The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included under Item 1. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed with theSecurities and Exchange Commission ("SEC") onFebruary 18, 2022 . This Quarterly Report on Form 10-Q and, in particular, this "Management's Discussion and Analysis of Financial Condition and Results of Operations", may contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, including statements regarding:
•the projected development of additional disposal capacity or expectations regarding permits for existing capacity;
•the outcome of any legal or regulatory matter;
•expected liquidity and financing plans;
•expected future revenues, operations, expenditures and cash needs;
•fluctuations in commodity pricing of our recyclables, increases in landfill tipping fees and fuel costs and general economic and weather conditions;
•projected future obligations related to final capping, closure and post-closure costs of our existing landfills and any disposal facilities which we may own or operate in the future;
•our ability to use our net operating losses and tax positions;
•our ability to service our debt obligations;
•the recoverability or impairment of any of our assets or goodwill;
•estimates of the potential markets for our products and services, including the anticipated drivers for future growth;
•sales and marketing plans or price and volume assumptions;
•potential business combinations or divestitures; and
•projected improvements to our infrastructure and the impact of such improvements on our business and operations.
In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by the use of the words "believes", "expects", "anticipates", "plans", "may", "will", "would", "intends", "estimates" and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, as well as management's beliefs and assumptions, and should be read in conjunction with our consolidated financial statements and notes thereto. These forward-looking statements are not guarantees of future performance, circumstances or events. The occurrence of the events described and the achievement of the expected results depends on many events, some or all of which are not predictable or within our control. Actual results may differ materially from those set forth in the forward-looking statements. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those detailed in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and those included under Part II, Item 1A of this Quarterly Report on Form 10-Q. There may be additional risks that we are not presently aware of or that we currently believe are immaterial, which could have an adverse impact on our business. We explicitly disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by law. 25 --------------------------------------------------------------------------------
Company Overview
Casella 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, which leverages 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. Our Resources Solutions operations consist of two lines-of-service: processing and non-processing. 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 resource management solutions to large and complex organizations, as well as traditional collection, disposal and recycling services provided to large account multi-site customers.
As of
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 services, 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 resource management solutions to large and complex organizations, as well as traditional collection, disposal and recycling services provided to large account multi-site customers. 26 --------------------------------------------------------------------------------
A summary of revenues attributable to services provided (dollars in millions and as a percentage of total revenues) follows:
Three Months EndedJune 30 , $ Six Months EndedJune 30 , $ 2022 2021 Change 2022 2021 Change Collection$ 137.3 48.4 %$ 107.3 49.7 %$ 30.0 $ 256.8 49.6 %$ 204.8 50.5 %$ 52.0 Disposal 60.2 21.2 % 49.2 22.8 % 11.0 103.4 20.0 % 87.0 21.5 % 16.4 Power 1.8 0.6 % 1.1 0.5 % 0.7 4.4 0.9 % 2.4 0.6 % 2.0 Processing 2.8 1.1 % 2.3 1.1 % 0.5 4.7 0.8 % 3.8 0.9 % 0.9 Solid waste 202.1 71.3 % 159.9 74.1 % 42.2 369.3 71.3 % 298.0 73.5 % 71.3 Processing 33.9 11.9 % 21.1 9.7 % 12.8 61.3 11.9 % 38.3 9.5 % 23.0 Non-processing 47.7 16.8 % 34.9 16.2 % 12.8 87.1 16.8 % 69.1 17.0 % 18.0 Resource solutions 81.6 28.7 % 56.0 25.9 % 25.6 148.4 28.7 % 107.4 26.5 % 41.0 Total revenues$ 283.7 100.0 %$ 215.9 100.0 %$ 67.8 $ 517.7 100.0 %$ 405.4 100.0 %$ 112.3
A summary of the period-to-period changes in solid waste revenues (dollars in millions and as percentage growth of solid waste revenues) follows:
Period-to-Period Change for the Three Period-to-Period Change for the Six Months Months Ended June 30, 2022 vs. 2021 Ended June 30, 2022 vs. 2021 Amount % Growth Amount % Growth Price $ 11.1 6.9 % $ 18.9 6.3 % Volume 2.6 1.6 % 3.3 1.1 % Surcharges and other fees 8.4 5.3 % 10.2 3.4 % Commodity price and volume 0.7 0.5 % 2.3 0.8 % Acquisitions 19.4 12.1 % 36.6 12.3 % Solid waste revenues $ 42.2 26.4 % $ 71.3 23.9 % Solid waste revenues Price.
