CASELLA WASTE SYSTEMS, INC. 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, 2020 filed with theSecurities and Exchange Commission ("SEC") onFebruary 19, 2021 . 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; •the expected and potential direct or indirect impacts of the novel coronavirus ("COVID-19") pandemic on our business; •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, 2020 . 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. 27 -------------------------------------------------------------------------------- Company Overview Founded in 1975 with a single truck,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 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 six 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 includes our larger-scale recycling and commodity brokerage operations along with our organics services and large scale commercial and industrial services. As ofOctober 15, 2021 , we owned and/or operated 51 solid waste collection operations, 65 transfer stations, 23 recycling facilities, eight Subtitle D landfills, three landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition ("C&D") materials. Results of Operations Recent Events COVID-19 The global outbreak of the COVID-19 pandemic has caused economic disruption across our geographic footprint and has adversely affected our business. The COVID-19 pandemic negatively impacted our revenues starting at the end of the three months endedMarch 31, 2020 , as many small business and construction collection customers required service level changes and volumes into our landfills declined due to lower economic activity. Demand for services has improved as local economies have reopened as allowed by State Governments and our collection and disposal volumes, as well as overall operations, have been less impacted by the effects of the COVID-19 pandemic in the three and nine months endedSeptember 30, 2021 . The COVID-19 pandemic has negatively impacted and may continue to impact our business in other ways, as we have experienced increased costs as a result of the COVID-19 pandemic, including, but not limited to, higher costs associated with providing a safe working environment for our employees (such as increased costs associated with the protection of our employees, including costs for additional safety equipment, hygiene products and enhanced facility cleaning), employee impacts from illness, supporting a remote administrative workforce, community response measures, the inability of customers to continue to pay for services, and temporary facility closures of our customers. Furthermore, residual macroeconomic effects associated with the pandemic have negatively impacted the global supply chain, labor markets and distribution networks leading to heightened inflation across labor, select services and goods, and capital investments. As of the date of this filing, we are unable to determine or predict the full extent of any possible continuing impact that the COVID-19 pandemic will have on our business, results of operations, liquidity and capital resources. Future developments, such as the possibility of continuing spread of COVID-19 across our geographic footprint, the administration rates and effectiveness of vaccinations, the severity and containment of certain COVID-19 variants along with the pace and extent to which the States in which we operate continue to facilitate a return to normal economic and operation conditions, are uncertain and cannot be predicted at this time. 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, transfer, transportation and disposal, landfill gas-to-energy, processing, and recycling 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 as either processing or non-processing services in ourResource Solutions operating segment. Revenues from processing services consist of revenues derived from municipalities and customers in the form of processing fees, tipping fees, commodity sales, and organic material sales. Revenues from non-processing services consist of brokerage services; overall resource management services providing a wide range of environmental services and zero waste solutions to large and complex organizations; and traditional collection, disposal and recycling services provided to large account multi-site customers. 28 --------------------------------------------------------------------------------
A summary of revenues attributable to service provided (dollars in millions and as a percentage of total revenues) follows:
Three Months Ended September 30, $ Nine Months Ended September 30, $
2021 2020 Change 2021 2020 Change
Collection $ 118.9 49.1 % $ 102.3 50.5 % $ 16.6 $ 323.7 50.0 % $ 290.8 50.6 % $ 32.9
Disposal 55.6 23.0 % 47.6 23.5 % 8.0 142.6 22.0 % 130.0 22.6 % 12.6
Power 1.3 0.5 % 1.0 0.5 % 0.3 3.7 0.6 % 2.9 0.5 % 0.8
Processing 2.9 1.2 % 2.2 1.0 % 0.7 6.7 1.0 % 5.3 1.0 % 1.4
Solid waste 178.7 73.8 % 153.1 75.5 % 25.6 476.7 73.6 % 429.0 74.7 % 47.7
Processing 27.4 11.4 % 15.7 7.8 % 11.7 65.7 10.2 % 45.7 8.0 % 20.0
Non-processing 35.9 14.8 % 33.9 16.7 % 2.0 105.0 16.2 % 99.6 17.3 % 5.4
Resource solutions 63.3 26.2 % 49.6 24.5 % 13.7 170.7 26.4 % 145.3 25.3 % 25.4
Total revenues $ 242.0 100.0 % $ 202.7 100.0 % $ 39.3 $ 647.4 100.0 % $ 574.3 100.0 % $ 73.1 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 Nine Months
Months Ended September 30, 2021 vs. 2020 Ended September 30, 2021 vs. 2020
Amount % Growth Amount % Growth
Price $ 6.2 4.1 % $ 16.4 3.8 %
Volume 4.3 2.8 % 10.1 2.3 %
Surcharges and other fees (0.2) (0.2) % (2.2) (0.5) %
Commodity price and volume 0.5 0.3 % 1.2 0.3 %
Acquisitions 14.8 9.7 % 22.3 5.2 %
Closed operations - - % (0.1) - %
Solid waste revenues $ 25.6 16.7 % $ 47.7 11.1 %
Solid waste revenues
Price.
