WASTE CONNECTIONS, INC. FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We make statements in this Quarterly Report on Form 10-Q that are forward-looking in nature. These include:
Statements regarding our landfills, including capacity, duration, special
? projects, demand for and pricing of recyclables, landfill alternatives and
related capital expenditures;
? Discussion of competition, loss of contracts, price increases and additional
exclusive and/or long-term collection service arrangements;
Forecasts of cash flows necessary for operations and free cash flow to reduce
? leverage as well as our ability to draw on our credit facility and access the
capital markets to refinance or expand;
? Statements regarding our ability to access capital resources or credit markets;
? Plans for, and the amounts of, certain capital expenditures for our existing
and newly acquired properties and equipment;
? Statements regarding fuel, oil and natural gas demand, prices, and price
volatility;
? Assessments of regulatory developments and potential changes in environmental,
health, safety and tax laws and regulations; and
Other statements on a variety of topics such as the coronavirus disease 2019
("COVID-19") pandemic, inflation, credit risk of customers, seasonality,
? labor/pension costs and labor union activity, operational and safety risks,
acquisitions, litigation developments and results, goodwill impairments,
insurance costs and cybersecurity threats.
These statements can be ?identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," "might," "will," ??"could," "should" or "anticipates," or the negative thereof or comparable terminology, or by discussions of strategy. Our ?business and operations are subject to a variety of risks and uncertainties and, consequently, actual results may differ ?materially from those projected by any forward-looking statements. Factors that could cause actual results to differ ?from those projected include, but are not limited to, risk factors detailed from time to time in our filings with theSEC and the securities commissions or similar regulatory authorities inCanada . There may be additional risks of which we are not presently aware or that we currently believe are immaterial that ?could have an adverse impact on our business. We make no commitment to revise or update any forward-looking ?statements to reflect events or circumstances that may change, unless required under applicable securities laws.
OVERVIEW OF OUR BUSINESS
We are an integrated solid waste services company that provides non-hazardous waste collection, transfer and disposal services, along with resource recovery primarily through recycling and renewable fuels generation, in mostly exclusive and secondary markets across 43 states in theU.S. and six provinces inCanada .Waste Connections also provides non-hazardous oil and natural gas exploration and production ("E&P") waste treatment, recovery and disposal services in 29
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several basins across the
Environmental, organizational and financial sustainability initiatives have been key components of our success since we were founded in 1997. We continue to grow and expand these efforts and our disclosure regarding progress towards their achievement as our industry and technology continue to evolve. To that end, we have committed$500 million to the advancement of long-term, aspirational ESG targets, which have been incorporated into executive compensation metrics. Our investments primarily focus on reducing emissions, increasing resource recovery of both recyclable commodities and clean energy fuels, reducing reliance on off-site disposal for landfill leachate, further improving safety through reduced incidents and enhancing employee engagement through improved voluntary turnover and Servant Leadership scores. Our 2022 Sustainability Report can be found at www.wasteconnections.com/sustainability but does not constitute a part of, and is not incorporated by reference into, this Quarterly Report on Form 10-Q. We generally seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. In markets where waste collection services are provided under exclusive arrangements, or where waste disposal is municipally owned or funded or available at multiple municipal sources, we believe that controlling the waste stream by providing collection services under exclusive arrangements is often more important to our growth and profitability than owning or operating landfills. We also target niche markets, like non-hazardous E&P waste treatment, recovery and disposal services. The solid waste industry is local and highly competitive in nature, requiring substantial labor and capital resources. We compete for collection accounts primarily on the basis of price and, to a lesser extent, the quality of service, and compete for landfill business on the basis of tipping fees, geographic location and quality of operations. The solid waste industry has been consolidating and continues to consolidate as a result of a number of factors, including the increasing costs and complexity associated with waste management operations and regulatory compliance. Many small independent operators and municipalities lack the capital resources, management, operating skills and technical expertise necessary to operate effectively in such an environment. The consolidation trend has caused solid waste companies to operate larger landfills that have complementary collection routes that can use company-owned disposal capacity. Controlling the point of transfer from haulers to landfills has become increasingly important as landfills continue to close and disposal capacity moves farther from the collection markets it serves. Generally, the most profitable operators within the solid waste industry are those companies that are vertically integrated or enter into long-term collection contracts. A vertically integrated operator will benefit from: (1) the internalization of waste, which is bringing waste to a company-owned landfill; (2) the ability to charge third-party haulers tipping fees either at landfills or at transfer stations; and (3) the efficiencies gained by being able to aggregate and process waste at a transfer station prior to landfilling. The demand for our E&P waste services depends on the continued demand for, and production of, oil and natural gas. Crude oil and natural gas prices historically have been volatile, including as a result of macroeconomic and geopolitical conditions, which may impact levels of exploration and production activity, with a corresponding impact to our E&P waste activity. Most recently, in 2022, sustained increases in prices of crude oil as a result of inflationary pressures, the uncertainty associated with the Ukrainian conflict and any related bans on oil sales fromRussia or supply chain disruptions as recently experienced contributed to increased levels of drilling activity and demand for our E&P waste services. Conversely, in 2020 and 2021, a significant decline in oil prices driven by both surplus production and supply, as well as the decrease in demand caused by factors including the COVID-19 pandemic, resulted in decreased levels of E&P drilling activity and a corresponding decrease in demand for our E&P waste services. Additionally, across the industry there was uncertainty regarding future demand for oil and related services, as noted by several energy companies, many of whom are customers of our E&P waste services. These energy companies wrote down the values of their oil and gas assets in anticipation of the potential for the decarbonization of their energy product mix given an increased global focus on reducing greenhouse gases and addressing climate change. At that time, the uncertainty regarding global demand had a significant impact on the investment and operating plans of our E&P waste customers in the basins where we operate. 30
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THE COVID-19 PANDEMIC'S IMPACT ON OUR RESULTS OF OPERATIONS
March 11, 2023 marked the three-year anniversary of COVID-19 being declared a global pandemic by theWorld Health Organization . The related economic disruptions largely associated with closures or restrictions put into effect following the onset of the COVID-19 pandemic in the first quarter of 2020 resulted in declines in solid waste commercial collection, transfer station and landfill volumes, and roll off activity. Throughout the remaining fiscal year 2020 and during 2021, solid waste revenue and reported volumes largely reflected the pace and shape of the closures and subsequent reopening activity, with the timing and magnitude of recovery varying by market. Most of the impacts to solid waste volumes associated with the pandemic have largely abated, with landfill volumes and roll off pulls returning to pre-pandemic levels. In certain markets, commercial collection volumes have not returned to pre-pandemic levels. The COVID-19 pandemic also contributed to a decline in demand for and the value of crude oil, which impacted E&P drilling activity and resulted in lower E&P waste revenue during 2020 and 2021. During 2022, E&P waste revenue increased on higher levels of drilling activity in several of the major basins. Since the onset of the COVID-19 pandemic, protecting the health, welfare and safety of our employees has been our top priority. Recognizing the potential for financial hardship and other challenges, we have looked to provide a safety net for our employees on issues of income and family health. To that end, since the onset of the pandemic through year-end 2022, we incurred over$50 million in incremental COVID-19-related costs, primarily supplemental pay and benefits for frontline employees, including approximately$10 million during 2022. As a result of the COVID-19 pandemic and subsequent reopening activity, we have also experienced an impact to our operating costs as a result of factors including supply chain disruptions and labor constraints, as demand has recovered and competition has increased. As a result, we have incurred incremental costs associated with higher wages, increased overtime as a result of higher turnover, and increased reliance on third party services. The impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows in future periods will depend largely on future developments, including the duration and spread of any further outbreaks in theU.S. andCanada , the rate of vaccinations, the severity of COVID-19 variants, the actions to contain such coronavirus variants, and how quickly and to what extent normal economic and operating conditions can resume.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity withU.S. generally accepted accounting principles, or GAAP, requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements. As described by theSEC , critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on the financial condition or operating performance of a company. Such critical accounting estimates and assumptions are applicable to our reportable segments. Refer to our most recent Annual Report on Form 10-K for a complete description of our critical accounting estimates and assumptions.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note 3 to
our Condensed Consolidated Financial Statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
The following table sets forth items in our Condensed Consolidated Statements of Net Income in thousands ofU.S. dollars and as a percentage of revenues for
the
periods indicated.
