a facility in Southwest Louisiana. 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, 2011, we
served more than two million residential, commercial and industrial customers from a network of
operations in 29 states: Alabama, Arizona, California, Colorado, Idaho, Illinois, Iowa, Kansas,
Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada,
New Mexico, New York, 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 140 solid
waste collection operations, 57 transfer stations, seven intermodal facilities, 39 recycling
operations, 43 municipal solid waste landfills, two construction and demolition landfills and one
exploration and production waste treatment and disposal facility.
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 38
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note 3 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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Collection |
|
$ |
282,176 |
|
|
|
61.1 |
% |
|
$ |
244,936 |
|
|
|
61.8 |
% |
|
$ |
796,783 |
|
|
|
61.9 |
% |
|
$ |
712,114 |
|
|
|
63.1 |
% |
Disposal and
transfer |
|
|
138,680 |
|
|
|
30.0 |
|
|
|
125,473 |
|
|
|
31.7 |
|
|
|
381,961 |
|
|
|
29.6 |
|
|
|
342,390 |
|
|
|
30.3 |
|
Intermodal,
recycling and other |
|
|
40,829 |
|
|
|
8.9 |
|
|
|
25,885 |
|
|
|
6.5 |
|
|
|
109,301 |
|
|
|
8.5 |
|
|
|
74,505 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
461,685 |
|
|
|
100.0 |
% |
|
|
396,294 |
|
|
|
100.0 |
% |
|
|
1,288,045 |
|
|
|
100.0 |
% |
|
|
1,129,009 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: intercompany
elimination |
|
|
(57,723 |
) |
|
|
|
|
|
|
(50,509 |
) |
|
|
|
|
|
|
(162,431 |
) |
|
|
|
|
|
|
(145,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
403,962 |
|
|
|
|
|
|
$ |
345,785 |
|
|
|
|
|
|
$ |
1,125,614 |
|
|
|
|
|
|
$ |
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 before
depreciation, amortization and gain (loss) on disposal of assets. Operating income 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 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, which are also our
reportable segments. Each operating segment is responsible for managing several vertically
integrated operations, which are comprised of districts. In April 2011, as a result of the County
Waste acquisition (described in Note 7 to the Notes to Condensed Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q), we realigned our reporting
structure and changed our three geographic operating segments from Western, Central and Southern to
Western, Central and Eastern. As part of this realignment, the states of Arizona, Louisiana, New
Mexico and Texas, which were previously part of the Southern region, are now included in the
Central region. Also as part of this realignment, the state of Michigan, which was previously part
of the Central region, is now included in the Eastern region. Additionally, the states of New York
and Massachusetts, which we now operate in as a result of the County Waste acquisition, are
included in the Eastern region. The segment information presented herein reflects the realignment
of these districts. Under the current orientation, our Western Region is comprised of operating
locations in California, Idaho, Montana, Nevada, Oregon, Washington and western Wyoming; our
Central Region is comprised of operating locations in Arizona, Colorado, Kansas, Louisiana,
Minnesota, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, Utah and eastern Wyoming; and our
Eastern Region is comprised of operating locations in Alabama, Illinois, Iowa, Kentucky,
Massachusetts, Michigan, Mississippi, New York, North Carolina, South Carolina and Tennessee.
Page 39
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Western |
|
$ |
197,260 |
|
|
$ |
188,538 |
|
|
$ |
559,377 |
|
|
$ |
531,502 |
|
Central |
|
|
112,851 |
|
|
|
100,579 |
|
|
|
323,762 |
|
|
|
285,292 |
|
Eastern |
|
|
93,851 |
|
|
|
56,668 |
|
|
|
242,475 |
|
|
|
167,008 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
403,962 |
|
|
$ |
345,785 |
|
|
$ |
1,125,614 |
|
|
$ |
983,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income 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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Western |
|
$ |
65,306 |
|
|
$ |
60,500 |
|
|
$ |
177,593 |
|
|
$ |
164,737 |
|
Central |
|
|
40,174 |
|
|
|
33,792 |
|
|
|
115,261 |
|
|
|
94,794 |
|
Eastern |
|
|
27,179 |
|
|
|
17,379 |
|
|
|
70,856 |
|
|
|
52,074 |
|
Corporate(a) |
|
|
1,695 |
|
|
|
2,021 |
|
|
|
3,351 |
|
|
|
3,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
134,354 |
|
|
$ |
113,692 |
|
|
$ |
367,061 |
|
|
$ |
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 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 before depreciation, amortization and gain
(loss) on disposal of assets for our reportable segments for the three and nine month periods ended
September 30, 2011, compared to the three and nine month periods ended September 30, 2010, are
discussed below:
Segment Revenue
Revenue in our Western segment increased $8.8 million, or 4.6%, to $197.3 million for the
three months ended September 30, 2011, from $188.5 million for the three months ended September 30,
2010. For the three months ended September 30, 2011, the components of the increase consisted of
revenue acquired from acquisitions closed during, or subsequent to, the three months ended
September 30, 2010, of $0.1 million, net price increases of $4.5 million, recyclable commodity
sales increases of $4.4 million, intermodal revenue increases of $1.1 million and other revenue
increases of $0.1 million, partially offset by volume decreases of $1.4 million.
Revenue in our Western segment increased $27.9 million, or 5.2%, to $559.4 million for the
nine months ended September 30, 2011, from $531.5 million for the nine months ended September 30,
2010. For the nine months ended September 30, 2011, the components of the increase consisted of
revenue acquired from acquisitions closed during, or subsequent to, the nine months ended September
30, 2010, of $0.6 million, net price increases of $12.6 million, recyclable commodity sales
increases of $12.2 million, intermodal revenue
increases of $3.9 million and other revenue increases of $0.3 million, partially offset by
decreases of $1.0 million from divested operations and volume decreases of $0.7 million.
Page 40
Revenue in our Central segment increased $12.3 million, or 12.2%, to $112.9 million for the
three months ended September 30, 2011, from $100.6 million for the three months ended September 30,
2010. For the three months ended September 30, 2011, the components of the increase consisted of
revenue acquired from acquisitions closed during, or subsequent to, the three months ended
September 30, 2010, of $7.4 million, net price increases of $4.8 million and recyclable commodity
sales increases of $0.7 million, partially offset by volume decreases of $0.6 million.