The price change component in quarterly and year-to-date solid waste revenues
growth from the prior year periods is the result of the following:
•$4.7 million quarterly and $11.9 million year-to-date from favorable collection
pricing; and
•$1.5 million quarterly and $4.5 million year-to-date from favorable disposal
pricing associated with our landfills and transfer stations.
Volume.
The volume change component in quarterly solid waste revenues growth from the
prior year is the result of the following:
•$3.5 million from higher disposal volumes (of which $2.3 million relates to
higher transfer station volumes, $0.9 million relates to higher transportation
volumes associated primarily with one of our larger customers, and $0.3 million
relates to higher third-party landfill volumes); and
•$0.5 million from higher collection volumes as a result of increased activity
and new customer acquisition; and
•$0.3 million from higher processing volumes.
The volume change component in year-to-date solid waste revenues growth from the
prior year is the result of the following:
•$4.7 million from higher disposal volumes (of which $4.4 million relates to
higher transfer station volumes and $0.8 million relates to higher third-party
landfill volumes as a result of increased activity and an increased demand for
services due to economic recovery from the prior year, which was negatively
impacted by the COVID-19 pandemic, and $(0.5) million relates to lower
transportation volumes);
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•$4.6 million from higher collection volumes as a result of increased activity,
new customer acquisition and an increased demand for services due to economic
recovery from the prior year, which was negatively impacted by the COVID-19
pandemic; and
•$0.8 million from higher processing volumes.
Surcharges and other fees.
The surcharges and other fees change component in quarterly and year-to-date
solid waste revenues growth from the prior year periods is associated with the
energy component of the energy and environmental fee and the sustainability
recycling adjustment fee. The sustainability recycling adjustment fee floats on
a monthly basis conversely with recycled commodity prices, which were higher as
compared to the prior year periods, resulting in lower sustainability recycling
adjustment fee revenues. This was partially offset by the impact of the energy
component of the energy and environmental fee, which floats on a monthly basis
in conjunction with diesel fuel prices, that were higher as compared to the
prior year periods, resulting in higher energy fee revenues.
Commodity price and volume.
The commodity price and volume change component in quarterly solid waste
revenues growth from the prior year is the result of $0.5 million from favorable
commodity and energy pricing.
The commodity price and volume change component in year-to-date solid waste
revenues growth from the prior year is the result of the following:
•$1.1 million from favorable commodity and energy pricing; and
•$0.1 million due to higher landfill gas-to-energy volumes.
Acquisitions.
The acquisitions change component in quarterly and year-to-date solid waste
revenues growth from the prior year periods is the result of the following:
•the timing and acquisition of: a residential, commercial and roll-off
collection business in eastern Connecticut that operates a rail-served
construction and demolition processing and waste transfer facility and a waste
transfer station whose assets and liabilities are allocated to our Eastern
region; a solid-waste collection business that operates a waste transfer
station, a septic and portable toilet business, and a tuck-in solid-waste
collection business in our Eastern region; and a waste composting and food-scrap
hauling business, a solid-waste collection business that operates a waste
transfer station, and two tuck-in solid-waste collection businesses in our
Western region in the nine months ended September 30, 2021 ; and
•the timing and acquisition of seven tuck-in solid-waste collection businesses
and a solid-waste collection business in our Western region in the prior year.
Resource Solutions revenues
The change component in quarterly and year-to-date resource solutions revenues
growth of $13.7 million and $25.4 million , respectively, from the prior year
periods is the result of the following:
•$6.0 million quarterly and $12.7 million year-to-date from the favorable impact
of commodity pricing in the marketplace (not including the negative impact of
lower intercompany tipping fees that were reduced due to higher commodity
pricing);
•$4.2 million quarterly and $4.2 million year-to-date from an acquisition, which
operates a single stream recycling facility and several other recycling
operations, in the three months ended September 30, 2021 ;
•$2.0 million quarterly and $5.4 million year-to-date from higher non-processing
revenues primarily due to higher volumes; and
•$1.5 million quarterly and $3.1 million year-to-date from higher processing
volumes driven by higher recycling commodity volumes and other processing
volumes.
