CASELLA WASTE SYSTEMS, INC.
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
notes thereto, and other financial information, included elsewhere in this
Annual Report on Form 10-K. This discussion contains forward-looking statements
and involves numerous risks and uncertainties. Our actual results may differ
materially from those contained in any forward-looking statements.
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Discussion and analysis of the fiscal year endedDecember 31, 2020 ("fiscal year 2020") compared to the fiscal year endedDecember 31, 2019 is included under the heading Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 as filed with theSecurities and Exchange Commission onFebruary 19, 2021 . Company OverviewCasella Waste Systems, Inc. , aDelaware corporation, and its wholly-owned subsidiaries (collectively, "we", "us" or "our"), is a regional, vertically integrated solid waste services company. We provide resource management expertise and services to residential, commercial, municipal, institutional and industrial customers, primarily in the areas of solid waste collection and disposal, transfer, recycling and organics services. We provide integrated solid waste services in seven states:Vermont ,New Hampshire ,New York ,Massachusetts ,Connecticut ,Maine andPennsylvania , with our headquarters located inRutland, Vermont . We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services. We manage our resource-renewal operations through theResource Solutions operating segment. EffectiveJanuary 1, 2021 , we realigned theResource Solutions operating segment, which includes our larger-scale recycling and commodity brokerage operations along with our organics services and large scale commercial and industrial services, from our historical lines-of-service of recycling, organics and customer solutions into two lines-of-service: processing and non-processing. We realigned theResource Solutions operating segment to leverage our core competencies in materials processing, industrial recycling, organics and resource management service offerings to deliver a comprehensive solution for our larger commercial, municipal, institutional and industrial customers that have more diverse waste and recycling needs. Processing services consist of the receipt of recycled, sludge or other organic materials at one of our materials recovery, processing or disposal facilities, where it is then sorted, mixed and/or processed, and then disposed of or sold. Non-processing services consist of brokerage services and overall resource management services, which provide a wide range of environmental services and zero waste solutions to large and complex organizations, as well as traditional collection, disposal and recycling services provided to large account multi-site customers.
As of
Acquisitions and Divestitures
Acquisitions
We have a business development team that identifies acquisition candidates, categorizes the opportunity by strategic fit and perceived level of financial accretion, establishes contact with the appropriate representative of the acquisition candidate and gathers further information on the acquisition candidate.
We have made in the past, and we may make in the future, acquisitions to densify existing operations, expand service areas, and grow services for our customers. These acquisitions may include "tuck-in" acquisitions within our existing markets, assets that are adjacent to or outside of our existing markets, or larger, more strategic acquisitions. In addition, from time to time, we may acquire businesses that are complementary to our core business strategy. We face competition for acquisition targets, particularly the larger and more meaningful targets, but we believe that our strong relationships and reputation inNew England ,New York andConnecticut help to offset this factor. In fiscal year 2021, we acquired ten businesses: a residential, commercial and roll-off collection business in easternConnecticut that operates a rail-served C&D processing and waste transfer facility, a waste transfer station, a single-stream recycling facility, and several other recycling operations whose assets and liabilities are allocated between our Eastern region andResource Solutions operating segments; a solid-waste collection business that operates a waste transfer station, a septic and portable toilet business, and two tuck-in solid-waste collection businesses in our Eastern region; and a solid-waste transfer station business, a waste composting and food-scrap hauling business, a solid-waste collection business that operates a waste transfer station, and two tuck-in solid-waste collection businesses in our Western region for total consideration of$171.7 million , including$166.5 million in cash and$5.2 million in holdbacks to sellers and contingent consideration. In fiscal year 2020, we acquired ten businesses: seven tuck-in solid waste collection businesses and a solid waste collection business in our Western region, a transportation business in our Eastern region, and one recycling operation in ourResource Solutions operating segment for total consideration of$33.5 million , including$29.0 million in cash and$4.5 million in holdbacks to sellers. 32
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Divestitures
From time to time, we may sell or divest certain investments or other components of our business. These divestitures may be undertaken for a number of reasons, including: to generate proceeds to pay down debt; as a result of a determination that the specified asset will provide inadequate returns to us or that the asset no longer serves a strategic purpose in connection with our business; or as a result of a determination that the asset may be more valuable to a third-party. We will continue to look to divest certain activities and investments that no longer enhance or complement our core business if the right opportunity presents itself. Results of Operations Revenues We manage our solid waste operations, which include a full range of solid waste services, on a geographic basis through two regional operating segments, which we designate as the Eastern and Western regions. Revenues in our Eastern and Western regions consist primarily of fees charged to customers for solid waste collection and disposal, including landfill, transfer and transportation, landfill gas-to-energy, and processing services. We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual households. Landfill and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations. We also generate and sell electricity at certain of our landfill facilities. We manage our resource-renewal operations through theResource Solutions operating segment, which includes processing and non-processing services. Revenues from processing services are derived from municipalities and customers in the form of processing fees, tipping fees, and commodity sales, primarily comprised of newspaper, corrugated containers, plastics, ferrous and aluminum, and organic materials such as our earthlife® soils products including fertilizers, composts and mulches. Revenues from non-processing services are derived from brokerage services and overall resource management services providing a wide range of environmental services and zero waste solutions to large and complex organizations, as well as traditional collection, disposal and recycling services provided to large account multi-site customers. The table below shows revenue attributable to services provided (in millions) for the following periods: Fiscal Year Ended December 31, $ 2021 2020 Change Collection $ 442.7$ 391.4 $ 51.3 Disposal 197.0 175.5 21.5 Power 5.1 4.1 1.0 Processing 9.3 7.3 2.0 Solid waste operations 654.1 578.3 75.8 Processing 93.3 62.5 30.8 Non-processing 141.8 133.8 8.0 Resource Solutions operations 235.1 196.3 38.8 Total revenues $ 889.2$ 774.6 $ 114.6 33
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Solid waste revenues
A summary of the period-to-period change in solid waste revenues (dollars in millions and as percentage growth of solid waste revenues) follows:
Period-to-Period Change For
Fiscal Year 2021 vs Fiscal Year 2020
Amount % Growth
Price $ 22.8 3.9 %
Volume 12.9 2.2 %
Surcharges and other fees (2.0) (0.3) %
Commodity price and volume 2.0 0.3 %
Acquisitions 40.2 7.0 %
Closed operations (0.1) - %
Solid waste revenues $ 75.8 13.1 %
Price.
The price change component in fiscal year 2021 solid waste revenues growth from the prior year is a result of the following:
•$16.8 million from favorable collection pricing; and
•$6.0 million from favorable disposal pricing associated with our landfills and transfer stations.
Volume.
The volume change component in fiscal year 2021 solid waste revenues growth from the prior year is a result of the following:
•$7.4 million from higher disposal volumes (of which$4.1 million relates to higher transfer station volumes and$3.1 million relates to higher third-party landfill volumes as a result of increased activity and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic, and$0.2 million relates to higher transportation volumes);
•$4.8 million from higher collection volumes as a result of increased activity, new customer growth and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic; and
•$0.7 million from higher processing volumes.
Surcharges and other fees.