The price change component in quarterly solid waste revenues growth from the prior year period is the result of the following:
•$8.3 million from favorable collection pricing; and
•$2.8 million from favorable disposal pricing associated with our landfills, transfer stations and to a lesser extent transportation services in our Western region.
The price change component in year-to-date solid waste revenues growth from the prior year period is the result of the following:
•$14.6 million from favorable collection pricing; and
•$4.3 million from favorable disposal pricing associated with our landfills, transfer stations and to a lesser extent transportation services in our Western region. Volume.
The volume change component in quarterly solid waste revenues growth from the prior year period is the result of the following:
•$3.1 million from higher disposal volumes (of which$1.4 million relates to higher third-party landfill volumes,$1.2 million relates to higher transfer station volumes and$0.5 million relates to higher transportation volumes); and
•$0.2 million from higher processing volumes; partially offset by
•$(0.7) million from lower collection volumes in our Western region with higher customer churn due to higher pricing, implementation of the energy and environmental fee ("E&E Fee"), and customer deselection.
The volume change component in year-to-date solid waste revenues growth from the prior year period is the result of the following:
•$3.4 million from higher disposal volumes (of which
27 --------------------------------------------------------------------------------
•$0.1 million from higher processing volumes; partially offset by
•$(0.2) million from lower collection volumes in our Western region with higher customer churn due to higher pricing, implementation of the E&E Fee, and customer deselection.
Surcharges and other fees.
The surcharges and other fees change components in quarterly and year-to-date solid waste revenues growth from the prior year periods are the result of higher energy fee revenues on higher diesel fuel prices, partially offset by lower sustainability recycling adjustment fees ("SRA Fee") year-to-date on higher recycled commodity prices.
Commodity price and volume.
The commodity price and volume change component in quarterly solid waste
revenues growth from the prior year period is the result of
The commodity price and volume change component in year-to-date solid waste
revenues growth from the prior year period is the result of
Acquisitions.
The acquisitions change components in quarterly and year-to-date solid waste revenues growth from the prior year periods are the result of increased acquisition activity in line with our growth strategy, including the timing and acquisition of eight businesses in the six months endedJune 30, 2022 and ten businesses in the fiscal year endedDecember 31, 2021 .
The change component in quarterly
•$17.2 million from acquisition activity;
•$5.9 million from higher non-processing revenues due to higher volumes on organic business growth, favorable pricing and increased fees; and
•$3.1 million from the favorable impact of recycling commodity pricing on processing revenues; partially offset by
•$(0.6) million from lower processing volumes mainly driven by lower recycling commodity volumes.
The change component in year-to-date
•$26.5 million from acquisition activity;
•$9.3 million from higher non-processing revenues due to higher volumes on organic business growth, favorable pricing and increased fees; and
•$5.4 million from the favorable impact of recycling commodity pricing on processing revenues; partially offset by
•$(0.2) million from lower processing volumes mainly driven by lower recycling commodity volumes.