Revenue in our Central segment increased $38.5 million, or 13.5%, to $323.8 million for the
nine months ended September 30, 2011, from $285.3 million for the nine months ended September 30,
2010. For the nine months ended September 30, 2011, the components of the increase consisted of
revenue acquired from acquisitions closed during, or subsequent to, the nine months ended September
30, 2010, of $25.1 million, net price increases of $14.7 million and recyclable commodity sales
increases of $1.2 million, partially offset by volume decreases of $2.5 million.
Revenue in our Eastern segment increased $37.2 million, or 65.6%, to $93.9 million for the
three months ended September 30, 2011, from $56.7 million for the three months ended September 30,
2010. For the three months ended September 30, 2011, the components of the increase consisted of
revenue acquired from acquisitions closed during, or subsequent to, the three months ended
September 30, 2010, of $32.9 million, net price increases of $2.8 million, volume increases of $1.2
million and recyclable commodity sales increases of $0.3 million.
Revenue in our Eastern segment increased $75.5 million, or 45.2%, to $242.5 million for the
nine months ended September 30, 2011, from $167.0 million for the nine months ended September 30,
2010. For the nine months ended September 30, 2011, the components of the increase consisted of
revenue acquired from acquisitions closed during, or subsequent to, the nine months ended September
30, 2010, of $66.2 million, net price increases of $7.1 million, volume increases of $2.0 million
and recyclable commodity sales increases of $0.6 million, partially offset by other revenue
decreases of $0.4 million.
Segment Operating Income before Depreciation, Amortization and Gain (Loss) on Disposal of
Assets
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Western segment increased $4.8 million, or 7.9%, to $65.3 million for the three months ended
September 30, 2011, from $60.5 million for the three months ended September 30, 2010. Operating
income before depreciation, amortization and gain (loss) on disposal of assets in our Western
segment increased $12.9 million, or 7.8%, to $177.6 million for the nine months ended September 30,
2011, from $164.7 million for the nine months ended September 30, 2010. The increases were
primarily due to increased revenues, decreased disposal expenses, decreased third party trucking
and transportation expenses at our collection and disposal operations and decreased expenses for
uncollectible accounts receivable, partially offset by 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, increased direct and administrative
labor expenses, increased diesel fuel expense, increased truck and equipment repair expenses and
increased legal expenses.
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Central segment increased $6.4 million, or 18.9%, to $40.2 million for the three months ended
September 30, 2011, from $33.8 million for the three months ended September 30, 2010. Operating
income before depreciation, amortization and gain (loss) on disposal of assets in our Central
segment increased $20.5 million, or 21.6%, to $115.3 million for the nine months ended September
30, 2011, from $94.8 million for the nine months ended September 30, 2010. The increases were
primarily due to income generated from acquisitions closed during, or subsequent to, the three
months ended September 30, 2010 and the following changes at operations owned in comparable periods
in 2010 and 2011: increased revenues, partially offset by increased disposal expenses,
increased third party trucking and transportation expenses, increased taxes on revenues,
increased direct labor expenses, increased diesel fuel expense and increased truck and equipment
repair expenses.
Page 41
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Eastern segment increased $9.8 million, or 56.4%, to $27.2 million for the three months ended
September 30, 2011, from $17.4 million for the three months ended September 30, 2010. Operating
income before depreciation, amortization and gain (loss) on disposal of assets in our Eastern
segment increased $18.8 million, or 36.1%, to $70.9 million for the nine months ended September 30,
2011, from $52.1 million for the nine months ended September 30, 2010. The increases were primarily
due to income generated from acquisitions closed during, or subsequent to, the three and nine
months ended September 30, 2010 and the following changes at operations owned in comparable periods
in 2010 and 2011: increased revenues, partially offset by increased third party trucking and
transportation expenses, increased taxes on revenues, increased direct labor expenses, increased
diesel fuel expense, increased truck and equipment repair expenses, increased landfill leachate
disposal costs at certain landfills we own and increased expenses for uncollectible accounts
receivable.
Operating income before depreciation, amortization and gain (loss) on disposal of assets at
Corporate decreased $0.3 million, or 16.1%, to $1.7 million for the three months ended September
30, 2011, from $2.0 million for the three months ended September 30, 2010. Operating income before
depreciation, amortization and gain (loss) on disposal of assets at Corporate decreased $0.4
million, or 10.8%, to $3.4 million for the nine months ended September 30, 2011, from $3.8 million
for the nine months ended September 30, 2010. Our estimated recurring corporate expenses, which
can vary from the actual amount of incurred corporate expenses, are allocated to our three
geographic operating segments.
Page 42
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of operations |
|
|
56.6 |
|
|
|
56.0 |
|
|
|
56.6 |
|
|
|
56.7 |
|
Selling, general and
administrative |
|
|
10.2 |
|
|
|
11.1 |
|
|
|
10.7 |
|
|
|
11.2 |
|
Depreciation |
|
|
9.6 |
|
|
|
10.0 |
|
|
|
9.7 |
|
|
|
10.1 |
|
Amortization of intangibles |
|
|
1.3 |
|
|
|
1.0 |
|
|
|
1.3 |
|
|
|
1.1 |
|
Loss on disposal of assets |
|
|
0.2 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
22.1 |
|
|
|
21.9 |
|
|
|
21.6 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(3.0 |
) |
|
|
(2.7 |
) |
|
|
(2.8 |
) |
|
|
(3.1 |
) |
Interest income |
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0 |
) |
Other income (expense), net |
|
|
(0.2 |
) |
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
Income tax provision |
|
|
(7.4 |
) |
|
|
(7.7 |
) |
|
|
(7.3 |
) |
|
|
(6.7 |
) |
Net income attributable to
noncontrolling interests |
|
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Waste Connections |
|
|
11.5 |
% |
|
|
11.9 |
% |
|
|
11.3 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Total revenues increased $58.2 million, or 16.8%, to $404.0 million for the
three months ended September 30, 2011, from $345.8 million for the three months ended September 30,
2010. Total revenues increased $141.8 million, or 14.4%, to $1.126 billion for the nine months
ended September 30, 2011, from $983.8 million for the nine months ended September 30, 2010.