The surcharges and other fees change component in fiscal year 2021 solid waste
revenues growth from the prior year is associated with the sustainability
recycling adjustment fee ("SRA Fee") and the energy component of the energy and
environmental fee. The SRA Fee floats on a monthly basis conversely with
recycled commodity prices, which were higher as compared to the prior year
periods, resulting in lower SRA Fee revenues. This was partially offset by the
impact of the energy component of the energy and environmental fee, which floats
on a monthly basis in conjunction with diesel fuel prices, which were higher as
compared to the prior year, resulting in higher energy fee revenues.
Commodity price and volume.
The commodity price and volume change component in fiscal year 2021 solid waste revenues growth from the prior year is a result of the following:
•$1.9 million from favorable commodity and energy pricing; and
•$0.1 million due primarily to higher commodity processing volumes.
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Acquisitions.
The acquisitions change component in fiscal year 2021 solid waste revenues growth is a result of increased acquisition activity in line with our growth strategy, including the following:
•the timing and acquisition of ten businesses in fiscal year 2021: a residential, commercial and roll-off collection business in easternConnecticut that operates a rail-served C&D processing and waste transfer facility, a waste transfer station, a single-stream recycling facility, and several other recycling operations whose assets and liabilities are allocated between our Eastern region andResource Solutions operating segments; a solid-waste collection business that operates a waste transfer station, a septic and portable toilet business, and two tuck-in solid-waste collection businesses in our Eastern region; and a solid-waste transfer station business, a waste composting and food-scrap hauling business, a solid-waste collection business that operates a waste transfer station, and two tuck-in solid-waste collection businesses in our Western region; and •the timing and acquisition of ten businesses in fiscal year 2020: seven tuck-in solid waste collection businesses and a solid waste collection business in our Western region, a transportation business in our Eastern region, and one recycling operation in ourResource Solutions operating segment.
The change component in fiscal year 2021 resource solutions revenues growth of
•$17.0 million from the favorable impact of commodity pricing in the marketplace (not including the negative impact of lower intercompany tipping fees that were reduced due to higher commodity pricing);
•$9.6 million from acquisition activity;
•$8.0 million from higher non-processing revenues due to higher volumes; and
•$4.2 million from higher processing volumes driven by higher recycling commodity volumes and other processing volumes.
Operating Expenses
A summary of our cost of operations, general and administration and depreciation
and amortization expenses is as follows (dollars in millions and as a percentage
of total revenues):
Fiscal Years Ended December 31, $
2021 2020 Change
Cost of operations $ 582.4 65.5 % $ 515.6 66.6 % $ 66.8
General and administration $ 118.8 13.4 % $ 102.4 13.2 % $ 16.4
Depreciation and amortization $ 103.6 11.6 % $ 90.8 11.7 % $ 12.8
Cost of Operations
Cost of operations includes labor costs, tipping fees paid to third-party
disposal facilities, fuel costs, maintenance and repair costs of vehicles and
equipment, workers' compensation and vehicle insurance costs, the cost of
purchasing materials to be recycled, third-party transportation costs, district
and state taxes, host community fees and royalties. Cost of operations also
includes accretion expense related to final capping, closure and post-closure
obligations, leachate treatment and disposal costs and depletion of landfill
operating lease obligations.
An explanation of the period-to-period change in cost of operations is as follows:
Third-party direct costs in fiscal year 2021 increased$22.7 million from the prior year, while decreasing approximately (80) basis points as a percentage of revenues, due to the following:
•higher third-party disposal costs associated with increased solid waste volumes on organic growth and acquisition activity; and
•higher hauling and third-party transportation costs associated with increased solid waste volumes on organic growth and acquisition activity; higher non-processing and higher commodity and other processing volumes in ourResource Solutions operating segment. 35
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Maintenance and repair costs in fiscal year 2021 increased$17.7 million from the prior year, while increasing approximately 10 basis points as a percentage of revenues, due primarily to: higher overall fleet maintenance costs and higher facility maintenance costs in ourResource Solutions operating segment, and to a lesser extent the Eastern and Western regions, acquisition activity and an increased demand for services. Direct labor costs in fiscal year 2021 increased$17.1 million from the prior year, while increasing approximately 20 basis points as a percentage of revenues, due primarily to: higher labor and benefit costs on wage inflation in our markets and increased overtime on higher solid waste volumes associated with an increased demand for services and acquisition activity; higher health insurance costs; and higher workers compensation costs on claim activity. Fuel costs in fiscal year 2021 increased$5.5 million from the prior year, while increasing approximately 30 basis points as a percentage of revenues, due to higher volumes driven by acquisition activity, along with higher fuel prices. Direct operational costs in fiscal year 2021 increased$3.7 million from the prior year, while decreasing approximately (90) basis points as a percentage of revenues, due primarily to: higher landfill operating costs, including higher leachate costs and higher host community and royalty fees, and higher variable operating costs on increased activity; partially offset by lower equipment operating lease expense.
General and Administration
General and administration expenses include management, clerical and administrative compensation and overhead, professional services and costs associated with marketing, sales force and community relations efforts.
The period-to-period change in general and administration expense can be primarily attributed to: increased overhead costs associated with wage inflation, human resources costs to attract, train and retain employees, and business growth; and higher equity compensation costs and accrued incentive compensation on improved performance.
Depreciation and Amortization
Depreciation and amortization expense includes: (i) depreciation of property and equipment (including assets recorded for finance leases) on a straight-line basis over the estimated useful lives of the assets; (ii) amortization of landfill costs (including those costs incurred and all estimated future costs for landfill development and construction, along with asset retirement costs arising from closure and post-closure obligations) on a units-of-consumption method as landfill airspace is consumed over the total estimated remaining capacity of a site, which includes both permitted capacity and unpermitted expansion capacity that meets certain criteria for amortization purposes, and amortization of landfill asset retirement costs arising from final capping obligations on a units-of-consumption method as airspace is consumed over the estimated capacity associated with each final capping event; and (iii) amortization of intangible assets with a definite life, using either an economic benefit provided approach or on a straight-line basis over the definitive terms of the related agreements.
A summary of the components of depreciation and amortization expense (dollars in millions and as a percentage of total revenues) follows:
Fiscal Year Ended December 31, $
2021 2020 Change
Depreciation expense $ 62.3 7.0 % $ 54.4 7.0 % $ 7.9
Landfill amortization expense 30.3 3.4 % 27.5 3.6 % 2.8
Other amortization expense 11.0 1.2 % 8.9 1.1 % 2.1
$ 103.6 11.6 % $ 90.8 11.7 % $ 12.8
The period-to-period change in depreciation and other amortization expense can
be primarily attributed to increased investments in our fleet and acquisition
activity. Landfill amortization expense increased primarily due to higher
third-party and overall landfill volumes and changes to cost estimates and other
assumptions from prior year periods.
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Expense from Acquisition Activities and Other Items
In the fiscal years 2021 and 2020, we recorded charges of$5.3 million and$1.9 million , respectively, comprised primarily of legal, consulting and other similar costs associated with the acquisition and integration of acquired businesses or select development projects. See Note 5, Business Combinations, to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for disclosure regarding acquisition activity.
Environmental Remediation Charge
In the fiscal year 2021, we recorded an environmental remediation charge of$0.9 million associated with a settlement agreement to conduct restoration of a stream bed on lands adjoining our North Country Environmental Services landfill located inBethlehem, New Hampshire . See Note 12, Commitments and Contingencies, to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure regarding the matter.