Three Months Ended March 31,
2023 2022
Revenues $ 1,900,503 100.0 % $ 1,646,255 100.0 %
Cost of operations 1,146,941 60.3 989,518 60.1Selling, general and administrative 193,667 10.2
163,414 9.9
Depreciation 204,059 10.8 179,950 11.0
Amortization of intangibles 39,282 2.1 37,635 2.3Impairments and other operating items 1,865 0.1
1,878 0.1
Operating income 314,689 16.5 273,860 16.6
Interest expense (68,353) (3.6) (41,324) (2.5)
Interest income 2,715 0.1 137 0.0
Other income (expense), net 3,174 0.2 (3,466) (0.2)
Income tax provision (54,389) (2.8) (48,839) (2.9)
Net income 197,836 10.4 180,368 11.0Net income attributable to noncontrolling interests (23) (0.0) (44) (0.0) Net income attributable to Waste Connections$ 197,813 10.4
%
Revenues. Total revenues increased$254.2 million , or 15.4%, to$1.901 billion for the three months endedMarch 31, 2023 , from$1.646 billion for the three months endedMarch 31, 2022 .
During the three months ended
Operations that were divested during, or subsequent to, the three months endedMarch 31, 2022 , decreased revenues by$0.5 million for the three months endedMarch 31, 2023 . During the three months endedMarch 31, 2023 , the net increase in prices charged to our customers at our existing operations was$183.5 million , consisting of$171.2 million of core price increases and surcharges of$12.3 million . During the three months endedMarch 31, 2023 , we recognized volume losses totaling$20.5 million , primarily due to lower post-collection volumes in part due to weather impacting our operations in several markets, primarily in our Western segment. E&P waste revenues at facilities owned during the three months endedMarch 31, 2023 and 2022 increased$7.8 million due to increases in overall demand for our E&P waste services as a result of increases in drilling and production activity levels in certain basins. Revenues from sales of recyclable commodities at facilities owned during the three months endedMarch 31, 2023 and 2022 decreased$29.9 million . The decrease is primarily attributable to lower commodity pricing for old corrugated cardboard, aluminum, plastics and other paper products as compared to the prior period. A decrease in the average Canadian dollar toU.S. dollar currency exchange rate resulted in a decrease in revenues of$13.7 million for the three months endedMarch 31, 2023 . The average Canadian dollar toU.S. dollar exchange rates on our Canadian revenues were 0.7397 and 0.7897 for the three months endedMarch 31, 2023 and 2022, respectively. Other revenues decreased$5.1 million during the three months endedMarch 31, 2023 , due primarily to a$4.3 million decrease in landfill gas revenues on lower values for renewable energy credits partially offset by higher landfill gas volumes, as well as a$1.9 million decrease in intermodal revenues, partially offset by a$1.1 million increase in other non-core revenue sources. 32 Table of Contents Cost of Operations. Total cost of operations increased$157.4 million , or 15.9%, to$1.147 billion for the three months endedMarch 31, 2023 , from$989.5 million for the three months endedMarch 31, 2022 . The increase was primarily the result of$86.4 million of additional operating costs from acquisitions closed during, or subsequent to, the three months endedMarch 31, 2022 , and an increase in operating costs at our existing operations of$78.1 million , assuming foreign currency parity, partially offset by a decrease in operating costs of$7.1 million resulting from a lower average foreign currency exchange rate in effect during the current period. The increase in operating costs of$78.1 million , assuming foreign currency parity, at our existing operations for the three months endedMarch 31, 2023 consisted of an increase in labor and recurring incentive compensation expenses of$34.3 million due primarily to employee pay increases, an increase in truck, container, equipment and facility maintenance and repair expenses of$17.6 million due primarily to increased collection routes and equipment operating hours, container parts and service rate increases, an increase in third-party trucking and transportation expenses of$9.8 million due primarily to higher rates charged by third-party providers, an increase in fuel expense of$8.4 million due to higher diesel and natural gas prices and increased fuel usage, an increase in leachate costs of$3.4 million , an increase in taxes on revenues of$3.2 million as the result of increased revenues, an increase in expenses for auto and workers' compensation claims of$3.1 million due primarily to increased claims and inflation-led cost increases, an increase in landfill maintenance costs of$2.1 million and$5.2 million of other net expense increases, partially offset by a decrease in supplemental compensation to non-management personnel of$9.0 million associated with the impact of the COVID-19 pandemic that occurred in the prior year period. Cost of operations as a percentage of revenues increased 0.2 percentage points to 60.3% for the three months endedMarch 31, 2023 , from 60.1% for the three months endedMarch 31, 2022 . The increase as a percentage of revenues consisted of a 0.5 percentage point increase from acquisitions closed during, or subsequent to, the three months endedMarch 31, 2022 having operating costs as a percentage of revenue higher than our company average, a 0.4 percentage point increase in truck, container, equipment and facility repairs, a 0.2 percentage point increase related to higher labor and recurring incentive compensation expenses, partially offset by a 0.5 percentage point decrease in disposal costs driven by the relative impact of price-driven revenue increases, a 0.3 percentage point decrease in compensation to non-management personnel associated with the impact of the COVID-19 pandemic that occurred in the prior year period and a 0.1 percentage point decrease from all other net changes. SG&A. SG&A expenses increased$30.3 million , or 18.5%, to$193.7 million for the three months endedMarch 31, 2023 , from$163.4 million for the three months endedMarch 31, 2022 . The increase was comprised of an increase of$22.2 million , assuming foreign currency parity, at our existing operations and$9.3 million from acquisitions closed during, or subsequent to, the three months endedMarch 31, 2022 , partially offset by a decrease of$1.2 million resulting from a lower average foreign currency exchange rate in effect during the current period. The increase in SG&A expenses at our existing operations of$22.2 million , assuming foreign currency parity, for the three months endedMarch 31, 2023 was comprised of an increase in administrative payroll expenses of$7.3 million due primarily to annual pay increases and increased headcount related to growth, an increase in equity-based compensation expenses of$5.1 million associated with our annual recurring grants of