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(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to ______________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.  STOCK-BASED COMPENSATION

 

A summary of outstanding restricted stock and restricted stock units under the 2002 Restricted Stock Plan and the Second Amended and Restated 2004 Equity Incentive Plan at December 31, 2006 and June 30, 2007, and changes during the six month period ended June 30, 2007, is presented below:

 

		Unvested Shares
Outstanding at December 31, 2006			568,940
Granted			420,602
Forfeited			(11,606	)
Vested			(150,453	)
Outstanding at June 30, 2007			827,483

The weighted average grant date fair value per share for the 420,602 shares of common stock underlying restricted stock units granted during the six month period ended June 30, 2007 was $29.03. During the six months ended June 30, 2007, the Company's stock-based compensation expense from restricted stock and restricted stock units was $2,804. 

 

4.  LANDFILL ACCOUNTING

 

At June 30, 2007, the Company owned 25 landfills, and operated, but did not own, three landfills under life-of-site operating agreements and eight landfills under limited-term operating agreements.  The Company’s landfills have site costs with a net book value of $439,015 at June 30, 2007.  With the exception of three owned landfills that only accept construction and demolition waste, all landfills that the Company owns or operates are municipal solid waste landfills.  For the Company’s eight landfills operated under limited-term operating agreements, the owner of the property (generally a municipality) usually owns the permit and is generally responsible for final capping, closure and post-closure obligations.  The Company is responsible for all final capping, closure and post-closure liabilities for the three landfills that it operates under life-of-site operating agreements. 

 

Many of the Company’s existing landfills have the potential for expanded disposal capacity beyond the amount currently permitted.  The Company’s internal and third-party engineers perform surveys at least annually to estimate the disposal capacity at its landfills.  At its owned landfills and landfills operated under life-of-site operating agreements, the Company’s landfill depletion rates are based on the remaining disposal capacity, considering both permitted and expansion airspace.  At its landfills operated under limited-term operating agreements that have capitalized expenditures, the Company’s landfill depletion rates are based on the term of the operating agreement.  Expansion airspace consists of additional disposal capacity being pursued through means of an expansion but is not actually permitted.  Expansion airspace that meets certain internal criteria is included in the estimate of total landfill airspace. 

 

 

Based on remaining permitted capacity as of June 30, 2007, and projected annual disposal volumes, the average remaining landfill life for the Company’s owned landfills and landfills operated under life-of-site operating agreements is approximately 50 years.  The Company is currently seeking to expand permitted capacity at five of its owned landfills and one landfill that it operates under a life-of-site operating agreement, and considers the achievement of these expansions to be probable.  Although the Company cannot be certain that all future expansions will be permitted as designed, the average remaining life, when considering remaining permitted capacity, probable expansion capacity and projected annual disposal volume, of the Company’s owned landfills and landfills operated under life-of-site operating agreements is 54 years, with lives ranging from 6 to 206 years. 

 

During the six months ended June 30, 2006 and 2007, the Company expensed approximately $8,777 and $9,835, respectively, or an average of $2.52 and $2.53 per ton consumed, respectively, related to landfill depletion at owned landfills and landfills operated under life-of-site agreements. 

 

The Company reserves for final capping, closure and post-closure maintenance obligations at the landfills it owns and landfills it operates under life-of-site operating agreements.  The Company calculates the net present value of its final capping, closure and post-closure commitments recorded in 2007 assuming a 2.5% inflation rate and a 7.5% discount rate.  The resulting final capping, closure and post-closure obligation is recorded on the balance sheet as an addition to site costs and amortized to depletion expense as the landfill’s airspace is consumed.  Interest is accreted on the recorded liability using the corresponding discount rate.  During the six months ended June 30, 2006 and 2007, the Company expensed approximately $300 and $522, respectively, or an average of $0.09 and $0.13 per ton consumed, respectively, related to final capping, closure and post-closure accretion expense. 