Southbridge Landfill Closure Charge, Net
In the fiscal year endedDecember 31, 2017 , we initiated the plan to cease operations of our landfill located inSouthbridge, Massachusetts ("Southbridge Landfill ") and later closed it inNovember 2018 whenSouthbridge Landfill reached its final capacity. Accordingly, in fiscal years 2021 and 2020, we recorded charges associated with the closure of ourSouthbridge Landfill (in millions) as follows: Fiscal Year Ended December 31, 2021 2020 Legal and transaction costs (1)$ 0.9 $ 2.3 Contract settlement charge (2) 0.6 - Landfill closure project (credit) charge (3) (1.0) 0.5 Legal settlement charge (4) - 2.0 Environmental remediation charge (5) - (0.2) Southbridge Landfill closure charge, net$ 0.5 $ 4.6
(1)We incurred legal costs as well as other transaction costs associated with
various matters as part of the
(2)We updated the cost estimates associated with a contract settlement charge
associated with the
(3)We recorded a landfill closure project (credit) charge associated with
revised costs under the closure plan at
(4)We established reserves and made payments associated with legal settlements
associated with claims against us as part of the
(5)We recorded an environmental remediation reversal associated with the
completion of environmental remediation at the
See Note 12, Commitments and Contingencies to our consolidated financial
statements included under Item 8, "Financial Statements and Supplementary Data"
of this Annual Report on Form 10-K for further disclosure regarding the
environmental remediation charge associated with the
Other expenses Interest Expense, net
Our interest expense, net decreased
Provision (Benefit) for Income Taxes
Our provision (benefit) for income taxes was$16.9 million in fiscal year 2021 and$(52.8) million in fiscal year 2020. The provision for income taxes in fiscal year 2021 includes$1.8 million of current income taxes and$15.1 million of deferred 37
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income taxes. For fiscal year 2020, the benefit for income taxes includes$(0.5) million of current income taxes and$(52.3) million of deferred income taxes. The effective rate for the fiscal year 2021 is 29% and is computed based on the statutory rate of 21% adjusted primarily for state taxes and nondeductible officer compensation. The significant increase in the year-to-date deferred tax provision between the periods relates primarily to the$61.3 million tax benefit recognized in fiscal year 2020 for the release of our valuation allowance. On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. In the quarter endedDecember 31, 2020 , we assessed the valuation allowance and considered positive evidence, including significant cumulative consolidated income over the three years endedDecember 31, 2020 , revenue growth and expectations of future profitability, and negative evidence, including the impact of a negative change in the economic climate, significant risks and uncertainties in the business and restrictions on tax loss utilization in certain state jurisdictions. After assessing both the positive evidence and the negative evidence, we determined it was more likely than not that the majority of our deferred tax assets would be realized in the future and released the valuation allowance on the majority of our net operating loss carryforwards and other deferred tax assets as ofDecember 31, 2020 , resulting in a benefit from income taxes of$61.3 million . Following reassessment in fiscal year 2021, our judgement with regard to the realizability of our deferred tax assets remains consistent. We continue to maintain a valuation allowance related to deferred tax assets that would generate capital losses when realized and deferred tax assets related to certain state jurisdictions. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted which, among other things, allowed the carryback of remaining minimum tax credit carryforwards to tax year 2018. Prior to the CARES Act, the minimum tax credit carryforwards were fully refundable through tax year 2021, if not otherwise used to offset tax liabilities. A current income tax benefit of$(1.0) million , offset by a$1.0 million deferred tax provision, was recognized in the three months endedMarch 31, 2020 for the remaining minimum tax credit carried back to tax year 2018. OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "TCJ Act") was enacted. The TCJ Act significantly changedU.S. corporate income tax laws by, among other things, changing carryforward rules for net operating losses. Our$52.4 million in federal net operating loss carryforwards generated as of the end of tax year 2017 continue to be carried forward for 20 years and are expected to be available to fully offset taxable income earned in tax year 2022 and future tax years. Federal net operating losses generated after tax year 2017, totaling$46.5 million carried forward to tax year 2022, will be carried forward indefinitely, but generally may only offset up to 80% of taxable income earned in a tax year. In addition, the TCJ Act added limitations on the deductibility of interest expense that become more restrictive beginning in tax year 2022 and potentially could limit the deductibility of some of our interest expense. Any interest expense limited may be carried forward indefinitely and utilized in later years subject to the limitation.
Segment Reporting
We report selected information about our reportable operating segments in a manner consistent with that used for internal management reporting. We classify our solid waste operations on a geographic basis through regional operating segments, our Western and Eastern regions. Revenues associated with our solid waste operations are derived mainly from solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services in the northeasternUnited States . EffectiveJanuary 1, 2021 , we realigned theResource Solutions operating segment, which includes our larger-scale recycling and commodity brokerage operations along with our organics services and large scale commercial and industrial services, from our historical lines-of-service of recycling, organics and customer solutions into two lines-of-service: processing and non-processing. We realigned theResource Solutions operating segment to leverage our core competencies in materials processing, industrial recycling, organics and resource management service offerings to deliver a comprehensive solution for our larger commercial, municipal, institutional and industrial customers that have more diverse waste and recycling needs. Revenues from processing services are derived from municipalities and customers in the form of processing fees, tipping fees, commodity sales, and organic material sales. Revenues from non-processing services are derived from brokerage services and overall resource management services providing a wide range of environmental services and zero waste solutions to large and complex organizations, as well as traditional collection, disposal and recycling services provided to large account multi-site customers.Legal, tax, information technology, human resources, certain finance and accounting and other administrative functions are included in our Corporate Entities segment, which is not a reportable operating segment. Corporate Entities results reflect those costs not allocated to our reportable operating segments. 38
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A summary of revenues by operating segment (in millions) follows:
Fiscal Year Ended December 31, $
2021 2020 Change
Eastern $ 264.6 $ 220.3 $ 44.3
Western 389.5 358.0 31.5
Resource Solutions 235.1 196.3 38.8
Total $ 889.2 $ 774.6 $ 114.6
Eastern Region
The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
Period-to-Period Change For
Fiscal Year 2021 vs Fiscal Year 2020
Amount % Growth
Price $ 9.0 4.1 %
Volume 10.0 4.6 %
Surcharges and other fees (0.9) (0.4) %
Commodity price and volume 0.2 0.1 %
Acquisitions 26.1 11.8 %
Closed operations (0.1) (0.1) %
Solid waste revenues $ 44.3 20.1 %
Price.
The price change component in fiscal year 2021 solid waste revenues growth from the prior year is a result of the following:
•$6.2 million from favorable collection pricing; and
•$2.8 million from favorable disposal pricing related to transfer stations and landfills.
Volume.
The volume change component in fiscal year 2021 solid waste revenues growth from the prior year is a result of the following:
•$6.2 million from higher disposal volumes related to transfer stations and landfills as a result of increased activity and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic; and
•$3.0 million from higher collection volumes as a result of increased activity, new customer growth and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic; and
•$0.8 million from higher processing volumes.
Surcharges and other fees.