Operating Expenses
A summary of cost of operations, general and administration expense, and depreciation and amortization expense (dollars in millions and as a percentage of total revenues) is as follows:
Three Months Ended June 30, $ Six Months Ended June 30, $ 2022 2021 Change 2022 2021 Change Cost of operations$ 186.0 65.6 %$ 138.6 64.2 %$ 47.4 $ 348.5 67.3 %$ 265.7 65.5 %$ 82.8 General and administration$ 33.6 11.8 %$ 29.2 13.5 %$ 4.4 $ 63.4 12.2 %$ 56.3 13.9 %$ 7.1 Depreciation and amortization$ 31.2 11.0 %$ 24.3 11.3 %$ 6.9 $ 60.6 11.7 %$ 47.0 11.6 %$ 13.6 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. 28 -------------------------------------------------------------------------------- As a percentage of revenues, cost of operations increased approximately 140 basis points and 180 basis points during the three and six months endedJune 30, 2022 , respectively, from the same periods of the prior year. The period-to-period changes in cost of operations can be primarily attributed to the following: Third-party direct costs increased$19.6 million quarterly, while increasing approximately 90 basis points as a percentage of revenues, and increased$32.3 million year-to-date, while increasing approximately 80 basis points as a percentage of revenues, due to the following:
•higher hauling and third-party transportation costs associated primarily with:
•increased solid waste volumes on acquisition activity;
•higher fuel surcharges from third-party transporters; and
•higher non-processing volumes in our
•lower Western region collection volumes in the quarter.
•higher purchased material costs associated primarily with:
•acquisition activity; and
•higher recycling commodity prices in our
•higher third-party disposal costs associated primarily with:
•increased solid waste volumes on acquisition activity and to a lesser extent organic business growth; and
•higher fuel surcharges from third-party transporters.
Direct labor costs increased
•wage inflation in our markets and increased overtime and outside labor costs on higher solid waste volumes on acquisition activity and to a lesser extent organic business growth;
•higher non-processing volumes on acquisition activity and organic business growth; and
•higher workers compensation costs on claim activity.
Maintenance and repair costs increased$8.2 million quarterly, while decreasing approximately (60) basis points as a percentage of revenues, and increased$15.5 million year-to-date, while decreasing approximately (30) basis points as a percentage of revenues, due primarily to higher fleet, facility and container maintenance costs associated with inflation and acquisition activity. Fuel costs increased$7.4 million quarterly, while increasing approximately 200 basis points as a percentage of revenues, and increased$11.8 million year-to-date, while increasing approximately 170 basis points as a percentage of revenues, due primarily to higher fuel prices and higher volumes driven by acquisition activity and to a lesser extent organic business growth.
Direct operational costs increased
•lower host community and royalty fees; and
•lower non-landfill operating lease expense; more than offset by
•higher landfill operating costs in our Western region due to severe winter weather earlier in the year and construction delays compounded with higher quarterly landfill volumes;
•higher vehicle insurance costs; and
•higher repair and replacement part costs.
General and Administration
General and administration expense includes (i) management, clerical and administrative compensation, (ii) bad debt expense, and (iii) overhead costs, professional service fees and costs associated with marketing, sales force and community relations efforts.
The period-to-period changes in general and administration expenses of
29 --------------------------------------------------------------------------------
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:
Three Months Ended June 30, $ Six Months Ended June 30, $ 2022 2021 Change 2022 2021 Change Depreciation$ 18.9 6.7 %$ 14.5 6.7 %$ 4.4 $ 38.4 7.4 %$ 28.8 7.1 %$ 9.6 Landfill amortization 8.0 2.8 % 7.8 3.6 % 0.2 14.1 2.7 % 14.2 3.5 % (0.1) Other amortization 4.3 1.5 % 2.0 1.0 % 2.3 8.1 1.6 % 4.0 1.0 % 4.1$ 31.2 11.0 %$ 24.3 11.3 %$ 6.9 $ 60.6 11.7 %$ 47.0 11.6 %$ 13.6 The period-to-period increases in depreciation and other amortization expense can be primarily attributed to acquisition activity, which included$1.5 million of additional depreciation and other amortization expense related to a purchase price allocation adjustment in the quarter endedMarch 31, 2022 , and increased investments in our fleet. Landfill amortization expense increased in the three months endedJune 30, 2022 , remaining slightly down year-to-date, on higher landfill volumes in our Western region.
Expense from Acquisition Activities
In the three and six months endedJune 30, 2022 , we recorded charges of$1.0 million and$3.1 million , respectively, and in the three and six months endedJune 30, 2021 , we recorded charges of$1.6 million and$2.0 million , respectively, comprised primarily of legal, consulting and other similar costs associated with due diligence and the acquisition and integration of acquired businesses or select development projects.
