Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We make statements in this Quarterly Report on Form 10-Q that are forward-looking in nature. These include:
● Statements regarding our landfills, including capacity, duration, special projects, demand for and pricing of recyclables, landfill alternatives and related capital expenditures;
● Discussion of competition, loss of contracts, price increases and additional exclusive and/or long-term collection service arrangements;
● Forecasts of cash flows necessary for operations and free cash flow to reduce leverage as well as our ability to draw on our credit facility and access the capital markets to refinance or expand;
● Statements regarding our ability to access capital resources or credit markets at all or on favorable terms;
● Plans for, and the amounts of, certain capital expenditures for our existing and newly acquired properties and equipment;
● Statements regarding fuel, oil and natural gas demand, prices, and price volatility;
● Assessments of regulatory developments and potential changes in environmental, health, safety and tax laws and regulations; and
● Other statements on a variety of topics such as the coronavirus disease 2019 (“COVID-19”) pandemic, credit risk of customers, seasonality, labor/pension costs and labor union activity, operational and safety risks, acquisitions, litigation results, goodwill impairments, insurance costs and cybersecurity threats.
These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “may,” “might,” “will,” “could,” “should” or “anticipates,” or the negative thereof or comparable terminology, or by discussions of strategy.
Our business and operations are subject to a variety of risks and uncertainties and, consequently, actual results may differ materially from those projected by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, risk factors detailed from time to time in our filings with the SEC and the securities commissions or similar regulatory authorities in Canada.
There may be additional risks of which we are not presently aware or that we currently believe are immaterial that could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements to reflect events or circumstances that may change, unless required under applicable securities laws.
OVERVIEW OF OUR BUSINESS
We are an integrated solid waste services company that provides non-hazardous waste collection, transfer and disposal services, along with resource recovery primarily through recycling and renewable fuels generation, in mostly exclusive and secondary markets across 43 states in the U.S. and six provinces in Canada. Waste Connections also provides non-hazardous oil and natural gas exploration and production (“E&P”) waste treatment, recovery and disposal services in several basins across the U.S., as well as intermodal services for the movement of cargo and solid waste containers in the Pacific Northwest.
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Environmental, organizational and financial sustainability initiatives have been key components of our success since we were founded in 1997. We remain committed to growing and expanding these efforts as our industry and technology continue to evolve. To that end, in 2020 we made a $500 million commitment to the advancement of the long-term, aspirational targets outlined in our 2021 Sustainability Report. This report can be found at www.wasteconnections.com/sustainability but does not constitute a part of, and is not incorporated by reference into, this Quarterly Report on Form 10-Q.
We generally seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. In markets where waste collection services are provided under exclusive arrangements, or where waste disposal is municipally owned or funded or available at multiple municipal sources, we believe that controlling the waste stream by providing collection services under exclusive arrangements is often more important to our growth and profitability than owning or operating landfills. We also target niche markets, like non-hazardous E&P waste treatment, recovery and disposal services.
The solid waste industry is local and highly competitive in nature, requiring substantial labor and capital resources. We compete for collection accounts primarily on the basis of price and, to a lesser extent, the quality of service, and compete for landfill business on the basis of tipping fees, geographic location and quality of operations. The solid waste industry has been consolidating and continues to consolidate as a result of a number of factors, including the increasing costs and complexity associated with waste management operations and regulatory compliance. Many small independent operators and municipalities lack the capital resources, management, operating skills and technical expertise necessary to operate effectively in such an environment. The consolidation trend has caused solid waste companies to operate larger landfills that have complementary collection routes that can use company-owned disposal capacity. Controlling the point of transfer from haulers to landfills has become increasingly important as landfills continue to close and disposal capacity moves farther from the collection markets it serves.
Generally, the most profitable operators within the solid waste industry are those companies that are vertically integrated or enter into long-term collection contracts. A vertically integrated operator will benefit from: (1) the internalization of waste, which is bringing waste to a company-owned landfill; (2) the ability to charge third-party haulers tipping fees either at landfills or at transfer stations; and (3) the efficiencies gained by being able to aggregate and process waste at a transfer station prior to landfilling.