restricted share units to our personnel, an increase in deferred compensation expenses of$3.3 million as a result of increases in the market value of investments to which employee deferred compensation liability balances are tracked, a collective increase in travel, meetings, training and community activity expenses of$3.1 million due to increased activity in the current year period due to a reduction in restrictions associated with the COVID-19 pandemic, an increase in professional fees of$3.1 million due primarily to increased legal services, an increase in software license fees of$1.5 million associated with new information technology applications and$2.1 million of other net expense increases, partially offset by a decrease in direct acquisition expenses of$2.5 million due to a decrease in acquisition activity in the current period and a decrease of$0.8 million resulting from the prior year payment of supplemental bonuses to non-management employees associated with the impact of the COVID-19 pandemic that did not reoccur in the current year. SG&A expenses as a percentage of revenues increased 0.3 percentage points to 10.2% for the three months endedMarch 31, 2023 , from 9.9% for the three months endedMarch 31, 2022 . The increase as a percentage of revenues was primarily attributable to a 0.2 percentage point increase in equity-based compensation expense associated with our annual recurring grants of restricted share units to our personnel, a 0.2 percentage point increase in deferred compensation 33
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expense, a 0.2 percentage point increase in travel and meetings costs and a 0.1 percentage point increase in professional services and legal costs, partially offset by a 0.2 percentage point decrease from acquisitions closed during, or subsequent to, the three months endedMarch 31, 2022 having lower SG&A costs as a percentage of revenue than our company average and a 0.2 percentage point decrease from lower direct acquisitions costs. Depreciation. Depreciation expense increased$24.1 million , or 13.4%, to$204.0 million for the three months endedMarch 31, 2023 , from$179.9 million for the three months endedMarch 31, 2022 . The increase was comprised of an increase in depreciation and depletion expense of$18.1 million from acquisitions closed during, or subsequent to, the three months endedMarch 31, 2022 , an increase in depreciation expense of$6.8 million from the impact of additions to our fleet and equipment purchased to support our existing operations and$0.6 million of other net increases, partially offset by a decrease of$1.4 million resulting from a lower average foreign currency exchange rate in effect during the current period. Depreciation expense as a percentage of revenues decreased 0.2 percentage points to 10.8% for the three months endedMarch 31, 2023 , from 11.0% for the three months endedMarch 31, 2022 . The decrease as a percentage of revenues was primarily attributable to the impact of price-driven revenue increases in our solid waste services. Amortization of Intangibles. Amortization of intangibles expense increased$1.7 million , or 4.4%, to$39.3 million for the three months endedMarch 31, 2023 , from$37.6 million for the three months endedMarch 31, 2022 . The increase was the result of$8.3 million from intangible assets acquired in acquisitions closed during, or subsequent to, the three months endedMarch 31, 2022 , partially offset by a decrease of$6.2 million from certain intangible assets becoming fully amortized subsequent toMarch 31, 2022 , and a decrease of$0.4 million resulting from a lower average foreign currency exchange rate in effect during the current period. Amortization of intangibles expense as a percentage of revenues decreased 0.2 percentage points to 2.1% for the three months endedMarch 31, 2023 , from 2.3% for the three months endedMarch 31, 2022 . The decrease as a percentage of revenues was attributable to the impact of price-driven revenue increases in our solid waste services. Impairments and Other Operating Items. Impairments and other operating items remained unchanged, with net losses totaling$1.9 million for the three months endedMarch 31, 2023 and 2022.
The net losses of
The net losses of$1.9 million recorded during the three months endedMarch 31, 2022 consisted of$3.6 million of charges to terminate or write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to their original estimated termination date, partially offset by net gains of$1.7 million from disposal of property and equipment. Operating Income. Operating income increased$40.8 million , or 14.9%, to$314.7 million for the three months endedMarch 31, 2023 , from$273.9 million for the three months endedMarch 31, 2022 . The increase in our operating income for the three months endedMarch 31, 2023 was due primarily to price increases for our solid waste services, operating income generated from acquisitions closed during, or subsequent to, the three months endedMarch 31, 2022 and an increase in earnings at our E&P waste operations, partially offset by lower recyclable commodity pricing in the period. Operating income as a percentage of revenues decreased 0.1 percentage points to 16.5% for the three months endedMarch 31, 2023 , from 16.6% for the three months endedMarch 31, 2022 . The decrease as a percentage of revenues was comprised of a 0.3 percentage point increase in SG&A expense, a 0.2 percentage point increase in our costs of operations, partially offset by a 0.2 percentage point decrease in depreciation expense and a 0.2 percentage point decrease in amortization
expense.
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Interest Expense. Interest expense increased $27.1 million , or 65.4%, to $68.4
million for the three months ended March 31, 2023 , from $41.3 million for the
three months ended March 31, 2022 . The increase was primarily attributable to an
increase of $11.3 million due to an increase in the average borrowings
outstanding under our Term Loan Agreement, an increase of $10.8 million from the
issuance of $1.250 billion of senior unsecured notes during, or subsequent to,
the three months ended March 31, 2022 and an increase of $5.9 million from
higher interest rates on borrowings outstanding under our Credit Agreement,
partially offset by $0.9 million of other net expense decreases.
Interest Income. Interest income increased $2.6 million to $2.7 million for the
three months ended March 31, 2023 , from $0.1 million for the three months ended
March 31, 2022 . The increase was primarily attributable to higher average
investment rates in the current period.
Other Income (Expense), Net. Other income (expense), net increased $6.7
million , to an income total of $3.2 million for the three months ended March 31,
2023 , from an expense total of $3.5 million for the three months ended March 31,
2022 .