Other Expenses
Interest Expense, net
Our interest expense, net increased
Provision for Income Taxes
Our provision for income taxes increased$3.1 million quarterly and$1.7 million year-to-date as compared to the same periods in the prior year, primarily due to higher income from operations between the periods, and one-time adjustments for the tax benefit on equity compensation awards between the periods and for a decrease in the current period in our state deferred tax asset from a change in state law in our footprint. The provision for income taxes in the six months endedJune 30, 2022 included$2.4 million of current income taxes and$7.1 million of deferred income taxes. For the six months endedJune 30, 2021 , the provision included a$0.8 million of current income taxes and$7.1 million of deferred income taxes. The effective rate for the six months endedJune 30, 2022 was 31% before the one-time adjustments, and was computed based on the statutory rate of 21% adjusted primarily for state taxes and nondeductible officer compensation. 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 2017 continue to be carried forward for 20 years and are expected to be available to fully offset taxable income earned in the fiscal year endingDecember 31, 2022 ("fiscal year 2022") and future tax years. Federal net operating losses generated after 2017, totaling$46.5 million carried forward to fiscal year 2022, will be carried forward indefinitely, but generally may only offset up to 80% of taxable income earned in a tax year. 30 --------------------------------------------------------------------------------
Segment Reporting
Revenues
A summary of revenues by operating segment (in millions) follows:
Three Months Ended Six Months Ended June 30, $ June 30, $ 2022 2021 Change 2022 2021 Change Eastern$ 87.3 $ 61.1 $ 26.2 $ 158.6 $ 113.4 $ 45.2 Western 114.9 98.9 16.0 210.7 184.6 26.1 Resource solutions 81.5 55.9 25.6 148.4 107.4 41.0 Total revenues$ 283.7 $ 215.9 $ 67.8 $ 517.7 $ 405.4 $ 112.3 Eastern Region
A summary of the period-to-period changes in solid waste revenues (dollars in millions and as percentage growth of solid waste revenues) follows:
Period-to-Period Change for the Three Period-to-Period Change for the Six Months Months Ended June 30, 2022 vs. 2021 Ended June 30, 2022 vs. 2021 Amount % Growth Amount % Growth Price $ 4.8 7.9 % $ 8.3 7.3 % Volume 2.2 3.6 % 2.8 2.5 % Surcharges and other fees 3.7 6.1 % 4.4 3.8 % Acquisitions 15.5 25.3 % 29.7 26.2 % Solid waste revenues $ 26.2 42.9 % $ 45.2 39.8 % Price.
The price change component in quarterly solid waste revenues growth from the prior year period is the result of the following:
•$3.5 million from favorable collection pricing; and
•$1.3 million from favorable disposal pricing related to transfer stations and to a lesser extent landfills.
The price change component in year-to-date solid waste revenues growth from the prior year period is the result of the following:
•$6.3 million from favorable collection pricing; and
•$2.0 million from favorable disposal pricing related to transfer stations and to a lesser extent landfills.
Volume.
The volume change component in quarterly solid waste revenues growth from the prior year period is the result of the following:
•$1.1 million from higher disposal volumes related to transfer stations and to a lesser extent landfills;
•$0.8 million from higher collection volumes as a result of organic business growth; and
•$0.2 million from higher processing volumes.
The volume change component in year-to-date solid waste revenues growth from the prior year period is the result of the following:
•$1.3 million from higher disposal volumes related to transfer stations, partially offset by lower landfill volumes;
•$1.4 million from higher collection volumes as a result of organic business growth; and
•$0.1 million from higher processing volumes.
Surcharges and other fees. The surcharges and other fees change components in quarterly and year-to-date solid waste revenues growth from the prior year periods are the result of higher energy fee revenues on higher diesel fuel prices, partially offset by lower SRA Fees on higher recycled commodity prices. 31 --------------------------------------------------------------------------------
Acquisitions.
The acquisitions change components in quarterly and year-to-date solid waste revenues growth from the prior year periods are the result of increased acquisition activity in line with our growth strategy, including the timing and acquisition of two businesses in the six months endedJune 30, 2022 and five businesses in the fiscal year endedDecember 31, 2021 .