The surcharges and other fees change component in fiscal year 2021 solid waste revenues growth from the prior year is associated with the SRA Fee and the energy component of the energy and environmental fee. The SRA Fee floats on a monthly basis conversely with recycled commodity prices, which were higher as compared to the prior year periods, resulting in lower SRA Fee revenues. This was partially offset by the impact of the energy component of the energy and environmental fee, which floats on a monthly basis in conjunction with diesel fuel prices, which were higher as compared to the prior year, resulting in higher energy fee revenues.
Acquisitions.
The acquisitions change component in fiscal year 2021 solid waste revenues growth is a result of increased acquisition activity in line with our growth strategy, including the following:
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•the timing and acquisition of a residential, commercial and roll-off collection business in easternConnecticut that operates a rail-served C&D processing and waste transfer facility and a waste transfer station whose assets and liabilities are partially allocated to our Eastern region; a solid-waste collection business that operates a waste transfer station; a septic and portable toilet business; and two tuck-in solid-waste collection business; and
•the timing and acquisition of a transportation business in the prior year.
The following table provides details associated with the period-to-period change in revenues (dollars in millions and as percentage growth of solid waste revenues) attributable to services provided:
Period-to-Period Change For
Fiscal Year 2021 vs Fiscal Year 2020
Amount % Growth
Price $ 13.7 3.8 %
Volume 3.0 0.8 %
Surcharges and other fees (1.1) (0.3) %
Commodity price and volume 1.8 0.5 %
Acquisitions 14.1 4.0 %
Solid waste revenues $ 31.5 8.8 %
Price.
The price change component in fiscal year 2021 solid waste revenues growth from the prior year is a result of the following:
•$10.5 million from favorable collection pricing; and
•$3.2 million from favorable disposal pricing related to landfills and transfer stations.
Volume.
The volume change component in fiscal year 2021 solid waste revenues growth from the prior year is a result of the following:
•$1.8 million from higher collection volumes as a result of increased activity, new customer acquisition and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic; and •$1.2 million from higher disposal volumes related mainly to transfer stations and, to a lesser extent transportation, due to an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic. Surcharges and other fees. The surcharges and other fees change component in fiscal year 2021 solid waste revenues growth from the prior year is associated with the SRA Fee and the energy component of the energy and environmental fee. The SRA Fee floats on a monthly basis conversely with recycled commodity prices, which were higher as compared to the prior year periods, resulting in lower SRA Fee revenues. This was partially offset by the impact of the energy component of the energy and environmental fee, which floats on a monthly basis in conjunction with diesel fuel prices, which were higher as compared to the prior year, resulting in higher energy fee revenues.
Commodity price and volume.
The commodity price and volume change component in fiscal year 2021 solid waste revenues growth from the prior year is the result of favorable energy and commodity pricing and higher commodity processing volumes.
Acquisitions.
The acquisitions change component in fiscal year 2021 solid waste revenues solid waste growth is a result of increased acquisition activity in line with our growth strategy, including the following:
•the timing and acquisition of a solid-waste transfer station business, a waste
composting and food-scrap hauling business, a solid-waste collection business
that operates a waste transfer station, and two tuck-in solid-waste collection
businesses; and
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•the timing and acquisition of seven tuck-in solid waste collection businesses and a solid waste collection business in our Western region in the prior year.
Operating Income (Loss)
A summary of operating income (loss) by operating segments (in millions)
follows:
December 31, $
2021 2020 Change
Eastern $ 12.9 $ 11.6 $ 1.3
Western 49.0 42.7 6.3
Resource Solutions 17.6 7.4 10.2
Corporate Entities (1.8) (2.4) 0.6
Total $ 77.7 $ 59.3 $ 18.4
Eastern Region
Eastern region operating income increased $1.3 million in fiscal year 2021 from
the prior year. Excluding the impact of the Southbridge Landfill closure charge,
environmental remediation charge and the expense from acquisition activities,
our operating performance in fiscal year 2021 improved as a result of revenue
growth, inclusive of inter-company revenues, more than offsetting the following
cost impacts discussed below.
Cost of operations: Cost of operations increased
•higher disposal, hauling and transportation costs associated with increased solid waste volumes on acquisition activity as well as organic growth associated with increased demand for services due to increased activity associated with the economic recovery; •higher direct labor costs due to wage inflation in our markets, increased overtime on business growth, higher health insurance costs and higher workers compensation costs on claims activity;
•higher direct operational costs due to increased landfill operating costs on volume growth, partially offset by lower equipment operating lease expense;
•higher fleet and facility maintenance costs, including operational support costs, on increased demand and acquisition activity; and
•higher fuel costs on higher volumes and higher fuel prices.
General and administration: General and administration expense increased$6.7 million in fiscal year 2021 due to increased overhead costs associated with wage inflation, human resources costs to attract, train and retain employees and business growth, and higher equity compensation costs and accrued incentive compensation on improved performance. Depreciation and amortization: Depreciation and amortization expense increased$7.9 million in fiscal year 2021 due to increased investments in our fleet and acquisition activity, and higher landfill amortization expense primarily on higher landfill volumes and changes to cost estimates and other assumptions from prior year periods.Western Region Western region operating income increased$6.3 million in fiscal year 2021 from the prior year. Excluding the impact of expense from acquisition activities, our operating performance in fiscal year 2021 improved as a result of revenue growth, inclusive of inter-company revenues, more than offsetting the following cost impacts discussed below.
Cost of operations: Cost of operations increased
•higher disposal, hauling and transportation costs associated with increased solid waste volumes on acquisition activity as well as organic growth associated with increased demand for services due to increased activity associated with the economic recovery; •higher direct labor costs due to wage inflation in our markets, increased overtime on business growth, higher health insurance costs and higher workers compensation costs on claims activity;
•higher fleet and facility maintenance costs, including operational support costs, on increased demand and acquisition activity;
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•higher direct operational costs due to increased landfill operating costs, including host community and royalty fees, partially offset by lower equipment operating lease expense; and
•higher fuel costs on higher volumes and higher fuel prices.
General and administration: General and administration expense increased$8.2 million in fiscal year 2021 due to increased overhead costs associated with wage inflation, human resources costs to attract, train and retain employees and business growth, and higher equity compensation costs and accrued incentive compensation on improved performance. Depreciation and amortization: Depreciation and amortization expense increased$4.6 million in fiscal year 2021 due to higher depreciation expense associated with increased investments in our fleet and acquisition activity, and higher landfill amortization expense on higher landfill volumes at certain of our landfills and changes to cost estimates and other assumptions from prior year periods.Resource Solutions Operating income increased$10.2 million in fiscal year 2021 driven by revenue growth, inclusive of inter-company revenues, more than offsetting the following cost changes: Cost of operations: Cost of operations increased$17.3 million in fiscal year 2021 due to: increased hauling, disposal and transportation costs associated with acquisition activity, higher commodity and other processing volumes, higher non-processing volumes associated with our brokerage operations with high pass through of direct costs; and higher facility operation support costs; partially offset by lower third-party disposal costs on the internalization of more non-processing volumes. General and administration: General and administration increased$1.5 million due to higher accrued incentive compensation costs on improved performance and higher labor, benefit and other service costs on business growth.