Other income of $3.2 million recorded during the three months ended March 31,
2023 consisted of increases in other income of $1.9 million derived from higher
interest rates in the current period on restricted cash and $1.3 million from an
increase in the value of investments purchased to fund our employee deferred
compensation obligations.
Other expense of $3.5 million recorded during the three months ended March 31,
2022 consisted of $1.9 million from a decline in the value of investments
purchased to fund our employee deferred compensation obligations, a $1.0 million
adjustment to increase certain acquisition-related accrued liabilities recorded
in prior periods and $0.6 million of other net expenses.
Income Tax Provision. Income taxes increased $5.6 million , to $54.4 million for
the three months ended March 31, 2023 , from $48.8 million for the three months
ended March 31, 2022 . Our effective tax rate for the three months ended March
31, 2023 was 21.6%. Our effective tax rate for the three months ended March 31,
2022 was 21.3%.
The income tax provision for the three months ended March 31, 2023 included a
benefit of $2.7 million from share-based payment awards being recognized in the
income statement when settled, as well as a portion of our internal financing
being taxed at effective rates substantially lower than the U.S. federal
statutory rate.
The income tax provision for the three months ended March 31, 2022 included a
benefit of $2.4 million from share-based payment awards being recognized in the
income statement when settled, as well as a portion of our internal financing
being taxed at effective rates substantially lower than the U.S. federal
statutory rate.
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SEGMENT RESULTS
General
No single contract or customer accounted for more than 10% of our total revenues
at the consolidated or reportable segment level during the periods presented.
The following table disaggregates our revenue by service line for the periods
indicated (in thousands of U.S. dollars).
Three Months Ended March 31,
2023 2022
Commercial $ 602,279 $ 499,676
Residential 514,053 440,288
Industrial and construction roll off 318,315 259,488Total collection 1,434,647 1,199,452 Landfill 343,433 299,765 Transfer 273,521 217,957 Recycling 31,301 63,094 E&P 51,759 43,555 Intermodal and other 38,212 45,693 Intercompany (272,370) (223,261) Total$ 1,900,503 $ 1,646,255
We manage our operations through the following five geographic solid waste
operating segments: Eastern, Southern, Western, Central and
Our
Chief Operating Decision Maker evaluates operating segment profitability and determines resource allocations based on several factors, of which the primary financial measure is segment EBITDA. We define segment EBITDA as earnings before interest, taxes, depreciation, amortization, impairments and other operating items and other income (expense). Segment EBITDA is not a measure of operating income, operating performance or liquidity under GAAP and may not be comparable to similarly titled measures reported by other companies. Our management uses segment EBITDA in the evaluation of segment operating performance as it is a profit measure that is generally within the control of the operating segments.
Each operating segment is responsible for managing several vertically integrated operations, which are comprised of districts.
Summarized financial information for our reportable segments are shown in the
following tables in thousands of
Three Months Ended EBITDA Depreciation and March 31, 2023 Revenue EBITDA (b) Margin Amortization Eastern$ 491,418 $ 119,980 24.4 % $ 69,646 Southern 447,040 133,271 29.8 % 51,103 Western 410,003 116,301 28.4 % 48,689 Central 324,886 109,813 33.8 % 40,153 Canada 227,156 82,984 36.5 % 29,992 Corporate(a) - (2,454) - 3,758$ 1,900,503 $ 559,895 29.5 % $ 243,341 Three Months Ended EBITDA Depreciation and March 31, 2022 Revenue EBITDA (b) Margin Amortization Eastern$ 421,597 $ 107,788 25.6 % $ 65,284 Southern 387,064 108,610 28.1 % 47,572 Western 346,710 104,747 30.2 % 36,563 Central 276,177 92,036 33.3 % 35,026 Canada 214,707 84,844 39.5 % 27,364 Corporate(a) - (4,702) - 5,776$ 1,646,255 $ 493,323 30.0 % $ 217,585 36 Table of Contents The majority of Corporate expenses are allocated to the five operating segments. Direct acquisition expenses, expenses associated with common
shares held in the deferred compensation plan exchanged for other investment (a) options and share-based compensation expenses associated with Progressive
Waste share-based grants outstanding at
the Company are not allocated to the five operating segments and comprise the
net EBITDA for our Corporate segment for the periods presented.
For those items included in the determination of segment EBITDA, the (b) accounting policies of the segments are the same as those described in our
most recent Annual Report on Form 10-K.
A reconciliation of segment EBITDA to Income before income tax provision is included in Note 10 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this report.
Significant changes in revenue, EBITDA and depreciation, depletion and amortization for our reportable segments for the three month period endedMarch 31, 2023 , compared to the three month period endedMarch 31, 2022 , are discussed below.
Effective
Eastern
Revenue increased$69.8 million to$491.4 million for the three months endedMarch 31, 2023 , from$421.6 million for the three months endedMarch 31, 2022 , due to price increases, contributions from acquisitions, and an increase in roll off volume, partially offset by decreased post-collection volumes, decreased residential collection volumes, lower prices for recyclable commodities and decreased recycle commodity volumes. EBITDA increased$12.2 million to$120.0 million , or a 24.4% EBITDA margin for the three months endedMarch 31, 2023 , from$107.8 million , or a 25.6% EBITDA margin for the three months endedMarch 31, 2022 . The decrease in our EBITDA margin was due primarily to the impact of acquisitions having lower EBITDA margins than our segment average, increased labor costs, increased third-party trucking and transportation expenses, higher costs associated with increased rates for truck, container, and facility repair parts and services, increased diesel fuel expenses driven by higher pricing, higher leachate and other landfill maintenance costs, an increase in professional fees driven by legal costs, and an increase in the average auto and workers' compensation claim cost, partially offset by lower recycle commodity rebates driven by lower average commodity pricing. Depreciation, depletion and amortization expense increased$4.3 million , to$69.6 million for the three months endedMarch 31, 2023 , from$65.3 million for the three months endedMarch 31, 2022 , due to assets acquired in acquisitions, additions to our fleet and equipment and higher depletion expense due to higher landfill development costs increasing our per ton landfill depletion rates,
net of lower landfill volumes. Southern Revenue increased$59.9 million to$447.0 million for the three months endedMarch 31, 2023 , from$387.1 million for the three months endedMarch 31, 2022 , due to solid waste price increases, contributions from acquisitions, increased E&P waste revenues attributable to increases in the demand for our E&P waste services and increased landfill volumes in ourFlorida market driven by the impact of Hurricane Ian on construction and demolition activity, partially offset by lower residential collection volumes due to the purposeful non-renewal of a collection contract during the prior year period and a decrease in recyclable commodity prices as compared to the prior year. EBITDA increased$24.7 million to$133.3 million , or a 29.8% EBITDA margin for the three months endedMarch 31, 2023 , from$108.6 million , or a 28.1% EBITDA margin for the three months endedMarch 31, 2022 . The increase in our EBITDA margin was due to price-led increases in solid waste revenue, contribution from the aforementioned hurricane-driven construction and demolition activity increasing post-collection volumes, increased earnings at our E&P 37