A summary of the period-to-period changes in solid waste revenues (dollars in millions and as percentage growth of solid waste revenues) follows:
Period-to-Period Change for the Three Period-to-Period Change for the Six Months Months Ended June 30, 2022 vs. 2021 Ended June 30, 2022 vs. 2021 Amount % Growth Amount % Growth Price $ 6.3 6.4 % $ 10.6 5.7 % Volume 0.4 0.3 % 0.4 0.2 % Surcharges and other fees 4.7 4.8 % 5.9 3.2 % Commodity price and volume 0.7 0.7 % 2.3 1.2 % Acquisitions 3.9 4.0 % 6.9 3.8 % Solid waste revenues $ 16.0 16.2 % $ 26.1 14.1 % Price.
The price change component in quarterly solid waste revenues growth from the prior year period is the result of the following:
•$4.8 million from favorable collection pricing; and
•$1.5 million from favorable disposal pricing related to landfills, transfer stations, and to a lesser extent transportation services.
The price change component in year-to-date solid waste revenues growth from the prior year period is the result of the following:
•$8.3 million from favorable collection pricing; and
•$2.3 million from favorable disposal pricing related to landfills, transfer stations, and to a lesser extent transportation services.
Volume.
The volume change components in quarterly and year-to-date solid waste revenues growth from the prior year periods are the result of the following:
•$2.0 million from higher disposal volumes related to landfills, transfer stations, and transportation services; partially offset by
•$(1.6) million from lower collection volumes with higher customer churn due to higher pricing, implementation of the E&E Fee, and customer deselection.
Surcharges and other fees.
The surcharges and other fees change components in quarterly and year-to-date solid waste revenues growth from the prior year periods are the result of higher energy fee revenues on higher diesel fuel prices, partially offset by lower SRA Fees year-to-date on higher recycled commodity prices.
Commodity price and volume.
The commodity price and volume change components in quarterly and year-to-date solid waste revenues growth from the prior year periods are primarily the result of favorable landfill gas-to-energy pricing.
Acquisitions.
The acquisitions change components in quarterly and year-to-date solid waste revenues growth from the prior year periods is the result of increased acquisition activity in line with our growth strategy, including the timing and acquisition of five businesses in the six months endedJune 30, 2022 and five businesses in the fiscal year endedDecember 31, 2021 . 32 --------------------------------------------------------------------------------
Operating Income
A summary of operating income (loss) by operating segment (in millions) follows: Three Months Ended Six Months Ended June 30, $ June 30, $ 2022 2021 Change 2022 2021 Change Eastern$ 6.1 $ 3.8 $ 2.3 $ 3.9 $ 6.0 $ (2.1) Western 19.9 14.9 5.0 29.2 22.7 6.5 Resource Solutions 6.2 3.7 2.5 9.9 6.1 3.8 Corporate entities (0.5) (0.5) - (1.1) (0.8) (0.3) Operating income$ 31.7 $ 21.9 $ 9.8 $ 41.9 $ 34.0 $ 7.9 Eastern Region Operating income increased$2.3 million quarterly and decreased$(2.1) million year-to-date from the prior year periods. Excluding the impact of theSouthbridge Landfill closure charge and the expense from acquisition activities, our operating performance in the three and six months endedJune 30, 2022 was driven by revenue growth, inclusive of inter-company revenues, and the following cost changes.
Cost of operations: Cost of operations increased
•higher third-party disposal costs and higher hauling and third-party transportation costs associated with increased solid waste volumes on acquisition activity and to a lesser extent organic business growth, and higher fuel surcharges from third-party transporters;
•higher labor and related benefit costs due primarily to wage inflation in our markets and increased overtime on higher solid waste volumes associated primarily with acquisition activity and to a lesser extent organic business growth, higher outside labor costs, and higher workers compensation costs on claim activity;
•higher maintenance and repair costs due primarily to higher fleet, facility and container maintenance costs associated with inflation and acquisition activity;
•higher fuel costs due to higher fuel prices and higher volumes driven by acquisition activity and to a lesser extent an organic business growth; and
•higher direct operational costs due to increased vehicle insurance costs and higher repair and replacement part costs.