Liquidity and Capital Resources
Recent Events
OnDecember 22, 2021 , we entered into an amended and restated credit agreement ("Amended and Restated Credit Agreement") which provides for a$350.0 million aggregate principal amount term loan A facility ("Term Loan Facility") and a$300.0 million revolving line of credit facility, with a$75.0 million sublimit for letters of credit ("Revolving Credit Facility" and, together with the Term Loan Facility, the "Credit Facility"). We have$271.9 million of undrawn capacity from our Revolving Credit Facility") and$33.8 million of cash and cash equivalents as ofDecember 31, 2021 to help meet our short-term and long-term liquidity needs. 42
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A summary of cash and cash equivalents, restricted assets and debt balances, excluding any debt issuance costs, (in millions) follows:
December 31,
2021 2020
Cash and cash equivalents $ 33.8 $ 154.3
Restricted assets:
Restricted investments securities - landfill closure $ 2.1 $ 1.8
Debt:
Current portion $ 9.9 $ 9.2
Non-current portion 552.7 539.2
Total debt $ 562.6 $ 548.4
Summary of Cash Flow Activity
A summary of cash flows (in millions) follows:
Fiscal Year Ended
December 31, $
2021 2020 Change
Net cash provided by operating activities $ 182.7 $ 139.9 $ 42.8
Net cash used in investing activities $ (293.2) $
(140.0)
Cash flows from operating activities.
A summary of operating cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2021 2020
Net income $ 41.1 $ 91.1
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 103.6 90.8
Interest accretion on landfill and environmental remediation liabilities
7.3 7.1
Amortization of debt issuance costs on long-term debt 2.3 2.2
Stock-based compensation 11.6 8.2
Operating lease right-of-use assets expense 13.8 16.3
Loss on sale of property and equipment 0.2 0.9
Southbridge Landfill non-cash closure (credit) charge, net (0.4) 0.3
Non-cash expense from acquisition activities and other items 0.3 0.6
Environmental remediation charge 0.9 -
Deferred income taxes 15.1 (52.3)
195.8 165.2
Changes in assets and liabilities, net (13.1) (25.3)
Net cash provided by operating activities $
182.7
Net cash provided by operating activities increased$42.8 million in fiscal year 2021 as compared to fiscal year 2020. This was the result of improved operational performance combined with the favorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures. For discussion of our improved operational performance in fiscal year 2021 as compared to fiscal year 2020, see Results of Operations included in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The favorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures, which are affected by both cost changes and the timing of payments, in fiscal year 2021 as compared to fiscal year 2020 was due primarily to the following: •a$29.1 million favorable impact to operating cash flows associated with the change in accounts payable based on increased activity, primarily on acquisitions, differences in the timing of payments and a slightly higher days payable outstanding; partially offset by 43
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•a
•a
Cash flows from investing activities.
A summary of investing cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2021 2020
Acquisitions, net of cash acquired $ (170.7) $ (32.5) Additions to property, plant and equipment (123.3) (108.0)
Proceeds from sale of property and equipment 0.8 0.5
Net cash used in investing activities
A summary of the most significant items affecting the change in our investing cash flows follows:
Acquisitions, net of cash acquired. In fiscal year 2021, we acquired ten businesses for total consideration of$171.7 million , including$166.5 million in cash and$1.3 million in cash held in escrow accounts as holdbacks to sellers, and paid$2.9 million in holdback payments on businesses previously acquired, as compared to fiscal year 2020, during which we acquired ten businesses for total consideration of$33.5 million , including$29.0 million in cash, and paid$3.5 million in holdback payments on businesses previously acquired. Capital expenditures. Capital expenditures were$15.3 million higher in fiscal year 2021 as compared to fiscal year 2020 primarily due to timing differences and the following items:
•$9.1 million in higher growth capital expenditures related primarily to investments to support business growth;
•$8.8 million in higher replacement capital expenditures as additional capital spend on vehicles, machinery, equipment and containers more than offset lower capital spend on landfill development; and •$2.8 million in higher capital expenditures from phase VI construction and development costs related to long-term infrastructure at the Subtitle D landfill inCoventry, Vermont ("Waste USA Landfill ") to facilitate future landfill airspace construction, which will significantly enhance the economic useful life of theWaste USA Landfill once construction is finished; partially offset by •$(5.5) million in lower capital expenditures associated with the integration of newly acquired operations, which includes planned capital expenditures following an acquisition, as well as non-routine development investments that are expected to provide long-term returns.
Cash flows from financing activities.
A summary of financing cash flows (in millions) follows:
Fiscal Year Ended
December 31,
2021 2020
Proceeds from debt borrowings $ 3.7 $ 157.0
Principal payments on debt (10.3) (149.4)
Payments of debt issuance costs (3.7) (1.5)
Proceeds from the exercise of share-based awards 0.2
0.1
Proceeds from the public offering of Class A Common Stock -
144.8
Net cash (used in) provided by financing activities$ (10.1)
A summary of the most significant items affecting the change in our financing cash flows follows:
Debt activity. Net cash associated with debt activity decreased$(14.2) million in fiscal year 2021 compared to fiscal year 2020. The decrease in financing cash flows is related to our strong cash position in fiscal year 2021, combined with the issuance ofNew York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2020 ("New York Bonds 2020") and the pay down of our revolving credit facility in fiscal year 2020. 44
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Payments of debt issuance costs. We paid$3.7 million of debt issuance costs in fiscal year 2021 related to the refinancing of our credit facility as compared to$1.5 million in fiscal year 2020 related to the issuance of$40.0 million aggregate principal amount of New York Bonds 2020. Proceeds from the public offering of Class A Common Stock. In fiscal year 2020, we completed a public offering of 2.7 million shares of our Class A common stock at a public offering price of$56.00 per share. The offering resulted in net proceeds to us of$144.8 million , after deducting underwriting discounts, commissions and offering expenses. The net proceeds from the offering were used for general corporate purposes, including acquisitions or development of new operations or assets with the goal of complementing or expanding our business, and for working capital and capital expenditures.