 

The following is a reconciliation of the Company’s final capping, closure and post-closure liability balance from December 31, 2006 to June 30, 2007:

 

Final capping, closure and post-closure liability at December 31, 2006		$11,638
Adjustments to final capping, closure and post-closure liabilities			1,135
Assumption of closure liabilities from acquisitions			2,419
Liabilities incurred			635
Accretion expense			522
Closure expenditures			(83	)
Final capping, closure and post-closure liability at June 30, 2007		$	16,266

The Company recorded adjustments to its final capping, closure and post-closure liabilities due to revisions in cost estimates, a decrease in the expansion airspace at a landfill for which an expansion is being pursued, and estimated increases in annual volume at an owned landfill, causing the remaining life, in years, of the landfill to decrease.  The Company performs its annual review of its engineering cost and capacity estimates in the first quarter of each year. 

 

At June 30, 2007, $14,790 of the Company’s restricted assets balance was for purposes of settling future final capping, closure and post-closure liabilities. 

 

 

5.  LONG-TERM DEBT

 

Long-term debt consists of the following:

 

		December 31, 2006			June 30, 2007
Revolver under Credit Facility, bearing interest ranging from 6.2% to 8.25%*		$400,000			$400,000
2026 Senior Convertible Notes, bearing interest at 3.75%		200,000			200,000
2001 Wasco Bonds, bearing interest from 7.0% to 7.25%*			11,740			11,285
California Tax-Exempt Bonds, bearing interest ranging from 3.65% to 3.95%*			20,090			20,030
Notes payable to sellers in connection with acquisitions, bearing interest at 5.5% to 7.5%*			4,867			4,056
Notes payable to third parties, bearing interest at 5.1% to 11.0%*			7,495			7,138
			644,192			642,509
Less - current portion			(6,884	)		(6,657	)
		$	637,308		$	635,852

*  Interest rates in the table above represent the range of interest rates incurred during the six month period ended June 30, 2007. 

6.  NET INCOME PER SHARE INFORMATION

 

The following table sets forth the numerator and denominator used in the computation of basic and diluted net income per common share for the three and six months ended June 30, 2006 and 2007: 

 

		Three months ended June 30,						Six months ended June 30,
			2006			2007			2006			2007
Numerator:
Net income for basic and diluted earnings per share		$	19,200		$	25,266		$	34,923		$	47,646
Denominator:
Basic shares outstanding			67,761,623			68,592,474			68,130,920			68,529,546
Dilutive effect of 2022 Convertible Subordinated Notes			649,132			-			786,051			-
Dilutive effect of stock options and warrants			1,785,697			1,687,348			1,833,633			1,762,522
Dilutive effective of restricted stock			131,384			345,264			104,121			314,778
Diluted shares outstanding			70,327,836			70,625,086			70,854,725			70,606,846

The Company’s Floating Rate Convertible Subordinated Notes due 2022 (the “2022 Notes”) were convertible, under certain circumstances, into a maximum of 8,137,002 shares of common stock until they were redeemed in May and June 2006.  The 2022 Notes required (subject to certain exceptions) payment of the principal value in cash and net share settle of the conversion value in excess of the principal value of the notes upon conversion.  In accordance with EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share (“EITF 04-8”), the Company has included the dilutive effect of the conversion value in excess of the principal value of the notes. 

 

 

The Company’s 3.75% Convertible Senior Notes due 2026 (the “2026 Notes”) are convertible, under certain circumstances, into a maximum of 5,882,354 shares of common stock.  The 2026 Notes require (subject to certain exceptions) payment of the principal value in cash and net share settle of the conversion value in excess of the principal value of the notes upon conversion.  In accordance with EITF 04-8, these shares have not been included in the computation of diluted net income per share for the three and six months ended June 30, 2006 and 2007 because the conversion value was not in excess of the principal value of the notes.  In addition, the conversion feature of the 2026 Notes meets all the requirements of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, to be accounted for as an equity interest and not as a derivative.  Therefore, in the event the 2026 Notes become convertible, a holder electing to convert will receive a cash payment for the principal amount of the debt and net shares of the Company’s common stock equal to the value of the conversion spread, which the Company will account for as a debt repayment with no gain or loss, and the issuance of common stock will be recorded in stockholders’ equity. 