Acquisitions closed during, or subsequent to, the three months ended September 30, 2010,
increased revenues by approximately $40.3 million in the three months ended September 30, 2011.
Acquisitions closed during, or subsequent to, the nine months ended September 30, 2010, increased
revenues by approximately $90.9 million in the nine months ended September 30, 2011.
During the three months ended September 30, 2011, the net increase in prices charged to our
customers was $12.1 million, consisting of $9.0 million of core price increases and $3.1 million of
fuel, materials and environmental surcharges. During the nine months ended September 30, 2011, the
net increase in prices charged to our customers was $34.3 million, consisting of $26.8 million of
core price increases and $7.5 million of fuel, materials and environmental surcharges.
Volume decreases in our existing business during the three months ended September 30, 2011,
decreased revenues by approximately $0.8 million. Volume decreases in our existing business during
the nine months ended September 30, 2011, decreased revenues by approximately $1.1 million. The
net decreases in volume were primarily attributable to decreases in commercial hauling activity,
partially offset by increases in landfill special waste volumes and roll off hauling activity.
Page 43
Increased recyclable commodity volumes collected and increased recyclable commodity prices
during the three months ended September 30, 2011, increased revenues by $5.4 million. Increased
recyclable commodity volumes collected and increased recyclable commodity prices during the nine
months ended September 30, 2011, increased revenues by $14.0 million. The increases in recyclable
commodity prices were primarily due to increased overseas demand for recyclable commodities.
Other revenues increased by $1.2 million during the three months ended September 30, 2011.
Other revenues increased by $3.7 million during the nine months ended September 30, 2011. The
increases were primarily due to an increase in cargo volume at our intermodal operations.
Cost of Operations. Total cost of operations increased $35.0 million, or 18.0%, to
$228.6 million for the three months ended September 30, 2011, from $193.6 million for the three
months ended September 30, 2010. The increase was primarily attributable to operating costs
associated with acquisitions closed during, or subsequent to, the three months ended September 30,
2010, increased rail transportation expenses at our intermodal operations, 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 diesel fuel expense resulting from higher market
prices for fuel, increased truck, equipment and container repair expenses and increased landfill
leachate disposal costs at certain landfills we own, partially offset by a decrease in auto and
workers compensation insurance expense under our high deductible insurance program due to a
reduction in projected losses on open claims.
Total cost of operations increased $79.5 million, or 14.3%, to $637.5 million for the nine
months ended September 30, 2011, from $558.0 million for the nine months ended September 30, 2010.
The increase was primarily attributable to operating costs associated with acquisitions closed
during, or subsequent to, the nine months ended September 30, 2010, increased rail transportation
expenses at our intermodal operations, increased third party trucking and transportation expenses
due to increased waste disposal internalization, 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 diesel fuel expense resulting from higher market prices for fuel and increased
truck, 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.
Cost of operations as a percentage of revenues increased 0.6 percentage points to 56.6% for
the three months ended September 30, 2011, from 56.0% for the three months ended September 30,
2010, due primarily to acquisitions closed during, or subsequent to, the three months ended
September 30, 2010 having higher disposal costs as a percentage of revenue relative to our company
average, increased diesel fuel expense, increased truck, equipment and container repair expenses,
increased rail transportation expenses and increased expenses associated with the cost of
purchasing recyclable commodities, partially offset by leveraging existing personnel to support
increases in landfill volumes, recyclable commodity revenue and intermodal revenue, higher gross
margins on landfill special waste volumes and decreased auto and workers compensation insurance
expenses.
Cost of operations as a percentage of revenues decreased 0.1 percentage points to 56.6% for
the nine months ended September 30, 2011, from 56.7% for the nine months ended September 30, 2010,
due primarily to higher gross margins on landfill special waste volumes, decreased auto and
workers compensation expense and leveraging existing personnel to support increases in landfill
volumes, recyclable commodity revenue and intermodal revenue, partially offset by acquisitions
closed during, or subsequent to, the nine months ended September 30, 2010 having higher disposal
costs as a percentage of revenue relative to our company average and increased diesel fuel expense.
Page 44
SG&A. SG&A expenses increased $2.5 million, or 6.7%, to $41.0 million for the three
months ended September 30, 2011, from $38.5 million for the three months ended September 30, 2010.
The increase was
primarily the result of additional personnel expenses from acquisitions closed during, or
subsequent to, the three months ended September 30, 2010, increased payroll and payroll-related
expenses, increased equity compensation expense and increased cash incentive compensation expense,
partially offset by decreased direct acquisition expenses and decreased employee deferred
compensation expense resulting from deferred compensation liabilities to employees being reduced as
a result of declines in the market value of investments to which employee deferred compensation
balances are tracked.
SG&A expenses increased $10.6 million, or 9.6%, to $121.1 million for the nine months ended
September 30, 2011, from $110.5 million for the nine months ended September 30, 2010. The increase
was primarily the result of additional personnel expenses from acquisitions closed during, or
subsequent to, the nine months ended September 30, 2010, increased payroll and payroll-related
expenses, increased equity compensation expense and increased cash incentive compensation expense,
partially offset by decreased employee deferred compensation expense resulting from deferred
compensation liabilities to employees being reduced as a result of declines in the market value of
investments to which employee deferred compensation balances are tracked.
SG&A expenses as a percentage of revenues decreased 0.9 percentage points to 10.2% for the
three months ended September 30, 2011, from 11.1% for the three months ended September 30, 2010.
SG&A expenses as a percentage of revenues decreased 0.5 percentage points to 10.7% for the nine
months ended September 30, 2011, from 11.2% for the nine months ended September 30, 2010. The
decreases as a percentage of revenues were primarily attributable to leveraging our administrative
activities to support increases in landfill volumes, recyclable commodity revenue and intermodal
revenue, and acquisitions closed during, or subsequent to, the three and nine months ended
September 30, 2010 having lower SG&A expenses as a percentage of revenue than our company average.