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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 September 30, $ Nine Months Ended September 30, $
2021 2020 Change 2021 2020 Change
Cost of operations $ 153.9 63.6 % $ 130.4 64.3 % $ 23.5 $ 419.6 64.8 % $ 382.4 66.6 % $ 37.2
General and administration $ 31.0 12.8 % $ 25.0 12.3 % $ 6.0 $ 87.3 13.5 % $ 74.2 12.9 % $ 13.1
Depreciation and amortization $ 27.5 11.4 % $ 23.8 11.7 % $ 3.7 $ 74.5 11.5 % $ 67.3 11.7 % $ 7.2
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, 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.
As a percentage of revenues, cost of operations decreased approximately (70)
basis points and (180) basis points during the three and nine months ended
September 30, 2021 , 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 $9.5 million quarterly while decreasing
approximately (20) basis points as a percentage of revenues, and increased $13.4
million year-to-date while decreasing approximately (90) basis points as a
percentage of revenues, due to the following:
•higher third-party disposal costs associated with increased volumes, including
higher organic collection and transfer station volumes; higher third-party
landfill volumes; higher collection volumes related to acquisition activity; and
higher non-processing volumes, and the internalization of more non-processing
volumes, in our Resource Solutions operating segment; and
•higher hauling and third-party transportation costs associated with increased
volumes, including higher organic collection and transfer station volumes;
higher third-party landfill volumes driven by our Eastern region; higher
collection and transportation volumes related to acquisition activity; and
higher brokerage, other processing and non-processing volumes in our Resource
Solutions operating segment; partially offset by lower third-party
transportation costs on a year-to-date basis associated with lower
transportation volumes in the Western region on less drill cutting activity.
Maintenance and repair costs increased $4.4 million quarterly while decreasing
approximately (50) basis points as a percentage of revenues, and increased $10.3
million year-to-date while decreasing approximately (10) basis points as a
percentage of revenues, due primarily to higher fleet maintenance costs, higher
facility maintenance costs, and higher resource renewal facility operational
support costs in our Resource Solutions operating segment associated with
acquisition activity and an increased demand for services.
Direct labor costs increased $5.6 million quarterly while increasing
approximately 20 basis points as a percentage of revenues, and increased
$9.3 million year-to-date while remaining flat as a percentage of revenues, due
primarily to: higher labor costs due to wage inflation in our markets and
increased overtime on higher collection, disposal and processing volumes
associated with an increased demand for services and acquisition activity; and
higher health insurance costs; partially offset on a year-to-date basis by lower
labor costs within our Resource Solutions operating segment.-
Fuel costs increased $1.6 million quarterly while increasing approximately 30
basis points as a percentage of revenues, and increased $2.9 million
year-to-date while increasing approximately 10 basis points as a percentage of
revenues, due to higher volumes primarily associated with acquisition activity,
along with higher fuel prices.
Direct operational costs increased $2.4 million quarterly while decreasing
approximately (50) basis points as a percentage of revenues, and increased $1.3
million year-to-date while decreasing approximately (90) basis points as a
percentage of revenues, due primarily to: higher landfill operating costs,
including higher leachate costs in the quarter, and higher variable operating
costs on increased activity; partially offset by lower equipment operating lease
expense.
General and Administration
General and administration expense includes management, clerical and
administrative compensation, bad debt expense, as well as overhead costs,
professional service fees and costs associated with marketing, sales force and
community relations efforts.
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The period-to-period changes in general and administration expense can be
primarily attributed to: increased overhead costs associated with wage
inflation, human resources costs to attract, train and retain employees and
business growth; higher professional fees and quarterly bad debt expense on
business growth; and higher equity compensation costs and higher accrued
incentive compensation on improved performance; partially offset by lower bad
debt expense year-to-date attributed to the timing of the COVID-19 pandemic,
which resulted in a large increase in the allowance for credit losses in prior
periods.
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 September 30, $ Nine Months Ended September 30, $
2021 2020 Change 2021 2020 Change
Depreciation $ 16.3 6.7 % $ 13.9 6.9 % $ 2.4 $ 45.1 7.0 % $ 40.2 7.0 % $ 4.9
Landfill amortization 8.1 3.3 % 7.6 3.8 % 0.5 22.3 3.4 % 20.5 3.6 % 1.8
Other amortization 3.1 1.4 % 2.3 1.1 % 0.8 7.1 1.1 % 6.6 1.1 % 0.5
$ 27.5 11.4 % $ 23.8 11.8 % $ 3.7 $ 74.5 11.5 % $ 67.3 11.7 % $ 7.2
The period-to-period increases in depreciation and amortization expense can be
primarily attributed to increased investments in our fleet and acquisition
activity. Landfill amortization expense increased in the three and nine months
ended September 30, 2021 due primarily to higher third-party and overall
landfill volumes and changes to cost estimates and other assumptions from prior
year periods.