 

For the three months ended June 30, 2006 and 2007, stock options and warrants to purchase 11,438 and zero shares, respectively, were excluded from the computation of diluted earnings per share as they were anti-dilutive.  For the six months ended June 30, 2006 and 2007, stock options and warrants to purchase 21,188 and 4,608 shares, respectively, were excluded from the computation of diluted earnings per share as they were anti-dilutive. 

 

7.  COMPREHENSIVE INCOME

 

Comprehensive income includes changes in the fair value of interest rate swaps that qualify for hedge accounting.  The difference between net income and comprehensive income for the three and six months ended June 30, 2006 and 2007 is as follows:

 

		Three months ended June 30,						Six months ended June 30,
			2006			2007			2006			2007
Net income		$	19,200		$	25,266		$	34,923		$	47,646
Unrealized gain (loss) on interest rate swaps, net of tax expense (benefit) of $727 and $833 for the three months ended June 30, 2006 and 2007, respectively, and $1,957 and $(40) for the six months ended June 30, 2006 and 2007, respectively			1,236			1,319			3,333			(97	)
Comprehensive income		$	20,436		$	26,585		$	38,256		$	47,549

 

 

The components of other comprehensive income and related tax effects for the three and six months ended June 30, 2006 and 2007 are as follows:

 

		Three months ended June 30, 2006
			Gross			Tax effect			Net of tax
Amounts reclassified into earnings		$	(1,552	)	$	(574	)	$	(978	)
Changes in fair value of interest rate swaps			3,515			1,301			2,214
		$	1,963		$	727		$	1,236
		Three months ended June 30, 2007
			Gross			Tax effect			Net of tax
Amounts reclassified into earnings		$	(837	)	$	(322	)	$	(515	)
Changes in fair value of interest rate swaps			2,989			1,155			1,834
		$	2,152		$	833		$	1,319

 

		Six months ended June 30, 2006
			Gross			Tax effect			Net of tax
Amounts reclassified into earnings		$	(2,790	)	$	(1,033	)	$	(1,757	)
Changes in fair value of interest rate swaps			8,080			2,990			5,090
		$	5,290		$	1,957		$	3,333
		Six months ended June 30, 2007
			Gross			Tax effect			Net of tax
Amounts reclassified into earnings		$	(2,258	)	$	(868	)	$	(1,390	)
Changes in fair value of interest rate swaps			2,121			828			1,293
		$	(137	)	$	(40	)	$	(97	)

 

 

The estimated amount of the existing unrealized gains as of June 30, 2007 (based on the interest rate yield curve at that date) included in accumulated other comprehensive income expected to be reclassified into pre-tax earnings within the next 12 months is $3,328.  The timing of actual amounts reclassified into earnings is dependent on future movements in interest rates. 

 

8.  INCOME TAXES

 

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), at the beginning of fiscal year 2007.  FIN 48 requires a company to evaluate whether the tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority.  It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements.  Under FIN 48, a company should also classify a liability for unrecognized tax benefits as current to the extent the company anticipates making a payment within one year.  As a result of the implementation of FIN 48, the changes to the Company’s reserve for uncertain tax positions was accounted for as a $2,897 adjustment to increase the beginning balance of retained earnings on the Company’s balance sheet.  At the beginning of 2007, the Company had approximately $6,702 of total gross unrecognized tax benefits.  Of this total, $2,618 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. 

 

 

The Company and its subsidiaries are subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions.  The Company has concluded all U.S. federal income tax matters for years through 2002.  The 2004 U.S. federal income tax return is currently under examination by the Internal Revenue Service. All material state and local income tax matters have been concluded for years through 2001. 

 

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.  The Company had approximately $453 accrued for interest, net of tax, and no accrual for penalties at the beginning of fiscal year 2007.  The Company does not anticipate the total amount of unrecognized tax benefits will significantly change by December 31, 2007. 

 

During the six months ended June 30, 2007, the Company recorded adjustments to income tax expense resulting from the reconciliation of its current and deferred income tax liability accounts and changes to the geographical apportionment of state income taxes.  The net impact of these adjustments was a decrease in income tax expense of $396. 