Depreciation. Depreciation expense increased $4.5 million, or 12.9%, to $38.9 million
for the three months ended September 30, 2011, from $34.4 million for the three months ended
September 30, 2010. Depreciation expense increased $9.5 million, or 9.6%, to $108.8 million for
the nine months ended September 30, 2011, from $99.3 million for the nine months ended September
30, 2010. 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, 2010,
increased depreciation expense associated with additions to our fleet and equipment purchased to
support our existing operations, and increased depletion expense associated with increases in
landfill volumes.
Depreciation expense as a percentage of revenues decreased 0.4 percentage points to 9.6% for
the three months ended September 30, 2011, from 10.0% for the three months ended September 30,
2010. Depreciation expense as a percentage of revenues decreased 0.4 percentage points to 9.7% for
the nine months ended September 30, 2011, from 10.1% for the nine months ended September 30, 2010.
The decreases were due primarily to acquisitions closed during, or subsequent to, the three and
nine months ended September 30, 2010 having depreciation expense as a percentage of revenues below
our company average and leveraging existing equipment to service increases in landfill volumes,
recyclable commodity revenue and intermodal revenue.
Amortization of Intangibles. Amortization of intangibles expense increased $1.5
million, or 42.1%, to $5.1 million for the three months ended September 30, 2011, from $3.6 million
for the three months ended September 30, 2010. Amortization of intangibles expense increased $4.0
million, or 36.9%, to $14.8 million for the nine months ended September 30, 2011, from $10.8
million for the nine months ended September 30, 2010. Amortization of intangibles expense as a
percentage of revenues increased 0.3 percentage points to 1.3% for the three months ended September
30, 2011, from 1.0% for the three months ended September 30, 2010. Amortization of intangibles
expense as a percentage of revenues increased 0.2 percentage points to 1.3% for the nine months
ended September 30, 2011, from 1.1% for the nine months ended September 30, 2010.
The increases were primarily attributable to the amortization of contracts and customer lists
acquired during, or subsequent to, the three and nine months ended September 30, 2010.
Operating Income. Operating income increased $13.6 million, or 18.0%, to $89.3
million for the three months ended September 30, 2011, from $75.7 million for the three months
ended September 30, 2010.
Operating income increased $38.1 million, or 18.6%, to $242.7 million for the nine months
ended September 30, 2011, from $204.6 million for the nine months ended September 30, 2010. 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.
Page 45
Operating income as a percentage of revenues increased 0.2 percentage points to 22.1% for the
three months ended September 30, 2011, from 21.9% for the three months ended September 30, 2010.
The increase as a percentage of revenues was due to the previously described 0.9 percentage point
decrease in SG&A expense and 0.4 percentage point decrease in depreciation expense, partially
offset by the 0.6 percentage point increase in cost of operations, 0.3 percentage point increase in
amortization expense and 0.2 percentage point increase in loss (gain) on disposal of assets.
Operating income as a percentage of revenues increased 0.8 percentage points to 21.6% for the
nine months ended September 30, 2011, from 20.8% for the nine months ended September 30, 2010. The
increase as a percentage of revenues was due to the previously described 0.1 percentage point
decrease in cost of operations, 0.5 percentage point decrease in SG&A expense and 0.4 percentage
point decrease in depreciation expense, partially offset by the 0.2 percentage point increase in
amortization expense.
Interest Expense. Interest expense increased $2.6 million, or 27.7%, to $12.0 million
for the three months ended September 30, 2011, from $9.4 million for the three months ended
September 30, 2010. The increase was due to interest expense associated with the April 2011
issuance of our 2016 Notes, 2018 Notes and 2021 Notes, partially offset by a reduction in the fixed
interest rate paid on $175 million of interest rate swaps. In February 2011, three interest rate
swaps with a combined notional amount of $175 million and fixed interest rate of 4.37% expired and
we commenced a new $175 million interest rate swap with a fixed interest rate of 2.85%.
Interest expense increased $1.1 million, or 3.6%, to $31.9 million for the nine months ended
September 30, 2011, from $30.8 million for the nine months ended September 30, 2010. The increase
was due to interest expense associated with the April 2011 issuance of our 2016 Notes, 2018 Notes
and 2021 Notes, partially offset by 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 and debt issuance costs on the redeemed 2026 Notes and the aforementioned changes in our
interest rate swaps.
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 $3.3 million, or 12.3%, to $29.9 million
for the three months ended September 30, 2011, from $26.6 million for the three months ended
September 30, 2010, as a result of increased pre-tax income. Income taxes increased $16.1 million,
or 24.3%, to $82.4 million for the nine months ended September 30, 2011, from $66.3 million for the
nine months ended September 30, 2010.
Our effective tax rates for the three months ended September 30, 2011 and 2010, were 39.1% and
39.2%, respectively. Our effective tax rates for the nine months ended September 30, 2011 and
2010, were 39.2% and 40.0%, respectively.
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.