General and administration: General and administration expense increased$2.5 million quarterly and$4.2 million year-to-date from the prior year periods primarily due to increased overhead costs associated with wage inflation, organic business growth, acquisition activity, higher accrued incentive compensation on improved performance, and higher bad debt expense, partially offset by lower equity compensation costs. Depreciation and amortization: Depreciation and amortization expense increased$4.2 million quarterly and$9.0 million year-to-date from the prior year periods due primarily to acquisition activity, which included additional depreciation and other amortization expense related to a purchase price allocation adjustment in the quarter endedMarch 31, 2022 , and increased investment in our fleet.
Operating income increased$5.0 million quarterly and$6.5 million year-to-date from the prior year periods. Excluding the impact of the expense from acquisition activities, our improved operating performance in the three and six months endedJune 30, 2022 was driven by revenue growth, inclusive of inter-company revenues, more than offsetting the following cost changes.
Cost of operations: Cost of operations increased
•higher third-party disposal costs and higher hauling and third-party transportation costs associated with increased solid waste volumes on acquisition activity, partially offset by lower collection volumes in the quarter and higher fuel surcharges from third-party transporters;
•higher labor and related benefit costs due primarily to wage inflation in our markets and increased overtime on higher solid waste volumes associated with acquisition activity and higher workers compensation costs on claim activity;
•higher maintenance and repair costs due primarily to higher fleet and facility maintenance costs associated with inflation and acquisition activity;
33 --------------------------------------------------------------------------------
•higher fuel costs due to higher fuel prices and higher volumes driven by acquisition activity; and
•higher direct operational costs due to higher landfill operating costs due to severe winter weather earlier in the year and construction delays compounded with higher quarterly landfill volumes, higher vehicle insurance costs, and higher repair and replacement part costs, partially offset by lower host community and royalty fees. General and administration: General and administration expense increased$0.4 million quarterly and$0.7 million year-to-date from the prior year periods primarily due to increased overhead costs associated with wage inflation, organic business growth, acquisition activity, higher accrued incentive compensation on improved performance, and higher bad debt expense, partially offset by lower equity compensation costs. Depreciation and amortization: Depreciation and amortization expense increased$0.8 million quarterly and$1.5 million year-to-date from the prior year periods primarily due to increased investments in our fleet and acquisition activity. Landfill amortization expense increased in the quarter, remaining slightly down year-to-date, on higher landfill volumes.
Operating income increased$2.5 million quarterly and$3.8 million year-to-date from the prior year periods. Excluding the impact of the expense from acquisition activities, our improved operating performance in the three and six months endedJune 30, 2022 was driven by revenue growth, inclusive of inter-company revenues, more than offsetting the following cost changes.
Cost of operations: Cost of operations increased
•higher purchased material costs associated with acquisition activity and higher recycling commodity prices;
•higher hauling and third-party transportation costs associated primarily with higher non-processing volumes and higher fuel surcharges from third-party transporters;
•higher labor and related benefit costs due primarily to wage inflation in our markets and increased overtime and outside labor costs on higher commodity and non-processing volumes associated with acquisition activity and to a lesser extent organic business growth; and
•higher maintenance and repair costs due primarily to higher facility and container maintenance costs and to a lesser extent vehicle maintenance costs, associated with inflation, acquisition activity, and organic business growth.
General and administration: General and administration expense increased$1.5 million quarterly and$1.8 million year-to-date from the prior year periods due to increased overhead costs associated with wage inflation, organic business growth, acquisition activity and higher quarterly bad debt expense, partially offset by lower equity compensation costs. Depreciation and amortization: Depreciation and amortization expense increased$1.6 million quarterly and$2.8 million year-to-date from the prior year periods due to acquisition activity, which included additional depreciation and other amortization expense related to a purchase price allocation adjustment in the quarter endedMarch 31, 2022 .