Outstanding Long-Term Debt
Credit Facility
OnDecember 22, 2021 , we entered into an Amended and Restated Credit Agreement, which provides for a$350.0 million aggregate principal amount Term Loan Facility and a$300.0 million Revolving Credit Facility, with a$75.0 million sublimit for letters of credit. The previous credit agreement included$347.4 million aggregate principal amount of outstanding term loan and a revolving line of credit facility that had not been borrowed against at the time of the amendment. The incremental proceeds from this transaction were used to pay related transaction expenses. We have the right to request, at our discretion, an increase in the amount of loans under the Credit Facility by an aggregate amount of$125.0 million , subject to the terms and conditions set forth in the Amended and Restated Credit Agreement. The Credit Facility has a 5-year term that matures inDecember 2026 and bears interest at a rate of LIBOR plus 1.375% per annum, which will be reduced to a rate of LIBOR plus as low as 1.125% upon us reaching a consolidated net leverage ratio of less than 2.25x. The Credit Facility contains customary benchmark replacement provisions pursuant to which, upon certain triggering events, the LIBOR benchmark used to calculate the LIBOR rate will be replaced with a secured overnight financing rate, as adjusted, on the terms and conditions in the Credit Facility. The Credit Facility is guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries and secured by substantially all of our assets. As ofDecember 31, 2021 , further advances were available under the Credit Facility in the amount of$271.9 million . The available amount is net of outstanding irrevocable letters of credit totaling$28.1 million , at which date no amount had been drawn. The Amended and Restated Credit Agreement requires us to maintain a minimum interest coverage ratio and a maximum consolidated net leverage ratio, to be measured at the end of each fiscal quarter. As ofDecember 31, 2021 , we were in compliance with all financial covenants contained in the Amended and Restated Credit Agreement as follows (in millions): Fiscal Year Ended Covenant Requirements at Credit Facility Covenant December 31, 2021 December 31, 2021 Maximum consolidated net leverage ratio (1) 2.35 4.00 Minimum interest coverage ratio 11.43 3.00 45
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(1)The maximum consolidated net leverage ratio is calculated as consolidated funded debt, net of unencumbered cash and cash equivalents in excess of$2.0 million and up to$100.0 million (calculated at$530.8 million as ofDecember 31, 2021 , or$562.6 million of consolidated funded debt less$31.8 million of cash and cash equivalents in excess of$2.0 million and up to$100.0 million as ofDecember 31, 2021 ), divided by consolidated EBITDA. Consolidated EBITDA is based on operating results for the twelve months preceding the measurement date ofDecember 31, 2021 . Consolidated funded debt, net of unencumbered cash and cash equivalents in excess of$2.0 million and up to$100.0 million , and consolidated EBITDA as defined by the Amended and Restated Credit Agreement ("Consolidated EBITDA") are non-GAAP financial measures that should not be considered an alternative to any measure of financial performance calculated and presented in accordance with generally accepted accounting principles inthe United States . A reconciliation of net cash provided by operating activities to Consolidated EBITDA is as follows (in millions):
Twelve Months Ended
December 31, 2021
Net cash provided by operating activities $ 182.7
Changes in assets and liabilities, net of effects of acquisitions and divestitures
13.1
Loss on sale of property and equipment (0.2)
Non-cash expense from acquisition activities and other items (0.3)
Environmental remediation charge (0.9)
Stock based compensation (11.6)
Operating lease right-of-use assets expense (5.6)
Southbridge Landfill non-cash closure charge, net 0.4
Interest expense, less amortization of debt issuance costs 18.9
Provision for income taxes, net of deferred income taxes 1.9
Adjustments as allowed by the Credit Agreement 27.4
Consolidated EBITDA $ 225.8
In addition to the financial covenants, the Amended and Restated Credit
Agreement also contains a number of important customary affirmative and negative
covenants which restrict, among other things, our ability to sell assets, incur
additional debt, create liens, make investments, and pay dividends. We do not
believe that these restrictions impact our ability to meet future liquidity
needs. As of December 31, 2021 , we were in compliance with all covenants
contained in the Amended and Restated Credit Agreement.
An event of default under any of our debt agreements could permit some of our
lenders, including the lenders under the Credit Facility, to declare all amounts
borrowed from them to be immediately due and payable, together with accrued and
unpaid interest, or, in the case of the Credit Facility, terminate the
commitment to make further credit extensions thereunder, which could, in turn,
trigger cross-defaults under other debt obligations. If we were unable to repay
debt to our lenders, or were otherwise in default under any provision governing
our outstanding debt obligations, our secured lenders could proceed against us
and against the collateral securing that debt.
Based on the seasonality of our business, operating results in the late fall,
winter and early spring months are generally lower than the remainder of our
fiscal year. Given the cash flow impact that this seasonality, the capital
intensive nature of our business and the timing of debt payments has on our
business, we typically incur higher debt borrowings in order to meet our
liquidity needs during these times. Consequently, our availability and
performance against our financial covenants tighten during these times as well.
Tax-Exempt Financings and Other Debt
As ofDecember 31, 2021 , we had outstanding$162.0 aggregate principal amount of tax exempt bonds,$45.7 million aggregate principal amount of finance leases and$4.8 million aggregate principal amount of notes payable. See Note 11, Debt to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for disclosure about debt. 46
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Contractual Obligations
The following table sets forth a summary of our significant contractual cash obligations (in thousands) as ofDecember 31, 2021 . These obligations are reflected in our balance sheet and include obligations with scheduled maturities, as well as significant obligations pertaining to accrued environmental remediation liabilities and final capping, closure and post-closure asset retirement obligations at our landfills. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented. Less than More than 5 one year 1 - 3 years 3 - 5 years years Total Debt$ 9,901 $ 19,485 $ 386,976 $ 146,208 $ 562,570 Interest obligations (1) 13,261 25,547 22,725 64,045 125,578 Non-cancellable operating leases 4,573 4,307 1,427 5,444 15,751 Landfill operating lease contracts 5,495 10,990 13,830 35,476 65,791 Pension plan contributions 147 294 294 1,436 2,171 Environmental remediation 354 1,436 626 4,308 6,724 Final capping, closure and post-closure 5,449 11,710 21,948 210,753 249,860 Total contractual cash obligations (2)$ 39,180 $ 73,769 $ 447,826 $ 467,670 $ 1,028,445 (1)Based on debt balances as ofDecember 31, 2021 . Interest obligations related to variable rate debt were calculated using variable rates in effect atDecember 31, 2021 .
(2)Contractual cash obligations do not include accounts payable or accrued
liabilities, which will be paid in the fiscal year ending
We have no contractual obligations related to unrecognized tax benefits atDecember 31, 2021 . For further description regarding contractual obligations, see Note 8, Leases, Note 10, Final Capping, Closure and Post-Closure Costs, Note 12, Commitments and Contingencies and Note 16, Income Taxes, to our consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Inflation
Inflationary increases in costs, including current inflationary pressures associated primarily with fuel, labor and certain capital item, have affected, and may continue to affect, our operating margins. We believe that inflation generally has not had a significant impact on our operating results. Consistent with industry practice, most of our contracts provide for a pass-through of certain costs to our customers, including increases in landfill tipping fees and in some cases fuel costs, intended to mitigate the impact of inflation on our operating results. We have also implemented a number of operating efficiency programs that seek to improve productivity and reduce our service costs, and a fuel surcharge, which is designed to recover escalating fuel price fluctuations above an annually reset floor. Based on these implementations, we believe we should be able to sufficiently offset most cost increases resulting from inflation. However, competitive factors may require us to absorb at least a portion of these cost increases. Additionally, management's estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities.
Regional Economic Conditions
Our business is primarily located in the northeasternUnited States . Therefore, our business, financial condition and results of operations are susceptible to downturns in the general economy in this geographic region and other factors affecting the region, such as state regulations and severe weather conditions. We are unable to forecast or determine the timing and/or the future impact of a sustained economic slowdown.