Page 46
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain cash flow information for the nine month periods ended
September 30, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Net cash provided by operating activities |
|
$ |
297,724 |
|
|
$ |
246,022 |
|
Net cash used in investing activities |
|
|
(328,240 |
) |
|
|
(100,808 |
) |
Net cash provided by (used in) financing activities |
|
|
57,203 |
|
|
|
(141,297 |
) |
|
|
|
|
|
|
|
Net increase in cash and equivalents |
|
|
26,687 |
|
|
|
3,917 |
|
Cash and equivalents at beginning of period |
|
|
9,873 |
|
|
|
9,639 |
|
|
|
|
|
|
|
|
Cash and equivalents at end of period |
|
$ |
36,560 |
|
|
$ |
13,556 |
|
|
|
|
|
|
|
|
Operating Activities Cash Flows
For the nine months ended September 30, 2011, net cash provided by operating activities was
$297.7 million. For the nine months ended September 30, 2010, net cash provided by operating
activities was $246.0 million. The $51.7 million net increase in cash provided by operating
activities was due primarily to the following:
|
1) |
|
An increase in net income of $28.3 million; |
|
2) |
|
An increase in deferred taxes of $21.0 million due primarily to the recognition
during the nine months ended September 30, 2011, of tax benefits totaling $16.4 million
associated with an Internal Revenue Service approved change in our tax method for
deducting depreciation expense for certain landfills as well as other tax deductible
timing differences associated with depreciation; |
|
3) |
|
An increase in depreciation and amortization expense of $13.5 million; less |
|
4) |
|
A decrease in cash flows from operating assets and liabilities, net of effects from
acquisitions, of $12.5 million to cash provided by operating assets and liabilities of
$1.9 million for the nine months ended September 30, 2011, from cash provided by operating
assets and liabilities of $14.4 million for the nine months ended September 30, 2010. The
significant components of the $1.9 million in cash inflows from changes in operating
assets and liabilities for the nine months ended September 30, 2011, include the
following: |
|
a) |
|
an increase in cash resulting from an increase in accrued liabilities
of $22.3 million due primarily to increased accrued interest expense due to
increased debt balances and the timing of interest payments, increased current
taxes payable, increased property taxes payable, increased liabilities for auto
and workers compensation claims, and increased wages and accrued vacation
liabilities; |
|
b) |
|
an increase in cash resulting from a $5.3 million decrease in prepaid
expenses and other current assets due primarily to decreases in prepaid income
taxes, partially offset by an increase in prepaid insurance expense and parts
inventory; |
|
c) |
|
an increase in cash resulting from an increase in deferred revenue of
$2.4 million due primarily to increased revenues and timing of billing for
services; less |
|
d) |
|
a decrease in cash resulting from a $23.5 million increase in
accounts receivable due to an increase in revenues; less |
|
e) |
|
a decrease in cash resulting from a $3.7 million decrease in accounts
payable due primarily to the timing of payments. |
Page 47
As of September 30, 2011, we had a working capital deficit of $12.1 million, including cash
and equivalents of $36.6 million. Our working capital deficit decreased $25.9 million from $38.0
million at December 31, 2010. To date, we have experienced no loss or lack of access to our cash
or cash equivalents; however, we can provide no assurances that access to our cash and cash
equivalents will not be impacted by adverse conditions in the financial markets. Our strategy in
managing our working capital is generally to apply the cash generated from our operations that
remains after satisfying our working capital and capital expenditure requirements, along with stock
repurchase and dividend programs, to reduce our indebtedness under our credit facility and to
minimize our cash balances.
Investing Activities Cash Flows
Net cash used in investing activities increased $227.4 million to $328.2 million for the nine
months ended September 30, 2011, from $100.8 million for the nine months ended September 30, 2010.
The significant components of the increase include the following:
|
1) |
|
An increase in payments for acquisitions of $230.6 million primarily due to the
recent acquisition of County Waste; |
|
2) |
|
A decrease in proceeds from the sale of property, plant and equipment of $2.5
million; less |
|
3) |
|
A decrease in capital expenditures for property and equipment of $2.1 million due to
decreases in expenditures for trucks, equipment and land, partially offset by an increase
in expenditures for site costs at various landfills, buildings and computers. |
Financing Activities Cash Flows
Net cash flows provided by financing activities increased $198.5 million to $57.2 million for
the nine months ended September 30, 2011, from cash flows used in financing activities of $141.3
million for the nine months ended September 30, 2010. The significant components of the increase
include the following:
|
1) |
|
An increase in net long-term borrowings of $224.8 million due primarily to the
issuance of new debt to fund the acquisition of County Waste; |
|
2) |
|
A decrease in payments to repurchase our common stock of $31.2 million; less |
|
3) |
|
An increase in cash dividends paid of $25.5 million with the initiation of a
quarterly cash dividend in November 2010; less |
|
4) |
|
A decrease in proceeds from option and warrant exercises of $18.3 million due to a
decrease in the number of options and warrants exercised in the nine month period ended
September 30, 2011; less |
|
5) |
|
An increase in debt issuance costs of $6.4 million in conjunction with the new credit
agreement entered into during the nine months ended September 30, 2011; less |
|
6) |
|
A decrease in the excess tax benefit associated with equity-based compensation of
$4.4 million. |
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.
Page 48
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. As of September 30, 2011 and 2010, we had
repurchased in aggregate 38.3 million and
33.6 million shares, respectively, of our common stock at an aggregate cost of $733.7 million and
$598.7 million, respectively. As of September 30, 2011, the remaining maximum dollar value of
shares available for purchase under the program was approximately $66.3 million.
On October 19, 2010, our Board of Directors declared a three-for-two split of our common
stock, in the form of a 50% stock dividend, payable to stockholders of record as of October 29,
2010. Shares resulting from the split were issued on November 12, 2010. All share and per share
amounts for all periods presented have been retroactively adjusted to reflect the stock split.
In addition, on October 19, 2010, our Board of Directors declared the initiation of a
quarterly cash dividend of $0.075 per share, as adjusted for the three-for-two stock split
described above. We also paid a quarterly cash dividend of $0.075 per share on our common stock,
totaling $8.5 million on each of March 1, 2011, May 20, 2011 and August 17, 2011. On October 18,
2011, we announced that our Board of Directors increased our regular quarterly cash dividend by
$0.015, from $0.075 to $0.09, and then declared a regular quarterly cash dividend of $0.09 per
share on our common stock. The dividend will be paid on November 16, 2011, to stockholders of
record on the close of business on November 2, 2011. The Board will review the cash dividend
periodically, with a long-term objective of increasing the amount of the dividend. We cannot
assure you as to the amounts or timing of future dividends.
We made $84.1 million in capital expenditures during the nine months ended September 30, 2011.
We expect to make capital expenditures of approximately $135 million in 2011 in connection with
our existing business. We have funded and intend to fund the balance of our planned 2011 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, 2011, we had $519.0 million outstanding under our credit facility,
exclusive of outstanding standby letters of credit of $80.4 million. As of September 30, 2011, we
were in compliance with all applicable covenants in our credit agreement.
On July 11, 2011, we, along with certain of our subsidiaries, entered into an Amended and
Restated Credit Agreement (the credit agreement) with Bank of America, N.A. and the other banks
and lending institutions party thereto, as lenders, Bank of America, N.A., as administrative agent,
and J.P. Morgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication
agents.