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waste operations, the impact of acquisitions having higher EBITDA margins than our segment average, and the purposeful non-renewal of a residential contract, partially offset by higher labor costs, an increase in costs for truck, container, and facility repair, increased diesel and natural gas fuel expenses, an increase in trucking costs, higher legal costs, an increase in auto and workers' compensation claim costs, and increased leachate expense. Depreciation, depletion and amortization expense increased$3.5 million , to$51.1 million for the three months endedMarch 31, 2023 , from$47.6 million for the three months endedMarch 31, 2022 , due to assets acquired in acquisitions, additions to our fleet and equipment and higher depletion expense due to increased landfill volumes and higher landfill development costs increasing our per ton landfill depletion rates, partially offset by a reduction in amortization expense associated with the loss of certain residential service contracts. Western Revenue increased$63.3 million to$410.0 million for the three months endedMarch 31, 2023 , from$346.7 million for the three months endedMarch 31, 2022 , due to contributions from acquisitions, price increases, partially offset by decreased roll off and post-collection volumes driven by significant weather events, a decrease in the price of recyclable commodities as compared to the prior year period, and lower intermodal revenue. EBITDA increased$11.6 million to$116.3 million , or a 28.4% EBITDA margin for the three months endedMarch 31, 2023 , from$104.7 million , or a 30.2% EBITDA margin for the three months endedMarch 31, 2022 . The decrease in our EBITDA margin was due to the impact of acquisitions having lower EBITDA margins than our segment average, higher labor costs due primarily to wage increases, an increase in costs for truck, container and facility repairs, increased diesel and natural gas fuel expenses, increased taxes on higher revenues, higher disposal costs driven by rate increases, partially offset by lower real estate rental costs and the benefits from price-led increases in revenue. Depreciation, depletion and amortization expense increased$12.1 million , to$48.7 million for the three months endedMarch 31, 2023 , from$36.6 million for the three months endedMarch 31, 2022 , due to assets acquired in acquisitions and additions to our fleet and equipment.
Central
Revenue increased$48.7 million to$324.9 million for the three months endedMarch 31, 2023 , from$276.2 million for the three months endedMarch 31, 2022 , due to price increases, contributions from acquisitions, partially offset by a decrease in the value of recyclable commodities compared to the prior year period. EBITDA increased$17.8 million to$109.8 million , or a 33.8% EBITDA margin for the three months endedMarch 31, 2023 , from$92.0 million , or a 33.3% EBITDA margin for the three months endedMarch 31, 2022 . The increase in our EBITDA margin was due to the benefits from price-led increases in revenue, partially offset by acquisitions having EBITDA margins lower than our segment average, increased labor costs related primarily to wage increases, an increase in the costs of truck, container and facility repairs, increased diesel and natural gas fuel expenses, higher taxes paid on increased revenues, an increase in trucking costs, higher disposal fees driven by rate increases, and higher recycle processing fees paid driven by a decrease in recyclable commodity prices. Depreciation, depletion and amortization expense increased$5.2 million , to$40.2 million for the three months endedMarch 31, 2023 , from$35.0 million for the three months endedMarch 31, 2022 , due to assets acquired in acquisitions, additions to our fleet and equipment and higher depletion expense due to higher landfill development costs increasing our per ton landfill depletion rates.
Revenue increased$12.5 million to$227.2 million for the three months endedMarch 31, 2023 , from$214.7 million for the three months endedMarch 31, 2022 , due to price increases, contributions from acquisitions, partially offset by a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods, lower prices for 38
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renewable energy credits associated with the generation of landfill gas, lower landfill volumes driven by decreased special waste, and lower prices for recyclable commodities as compared to the prior year period.
EBITDA decreased$1.8 million to$83.0 million , or a 36.5% EBITDA margin for the three months endedMarch 31, 2023 , from$84.8 million , or a 39.5% EBITDA margin for the three months endedMarch 31, 2022 . The decrease in our EBITDA margin was due to acquisitions having EBITDA margins lower than our segment average, increased disposal expenses, higher labor costs, increased allocated overhead costs from our corporate segment, and increased bad debt costs, partially offset by lower recyclable commodity rebate expenses driven by a decrease in recyclable commodity prices as compared to prior year. Depreciation, depletion and amortization expense increased$2.6 million , to$30.0 million for the three months endedMarch 31, 2023 , from$27.4 million for the three months endedMarch 31, 2022 , due to assets acquired in acquisitions and additions to our fleet and equipment, partially offset by a decrease in depletion expense due to lower landfill disposal volumes and a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods. Corporate EBITDA increased$2.2 million , to a loss of$2.5 million for the three months endedMarch 31, 2023 , from a loss of$4.7 million for the three months endedMarch 31, 2022 . The increase was due to compensation to non-management personnel associated with the impact of the COVID-19 pandemic that occurred in the prior year period that did not reoccur, increased allocation of costs to our operating segments driven by overall higher corporate expenses, lower costs associated with a decreased number of acquisitions when compared to prior year, partially offset by increased equity-based compensation expense associated with our annual recurring grants of restricted share units to our personnel, increased deferred compensation expenses, higher bad debt costs driven by increased revenue and acquisitions, and increased costs due to increased travel and meetings.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth cash flow information for the three months ended
Three Months Ended
March 31,
2023 2022Net cash provided by operating activities$ 442,358 $ 440,897 Net cash used in investing activities (317,759)
(489,881)
Net cash provided by (used in) financing activities (65,424)
292,058
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(54) 595
Net increase in cash, cash equivalents and restricted cash 59,121
243,669
Cash, cash equivalents and restricted cash at beginning of period 181,364
219,615
Cash, cash equivalents and restricted cash at end of period$ 240,485 $ 463,284 39 Table of Contents
Operating Activities Cash Flows
For the three months ended
Increase in earnings - Our increase in net cash provided by operating
activities was favorably impacted by
income, excluding depreciation, amortization of intangibles, share-based
compensation, adjustments to and payments of contingent consideration recorded
1) in earnings and loss on disposal of assets and impairments, due primarily to
price increases, earnings from acquisitions closed during, or subsequent to,
the three months ended
non-management personnel associated with the impact of the COVID-19 pandemic
that occurred in the three months ended
the current period, and an increase in earnings at our E&P waste operations.