The demand for our E&P waste services depends on the continued demand for, and production of, oil and natural gas. Crude oil and natural gas prices historically have been volatile. Macroeconomic and geopolitical conditions, including a significant decline in oil prices driven by both surplus production and supply, as well as the decrease in demand caused by factors including the COVID-19 pandemic, have resulted in decreased levels of E&P activity and a corresponding decrease in demand for our E&P waste services. Additionally, across the industry there is uncertainty regarding future demand for oil and related services, as noted by several energy companies, many of whom are customers of our E&P operations. These companies have written down the values of their oil and gas assets in anticipation of the potential for the decarbonization of their energy product mix given an increased global focus on reducing greenhouse gases and addressing climate change. Such uncertainty regarding global demand has had a significant impact on the investment and operating plans of our E&P waste customers in the basins where we operate. If the prices of crude oil and natural gas substantially decline, it could lead to declines in the level of production activity and demand for our E&P waste services, which could result in the recognition of impairment charges on our intangible assets and property and equipment associated with our E&P operations. Conversely, sustained increases in prices of crude oil as a result of inflationary pressures, the uncertainty associated with the Ukrainian conflict and any related bans on oil sales from Russia or supply chain disruptions could result in increasing levels of production activity and demand for our E&P waste services.
THE COVID-19 PANDEMIC’S IMPACT ON OUR RESULTS OF OPERATIONS
March 11, 2022 marked the two-year anniversary of COVID-19 being declared a global pandemic by the World Health Organization. The related economic disruptions largely associated with closures or restrictions put into effect following the onset of the COVID-19 pandemic in the first quarter of 2020 resulted in declines in solid waste commercial collection, transfer station and landfill volumes, and roll off activity. Throughout the remaining fiscal year 2020 and during 2021, solid waste revenue and reported volumes largely reflected the pace and shape of the closures and subsequent
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reopening activity, with the timing and magnitude of recovery varying by market. Most of the impacts to solid waste volumes associated with the pandemic have largely abated, with landfill volumes and roll off pulls returning to pre-pandemic levels. In certain markets, commercial collection volumes have not returned to pre-pandemic levels.
The COVID-19 pandemic also contributed to a decline in demand for and the value of crude oil, which impacted E&P drilling activity and resulted in lower E&P waste revenue. In recent quarters, E&P waste revenue has improved sequentially on increased drilling activity in several of the major basins.
Since the onset of the COVID-19 pandemic, protecting the health, welfare and safety of our employees has been our top priority. Recognizing the potential for financial hardship and other challenges, we have looked to provide a safety net for our employees on issues of income and family health. To that end, since the onset of the pandemic through year-end 2021, we have incurred over $40 million in incremental COVID-19-related costs, primarily supplemental pay for frontline employees. During Q1 2022, we continued to support our employees and their families, including approximately $10 million in supplemental pay and benefits due to surges in cases related to certain variants of COVID-19.
As a result of the COVID-19 pandemic and subsequent reopening activity, we have also experienced an impact to our operating costs as a result of factors including supply chain disruptions and labor constraints, as demand has recovered and competition has increased. As a result, we have incurred incremental costs associated with higher wages, increased overtime as a result of higher turnover, and increased reliance on third-party services.
The impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows in future periods will depend largely on future developments, including the duration and spread of the outbreak in the U.S. and Canada, the rate of vaccinations, the severity of COVID-19 variants, the actions to contain such coronavirus variants, and how quickly and to what extent normal economic and operating conditions can resume.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements. As described by the SEC, critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on the financial condition or operating performance of a company. Such critical accounting estimates and assumptions are applicable to our reportable segments. Refer to our most recent Annual Report on Form 10-K for a complete description of our critical accounting estimates and assumptions.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
The following table sets forth items in our Condensed Consolidated Statements of Net Income in thousands of U.S. dollars and as a percentage of revenues for the periods indicated.