Our credit agreement is comprised of a $1.2 billion revolving credit facility (the credit
facility) which matures on July 11, 2016. We have the ability under the credit agreement to
increase commitments under the revolving credit facility from $1.2 billion to $1.5 billion, subject
to conditions including that no default, as defined in the credit agreement, has occurred, although
no existing lender has any obligation to increase its
commitment. We used proceeds from the credit agreement in order to refinance our previous
$845 million credit facility, which had a maturity of September 27, 2012.
Page 49
Under the credit agreement, there is no maximum amount of standby letters of credit that can
be issued; however, the issuance of standby letters of credit reduces the amount of total
borrowings available. The credit agreement requires us to pay a commitment fee ranging from 0.200%
per annum to 0.350% per annum of the unused portion of the facility. The borrowings under the
credit agreement bear interest, at our option, at either the base rate plus the applicable base
rate margin on base rate loans, or the LIBOR rate plus the applicable LIBOR margin on LIBOR loans.
The base rate for any day is a fluctuating rate per annum equal to the highest of: (1) the federal
funds rate plus one half of one percent (0.500%); (2) the LIBOR rate plus one percent (1.000%), and
(3) the rate of interest in effect for such day as publicly announced from time to time by Bank of
America as its prime rate. The LIBOR rate is determined by the administrative agent pursuant to a
formula in the credit agreement. The applicable margins under the credit agreement vary depending
on our leverage ratio, as defined in the credit agreement, and range from 1.150% per annum to
2.000% per annum for LIBOR loans and 0.150% per annum to 1.000% per annum for base rate loans. The
interest rate applicable under the credit agreement is currently the LIBOR rate plus 1.400% per
annum, a 0.775% per annum increase in the corresponding interest rate under our previous credit
facility. The borrowings under the credit agreement are not collateralized.
The credit agreement contains representations and warranties and places certain business,
financial and operating restrictions on us relating to, among other things, indebtedness, liens and
other encumbrances, investments, mergers and acquisitions, asset sales, sale and leaseback
transactions, and dividends, distributions and redemptions of capital stock. The credit agreement
requires that we maintain specified financial ratios. We expect to use the credit agreement for
acquisitions, capital expenditures, working capital, standby letters of credit and general
corporate purposes.
On April 1, 2011, we entered into a Second Supplement to Master Note Purchase Agreement with
certain accredited institutional investors, pursuant to which we issued and sold to the investors
on that date $250.0 million of senior uncollateralized notes at fixed interest rates with interest
payable in arrears semi-annually on October 1 and April 1, beginning on October 1, 2011, in a
private placement. Of these notes, $100.0 million will mature on April 1, 2016 with an annual
interest rate of 3.30% (the 2016 Notes), $50.0 million will mature on April 1, 2018 with an
annual interest rate of 4.00% (the 2018 Notes), and $100.0 million will mature on April 1, 2021
with an annual interest rate of 4.64% (the 2021 Notes). The 2016 Notes, 2018 Notes and 2021
Notes are uncollateralized obligations and rank equally in right of payment with the 2015 Notes,
the 2019 Notes and obligations under our credit facility. The 2016 Notes, 2018 Notes and 2021
Notes are subject to representations, warranties, covenants and events of default. Upon the
occurrence of an event of default, payment of the 2016 Notes, 2018 Notes and 2021 Notes may be
accelerated by the holders of the respective notes. The 2016 Notes, 2018 Notes and 2021 Notes may
also be prepaid by us at any time at par plus a make-whole amount determined in respect of the
remaining scheduled interest payments on the respective notes, using a discount rate of the then
current market standard for United States treasury bills plus 0.50%. In addition, we will be
required to offer to prepay the 2016 Notes, 2018 Notes and 2021 Notes upon certain changes in
control.
We may issue additional series of senior uncollateralized notes pursuant to the terms and
conditions of the Master Note Agreement, provided that the purchasers of the outstanding notes,
including the 2016 Notes, 2018 Notes and 2021 Notes, shall not have any obligation to purchase any
additional notes issued pursuant to the Master Note Agreement and the aggregate principal amount of
the outstanding notes and any additional notes issued pursuant to the Master Note Agreement shall
not exceed $750.0 million. We currently have $600.0 million of Notes outstanding under the Master
Note Agreement.
We used the proceeds from the sale of the 2016 Notes, 2018 Notes, and 2021 Notes to fund a
portion of the purchase price for the County Waste acquisition, which is described below.
On April 1, 2011, we completed the acquisition of Hudson Valley Waste Holding, Inc., and its
wholly-owned subsidiary, County Waste and Recycling Service, Inc. (collectively, County Waste).
The operations include six collection operations, three transfer stations and one recycling
facility across six markets: Orange
County, New York; Greater Albany, New York; Springfield, Massachusetts; Fulton County, New
York; Warrant and Washington Counties, New York; and Greene, Columbia and Ulster Counties, New
York. We paid $299.0 million for the purchased operations plus amounts paid for the purchase of
accounts receivable and other prepaid assets and estimated working capital, which amounts are
subject to post-closing adjustments. No other consideration, including contingent consideration,
was transferred by us to acquire these operations.