Prepaid expenses - Our increase in net cash provided by operating activities
was favorably impacted by
prepaid expenses resulted in an increase to operating cash flows of
million for the three months ended
2) operating cash flows of
2022. The increase for the three months ended
to decreased prepaid income tax payments and lower payments of annual
insurance premiums. The decrease for the three months ended
due primarily to increases in prepaid income tax payments and prepaid vendor
payments.
Accounts receivable - Our increase in net cash provided by operating
activities was favorably impacted by
changes in accounts receivable resulted in an increase to operating cash flows
of
3) decrease to operating cash flows of
to one additional collection day in the period, partially offset by increases
in revenue, which remained as outstanding receivables at
decrease for the three months ended March 31, 2022 was due to increases in
revenues, which remained as outstanding receivables at March 31, 2022 .
Accounts payable and accrued liabilities - Our increase in net cash provided
by operating activities was unfavorably impacted by
accounts payable and accrued liabilities as changes in accounts payable and
accrued liabilities resulted in a decrease to operating cash flows of
million for the three months ended
4) operating cash flows of
2022. The decrease for the three months ended
to outstanding obligations to vendors and accrued annual management bonus
compensation as of
increase for the three months ended March 31, 2022 was due primarily to
increases in operating expenses during the period which remained as
outstanding obligations at March 31, 2022 .
Deferred income taxes - Our increase in net cash provided by operating
activities was unfavorably impacted by
taxes as changes in deferred income taxes resulted in an increase to operating
5) cash flows of
compared to an increase to operating cash flows of
months ended
deferred taxes was primarily due to accelerated tax depreciation from capital
expenditures.
Deferred revenue - Our increase in net cash provided by operating activities
was unfavorably impacted by
deferred revenue resulted in an increase to operating cash flows of
6) million for the three months ended
operating cash flows of
2022. For both comparative periods, deferred revenue increased due to price
increases on our advanced billed residential and commercial collection
services.
AtMarch 31, 2023 , we had a working capital deficit of$248.9 million , including cash and equivalents of$133.9 million . Our working capital increased$146.1 million from a working capital deficit of$395.0 million atDecember 31, 2022 including cash and equivalents of$78.6 million , due primarily to an increase in cash balances and decreases in accounts payable and accrued liabilities driven by the timing of payments for obligations to vendors and accrued annual management bonus compensation that were outstanding as ofDecember 31, 2022 , partially offset by decreased accounts receivable, a decrease in prepaid income tax and lower prepaid insurance costs. To date, we have experienced no loss or lack of access to our cash and equivalents; however, we can provide no assurances that access to our cash and equivalents will not be impacted by adverse conditions in the financial markets. Our strategy in managing our
working capital is
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generally to apply the cash generated from our operations that remains after
satisfying our working capital and capital expenditure requirements, along with
share repurchase and dividend programs, to reduce the unhedged portion of our
indebtedness under our Credit Agreement and to minimize our cash balances.Investing Activities Cash Flows
Net cash used in investing activities decreased$172.1 million to$317.8 million for the three months endedMarch 31, 2023 , from$489.9 million for the three months endedMarch 31, 2022 . The significant components of the decrease included the following:
1) A decrease in cash paid for acquisitions of
An increase in capital expenditures at operations acquired during the
2) comparative periods of
costs, trucks and equipment;
An increase in capital expenditures at operations owned in the comparable
3) periods of
site costs; and
A decrease in proceeds from disposal of assets of
4) disposal of non-strategic assets to provide funding toward new capital
expenditures.
Financing Activities Cash Flows
Net cash used in financing activities increased$357.5 million to$65.4 million for the three months endedMarch 31, 2023 , from net cash provided by financing activities of$292.1 million for the three months endedMarch 31, 2022 . The significant components of the increase included the following:
An increase from the net change in long-term borrowings of
1) which long-term borrowings increased
ended
ended
An increase from higher cash dividends paid of
2) an increase in our quarterly dividend rate for the three months ended March
31, 2023 to
An increase in tax withholdings related to net share settlements of
3) equity-based compensation of
equity-based compensation awards vesting; less
4) A decrease from lower payments to repurchase our common shares of
million that occurred in the three months ended
A decrease from costs incurred for the issuance of debt of
5) the issuance of
ended
OnJuly 26, 2022 , our Board of Directors approved, subject to receipt of regulatory approvals, the annual renewal of our normal course issuer bid, or the NCIB, to purchase up to 12,859,066 of our common shares during the period ofAugust 10, 2022 toAugust 9, 2023 or until such earlier time as the NCIB is completed or terminated at our option. Shareholders may obtain a copy of our TSX Form 12 - Notice of Intention to Make a Normal Course Issuer Bid, without charge, by request directed to our Executive Vice President and Chief Financial Officer at (832) 442-2200. The timing and amounts of any repurchases pursuant to the NCIB will depend on many factors, including our capital structure, the market price of our common shares and overall market conditions. All common shares purchased under the NCIB will be immediately cancelled following their repurchase. Information regarding our NCIB can be found under the section "Normal Course Issuer Bid" in Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference. Our Board of Directors authorized the initiation of a quarterly cash dividend inOctober 2010 and has increased it on an annual basis. InNovember 2022 , we announced that our Board of Directors increased our regular quarterly cash dividend by$0.025 , from$0.230 to$0.255 per share. Cash dividends of$65.8 million and$59.4 million were paid during the three months endedMarch 31, 2023 and 2022, respectively. We cannot assure as to the amounts or timing of future dividends. 41 Table of Contents Our business is capital intensive. Our capital requirements include acquisitions and capital expenditures for landfill cell construction, landfill development, landfill closure activities and intermodal facility construction in the future. We made$174.5 million in capital expenditures for property and equipment, net of proceeds from disposal of assets, during the three months endedMarch 31, 2023 , and we expect to make total capital expenditures for property and equipment of approximately$895 million in 2023, net of proceeds from disposal of assets. We have funded and intend to fund the balance of our planned 2023 capital expenditures principally through cash on hand, internally generated funds and borrowings under our Credit Agreement. In addition, we may make substantial additional capital expenditures in acquiring land and solid waste businesses. If we acquire additional landfill disposal facilities, we may also have to make significant expenditures to bring them into compliance with applicable regulatory requirements, obtain permits or expand our available disposal capacity. We cannot currently determine the amount of these expenditures because they will depend on the number, nature, condition and permitted status of any acquired landfill disposal facilities. We believe that our cash and equivalents, Credit Agreement and the funds we expect to generate from operations will provide adequate cash to fund our working capital and other cash needs for the foreseeable future. However, disruptions in the capital and credit markets could adversely affect our ability to draw on our Credit Agreement or raise other capital. Our access to funds under the Credit Agreement is dependent on the ability of the banks that are parties to the agreement to meet their funding commitments. Those banks may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. AtMarch 31, 2023 ,$650.0 million under the term loan and$650.6 million under the revolving credit facility were outstanding under the Credit Agreement, exclusive of outstanding standby letters of credit of$39.5 million . We also had$85.1 million of letters of credit issued and outstanding atMarch 31, 2023 under a facility other than the Credit Agreement. Our Credit Agreement matures inJuly 2026 . AtMarch 31, 2023 ,$800.0 million under the term loan was outstanding under the Term Loan Agreement, which matures inJuly 2026 . We are a well-known seasoned issuer with an effective shelf registration statement on Form S-3 filed inSeptember 2021 , which registers an unspecified amount of debt securities, including debentures, notes or other types of debt. In the future, we may issue debt securities under our shelf registration statement or in private placements from time to time on an opportunistic basis, based on market conditions and available pricing. Unless otherwise indicated in the relevant offering documents, we expect to use the proceeds from any such offerings for general corporate purposes, including repaying, redeeming or repurchasing debt, acquiring additional assets or businesses, capital expenditures and increasing our working capital.