 

9.  SHARE REPURCHASE PROGRAM

 

The Company’s Board of Directors has authorized a common stock repurchase program for the repurchase of up to $500,000 of common stock through December 31, 2008.  Under the program, stock repurchases may be made in the open market or in privately negotiated transactions from time to time at management’s discretion.  The timing and amounts of any repurchases will depend on many factors, including the Company’s capital structure, the market price of the common stock and overall market conditions.  During the six months ended June 30, 2006 and 2007, the Company repurchased 3,501,150 and 1,690,430 shares, respectively, of its common stock under this program at a cost of $87,744 and $51,894, respectively.  Additionally, as a result of the stock split, fractional shares equal to 3,040 whole shares were repurchased at a price of $132.  As of June 30, 2007, the remaining maximum dollar value of shares available for purchase under the program is approximately $170,179.  The Company’s policy related to repurchases of common stock is to charge any excess of cost over par value entirely to additional paid-in capital. 

 

10.  STOCK SPLIT

 

On February 12, 2007, the Company announced that its Board of Directors had authorized a three-for-two stock split of its common stock, in the form of a 50% stock dividend, payable to stockholders of record as of February 27, 2007.  Shares resulting from the split were issued on March 13, 2007. In connection therewith, the Company transferred $228 from retained earnings to common stock, representing the par value of additional shares issued.  All share and per share amounts for all periods presented have been adjusted to reflect the stock split. 

 

11.  COMMITMENTS AND CONTINGENCIES

 

The Company’s subsidiary, High Desert Solid Waste Facility, Inc. (formerly known as Rhino Solid Waste, Inc.), owns undeveloped property in Chaparral, New Mexico, for which it sought a permit to operate a municipal solid waste landfill.  After a public hearing, the New Mexico Environment Department (the “Department”) approved the permit for the facility on January 30, 2002.  Colonias Development Council (“CDC”), a nonprofit organization, opposed the permit at the public hearing and appealed the Department’s decision to the courts of New Mexico, primarily on the grounds that the Department failed to consider the social impact of the landfill on the community of Chaparral, and failed to consider regional planning issues.  On July 18, 2005, in Colonias Dev. Council v. Rhino Envtl. Servs., Inc. (In re Rhino Envtl. Servs.), 2005 NMSC 24, 117 P.3d 939, the New Mexico Supreme Court remanded the matter back to the Department to conduct a limited public hearing on certain evidence that CDC claims was wrongfully excluded from consideration by the hearing officer, and to allow the Department to reconsider the evidence already proffered concerning the impact of the landfill on the surrounding community’s quality of life.  The parties have agreed to reschedule the hearing for July 2008 to allow the Company time to explore a possible relocation of the landfill.  At June 30, 2007, the Company had $8,725 of capitalized expenditures related to this landfill development project.  If the Company is not ultimately issued a permit to operate the landfill, the Company will be required to expense in a future period the $8,725 of capitalized expenditures, less the recoverable value of the undeveloped property and other amounts recovered, which would likely have a material adverse effect on the Company’s reported income for that period. 

 

 

The Company opened a municipal solid waste landfill in Harper County, Kansas in January 2006, following the issuance by the Kansas Department of Health and Environment (“KDHE”) of a final permit to operate the landfill.  On October 3, 2005, landfill opponents filed a suit (Board of Commissioners of Sumner County, Kansas, Tri-County Concerned Citizens and Dalton Holland v. Roderick Bremby, Secretary of the Kansas Department of Health and Environment, et al.) in the District Court of Shawnee County, Kansas (Case No. 05-C-1264), seeking a judicial review of the order, alleging that a site analysis prepared for the Company and submitted to the KDHE as part of the process leading to the issuance of the permit was deficient in several respects.  The action sought to stay the effectiveness of the permit and to nullify it.  On April 7, 2006, the District Court issued an order denying the plaintiffs’ request for judicial review on the grounds that they lack standing to bring the action.  The plaintiffs appealed this decision to the Kansas Court of Appeals.  Oral arguments were held on June 7, 2007, and the Company is awaiting the court’s decision.  While the Company believes that it will prevail in this case, a final adverse determination with respect to the permit would likely have a material adverse effect on the Company’s reported income in the future.  The Company cannot estimate the amount of any such material adverse effect. 