Expense from Acquisition Activities
In the three and nine months ended September 30, 2021 , we recorded charges of
$1.9 million and $4.0 million , respectively, and in the three and nine months
ended September 30, 2020 we recorded charges of $0.2 million and $1.5 million ,
respectively, comprised primarily of legal, consulting and other similar costs
associated with the acquisition and integration of acquired businesses or select
development projects.
Southbridge Landfill Closure Charge
In 2017, we initiated the plan to cease operations of our landfill located in
Southbridge, Massachusetts ("Southbridge Landfill ") and later closed it in
November 2018 when Southbridge Landfill reached its final capacity. Accordingly,
in the three and nine months ended September 30, 2021 , we recorded charges of
$0.3 million and $0.7 million , respectively, associated with legal and other
costs pertaining to various matters as part of the unplanned early closure of
the Southbridge Landfill through completion of the closure process. In the three
and nine months ended September 30, 2020 , we recorded charges of $2.6 million
and $3.8 million , respectively, comprised of the following: $0.6 million and
$1.9 million , respectively, of legal and other costs pertaining to various
matters as part of the unplanned early closure of the Southbridge Landfill
through completion of the closure process, a charge of $2.0 million in both the
three and nine months ended September 30, 2020 associated with a settlement
pertaining to the Southbridge Landfill , a charge of $0.2 million in the nine
months ended September 30, 2020 due to changes in estimated costs and timing of
final capping, closure and post-closure activities at the Southbridge Landfill ,
and a recovery of $(0.2) million in the nine months ended September 30, 2020
associated with the completion of the environmental remediation at the site.
Other Expenses
Interest Expense, net
Our interest expense, net decreased $(0.2) million quarterly and $(0.9) million
year-to-date due primarily to lower average interest rates on our debt
associated with changes in London Inter-Bank Offered Rate ("LIBOR").
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Provision for Income Taxes
Our provision for income taxes increased $6.2 million quarterly and $13.6
million year-to-date, as compared to the same periods in the prior year. The
provision for income taxes in the nine months ended September 30, 2021 included
$1.5 million of current income taxes and $13.0 million of deferred income taxes.
For the nine months ended September 30, 2020 , the provision included a $(0.7)
million current income tax benefit and $1.5 million of deferred income taxes.
The effective rate for the three months ended September 30, 2021 was 31%, before
the one-time adjustments primarily related to accumulated other comprehensive
losses, and is computed based on the statutory rate of 21%, adjusted primarily
for state taxes and nondeductible officer compensation.
An increase of $11.5 million in the year-to-date deferred tax provision between
the periods relates to the release of a significant portion of our valuation
allowance in the fourth quarter ended December 31, 2020 . On a periodic basis, we
reassess the valuation allowance on our deferred income tax assets, weighing
positive and negative evidence to assess the recoverability of the deferred tax
assets. In the quarter ended December 31, 2020 , we assessed the valuation
allowance and considered positive evidence, including significant cumulative
consolidated income over the three years ended December 31, 2020 , revenue growth
and expectations of future profitability, and negative evidence, including the
impact of a negative change in the economic climate, significant risks and
uncertainties in the business and restrictions on tax loss utilization in
certain state jurisdictions. After assessing both the positive evidence and the
negative evidence, we determined it was more likely than not that the majority
of our deferred tax assets would be realized in the future and released the
valuation allowance on the majority of our net operating loss carryforwards and
other deferred tax assets as of December 31, 2020 , resulting in a benefit from
income taxes of $61.3 million . We continue to maintain a valuation allowance
related to deferred tax assets that would generate capital losses when realized
and deferred tax assets related to certain state jurisdictions.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES Act") was enacted which, among other things, allows the carryback of
remaining minimum tax credit carryforwards to tax year 2018. Prior to the CARES
Act, the minimum tax credit carryforwards were fully refunded through tax year
2021, if not otherwise used to offset tax liabilities. A current income tax
benefit of $(1.0) million , offset by a $1.0 million deferred tax provision, was
recognized in the three months ended March 31, 2020 for the remaining minimum
tax credit carried back to tax year 2018.
On December 22, 2017 , the Tax Cuts and Jobs Act (the "TCJ Act") was enacted. The
TCJ Act significantly changed U.S. corporate income tax laws by, among other
things, changing carryforward rules for net operating losses. Our $92.5 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 2021 and future tax years. Federal net
operating losses generated after 2017, totaling $46.5 million carried forward to
2021, will be carried forward indefinitely, but generally may only offset up to
80% of taxable income earned in a tax year.