At
Payments Due by Period
(amounts in
thousands of
Less Than 1 to 3 Over 5
Recorded Obligations Total 1 Year Years 3 to 5 Years Years
Long-term debt $ 6,997,427 $ 10,513 $ 13,915 $ 2,111,561 $ 4,861,438
Cash interest payments $ 2,477,936 $ 268,799 $ 540,949 $ 355,279 $ 1,312,909
Contingent consideration $ 102,903 $ 64,489 $ 3,224 $ 3,224 $ 31,966
Operating leases $ 240,989 $ 31,011 $
62,200
____________________
Long-term debt payments include:
credit facility under our Credit Agreement. We may elect to draw amounts on
our Credit Agreement in
rate loans, Canadian-based bankers' acceptances or BA equivalent notes, and
Canadian dollar prime rate loans. At
1) outstanding borrowings drawn under the revolving credit facility were in
Term SOFR rate loans, which bear interest at the Term SOFR rate plus the
applicable margin (for a total rate ranging from 5.77% to 5.91% on such date).
At
the revolving credit facility were in Canadian-based bankers' acceptances,
which bear
42
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interest at the Canadian Dollar Offered Rate plus the applicable acceptance fee
(for a total rate of 5.92% on such date).
under our Credit Agreement. Outstanding amounts on the term loan can be either
2) base rate loans or Term SOFR loans. At
under the term loan were in Term SOFR loans which bear interest at the Term
SOFR rate plus the applicable margin (for a total rate of 5.77% on such date).
under our Term Loan Agreement. Outstanding amounts on the term loan can be
3) either base rate loans or Term SOFR loans. At
outstanding under the term loan were in Term SOFR loans which bear interest at
the Term SOFR rate plus the applicable margin (for a total rate of 5.78% on
such date).
4)
Notes. The 2028 Senior Notes bear interest at a rate of 4.25%.
5)
Notes. The 2029 Senior Notes bear interest at a rate of 3.50%.
6)
Notes. The 2030 Senior Notes bear interest at a rate of 2.60%.
7)
Notes. The 2032 Senior Notes bear interest at a rate of 2.20%.
8)
Notes. The New 2032 Senior Notes bear interest at a rate of 3.20%.
9)
Notes. The 2033 Senior Notes bear interest at a rate of 4.20%.
10)
Notes. The 2050 Senior Notes bear interest at a rate of 3.05%.
11)
Notes. The 2052 Senior Notes bear interest at a rate of 2.95%.
12) and other third parties. Our notes payable to sellers and other third parties
bear interest at rates between 2.42% and 10.35% at
maturity dates ranging from 2024 to 2036.
13) financing leases bear interest at rates between 1.89% and 2.16% at
2023, and have expiration dates ranging from 2026 to 2027.
The following assumptions were made in calculating cash interest payments:
We calculated cash interest payments on the Credit Agreement using the Term
SOFR rate plus the applicable Term SOFR margin, the base rate plus the
1) applicable base rate margin, the Canadian Dollar Offered Rate plus the
applicable acceptance fee and the Canadian prime rate plus the applicable
prime rate margin at
off when it matures in
We calculated cash interest payments on the Term Loan Agreement using the Term
2) SOFR rate plus the applicable Term SOFR margin at
the Term Loan Agreement is paid off when it matures in July 2026 .
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We calculated cash interest payments on our interest rate swaps using the
3) stated interest rate in the swap agreement less the Term SOFR rate through the
earlier expiration of the term of the swaps or the term of the credit
facility.
Contingent consideration payments include$85.8 million recorded as liabilities in our Condensed Consolidated Financial Statements atMarch 31, 2023 , and$17.1 million of future interest accretion on the recorded obligations.
We are party to operating lease agreements and finance leases. These lease agreements are established in the ordinary course of our business and are designed to provide us with access to facilities and equipment at competitive, market-driven prices.
The estimated final capping, closure and post-closure expenditures presented above are in current dollars.
Amount of Commitment Expiration Per Period
(amounts in
thousands of
Less Than 1 to 3 3 to 5 Over 5
Unrecorded Obligations(1) Total 1 Year Years Years Years
Unconditional purchase obligations $ 175,812 $ 135,943 $ 39,163 $ 706 $ - ____________________
We are party to unconditional purchase obligations. These purchase
obligations are established in the ordinary course of our business and are
designed to provide us with access to products at competitive, market-driven
prices. At
of multiple fixed-price fuel purchase contracts under which we have
(1) 56.0 million gallons remaining to be purchased for a total of
The current fuel purchase contracts expire on or before
These arrangements have not materially affected our financial position,
results of operations or liquidity during the three months ended
2023, nor are they expected to have a material impact on our future financial
position, results of operations or liquidity.
We have obtained financial surety bonds, primarily to support our financial assurance needs and landfill and E&P waste operations. We provided customers and various regulatory authorities with surety bonds in the aggregate amounts of approximately$1.486 billion and$1.447 billion atMarch 31, 2023 andDecember 31, 2022 , respectively. These arrangements have not materially affected our financial position, results of operations or liquidity during the three months endedMarch 31, 2023 , nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
From time to time, we evaluate our existing operations and their strategic importance to us. If we determine that a given operating unit does not have future strategic importance, we may sell or otherwise dispose of those operations. Although we believe our reporting units would not be impaired by such dispositions, we could incur losses on them.