 

Resourceful Environmental Services, Inc. (“RES”) filed a complaint alleging that Waste Connections, Inc. and Waste Connections of Mississippi, LLC misrepresented their intention concerning the potential purchase of RES (Resourceful Environmental Services, Inc. v. Waste Connections, et al., filed on December 31, 2002 in the Circuit Court of Tippah County, Mississippi, Case No. T-02-308).  Plaintiff sought compensatory damages of $400, and punitive damages of $50,000.  Following a trial in June 2007, the jury rendered a unanimous verdict in favor of the Company and the other defendants.  No further recourse is expected against the Company in this matter. 

 

On October 25, 2006, a purported shareholder derivative complaint captioned Travis v. Mittelstaedt, et al. was filed in the United States District Court for the Eastern District of California, naming certain of the Company’s directors and officers as defendants, and naming the Company as a nominal defendant.  On January 30, 2007, a similar purported derivative action, captioned Pierce and Banister v. Mittelstaedt, et al., was filed in the same federal court as the Travis case. The Travis and Pierce and Banister cases have been consolidated. The consolidated complaint in the action alleges violations of various federal and California securities laws, breach of fiduciary duty, waste, and related claims in connection with the timing of certain stock option grants.  The consolidated complaint names as defendants certain of the Company’s current and former directors and officers, and names the Company as a nominal defendant. On June 22, 2007, the Company and the individual defendants filed motions to dismiss the consolidated action. The motions are pending, and a hearing on the motions is scheduled to occur in September 2007.

 

On October 30, 2006, the Company was served with another purported shareholder derivative complaint, naming certain of the Company’s current and former directors and officers as defendants, and naming the Company as a nominal defendant.  The suit, captioned Nichols v. Mittelstaedt, et al. and filed in the Superior Court of California, County of Sacramento, contains allegations substantially similar to the consolidated federal action described above.  On April 3, 2007, a fourth purported derivative action, captioned Priest v. Mittelstaedt, et al., was filed in the Superior Court of California, County of Sacramento, and contains allegations substantially similar to the consolidated federal action and the Nichols suit.  The Nichols and Priest suits have been stayed pending the outcome of the consolidated federal action.  The Company has completed a review of its historical stock option granting practices, including all option grants since its initial public offering in May 1998, and reported the results of the review to the Audit Committee of its Board of Directors.  The review identified a small number of immaterial exceptions to non-cash compensation expense attributable to administrative and clerical errors.  These exceptions are not material to the Company’s current and historical financial statements, and the Audit Committee concluded that no further action was necessary.  As with any litigation proceeding, the Company cannot predict with certainty the eventual outcome of this pending litigation, nor can it estimate the amount of any losses that might result. 

 

 

In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company is subject to various other judicial and administrative proceedings involving federal, state or local agencies.  In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company.  From time to time the Company may also be subject to actions brought by citizens’ groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. 

 

In addition, the Company is a party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business.  Except as noted in the legal cases described above, as of June 30, 2007, there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on its business, financial condition, results of operations or cash flows. 

 

12.  SEGMENT INFORMATION

 

The following table shows our total reported revenues by service line and intercompany eliminations:

 

		Three months ended June 30,						Six months ended June 30,
			2006			2007			2006			2007
Collection		$	151,370		$	172,401		$	291,650		$	332,552
Disposal and transfer			66,165			78,569			124,593			145,211
Recycling and other			19,192			22,936			37,324			45,160
Total		$	236,727		$	273,906		$	453,567		$	522,923
Intercompany elimination		$	29,757		$	32,822		$	56,428		$	62,888

 

13.  SUBSEQUENT EVENT

 

In July 2007, the Company completed a $15,500 tax-exempt bond financing to fund the costs of acquisition of trucks and other solid waste vehicles and equipment and to pay certain costs associated with the issuance of the bonds.  The bonds mature on August 1, 2018, and bear interest at variable rates based on market conditions for California tax-exempt bonds.  The bonds are collateralized by a letter of credit issued by Bank of America under the Company’s credit facility for $15,678. 

 

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