Three Months Ended March 31,
2022
2021
Revenues
$
1,646,255
100.0
%
$
1,395,942
100.0
%
Cost of operations
989,518
60.1
825,920
59.2
Selling, general and administrative
163,414
9.9
141,422
10.1
Depreciation
179,950
11.0
157,402
11.3
Amortization of intangibles
37,635
2.3
32,192
2.3
Impairments and other operating items
1,878
0.1
634
0.0
Operating income
273,860
16.6
238,372
17.1
Interest expense
(41,324)
(2.5)
(42,425)
(3.0)
Interest income
137
0.0
1,103
0.1
Other income (expense), net
(3,466)
(0.2)
3,548
0.2
Income tax provision
(48,839)
(2.9)
(40,291)
(2.9)
Net income
180,368
11.0
160,307
11.5
Net loss (income) attributable to noncontrolling interests
(44)
0.0
2
0.0
Net income attributable to Waste Connections
$
180,324
11.0
%
$
160,309
11.5
%
Revenues . Total revenues increased $250.3 million, or 17.9%, to $1.646 billion for the three months ended March 31, 2022, from $1.396 billion for the three months ended March 31, 2021.
During the three months ended March 31, 2022, incremental revenue from acquisitions closed during, or subsequent to, the three months ended March 31, 2021, increased revenues by $112.3 million.
Operations that were divested subsequent to March 31, 2021 decreased revenues by $2.3 million for the three months ended March 31, 2022.
During the three months ended March 31, 2022, the net increase in prices charged to our customers at our existing operations was $94.0 million, consisting of $83.5 million of core price increases and surcharges of $10.5 million.
During the three months ended March 31, 2022, we overcame the nonrenewal of two large residential collection contracts subsequent to March 31, 2021, which recognized $10.7 million of revenue in the prior year period, to generate total solid waste volume in our existing business of $7.0 million due primarily to increased commercial and roll off collection and increased landfill disposal.
E&P waste revenues at facilities owned during the three months ended March 31, 2022 and 2021 increased $16.6 million due to recoveries in the demand for crude oil resulting in an increase in the value of crude oil, increases in drilling and production activity levels and increases in overall demand for our E&P waste services.
Revenues from sales of recyclable commodities at facilities owned during the three months ended March 31, 2022 and 2021 increased $15.0 million due primarily to higher prices for old corrugated cardboard, aluminum, plastics and other paper products, higher volumes collected from commercial recycling customers, which declined in the prior year period due to economic disruptions resulting from the COVID-19 pandemic, and the impact of changes in our accounting policy associated with recognizing certain recyclable commodity sales gross of selling and processing expenses.
Other revenues increased $7.7 million during the three months ended March 31, 2022, due primarily to a $2.8 million increase resulting from higher prices for renewable energy credits associated with the generation of landfill gas at our Canada segment, a $2.7 million increase in intermodal revenues due primarily to reductions in shipping port logistical constraints which decreased intermodal cargo volumes in the prior year period, a $1.1 million increase in landfill gas sales at our U.S. segments and a $1.1 million increase in other non-core revenue sources.
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Cost of Operations . Total cost of operations increased $163.6 million, or 19.8%, to $989.5 million for the three months ended March 31, 2022, from $825.9 million for the three months ended March 31, 2021. The increase was primarily the result of an increase in operating costs at our existing operations of $91.3 million and $74.2 million of additional operating costs from acquisitions closed during, or subsequent to, the three months ended March 31, 2021, partially offset by a decrease in operating costs of $1.9 million at operations divested subsequent to the three months ended March 31, 2021.