Page 50
As of September 30, 2011, we had the following contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
Over 5 |
|
Recorded Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Long-term debt |
|
$ |
1,179,802 |
|
|
$ |
5,302 |
|
|
$ |
9,441 |
|
|
$ |
803,469 |
|
|
$ |
361,590 |
|
Cash interest payments |
|
$ |
297,902 |
|
|
$ |
48,242 |
|
|
$ |
92,414 |
|
|
$ |
77,749 |
|
|
$ |
79,497 |
|
|
|
|
Long-term debt payments include: |
|
1) |
|
$519.0 million in principal payments due July 2016 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 3.65% at September 30, 2011) on base rate
loans, or the Eurodollar rate plus the applicable Eurodollar margin (approximately 1.64%
at September 30, 2011) on Eurodollar loans. As of September 30, 2011, our credit facility
allowed us to borrow up to $1.2 billion. |
|
2) |
|
$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%. |
|
3) |
|
$100.0 million in principal payments due 2016 related to our 2016 Notes. Holders of
the 2016 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2016 Notes plus accrued and unpaid interest, if any, upon a
change in control, as defined in the Master Note Purchase Agreement. The 2016 Notes bear
interest at a rate of 3.30%. |
|
4) |
|
$50.0 million in principal payments due 2018 related to our 2018 Notes. Holders of
the 2018 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2018 Notes plus accrued and unpaid interest, if any, upon a
change in control, as defined in the Master Note Purchase Agreement. The 2018 Notes bear
interest at a rate of 4.00%. |
|
5) |
|
$175.0 million in principal payments due 2019 related to our 2019 Notes. Holders of
the 2019 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2019 Notes plus accrued and unpaid interest, if any, upon a
change in control, as defined in the Master Note Purchase Agreement. The 2019 Notes bear
interest at a rate of 5.25%. |
|
6) |
|
$100.0 million in principal payments due 2021 related to our 2021 Notes. Holders of
the 2021 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2021 Notes plus accrued and unpaid interest, if any, upon a
change in control, as defined in the Master Note Purchase Agreement. The 2021 Notes bear
interest at a rate of 4.64%. |
|
7) |
|
$38.5 million in principal payments related to our tax-exempt bonds, which bear
interest at variable rates (between 0.17% and 0.29%) at September 30, 2011. The
tax-exempt bonds have maturity dates ranging from 2012 to 2033. |
|
8) |
|
$19.4 million in principal payments related to our notes payable to sellers. Our
notes payable to sellers bear interest at rates between 2.50% and 10.35% at September 30,
2011, and have maturity dates ranging from 2012 to 2036. |
|
9) |
|
$2.9 million in principal payments related to our notes payable to third parties.
Our notes payable to third parties bear interest at rates between 6.7% and 10.9% at
September 30, 2011, and have maturity dates ranging from 2012 to 2019. |
Page 51
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, 2011. We assumed the credit
facility is paid off when it matures in July 2016. |
|
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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
73,971 |
|
|
$ |
10,355 |
|
|
$ |
18,588 |
|
|
$ |
13,045 |
|
|
$ |
31,983 |
|
|
|
|
(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, 2011, 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 $319.4 million and $285.7 million at
September 30, 2011 and December 31, 2010, respectively. These arrangements have not materially
affected our financial position, results of operations or liquidity during the nine months
ended September 30, 2011, 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, 2011 and
2010, at all of our landfills during the respective period, is shown below (tons in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Number of |
|
|
Total |
|
|
Number of |
|
|
Total |
|
|
|
Sites |
|
|
Tons |
|
|
Sites |
|
|
Tons |
|
Owned landfills and
landfills operated
under life-of-site
agreements |
|
|
40 |
|
|
|
10,785 |
|
|
|
38 |
|
|
|
9,875 |
|
Operated landfills |
|
|
5 |
|
|
|
499 |
|
|
|
6 |
|
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
11,284 |
|
|
|
44 |
|
|
|
10,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-GAAP FINANCIAL MEAURES
Free Cash Flow
We present free cash flow, a non-GAAP financial measure, supplementally because it is widely
used by investors as a valuation and liquidity measure in the solid waste industry. 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,
Page 52
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, 2011 and 2010, is calculated as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Net cash provided by operating activities |
|
$ |
297,724 |
|
|
$ |
246,022 |
|
Less: Change in book overdraft |
|
|
(937 |
) |
|
|
(374 |
) |
Plus: Proceeds from disposal of assets |
|
|
3,238 |
|
|
|
5,786 |
|
Plus: Excess tax benefit associated with
equity-based compensation |
|
|
4,500 |
|
|
|
8,935 |
|
Less: Capital expenditures for property and equipment |
|
|
(84,051 |
) |
|
|
(86,121 |
) |
Less: Distributions to noncontrolling interests |
|
|
(675 |
) |
|
|
|
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
219,799 |
|
|
$ |
174,248 |
|
|
|
|
|
|
|
|
Adjusted Operating Income Before Depreciation and Amortization
We present adjusted operating income before depreciation and amortization, a non-GAAP
financial measure, 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, 2011 and 2010, is calculated as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Operating income |
|
$ |
89,314 |
|
|
$ |
75,685 |
|
|
$ |
242,688 |
|
|
$ |
204,642 |
|
Plus: Depreciation and
amortization |
|
|
44,006 |
|
|
|
38,057 |
|
|
|
123,631 |
|
|
|
110,149 |
|
Plus: Closure and
post-closure accretion |
|
|
484 |
|
|
|
443 |
|
|
|
1,451 |
|
|
|
1,323 |
|
Plus/less: Loss (gain)
on disposal of assets |
|
|
1,034 |
|
|
|
(50 |
) |
|
|
742 |
|
|
|
572 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Acquisition-related
transaction costs (a) |
|
|
183 |
|
|
|
782 |
|
|
|
1,278 |
|
|
|
1,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
income before
depreciation and
amortization |
|
$ |
135,021 |
|
|
$ |
114,917 |
|
|
$ |
369,790 |
|
|
$ |
317,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the addback of acquisition-related costs. |
Page 53
Reconciliation of Net Income to Adjusted Net Income and Adjusted Net Income per diluted
share
Adjusted net income and adjusted net income per diluted share, both non-GAAP financial
measures, are provided supplementally because they are widely used by investors as a valuation
measure in the solid waste industry. We provide adjusted net income to exclude the effects of
items management believes impact the comparability of operating results between periods. Adjusted
net income has limitations due to the fact that it may exclude items that have an impact on our
financial condition and results of operations. Adjusted net income and adjusted net income per
diluted share are not a substitute for, and should be used in conjunction with, GAAP financial
measures. Management uses adjusted net income and adjusted net income per diluted share as one of
the principal measures to evaluate and monitor the ongoing financial performance of our operations.