Segment Reporting
Revenues
A summary of revenues by reportable operating segment (in millions) follows:
Three Months Ended Nine Months Ended
September 30, $ September 30, $
2021 2020 Change 2021 2020 Change
Eastern $ 75.2 $ 58.3 $ 16.9 $ 188.6 $ 161.8 $ 26.8
Western 103.5 94.7 8.8 288.1 267.2 20.9
Resource solutions 63.3 49.7 13.6 170.7 145.3 25.4
Total revenues $ 242.0 $ 202.7 $ 39.3 $ 647.4 $ 574.3 $ 73.1
33--------------------------------------------------------------------------------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 Nine Months Ended September 30, 2021 vs. 2020 Months Ended September 30, 2021 vs. 2020 Amount % Growth Amount % Growth Price $ 2.3 4.0 % $ 6.4 3.9 % Volume 3.6 6.1 % 10.2 6.4 % Surcharges and other fees (0.2) (0.3) % (0.9) (0.6) % Commodity price and volume 0.1 0.2 % 0.1 - % Acquisitions 11.1 19.0 % 11.1 6.9 % Closed landfill - (0.1) % (0.1) (0.1) % Solid waste revenues $ 16.9 28.9 % $ 26.8 16.5 % Price. The price change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is the result of the following: •$1.6 million quarterly and$4.3 million year-to-date from favorable collection pricing; and •$0.7 million quarterly and$2.1 million year-to-date from favorable disposal pricing related to transfer stations and landfills. Volume. The volume change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is the result of the following: •$2.7 million quarterly and$6.8 million year-to-date from higher disposal volumes related to transfer stations and landfills as a result of increased activity and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic; •$0.5 million quarterly and$2.6 million year-to-date from higher collection volumes as a result of increased activity, new customer acquisition and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic; and •$0.4 million quarterly and$0.8 million year-to-date from higher processing volumes. Surcharges and other fees. The surcharges and other fees change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is associated with the energy component of the energy and environmental fee and the sustainability recycling adjustment fee. The sustainability recycling adjustment fee floats on a monthly basis conversely with recycled commodity prices, which were higher as compared to the prior year periods, resulting in lower sustainability recycling adjustment fee revenues. This was partially offset by the impact of the energy component of the energy and environmental fee, which floats on a monthly basis in conjunction with diesel fuel prices, that were higher as compared to the prior year periods, resulting in higher energy fee revenues. Acquisitions. The acquisitions change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is associated with the timing and acquisition of: a residential, commercial and roll-off collection business in easternConnecticut that operates a rail-served construction and demolition processing and waste transfer facility and a waste transfer station whose assets and liabilities are allocated to our Eastern region; a solid-waste collection business that operates a waste transfer station; a septic and portable toilet business; and a tuck-in solid-waste collection business in the nine months endedSeptember 30, 2021 . 34 --------------------------------------------------------------------------------Western 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 Months Ended Period-to-Period Change for the Nine September 30, 2021 vs. 2020 Months Ended September 30, 2021 vs. 2020 Amount % Growth Amount % Growth Price $ 3.9 4.1 % $ 10.1 3.8 % Volume 0.9 0.9 % (0.3) (0.1) % Surcharges and other fees (0.1) (0.1) % (1.3) (0.5) % Commodity price and volume 0.4 0.5 % 1.2 0.4 % Acquisitions 3.7 3.9 % 11.2 4.2 % Solid waste revenues $ 8.8 9.3 % $ 20.9 7.8 % Price. The price change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is the result of the following: •$3.1 million quarterly and$7.6 million year-to-date from favorable collection pricing; and •$0.8 million quarterly and$2.5 million year-to-date from favorable disposal pricing related to landfills and transfer stations. Volume. The volume change component in quarterly solid waste revenues growth from the prior year is the result of$0.9 million from higher disposal volumes related to transportation, associated with a large customer, and higher transfer station volumes, partially offset by lower landfill volumes on lower drill cuttings activity). The volume impact on the change in year-to-date solid waste revenues growth from the prior year is the result of the following: •$(2.2) million from lower disposal volumes, despite higher volumes at transfer stations, related to transportation and landfills on lower drill cuttings activity, combined with timing around the negative impacts and recent recovery from the COVID-19 pandemic; partially offset by •$1.9 million from higher collection volumes as a result of increased activity, new customer acquisition and an increased demand for services due to economic recovery from the prior year, which was negatively impacted by the COVID-19 pandemic. Surcharges and other fees. The surcharges and other fees change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is associated with the energy component of the energy and environmental fee and the sustainability recycling adjustment fee. The sustainability recycling adjustment fee floats on a monthly basis conversely with recycled commodity prices, which were higher as compared to the prior year periods, resulting in lower sustainability recycling adjustment fee revenues. This was partially offset by the impact of the energy component of the energy and environmental fee, which floats on a monthly basis in conjunction with diesel fuel prices, that were higher as compared to the prior year periods, resulting in higher energy fee revenues. Commodity price and volume. The commodity price and volume