The increase in operating costs of $91.3 million at our existing operations for the three months ended March 31, 2022 consisted of an increase in labor and recurring incentive compensation expenses of $20.4 million due primarily to employee pay increases and headcount additions to support solid waste and E&P volume increases, an increase in fuel expense of $16.2 million due to higher diesel and natural gas prices, an increase in truck, container, equipment and facility maintenance and repair expenses of $11.9 million due primarily to increased collection routes and equipment operating hours and parts and service rate increases, an increase in third-party trucking and transportation expenses of $10.2 million due primarily to increased landfill special waste volumes requiring trucking and transportation services to our landfills and higher rates charged by third-party providers, an increase in third-party disposal expenses of $6.7 million due primarily to increased solid waste collection volumes, an increase in supplemental compensation to non-management personnel of $9.0 million to provide financial assistance associated with the impact of COVID-19, an increase in taxes on revenues of $4.3 million due primarily to increased revenues, an increase in expenses for purchasing and processing recyclable commodities of $3.5 million due to higher recyclable commodity values and changes in our accounting policy associated with recognizing certain recyclable commodity sales gross of selling and processing expenses, an increase in leachate expense of $2.2 million due primarily to higher precipitation in certain markets where our landfills are located, an increase in expenses for auto and workers’ compensation claims of $1.9 million due primarily to adjustments recorded in the prior year period to decrease projected losses on outstanding claims originally recorded prior to 2021, an increase in insurance premium expenses of $1.4 million due primarily to increased insurance premium costs for auto and environmental compliance, an increase in subcontracted hauling services at our solid waste operations of $1.2 million due to higher costs charged by third-party providers, an increase in intermodal rail expenses of $1.2 million due to higher cargo volumes and $4.3 million of other net expense increases, partially offset by a decrease in employee medical benefits expenses of $3.1 million due to decreased severity and declines in the quantity of medical visits.
Cost of operations as a percentage of revenues increased 0.9 percentage points to 60.1% for the three months ended March 31, 2022, from 59.2% for the three months ended March 31, 2021. The increase as a percentage of revenues consisted of a 0.7 percentage point increase from higher fuel expense, a 0.6 percentage point increase from higher supplemental compensation to non-management personnel, a 0.3 percentage point increase from higher third-party trucking and transportation expenses, a 0.3 percentage point increase from acquisitions closed during, or subsequent to, the three months ended March 31, 2021 having operating margins lower than our company average and a 0.2 percentage point increase from higher maintenance and repair expenses, partially offset by a 0.4 percentage point decrease from lower benefits expenses, a combined 0.6 percentage point decrease from disposal and labor due to price-driven revenue increases and a 0.2 percentage point decrease from all other net changes.
SG&A . SG&A expenses increased $22.0 million, or 15.6%, to $163.4 million for the three months ended March 31, 2022, from $141.4 million for the three months ended March 31, 2021. The increase was comprised of an increase of $13.7 million in SG&A expenses at our existing operations and $8.5 million of additional SG&A expenses from operating locations at acquisitions closed during, or subsequent to, the three months ended March 31, 2021, partially offset by a decrease in SG&A expenses of $0.2 million at operations divested during, or subsequent to, the three months ended March 31, 2021.
The increase in SG&A expenses at our existing operations of $13.7 million for the three months ended March 31, 2022 was comprised of a collective increase in travel, meeting, training and community activity expenses of $5.5 million due to increased travel and social gatherings in the current year period due to a reduction in restrictions associated with the COVID-19 pandemic, an increase in direct acquisition expenses of $4.0 million due to an increase in acquisition activity in the current period, an increase in administrative payroll expenses of $3.5 million due primarily to annual pay and headcount increases, an increase in equity-based compensation expenses of $2.2 million associated with our annual recurring grant of restricted share units to our personnel, an increase in professional fees of $1.6 million due primarily to increased legal services, an increase of $0.8 million resulting from the payment of supplemental bonuses to non-
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management employees to provide financial assistance associated with the impact of COVID-19 and $1.0 million of other net expense increases, partially offset by a decrease in deferred compensation expenses of $3.1 million as a result of decreases in the market value of investments to which employee deferred compensation liability balances are tracked and a decrease in accrued recurring cash incentive compensation expense to our management of $1.8 million.