Critical Accounting Estimates and Assumptions
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States ("GAAP") and necessarily include certain estimates and judgments made by management. On an on-going basis, management evaluates its estimates and judgments which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their evaluation form the basis for making judgments about the carrying values of assets and liabilities. However, even under optimal circumstances, estimates routinely require adjustments based on changing assumptions and circumstances, or new or better information becoming available. Accordingly, actual results may differ from these estimates under different assumptions and circumstances. 47
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The following is a list of accounting policies that we believe are the most critical in understanding our consolidated financial position, results of operations and cash flows and that may require management to make subjective or complex judgments about matters that are inherently uncertain. Our significant accounting policies are more fully discussed in Note 3, Summary of Significant Accounting Policies of our consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Landfill Accounting
Landfill Development Costs. We estimate the total cost to develop each of our landfill sites to its remaining permitted and expansion capacity (see landfill development costs discussed within the "Property, Plant and Equipment" accounting policy more fully discussed in Note 3, Summary of Significant Accounting Policies of our consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K). The projection of these landfill costs is dependent, in part, on future events. The remaining amortizable basis of each landfill includes costs to develop a site to its remaining permitted and expansion capacity and includes amounts previously expended and capitalized, net of accumulated airspace amortization, and projections of future purchase and development costs including capitalized interest. The interest capitalization rate is based on our weighted average interest rate incurred on borrowings outstanding during the period. Under life-cycle accounting, all costs related to acquisition and construction of landfill sites are capitalized and charged to expense based on tonnage placed into each site. Landfill permitting, acquisition and preparation costs are amortized on the units-of-consumption method as landfill airspace is consumed. In determining the amortization rate for each of our landfills, preparation costs include the total estimated costs to complete construction of the landfills' permitted and expansion capacity. The average amortization rate per ton for our landfills during fiscal year 2021 and 2020 was$7.03 and$7.06 , respectively. Final Capping, Closure and Post-Closure Costs. The cost estimates for final capping, closure and post-closure activities at landfills for which we have responsibility are estimated based on our interpretations of current requirements and proposed or anticipated regulatory changes. We also estimate additional costs based on the amount a third-party would charge us to perform such activities even when we expect to perform these activities internally. We estimate the airspace to be consumed related to each final capping event and the timing of construction related to each final capping event and of closure and post-closure activities. Because landfill final capping, closure and post-closure obligations are measured at estimated fair value using present value techniques, changes in the estimated timing of construction of future landfill final capping and closure and post-closure activities would have an effect on these liabilities, related assets and results of operations. Final capping activities include the installation of liners, drainage, compacted soil layers and topsoil over areas of a landfill where total airspace has been consumed and waste is no longer being received. Final capping activities occur throughout the life of the landfill. Our engineering personnel estimate the cost for each final capping event based on the acreage to be capped, along with the final capping materials and activities required. The estimates also consider when these costs would actually be paid and factor in inflation and discount rates. The engineers then quantify the landfill capacity associated with each final capping event and the costs for each event are amortized over that capacity as waste is received at the landfill. Closure and post-closure costs represent future estimated costs related to monitoring and maintenance of a solid waste landfill after a landfill facility ceases to accept waste and closes. We estimate, based on input from our engineers, accountants, lawyers, managers and others, our future cost requirements for closure and post-closure monitoring and maintenance based on our interpretation of the technical standards of the Subtitle D regulations and the air emissions standards under the Clean Air Act of 1970, as amended, as they are being applied on a state-by-state basis. Closure and post-closure accruals for the cost of monitoring and maintenance include site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operation and maintenance costs to be incurred for a period which is generally for a term of 30 years after final closure of a landfill. In determining estimated future closure and post-closure costs, we consider costs associated with permitted and permittable airspace. See Note 10, Final Capping, Closure and Post-Closure Costs to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure about final capping, closure and post-closure asset retirement costs, including revisions in estimates. Remaining Permitted Airspace. Our engineers, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined by an annual survey, which is then used to compare the existing landfill topography to the expected final landfill topography. Expansion Airspace. We currently include unpermitted expansion airspace in our estimate of remaining permitted and expansion airspace in certain circumstances. To be considered expansion airspace all of the following criteria must be met:
•we control the land on which the expansion is sought;
•all technical siting criteria have been met or a variance has been obtained or is reasonably expected to be obtained;
•we have not identified any legal or political impediments which we believe will not be resolved in our favor;
•we are actively working on obtaining any necessary permits and we expect that all required permits will be received; and
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•senior management has approved the project based on a review of the engineering
design and determination that the financial return profile meets our investment
criteria.
For unpermitted airspace to be included in our estimate of remaining permitted
and expansion airspace, the expansion effort must meet all of the criteria
listed above. These criteria are evaluated annually by our engineers,
accountants, lawyers, managers and others to identify potential obstacles to
obtaining the permits. Once the remaining permitted and expansion airspace is
determined in cubic yards, an airspace utilization factor ("AUF") is established
to calculate the remaining permitted and expansion capacity in tons. The AUF is
established using a process that considers the measured density obtained from
annual surveys. When we include the expansion airspace in our calculation of
remaining permitted and expansion airspace, we include the projected costs for
development, as well as the projected asset retirement costs related to final
capping, closure and post-closure of the expansion airspace in the amortization
basis of the landfill. See Part I. Item 1, "Business" of this Annual Report on
Form 10-K for more disclosure about permitted and permittable capacity at our
landfills.
After determining the costs and the remaining permitted and expansion capacity
at each of our landfills, we determine the per ton rates that will be expensed
as waste is received and deposited at each of our landfills by dividing the
costs by the corresponding number of tons. We calculate per ton amortization
rates for assets associated with each final capping event, for assets related to
closure and post-closure activities, and for all other costs capitalized or to
be capitalized in the future for each landfill. These rates per ton are updated
annually, or more frequently, as significant facts change.
It is possible that actual results, including the amount of costs incurred, the
timing of final capping, closure and post-closure activities, our airspace
utilization or the success of our expansion efforts could ultimately turn out to
be significantly different from our estimates and assumptions. To the extent
that such estimates or related assumptions prove to be significantly different
than actual results, lower profitability may be experienced due to higher
amortization rates, higher final capping, closure or post-closure rates, or
higher expenses. Higher profitability may result if the opposite occurs. Most
significantly, if it is determined that the expansion capacity should no longer
be considered in calculating the recoverability of the landfill asset, we may be
required to recognize an asset impairment. If it is determined that the
likelihood of receiving an expansion permit has become remote, the capitalized
costs related to the expansion effort are expensed immediately.
Environmental Remediation Liabilities
We have recorded environmental remediation liabilities representing our estimate of the most likely outcome of the matters for which we have determined that a liability is probable. These liabilities include potentially responsible party investigations, settlements, certain legal and consultant fees, as well as costs directly associated with site investigation and clean up, such as materials and incremental internal costs directly related to the remedy. We provide for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. We estimate costs required to remediate sites where it is probable that a liability has been incurred based on site-specific facts and circumstances. Estimates of the cost for the likely remedy are developed using third-party environmental engineers or other service providers. Where we believe that both the amount of a particular environmental remediation liability and timing of payments are reliably determinable, we inflate the cost in current dollars until the expected time of payment and discount the cost to present value. See Note 12, Commitments and Contingencies to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure about environmental remediation liabilities, including revisions in estimates.
Accounts Receivable, Net of Allowance for Credit Losses
Accounts receivable represent receivables from customers for collection,
transfer, recycling, disposal and other services. Our accounts receivable are
recorded when billed or when related revenue is earned, if earlier, and
represent claims against third-parties that will be settled in cash. The
carrying value of our accounts receivable, net of allowance for credit losses
represents its estimated net realizable value. Estimates are used in determining
our allowance for credit losses based on, among other things, our historical
loss trends, the age of outstanding accounts receivable, and current and
expected economic conditions. Additions charged to expense in fiscal year 2021
consider the current economic conditions and the potential impact to our
customers' ability to pay for services that we have provided. Our reserve is
evaluated and revised on a monthly basis. Past due accounts receivable are
written off when deemed to be uncollectible. See Note 6, Accounts Receivable,
Net of Allowance for Credit Losses to our consolidated financial statements
under Item 8, "Financial Statements and Supplementary Data" of this Annual
Report on Form 10-K for further disclosure about changes to the allowance for
credit losses.