The disposal tonnage that we received in the three month periods endedMarch 31, 2023 and 2022, at all of our landfills during the respective period, is shown below (tons in thousands): Three Months Ended March 31, 2023 2022 Number Total Number Total of Sites Tons of Sites Tons Owned operational landfills and landfills operated under life-of-site agreements 94 11,681
89 10,987
Operated landfills 7 160 5 150
101 11,841 94 11,137
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NON-GAAP FINANCIAL MEASURES
Adjusted Free Cash Flow
We present adjusted free cash flow, a non-GAAP financial measure, supplementally because it is widely used by investors as a liquidity measure in the solid waste industry. We calculate adjusted free cash flow as net cash provided by operating activities, plus or minus change in book overdraft, plus proceeds from disposal of assets, less capital expenditures for property and equipment and periodic distributions to noncontrolling interests. We further adjust this calculation to exclude the effects of items management believes impact the ability to evaluate the liquidity of our business operations. This measure is not a substitute for, and should be used in conjunction with, GAAP liquidity or financial measures. Other companies may calculate adjusted free cash flow differently. Our adjusted free cash flow for the three month periods endedMarch 31, 2023 and 2022, are calculated as follows (amounts in thousands ofU.S. dollars): Three Months EndedMarch 31, 2023 2022
Net cash provided by operating activities$ 442,358 $
440,897
Plus: Change in book overdraft 5,421
87
Plus: Proceeds from disposal of assets 1,260
15,012
Less: Capital expenditures for property and equipment (175,786) (152,318) Adjustments: Cash received for divestitures (a) -
(5,671)
Transaction-related expenses (b) 1,249
23,404
Pre-existing Progressive Waste share-based grants (c) (2)
76
Tax effect (d) (519) (1,110)
Adjusted free cash flow $ 273,981 $ 320,377
____________________
(a) Reflects the elimination of cash received in conjunction with the divestiture
of certain operations.
(b) Reflects the addback of acquisition-related transaction costs and the
settlement of an acquired tax liability.
(c) Reflects the cash settlement of pre-existing Progressive Waste share-based
awards during the period.
(d) The aggregate tax effect of footnotes (a) through (c) is calculated based on
the applied tax rates for the respective periods.
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Adjusted EBITDA
We present adjusted EBITDA, a non-GAAP financial measure, supplementally because
it is widely used by investors as a performance and valuation measure in the
solid waste industry. Management uses adjusted EBITDA as one of the principal
measures to evaluate and monitor the ongoing financial performance of our
operations. We define adjusted EBITDA as net income attributable to Waste
Connections , plus or minus net income (loss) attributable to noncontrolling
interests, plus income tax provision, plus interest expense, less interest
income, plus depreciation and amortization expense, plus closure and
post-closure accretion expense, plus or minus any loss or gain on impairments
and other operating items, plus other expense, less other income. We further
adjust this calculation to exclude the effects of other items management
believes impact the ability to assess the operating performance of our business.
This measure is not a substitute for, and should be used in conjunction with,
GAAP financial measures. Other companies may calculate adjusted EBITDA
differently. Our adjusted EBITDA for the three month periods ended March 31,
2023 and 2022, are calculated as follows (amounts in thousands of U.S. dollars):
Three Months Ended
March 31,
2023 2022Net income attributable to Waste Connections$ 197,813 $
180,324
Plus: Net income attributable to noncontrolling interests 23
44
Plus: Income tax provision 54,389 48,839
Plus: Interest expense 68,353 41,324
Less: Interest income (2,715) (137)Plus: Depreciation and amortization 243,341
217,585
Plus: Closure and post-closure accretion 4,520
4,096
Plus: Impairments and other operating items 1,865
1,878
Plus (less): Other expense (income), net (3,174)
3,466
Adjustments:
Plus: Transaction-related expenses (a) 2,081
4,540
Plus: Fair value changes to equity awards (b) 373
161
Adjusted EBITDA $ 566,869 $ 502,120
____________________
(a) Reflects the addback of acquisition-related transaction costs.
(b) Reflects fair value accounting changes associated with certain equity awards.
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Adjusted Net Income Attributable to
We present adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections , both non-GAAP financial measures, supplementally because they are widely used by investors as valuation measures in the solid waste industry. Management uses adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income attributable toWaste Connections to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income attributable toWaste Connections has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections for the three month periods endedMarch 31, 2023 and 2022, are calculated as follows (amounts in thousands ofU.S. dollars, except per share amounts): Three Months EndedMarch 31, 2023 2022
Reported net income attributable to Waste Connections$ 197,813 $ 180,324 Adjustments: Amortization of intangibles (a) 39,282
37,635
Impairments and other operating items (b) 1,865
1,878
Transaction-related expenses (c) 2,081
4,540
Fair value changes to equity awards (d) 373
161
Tax effect (e) (11,024)
(11,092)
Adjusted net income attributable to
Diluted earnings per common share attributable toWaste Connections' common shareholders: Reported net income$ 0.77 $ 0.69 Adjusted net income$ 0.89 $ 0.82 ____________________
(a) Reflects the elimination of the non-cash amortization of acquisition-related
intangible assets.
(b) Reflects adjustments for impairments and other operating items.
(c) Reflects the addback of acquisition-related transaction costs.
(d) Reflects fair value accounting changes associated with certain equity awards.
(e) The aggregate tax effect of the adjustments in footnotes (a) through (d) is
calculated based on the applied tax rates for the respective periods.
INFLATION
In the current environment, we have seen inflationary pressures resulting from
higher fuel, materials and labor costs in certain markets and higher resulting
third-party costs in areas such as brokerage, repairs and construction.
Consistent with industry practice, many of our contracts allow us to pass
through certain costs to our customers, including increases in landfill tipping
fees and, in some cases, fuel costs. To the extent that there are decreases in
fuel costs, in some cases, a portion of these reductions are passed through to
customers in the form of lower fuel and material surcharges. Therefore, we
believe that we should be able to increase prices to offset many cost increases
that result from inflation in the ordinary course of business. However,
competitive pressures or delays in the timing of rate increases under certain of
our contracts may require us to absorb at least part of these cost increases,
especially if cost increases exceed the average rate of inflation. Management's
estimates associated with inflation have an impact on our accounting for
landfill liabilities.
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SEASONALITY
Based on historic trends, excluding any impact from the COVID-19 pandemic or an
economic recession, we would expect our operating results to vary seasonally,
with revenues typically lowest in the first quarter, higher in the second and
third quarters and lower in the fourth quarter than in the second and third
quarters. This seasonality reflects (a) the lower volume of solid waste
generated during the late fall, winter and early spring because of decreased
construction and demolition activities during winter months in Canada and the
U.S. and (b) reduced E&P activity during harsh weather conditions, with expected
fluctuation due to such seasonality between our highest and lowest quarters of
approximately 10%. In addition, some of our operating costs may be higher in the
winter months. Adverse winter weather conditions slow waste collection
activities, resulting in higher labor and operational costs. Greater
precipitation in the winter increases the weight of collected municipal solid
waste, resulting in higher disposal costs, which are calculated on a per ton
basis.
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