SG&A expenses as a percentage of revenues decreased 0.2 percentage points to 9.9% for the three months ended March 31, 2022, from 10.1% for the three months ended March 31, 2021. The decrease as a percentage of revenues consisted of a 0.3 percentage point decrease from lower cash incentive compensation expense and a 0.2 percentage point decrease from lower deferred compensation expense, partially offset by a 0.3 percentage point increase from higher direct acquisition expenses.
Depreciation . Depreciation expense increased $22.5 million, or 14.3%, to $179.9 million for the three months ended March 31, 2022, from $157.4 million for the three months ended March 31, 2021. The increase was comprised of an increase in depreciation and depletion expense of $10.8 million from acquisitions closed during, or subsequent to, the three months ended March 31, 2021, an increase in depreciation expense of $6.2 million from the impact of additions to our fleet and equipment purchased to support our existing operations, an increase in depletion expense of $6.2 million resulting from increased landfill municipal solid waste, special waste and E&P volumes, partially offset by a decrease in depreciation and depletion expense of $0.7 million from operations divested subsequent to the three months ended March 31, 2021.
Depreciation expense as a percentage of revenues decreased 0.3 percentage points to 11.0% for the three months ended March 31, 2022, from 11.3% for the three months ended March 31, 2021. The decrease as a percentage of revenues was primarily attributable to the impact of price-driven revenue increases in our solid waste services, recyclable commodity sales and renewable energy credits.
Amortization of Intangibles . Amortization of intangibles expense increased $5.4 million, or 16.9%, to $37.6 million for the three months ended March 31, 2022, from $32.2 million for the three months ended March 31, 2021. The increase was the result of $9.0 million from intangible assets acquired in acquisitions closed during, or subsequent to, the three months ended March 31, 2021, partially offset by a decrease of $3.6 million from certain intangible assets becoming fully amortized subsequent to March 31, 2021.
Amortization expense as a percentage of revenues was unchanged at 2.3% for the three months ended March 31, 2022 and 2021.
Impairments and Other Operating Items . Impairments and other operating items increased $1.3 million, to net losses totaling $1.9 million for the three months ended March 31, 2022, from net losses totaling $0.6 million for the three months ended March 31, 2021.
The net losses of $1.9 million recorded during the three months ended March 31, 2022 consisted of $3.6 million of charges to terminate or write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to their original estimated termination date, partially offset by net gains of $1.7 million from disposal of property and equipment.
The net losses of $0.6 million recorded during the three months ended March 31, 2021 consisted of $0.5 million of charges to terminate or write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to their original estimated termination date and $0.1 million of other net charges.
Operating Income . Operating income increased $35.5 million, or 14.9%, to $273.9 million for the three months ended March 31, 2022, from $238.4 million for the three months ended March 31, 2021.
The increase in our operating income for the three months ended March 31, 2022 was due primarily to price increases for our solid waste services, increases in solid waste collection and disposal volumes, operating income contributions from increased sales of recyclable commodities and renewable energy credits associated with the generation of landfill gas,
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operating income generated from acquisitions closed during, or subsequent to, the three months ended March 31, 2021 and an increase in earnings at our E&P waste operations.
Operating income as a percentage of revenues decreased 0.5 percentage points to 16.6% for the three months ended March 31, 2022, from 17.1% for the three months ended March 31, 2021. The decrease in operating income as a percentage of revenues was comprised of a 0.9 percentage point increase in cost of operations and a 0.1 percentage point increase in impairments and other operating items, partially offset by a 0.3 percentage point decrease in depreciation expense and a 0.2 percentage point decrease in SG&A expense.