change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is the result of favorable energy and commodity pricing, combined with higher commodity volumes and year-to-date landfill gas-to-energy volumes. Acquisitions. The acquisitions change component in quarterly and year-to-date solid waste revenues growth from the prior year periods is the result of the timing and acquisition of: two tuck-in solid waste collection businesses; a solid waste collection business that operates a waste transfer station; and a waste composting and food-scrap hauling business in the nine months endedSeptember 30, 2021 ; along with the timing and acquisition of seven tuck-in solid waste collection businesses and a solid waste collection business during the prior year. 35 -------------------------------------------------------------------------------- Operating Income A summary of operating income (loss) by operating segment (in millions) follows: Three Months Ended Nine Months Ended September 30, $ September 30, $ 2021 2020 Change 2021 2020 Change Eastern$ 5.4 $ 3.7 $ 1.7 $ 11.4 $ 9.0 $ 2.4 Western 15.8 15.3 0.5 38.5 32.8 5.7 Resource solutions 6.7 2.2 4.5 12.8 5.0 7.8 Corporate entities (0.5) (0.6) 0.1 (1.4) (1.7) 0.3 Operating income$ 27.4 $ 20.6 $ 6.8 $ 61.3 $ 45.1 $ 16.2 Eastern Region Operating income increased$1.7 million quarterly and increased$2.4 million year-to-date. Excluding the impact of theSouthbridge Landfill closure charge and the expense from acquisition activities, our operating performance in the three and nine months endedSeptember 30, 2021 was driven by revenue growth, inclusive of inter-company revenues, more than offsetting the following cost changes: Cost of operations: Cost of operations increased$16.0 million quarterly and$23.5 million year-to-date due to: higher disposal, hauling and transportation costs associated with increased volumes, including acquisition activity as well as higher organic collection, transfer station and landfill volumes; higher labor and benefit costs due to wage inflation in our markets, increased overtime and increased health insurance costs; higher landfill operating costs on increased volumes; higher fleet and facility maintenance costs; and higher fuel costs on higher volumes and higher fuel prices. Volume increases and related costs were associated with increased demand for services due to increased activity associated with the economic recovery from the prior year and acquisition activity. General and administration: General and administration expense increased$2.2 million quarterly and$4.8 million year-to-date due to higher accrued incentive compensation on a year-to-date basis, higher overhead costs associated with improved performance and acquisition activity, and higher quarterly bad debt expense on business growth. Depreciation and amortization: Depreciation and amortization expense increased$2.7 million quarterly and$4.3 million year-to-date due to higher depreciation and amortization expense associated with increased investments in our fleet and acquisition activity, and higher landfill amortization primarily on higher landfill volumes and changes to cost estimates and other assumptions from prior year periods. Western Region Operating income increased$0.5 million quarterly and$5.7 million year-to-date. Excluding the impact of the expense from acquisition activities, our improved operating performance in the three and nine months endedSeptember 30, 2021 was driven by revenue growth, inclusive of inter-company revenues, more than offsetting the following cost changes: Cost of operations: Cost of operations increased$8.0 million quarterly and$17.4 million year-to-date due to: higher disposal costs associated with increased volumes, including acquisition activity as well as higher organic collection volumes and transfer station volumes; higher labor and benefit costs due to wage inflation in our markets, increased overtime and higher health insurance costs; higher fleet and facility maintenance costs; and higher fuel costs on higher volumes and higher fuel prices; partially offset by lower third-party transportation costs on a year-to-date basis associated with lower transportation volumes on lower drill cuttings activity; and lower equipment operating lease expense. Volume increases and related costs were associated with increased demand for services due to increased activity associated with the economic recovery from the prior year and acquisition activity. General and administration: General and administration expense increased$3.2 million quarterly and$7.0 million year-to-date due to higher accrued incentive compensation and higher overhead costs associated with improved performance and acquisition activity, and higher quarterly bad debt expense on business growth; partially offset by lower bad debt expense year-to-date attributed to the timing of the COVID-19 pandemic, which resulted in a large increase in the allowance for credit losses in prior periods. Depreciation and amortization: Depreciation and amortization expense increased$0.7 million quarterly and$3.0 million year-to-date primarily due to higher depreciation and amortization expense associated with increased investments in our fleet and acquisition activity, and higher landfill amortization on higher landfill volumes at certain of our landfills and changes to cost estimates and other assumptions from prior year periods. 