Liquidity and Capital Resources
We continually monitor our actual and forecasted cash flows, our liquidity, and our capital requirements in order to properly manage our liquidity needs as we move forward based on the capital intensive nature of our business and our growth acquisition strategy. We have$271.8 million of undrawn capacity from our$300.0 million Revolving Credit Facility as ofJune 30, 2022 to help meet our short-term and long-term liquidity needs. We expect existing cash, cash equivalents and restricted cash combined with cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future. Our known current- and long-term uses of cash include, among other possible demands: (1) capital expenditures and leases, (2) acquisitions, (3) repayments to service debt and other long-term obligations, and (4) payments for final capping, closure and post-closure asset retirement obligations and environmental remediation liabilities. 34 --------------------------------------------------------------------------------
A summary of cash and cash equivalents, restricted assets and debt balances, excluding any debt issuance costs (in millions) follows:
June 30 ,
2022
2021
Cash, cash equivalents and restricted cash: Cash and cash equivalents$ 39.3 $
33.8
Restricted cash 1.0
-
Total cash, cash equivalents and restricted cash
33.8
Restricted assets:
Restricted investment securities - landfill closure
2.1 Debt: Current portion$ 7.6 $ 9.9 Non-current portion 586.1 552.7 Total debt$ 593.7 $ 562.6 Summary of Cash Flow Activity
A summary of cash flows (in millions) follows:
Six Months Ended June 30, $ 2022 2021 Change Net cash provided by operating activities$ 92.2 $ 79.0 $ 13.2 Net cash used in investing activities$ (110.6) $
(61.1)
Cash flows from operating activities.
A summary of operating cash flows (in millions) follows:
Six Months Ended June 30, 2022 2021 Net income$ 22.0 $ 16.1
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization
60.6 47.0
Interest accretion on landfill and environmental remediation liabilities
4.0 4.0 Amortization of debt issuance costs 0.9 1.1 Stock-based compensation 3.2 6.1 Operating lease right-of-use assets expense 6.8 6.4 Gain on sale of property and equipment (0.3) (0.1) Non-cash expense from acquisition activities 0.6 1.0 Deferred income taxes 7.2 7.0 105.0 88.6 Changes in assets and liabilities, net (12.8) (9.6) Net cash provided by operating activities$ 92.2 $ 79.0 35
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A summary of the most significant items affecting the change in our operating cash flows follows:
Net cash provided by operating activities increased$13.2 million in the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . This was the result of improved operational performance, partially offset by an increase in the unfavorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures. For discussion of our improved operational performance in the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , see "Results of Operations" above. The increase in the unfavorable cash flow impact associated with the changes in our assets and liabilities, net of effects of acquisitions and divestitures, which are affected by both cost changes and the timing of payments, in the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 was primarily due to the following:
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Cash flows from investing activities.
A summary of investing cash flows (in millions) follows:
Six Months Ended June 30, 2022 2021 Acquisitions, net of cash acquired$ (56.3) $ (5.5)
Additions to property, plant and equipment (54.9) (56.1)
Proceeds from sale of property and equipment 0.6 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 the six months endedJune 30, 2022 , we acquired eight businesses for total consideration of$58.9 million , including$55.1 million in cash, and paid$1.2 million in holdback payments on businesses previously acquired, as compared to the six months endedJune 30, 2021 during which we acquired four businesses for total consideration of$4.9 million , including$4.4 million in cash, and paid$1.1 million in holdback payments on businesses previously acquired. Capital expenditures. Capital expenditures were$(1.2) million lower in the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 primarily due to lower post-acquisition capital spend and the completion of construction and development of phase VI at our Subtitle D landfill inCoventry, Vermont in the fiscal year endedDecember 31, 2021 , partially offset by higher capital spend associated with landfill development and the retrofitting of a single-stream material recovery facility.
Cash flows from financing activities.