Interest Expense . Interest expense decreased $1.1 million, or 2.6%, to $41.3 million for the three months ended March 31, 2022, from $42.4 million for the three months ended March 31, 2021. The decrease was primarily attributable to a decrease of $13.7 million from the repayment of $1.75 billion of senior unsecured notes in 2021, a decrease of $0.8 million from lower interest rates on borrowings outstanding under our Credit Agreement and $0.7 million of other net decreases, partially offset by an increase of $10.9 million from the issuance of $2.0 billion of senior unsecured notes subsequent to March 31, 2021 and an increase of $3.2 million due to an increase in the average borrowings outstanding under our Credit Agreement.
Interest Income . Interest income decreased $1.0 million to $0.1 million for the three months ended March 31, 2022, from $1.1 million for the three months ended March 31, 2021. The decrease was primarily attributable to lower average cash balances in the current period.
Other Income (Expense), Net . Other income (expense), net decreased $7.0 million, to an expense total of $3.5 million for the three months ended March 31, 2022, from an income total of $3.5 million for the three months ended March 31, 2021.
Other expense of $3.5 million recorded during the three months ended March 31, 2022 consisted of $1.9 million from a decline in the value of investments purchased to fund our employee deferred compensation obligations, a $1.0 million adjustment to increase certain acquisition-related accrued liabilities recorded in prior periods and $0.6 million of other net expenses.
Other income of $3.5 million recorded during the three months ended March 31, 2021 consisted of $1.2 million of income earned on investments purchased to fund our employee deferred compensation obligations, $1.2 million of adjustments to decrease certain accrued liabilities acquired in prior period acquisitions and $1.1 million in other net income sources.
Income Tax Provision . Income taxes increased $8.5 million, to $48.8 million for the three months ended March 31, 2022, from $40.3 million for the three months ended March 31, 2021. Our effective tax rate for the three months ended March 31, 2022 was 21.3%. Our effective tax rate for the three months ended March 31, 2021 was 20.1%.
The income tax provision for the three months ended March 31, 2022 included a benefit of $2.4 million from share-based payment awards being recognized in the income statement when settled, as well as a portion of our internal financing being taxed at effective rates substantially lower than the U.S. federal statutory rate.
The income tax provision for the three months ended March 31, 2021 included a benefit of $2.0 million from share-based payment awards being recognized in the income statement when settled, as well as a portion of our internal financing being taxed at effective rates substantially lower than the U.S. federal statutory rate.
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SEGMENT RESULTS
General
No single contract or customer accounted for more than 10% of our total revenues at the consolidated or reportable segment level during the periods presented. The following table disaggregates our revenue by service line for the periods indicated (dollars in thousands of U.S. dollars).
Three Months Ended March 31,
2022
2021
Commercial
$
499,676
$
426,395
Residential
440,288
400,819
Industrial and construction roll off
259,488
209,258
Total collection
1,199,452
1,036,472
Landfill
299,765
271,936
Transfer
217,957
189,323
Recycling
63,094
32,448
E&P
43,555
28,012
Intermodal and other
45,693
35,634
Intercompany
(223,261)
(197,883)
Total
$
1,646,255
$
1,395,942
We manage our operations through the following five geographic solid waste operating segments: Eastern, Southern, Western, Central and Canada. Our five geographic solid waste operating segments comprise our reportable segments. Our Chief Operating Decision Maker evaluates operating segment profitability and determines resource allocations based on several factors, of which the primary financial measure is segment EBITDA. We define segment EBITDA as earnings before interest, taxes, depreciation, amortization, impairments and other operating items and other income (expense). Segment EBITDA is not a measure of operating income, operating performance or liquidity under GAAP and may not be comparable to similarly titled measures reported by other companies. Our management uses segment EBITDA in the evaluation of segment operating performance as it is a profit measure that is generally within the control of the operating segments. Each operating segment is responsible for managing several vertically integrated operations, which are comprised of districts.
Summarized financial information for our reportable segments are shown in the following tables in thousands of U.S. dollars and as a percentage of total segment revenue for the periods indicated.