36 --------------------------------------------------------------------------------Resource Solutions Operating income increased$4.5 million quarterly and$7.8 million year-to-date driven by revenue growth, inclusive of inter-company revenues, more than offsetting the following cost changes: Cost of operations: Cost of operations increased$5.2 million quarterly and$10.3 million year-to-date due to: higher hauling and third-party transportation costs associated with higher brokerage volumes with high pass through direct costs and higher volumes on acquisition activity; higher disposal costs associated with internalizing more non-processing volumes; and higher resource renewal facility operation support costs; partially offset by lower salaries and labor costs on a year-to-date basis. General and administration: General and administration increased$0.6 million quarterly and increased$1.4 million year-to-date due to higher accrued incentive compensation costs on improved performance, and higher quarterly bad debt expense and higher labor costs on business growth. Liquidity and Capital Resources We continue to monitor the impact that the COVID-19 pandemic has had and may continue to have on our actual and forecasted cash flows, our liquidity, and our capital requirements in order to properly manage our liquidity needs as we move forward. Because of the nature of the services we provide, we expect to continue to generate positive operating cash flows through stable revenue sources. We had$172.0 million of undrawn capacity from our$200.0 million revolving line of credit facility ("Revolving Credit Facility") and$46.5 million of cash and cash equivalents as ofSeptember 30, 2021 to help meet our liquidity needs, and our next significant debt maturity, which is comprised of our Revolving Credit Facility and term loan A facility ("Term Loan Facility", and together with the Revolving Credit Facility, the "Credit Facility"), is inMay 2023 . We believe that we will remain in compliance with all necessary covenants of our Credit Facility over the remaining term of this facility. A summary of cash and cash equivalents, restricted assets and debt balances, excluding any debt issuance costs (in millions) follows: September 30, December 31, 2021 2020 Cash and cash equivalents $ 46.5$ 154.3 Restricted assets:
Restricted investment securities - landfill closure $ 1.9 $
1.8
Debt:
Current portion $ 16.8 $ 9.2
Non-current portion 541.8 539.2
Total debt $ 558.6 $ 548.4
Summary of Cash Flow Activity
A summary of cash flows (in millions) follows:
Nine Months Ended
September 30, $
2021 2020 Change
Net cash provided by operating activities $ 134.1 $ 111.9 $ 22.2
Net cash used in investing activities $ (234.1) $
(102.2)
37
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Cash flows from operating activities.
A summary of operating cash flows (in millions) follows:
Nine Months Ended
September 30,
2021 2020
Net income $ 32.0 $ 28.2
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 74.5 67.3
Interest accretion on landfill and environmental remediation liabilities
5.9 5.3
Amortization of debt issuance costs 1.7 1.6
Stock-based compensation 8.7 5.3
Operating lease right-of-use assets expense 10.0 12.3
(Gain) loss on sale of property and equipment - 0.3
Southbridge Landfill non-cash closure charge 0.1 2.1
Non-cash expense from acquisition activities 0.5 0.5
Deferred income taxes 13.0 1.5
146.4 124.4
Changes in assets and liabilities, net (12.3) (12.5)
Net cash provided by operating activities $
134.1
A summary of the most significant items affecting the change in our operating cash flows follows: Net cash provided by operating activities increased$22.2 million in the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . This was the result of improved operational performance, combined with a decline 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 nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 , see "Results of Operations" above. The decline 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 nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 was primarily due to the following: •a$28.9 million favorable impact to operating cash flows associated with the change in accounts payable; partially offset by •a$(17.3) million unfavorable impact to operating cash flows associated with the change in accounts receivable; and •a$(11.5) million unfavorable impact to operating cash flows associated with the change in prepaid expenses, inventories and other assets. Cash flows from investing activities. A summary of investing cash flows (in millions) follows: Nine Months Ended September 30, 2021 2020 Acquisitions, net of cash acquired$ (153.1) $ (25.4)
Additions to property, plant and equipment (81.6) (77.3)
Proceeds from sale of property and equipment 0.6 0.5
Net cash used in investing activities
38
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A summary of the most significant items affecting the change in our investing
cash flows follows:
Acquisitions, net of cash acquired. In the nine months ended September 30, 2021 ,
we acquired the following businesses: a residential, commercial and roll-off
collection business in eastern Connecticut that operates a rail-served
construction and demolition processing and waste transfer facility, a waste
transfer station, a single stream recycling facility, and several other
recycling operations whose assets and liabilities are allocated between our
Eastern region and Resource Solutions operating segments; a solid-waste
collection business that operates a transfer station, a septic and portable
toilet business, and a tuck-in solid waste collection business in our Eastern
region; and a waste composting and food-scrap hauling business, a solid waste
collection business that operates a waste transfer station, and two tuck-in
solid waste collection businesses in our Western region for total consideration
of $155.2 million , including $150.4 million in cash, and paid $2.7 million in
holdback payments on businesses previously acquired, as compared to the nine
months ended September 30, 2020 during which we paid $26.4 million in total
consideration, including $23.1 million in cash, to acquire six businesses,
including five tuck-in solid waste collection business in our Western region and
one recycling operation in our Resource Solutions operating segment, and paid
$2.3 million in holdback payments on businesses previously acquired.