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In testing for goodwill impairment, we estimate the fair value of each reporting unit, which we have determined to be our geographic operating segments and ourResource Solutions operating segment, and compare the fair value with the carrying value of the net assets of each reporting unit. If the fair value is less than its carrying value, then we would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, noting that the amount is not to exceed the total amount of goodwill allocated to that reporting unit. To determine the fair value of each of our reporting units as a whole we use discounted cash flow analyses, which require significant assumptions and estimates about the future operations of each reporting unit. Significant judgments inherent in this analysis include the determination of appropriate discount rates, the amount and timing of expected future cash flows and growth rates. The cash flows employed in our discounted cash flow analyses are based on financial forecasts developed internally by management. Our discount rate assumptions are based on an assessment of our risk adjusted discount rate, applicable for each reporting unit. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate our results against our current market capitalization. We elected to perform a quantitative analysis as part of our annual goodwill impairment test for fiscal year 2021. As ofOctober 1, 2021 , our Eastern, Western, andResource Solutions reporting units indicated that the fair value of each reporting unit exceeded its carrying amount, including goodwill. Furthermore, in each case the fair value of our Eastern, Western, andResource Solutions reporting units exceeded its carrying value by in excess of 180.0%. We incurred no impairment of goodwill as a result of our annual goodwill impairment tests in fiscal years 2021 or 2020. However, there can be no assurance that goodwill will not be impaired at any time in the future. Intangible assets consist primarily of covenants not-to-compete and customer relationships. Intangible assets are recorded at fair value and are amortized based on the economic benefit provided or using the straight-line method over their estimated useful lives. Covenants not-to-compete and customer relationships are typically amortized over a term of no more than 10 years. See Note 5, Business Combinations and Contingencies and Note 9,Goodwill and Intangible Assets to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure.
Recovery of Long-Lived Assets
We continually assess whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of our long-lived assets (other than goodwill) or whether the remaining balances of those assets should be evaluated for possible impairment. Long-lived assets include, for example, capitalized landfill costs, other property and equipment, identifiable intangible assets, and operating lease right-of-use assets. Events or changes in circumstances that may indicate that an asset may be impaired include the following:
•a significant decrease in the market price of an asset or asset group;
•a significant adverse change in the extent or manner in which an asset or asset group is being used or in its physical condition;
•a significant adverse change in legal factors or in the business climate that could affect the value of an asset or asset group, including an adverse action or assessment by a regulator;
•an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset;
•a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group;
•a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life; or
•an impairment of goodwill at a reporting unit.
There are certain indicators listed above that require significant judgment and
understanding of the waste industry when applied to landfill development or
expansion. For example, a regulator may initially deny a landfill expansion
permit application although the expansion permit is ultimately granted. In
addition, management may periodically divert waste from one landfill to another
to conserve remaining permitted landfill airspace. Therefore, certain events
could occur in the ordinary course of business and not necessarily be considered
indicators of impairment due to the unique nature of the waste industry.
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If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. We group our long-lived assets for this purpose at the lowest level for which identifiable cash flows are primarily independent of the cash flows of other assets or asset groups. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value. To determine fair value, we use discounted cash flow analyses and estimates about the future cash flows of the asset or asset group. This analysis includes a determination of an appropriate discount rate, the amount and timing of expected future cash flows and growth rates. The cash flows employed in our discounted cash flow analyses are typically based on financial forecasts developed internally by management. The discount rate used is commensurate with the risks involved. We may also rely on third-party valuations and or information available regarding the market value for similar assets. If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded in the period that the impairment occurs. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized. We incurred no impairment of long-lived assets in fiscal years 2021 or 2020. However, there can be no assurance that long-lived assets will not be impaired at any time in the future.
Self-Insurance Liabilities and Related Costs
We are self-insured for vehicles and workers' compensation with reinsurance coverage limiting our maximum exposure. Our maximum exposure in fiscal year 2021 under the workers' compensation plan was$1.25 million per individual event. Our maximum exposure in fiscal year 2021 under the automobile plan was$3.65 million per individual event. The liability for unpaid claims and associated expenses, including incurred but not reported losses, is determined by management with the assistance of a third-party actuary and reflected in our consolidated balance sheet as an accrued liability. We use a third-party to track and evaluate actual claims experience for consistency with the data used in the annual actuarial valuation. The actuarial-determined liability is calculated based on historical data, which considers both the frequency and settlement amount of claims. Our estimated accruals for these liabilities could be significantly different than our ultimate obligations if variables such as the frequency or severity of future events differ significantly from our assumptions. Our self-insurance reserves totaled$19.8 million and$16.9 million as ofDecember 31, 2021 andDecember 31, 2020 , respectively. Our estimated accruals for these liabilities could be significantly different than our ultimate obligations if variables such as the frequency or severity of future events differ significantly from our assumptions.
Income Taxes
We use estimates to determine our provision for income taxes and related assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Valuation allowances have been established for the possibility that tax benefits may not be realized for certain deferred tax assets. Deferred income taxes are recognized based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using currently enacted tax rates. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we will make an adjustment to the valuation allowance which would reduce the provision for income taxes. We account for income tax uncertainties according to guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. We recognize interest and penalties relating to income tax matters as a component of income tax expense.
See Note 16, Income Taxes to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure, including the effect of the valuation allowance release.
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Contingent Liabilities
We are subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty. We determine whether to disclose or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable, and whether it can be reasonably estimated. We analyze our litigation and regulatory matters based on available information to assess the potential liabilities. Management's assessment is developed based on an analysis of possible outcomes under various strategies. We accrue for loss contingencies when such amounts are probable and reasonably estimable. If a contingent liability is only reasonably possible, we will disclose the potential range of the loss, if estimable. We record losses related to contingencies in cost of operations or general and administration expenses, depending on the nature of the underlying transaction leading to the loss contingency. See Note 12, Commitments and Contingencies for disclosure about loss contingencies, as applicable. Contingent liabilities accounted for under purchase accounting are recorded at their fair values. These fair values may be different from the values we would have otherwise recorded, had the contingent liability not been assumed as part of an acquisition of a business. See Note 5, Business Combinations and Note 14, Fair Value of Financial Instruments to our consolidated financial statements included under Item 8, "Financial Statement and Supplementary Data" of this Annual Report on Form 10-K for disclosure about contingent consideration accounted for under purchase accounting.
Stock-Based Compensation
All share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense-in general and administration expense over the employee's requisite service period. For purposes of calculating stock-based compensation expense, forfeitures are accounted for as they occur. Our equity awards granted generally consist of stock options, including market-based performance stock options, restricted stock, restricted stock units and performance stock units, including market-based performance stock units. The fair value of each stock option grant is estimated using a Black-Scholes option-pricing model. The fair value of restricted stock, restricted stock unit and performance stock unit grants is at a price equal to the fair market value of our Class A common stock at the date of grant. The fair value of market-based performance stock unit grants is valued using aMonte Carlo pricing model. See Note 13, Stockholders' Equity to our consolidated financial statements included under Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further disclosure.
New Accounting Standards
For a description of the new accounting standards that may affect us, see Note 2, Accounting Changes to our consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
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