Three Months Ended
EBITDA
Depreciation and
March 31, 2022
Revenue
EBITDA (b)
Margin
Amortization
Eastern
$
421,597
$
107,788
25.6
%
$
65,284
Southern
387,064
108,610
28.1
%
47,572
Western
346,710
104,747
30.2
%
36,563
Central
276,177
92,036
33.3
%
35,026
Canada
214,707
84,844
39.5
%
27,364
Corporate (a)
—
(4,702)
—
5,776
$
1,646,255
$
493,323
30.0
%
$
217,585
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Three Months Ended
EBITDA
Depreciation and
March 31, 2021
Revenue
EBITDA (b)
Margin
Amortization
Eastern
$
336,461
$
89,121
26.5
%
$
53,474
Southern
338,161
93,424
27.6
%
45,485
Western
297,004
93,825
31.6
%
30,089
Central
235,386
79,040
33.6
%
31,575
Canada
188,930
73,940
39.1
%
26,492
Corporate (a)
—
(750)
—
2,479
$
1,395,942
$
428,600
30.7
%
$
189,594
(a) The majority of Corporate expenses are allocated to the five operating segments. Direct acquisition expenses, expenses associated with common shares held in the deferred compensation plan exchanged for other investment options and share-based compensation expenses associated with Progressive Waste share-based grants outstanding at June 1, 2016 that were continued by the Company are not allocated to the five operating segments and comprise the net EBITDA for our Corporate segment for the periods presented.
(b) For those items included in the determination of segment EBITDA, the accounting policies of the segments are the same as those described in our most recent Annual Report on Form 10-K.
A reconciliation of segment EBITDA to Income before income tax provision is included in Note 10 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this report.
Significant changes in revenue, EBITDA and depreciation, depletion and amortization for our reportable segments for the three month periods ended March 31, 2022, compared to the three month periods ended March 31, 2021, are discussed below.
Eastern
Revenue increased $85.1 million to $421.6 million for the three months ended March 31, 2022, from $336.5 million for the three months ended March 31, 2021, due to price increases, solid waste collection and disposal volume increases, contributions from acquisitions, higher prices for recyclable commodities and higher volumes collected from commercial recycling customers.
EBITDA increased $18.7 million to $107.8 million for the three months ended March 31, 2022, from $89.1 million for the three months ended March 31, 2021. EBITDA margin was 25.6% and 26.5% for the three months ended March 31, 2022 and 2021, respectively. The decrease in our EBITDA margin was due primarily to increased diesel fuel expenses, increased third-party trucking and transportation expenses, increased repair and maintenance expenses, increased leachate disposal expenses and increased corporate overhead expense allocations, partially offset by decreases from disposal due to price-driven revenue increases and decreased medical benefits expenses.
Depreciation, depletion and amortization expense increased $11.8 million, to $65.3 million for the three months ended March 31, 2022, from $53.5 million for the three months ended March 31, 2021, due to assets acquired in acquisitions, higher depreciation from additions to our fleet and equipment and higher depletion from increased landfill volumes.
Southern
Revenue increased $48.9 million to $387.1 million for the three months ended March 31, 2022, from $338.2 million for the three months ended March 31, 2021, due to solid waste price increases, increased E&P waste revenues attributable to increases in drilling and production activity levels resulting in increases in the demand for our E&P waste services, contributions from acquisitions and increased roll off collection and landfill volumes, partially offset by lower residential collection volumes due to the loss of a collection contract subsequent to March 31, 2021 and a decrease resulting from the divestiture of certain non-strategic operating locations.
EBITDA increased $15.2 million to $108.6 million for the three months ended March 31, 2022, from $93.4 million for the three months ended March 31, 2021. EBITDA margin was 28.1% and 27.6% for the three months ended March
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31, 2022 and 2021, respectively. The increase in our EBITDA margin was due to increased earnings at our E&P operations, price-led increases in solid waste revenue at locations owned in the comparable periods and decreased medical benefits expenses, partially offset by increased diesel and natural gas fuel expenses, increased vehicle and equipment maintenance and repair expenses and the impact of acquisitions closed subsequent to March 31, 2021 having lower EBITDA margins than our segment average.