Capital expenditures. Capital expenditures were $4.3 million higher in the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020 primarily due to:
•$3.5 million in higher capital expenditures from phase VI construction and
development costs related to long-term infrastructure at the Subtitle D landfill
in Coventry, Vermont ("Waste USA Landfill ") to facilitate future landfill
airspace construction, which will significantly enhance the economic useful life
of the Waste USA Landfill once construction is finished; and
•$3.1 million in higher growth capital expenditures related primarily to other
landfill development; partially offset by
•$(0.9) million in lower replacement capital expenditures as lower capital spend
on landfill development more than offset additional capital spend, including
vehicles, machinery, equipment and containers, associated with business growth;
and
•$(1.4) million in lower capital expenditures associated with the integration of
newly acquired operations, which includes planned capital expenditures following
an acquisition, as well as non-routine development investments that are expected
to provide long-term returns.
Cash flows from financing activities.
A summary of financing cash flows (in millions) follows:
Nine Months Ended
September 30,
2021 2020
Proceeds from long-term borrowings $ 0.5 $ 154.4
Principal payments on debt (8.6)
(145.0)
Payments of debt issuance costs -
(1.5)
Proceeds from the exercise of share based awards 0.2
0.1
Net cash (used in) provided by financing activities
8.0
A summary of the most significant items affecting the change in our financing cash flows follows: Debt activity. Net cash associated with debt activity decreased$(17.5) million . The decrease in financing cash flows is related to our strong cash position in the nine months endedSeptember 30, 2021 , combined with prior year borrowings against our Revolving Credit Facility, which was subsequently paid down in the prior year. Payments of debt issuance costs. We recorded$1.5 million of debt issuance cost payments in the nine months endedSeptember 30, 2020 related to the issuance of$40.0 million aggregate principal amount ofNew York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2020. 39 -------------------------------------------------------------------------------- Outstanding Long-Term Debt Credit Facility As ofSeptember 30, 2021 , we had outstanding$347.4 million aggregate principal amount of borrowings under our Term Loan Facility and no borrowings under our$200.0 million Revolving Credit Facility. The Credit Facility has a 5-year term that matures inMay 2023 and bears interest at a rate of LIBOR plus 1.50% per annum, which will be reduced to a rate of LIBOR plus as low as 1.25% upon us reaching a consolidated net leverage ratio of less than 2.25x. Our 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 ofSeptember 30, 2021 , further advances were available under the Revolving Credit Facility in the amount of$172.0 million . The available amount is net of outstanding irrevocable letters of credit totaling$28.0 million , at which date 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 ("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. As ofSeptember 30, 2021 , financial covenant requirements included a minimum interest coverage ratio of 3.00 times and a maximum consolidated net leverage ratio of 4.00 times. In addition to the financial covenants described above, 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. We do not believe that these restrictions impact our ability to meet future liquidity needs. As ofSeptember 30, 2021 , we were in compliance with all covenants contained in the Credit Agreement. 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 ofSeptember 30, 2021 , we had outstanding$162.0 aggregate principal amount of tax exempt bonds,$44.8 million aggregate principal amount of finance leases and$4.4 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. Inflation Inflationary increases in costs have affected our historical operating margins, including current inflationary pressures associated primarily with fuel, labor and certain capital items. We believe that inflation generally has not had a significant impact on our operating results. Consistent with industry practice, most of our contracts provide for a pass-through of certain costs to our customers, including increases in landfill tipping fees and in some cases fuel costs, intended to mitigate the impact of inflation on our operating results. We have also implemented a number of operating efficiency programs that seek to improve productivity and reduce our service costs, and a fuel surcharge, which is designed to recover escalating fuel price fluctuations above an annually reset floor. Based on these implementations, we believe we should be able to sufficiently offset most cost increases resulting from inflation. However, competitive factors may require us to absorb at least a portion of these cost increases. Additionally, management's estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities. Regional Economic Conditions Our business is primarily located in the northeasternUnited States . Therefore, our business, financial condition and results of operations are susceptible to downturns in the general economy in this geographic region and other factors affecting the region, such as state regulations and severe weather conditions. There can be no assurance that the economic conditions in the northeasternUnited States will recover from the impact of the COVID-19 pandemic at the same time as, or at the same rate as, other areas ofthe United States . 40
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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 ; and •decreased tourism inVermont ,New Hampshire ,Maine and easternNew York during the winter months tends to lower the volume of waste generated by commercial and restaurant customers, which is partially offset by increased volume from the ski industry. 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 theResource Solutions operating segment experiences increased volumes of fiber in November and December due to increased retail activity during the holiday season. Critical Accounting Policies and Estimates The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, as applicable, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 significant accounting policies are more fully discussed in Item 8 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 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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