A summary of financing cash flows (in millions) follows:
Six Months EndedJune 30, 2022
2021
Proceeds from long-term borrowings$ 82.2 $
0.5
Principal payments on debt (55.3)
(5.6)
Payments of debt issuance costs (1.2)
-
Payments of contingent consideration (1.0)
-
Proceeds from the exercise of share based awards 0.2
0.1
Net cash provided by (used in) financing activities
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A summary of the most significant items affecting the change in our financing cash flows follows:
Debt activity. Net cash associated with debt activity increased$32.0 million . The increase in financing cash flows in the six months endedJune 30, 2022 is due primarily to the issuance of$35.0 million aggregate principal amount ofVermont Bonds 2022A-1. Payment of debt issuance costs. We paid$1.2 million of debt issuance costs in the six months endedJune 30, 2022 related to the issuance of ofVermont Bonds 2022A-1.
Payment of contingent consideration. We paid
Outstanding Long-Term Debt
Credit Facility
As ofJune 30, 2022 , we had outstanding$350.0 million aggregate principal amount of borrowings under our term loan A facility ("Term Loan Facility") and$0.0 million in borrowings under our$300.0 million revolving credit facility ("Revolving Credit Facility"), with a$75.0 million sublimit for letters of credit (the Term Loan Facility and the Revolving Credit Facility together, the "Credit Facility"). The Credit Facility has a 5-year term that matures inDecember 2026 and bears interest at a rate of London Inter-Bank Offered Rate ("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 amended and restated credit agreement ("Credit Agreement"). 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 ofJune 30, 2022 , further advances were available under the Revolving Credit Facility in the amount of$271.8 million . The available amount is net of outstanding irrevocable letters of credit totaling$28.2 million , and as ofJune 30, 2022 no amount had been drawn. 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 Credit Agreement. The 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. In addition to these financial covenants, the 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. As ofJune 30, 2022 , we were in compliance with the covenants contained in the Credit Agreement. We do not believe that these restrictions impact our ability to meet future liquidity needs. 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 may tighten during these times as well.
Tax-Exempt Financings and Other Debt
As ofJune 30, 2022 , we had outstanding$197.0 million aggregate principal amount of tax exempt bonds, including the issuance of$35.0 million aggregate principal amount ofVermont Bonds 2022A-1,$45.9 million aggregate principal amount of finance leases and$0.8 million aggregate principal amount of notes payable. See Note 7, Debt to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further disclosure over debt. 37 --------------------------------------------------------------------------------
Inflation
Inflationary increases in costs, including current inflationary pressures associated primarily with fuel, labor and certain other cost categories and capital items, have materially affected, and may continue to materially affect, our operating margins and cash flows. While rapid inflation negatively impacted operating results and margins during the three and six months endedJune 30, 2022 , we believe that our flexible pricing structures and mature cost recovery fees are allowing us to recover and will continue to allow us to recover certain inflationary costs from our customer base. Consistent with industry practice, most of our contracts and service agreements provide for a pass-through of certain costs to our customers, including increases in landfill tipping fees and in most 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 the E&E Fee, which is designed to recover escalating fuel price fluctuations above a periodically reset floor. Despite these programs, 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.
Seasonality and Severe Weather
Our transfer and disposal revenues historically have been higher in the late spring, summer and early fall months. This seasonality reflects lower volumes of waste in the late fall, winter and early spring months because the volume of waste relating to C&D activities decreases substantially during the winter months in the northeasternUnited States . Because certain of our operating and fixed costs remain constant throughout the fiscal year, operating income is therefore impacted by a similar seasonality. Our operations can be adversely affected by periods of inclement or severe weather, which could increase our operating costs associated with the collection and disposal of waste, delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, increase the volume of waste collected under our existing contracts (without corresponding compensation), decrease the throughput and operating efficiency of our materials recycling facilities, or delay construction or expansion of our landfill sites and other facilities. Our operations can also be favorably affected by severe weather, which could increase the volume of waste in situations where we are able to charge for our additional services provided.
Our processing line-of-business in the
Critical Accounting Estimates and Assumptions
Our financial statements have been prepared in accordance with generally accepted accounting principles inthe United States 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. Actual results may differ from these estimates under different assumptions and circumstances. Our critical accounting estimates are more fully discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . New Accounting Pronouncements
For a description of the new accounting standards that may affect us, see Note 2, Accounting Changes to our consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
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