Other companies may calculate adjusted net income and adjusted net income per diluted share
differently.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Reported net income attributable to
Waste Connections |
|
$ |
46,329 |
|
|
$ |
40,986 |
|
|
$ |
127,281 |
|
|
$ |
98,959 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt, net of
taxes (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,320 |
|
Acquisition-related transaction costs,
net of taxes (b) |
|
|
114 |
|
|
|
485 |
|
|
|
1,037 |
|
|
|
730 |
|
Loss (gain) on disposal of assets, net
of taxes (c) |
|
|
641 |
|
|
|
(31 |
) |
|
|
460 |
|
|
|
777 |
|
Impact of deferred tax adjustment (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income attributable to
Waste Connections |
|
$ |
47,084 |
|
|
$ |
41,440 |
|
|
$ |
128,778 |
|
|
$ |
108,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
attributable to Waste Connections
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income |
|
$ |
0.41 |
|
|
$ |
0.35 |
|
|
$ |
1.12 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
0.42 |
|
|
$ |
0.35 |
|
|
$ |
1.13 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the elimination of costs associated with early redemption of outstanding
debt. |
|
(b) |
|
Reflects the elimination of acquisition-related costs. |
|
(c) |
|
Reflects the elimination of a loss (gain) on disposal of assets. |
|
(d) |
|
Reflects the elimination of an increase to the income tax provision associated with an
adjustment in our deferred tax liabilities primarily resulting from a voter-approved increase
in Oregon state income tax rates. |
INFLATION
Other than volatility in fuel prices, inflation has not materially affected our operations in
recent years. Consistent with industry practice, many of our contracts allow us to pass through
certain costs to our customers, including increases in landfill tipping fees and, in some cases,
fuel costs. Therefore, we believe that we should be able to increase prices to offset many cost
increases that result from inflation in the ordinary course of business. However, competitive
pressures or delays in the timing of rate increases under our contracts may require us to absorb at
least part of these cost increases, especially if cost increases exceed the average rate of
inflation. Managements estimates associated with inflation have an impact on our accounting for
landfill liabilities.
Page 54
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.
|
|
|
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, 2011, our derivative instruments included two 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 |
March 2009
|
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR
|
|
February 2011
|
|
February 2014 |
August 2011
|
|
$ |
150,000 |
|
|
|
0.7975 |
% |
|
1-month LIBOR
|
|
April 2012
|
|
January 2015 |
|
|
|
* |
|
plus applicable margin. |
Under derivatives and hedging guidance, 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 amount 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 September 30, 2011 and December 31, 2010, of $382.5 million and
$325.4 million, respectively, including floating rate debt under our credit facility and floating
rate municipal bond obligations. A one percentage point increase in interest rates on our
variable-rate debt as of September 30, 2011 and December 31, 2010, would decrease our annual
pre-tax income by approximately $3.8 million and $3.3 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.
Page 55
The market price of diesel fuel is unpredictable and can fluctuate significantly. We purchase
approximately 27 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.
At September 30, 2011, our derivative instruments included two 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 |
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, both of 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, 2011, we expect to purchase approximately 27 million gallons of
diesel fuel, of which 22.2 million gallons will be purchased at market prices and 4.8 million
gallons will be purchased at prices that are fixed under our fuel hedges. During the three month
period of October 1, 2011 to December 31, 2011, we expect to purchase approximately 5.5 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 2011 would decrease our pre-tax income during this
period by approximately $0.6 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 39 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, 2011 and 2010, would have had a $5.6 million and $3.6 million impact on revenues for
the nine months ended September 30, 2011 and 2010, respectively.
Page 56
|
|
|
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, 2011, 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, 2011, 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 57
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
Information regarding our legal proceedings can be found in Note 15 of our condensed
consolidated financial statements included in Part I, Item 1 of this report and is incorporated
herein by reference.
|
|
|
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, 2011, we have repurchased approximately 38.3 million shares of our
common stock at a cost of $733.7 million. The table below reflects repurchases we have made for
the three months ended September 30, 2011 (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Value of Shares that |
|
|
|
Total Number |
|
|
Average |
|
|
as Part of Publicly |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Purchased Under |
|
Period |
|
Purchased |
|
|
Per Share(1) |
|
|
Program |
|
|
the Program |
|
7/1/11 7/31/11 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
108,993 |
|
8/1/11 8/31/11 |
|
|
1,362,836 |
|
|
|
31.32 |
|
|
|
42,687 |
|
|
|
66,306 |
|
9/1/11 9/30/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,362,836 |
|
|
|
31.32 |
|
|
|
42,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount represents the weighted average price paid per common share. This price
includes a per share commission paid for all repurchases. |
See Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q.
Page 58
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.
|
|
|
|
|
|
WASTE CONNECTIONS, INC.
|
|
Date: October 19, 2011 |
BY: |
/s/ Ronald J. Mittelstaedt
|
|
|
|
Ronald J. Mittelstaedt, |
|
|
|
Chief Executive Officer |
|
|
|
|
Date: October 19, 2011 |
BY: |
/s/ Worthing F. Jackman
|
|
|
|
Worthing F. Jackman, |
|
|
|
Executive Vice President and
Chief Financial Officer |
|
Page 59
|
|
|
|
|
Exhibit Number |
|
Description of Exhibits |
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the exhibit filed with the Registrants
Form 10-Q filed on July 24, 2007) |
|
|
|
|
|
|
3.2 |
|
|
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) |
|
|
|
|
|
|
4.1 |
|
|
Amended and Restated Credit Agreement, dated as of July 11, 2011 |
|
|
|
|
|
|
10.1 |
+ |
|
Nonqualified Deferred Compensation Plan, amended and restated as of
September 22, 2011 |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules
13a-14(a)/15d-14(a) |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules
13a-14(a)/15d-14(a) |
|
|
|
|
|
|
32.1 |
|
|
Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. §1350 |
|
|
|
|
|
101.INS
|
* |
|
XBRL Instance Document |
|
|
|
|
|
101.SCH
|
* |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL
|
* |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.LAB
|
* |
|
XBRL Taxonomy Extension Labels Linkbase Document |
|
|
|
|
|
101.PRE
|
* |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
101.DEF
|
* |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
+ |
|
Management contract or compensatory plan, contract or arrangement. |
|
* |
|
In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise these
Exhibits shall be deemed furnished and not filed. |
Page 60