Depreciation, depletion and amortization expense increased $2.1 million, to $47.6 million for the three months ended March 31, 2022, from $45.5 million for the three months ended March 31, 2021, due to assets acquired in acquisitions and higher depletion from increased solid waste and E&P landfill volumes.
Western
Revenue increased $49.7 million to $346.7 million for the three months ended March 31, 2022, from $297.0 million for the three months ended March 31, 2021, due to contributions from acquisitions, price increases, increased collection and disposal volumes, higher prices for recyclable commodities and higher volumes collected from residential recycling customers and increased intermodal revenue.
EBITDA increased $10.9 million to $104.7 million for the three months ended March 31, 2022, from $93.8 million for the three months ended March 31, 2021. EBITDA margin was 30.2% and 31.6% for the three months ended March 31, 2022 and 2021, respectively. The decrease in our EBITDA margin was due to increased vehicle and equipment maintenance and repair expenses, increased diesel and natural gas fuel expenses, increased third-party trucking and transportation expenses and increased labor expenses attributable to pay rate increases, partially offset by decreases from disposal due to price-driven revenue increases and decreased medical benefits expenses.
Depreciation, depletion and amortization expense increased $6.5 million, to $36.6 million for the three months ended March 31, 2022, from $30.1 million for the three months ended March 31, 2021, due to assets acquired in acquisitions and higher depreciation from additions to our fleet and equipment.
Central
Revenue increased $40.8 million to $276.2 million for the three months ended March 31, 2022, from $235.4 million for the three months ended March 31, 2021, due to price increases, contributions from acquisitions and higher prices for recyclable commodities.
EBITDA increased $13.0 million to $92.0 million for the three months ended March 31, 2022, from $79.0 million for the three months ended March 31, 2021. EBITDA margin was 33.3% and 33.6% for the three months ended March 31, 2022 and 2021, respectively. The decrease in our EBITDA margin was due to increased vehicle and equipment maintenance and repair expenses, increased diesel and natural gas fuel expenses and increased labor expenses attributable to pay rate increases, partially offset by decreased medical benefits expenses and decreased third-party trucking and transportation expenses.
Depreciation, depletion and amortization expense increased $3.4 million, to $35.0 million for the three months ended March 31, 2022, from $31.6 million for the three months ended March 31, 2021, due to assets acquired in acquisitions and higher depreciation from additions to our fleet and equipment.
Canada
Revenue increased $25.8 million to $214.7 million for the three months ended March 31, 2022, from $188.9 million for the three months ended March 31, 2021, due to price increases, contributions from acquisitions, higher commercial and roll off collection volumes, higher landfill special waste volumes, higher prices for renewable energy credits associated with the generation of landfill gas, higher prices for recyclable commodities and higher volumes collected from commercial recycling customers, partially offset by lower residential collection volumes due to the loss of a collection contract subsequent to March 31, 2021.
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EBITDA increased $10.9 million to $84.8 million for the three months ended March 31, 2022, from $73.9 million for the three months ended March 31, 2021. EBITDA margin was 39.5% and 39.1% for the three months ended March 31, 2022 and 2021, respectively. The increase in our EBITDA margin was due to price-led increases in revenue at locations owned in the comparable periods, partially offset by increased diesel fuel expenses and increased cost of recyclable commodities expenses.
Depreciation, depletion and amortization expense increased $0.9 million, to $27.4 million for the three months ended March 31, 2022, from $26.5 million for the three months ended March 31, 2021, due to assets acquired in acquisitions and higher depletion from increased landfill volumes.
Corporate
EBITDA decreased $4.0 million, to a loss of $4.7 million for the three months ended March 31, 2022, from a loss of $0.7 million for the three months ended March 31, 2021. The decrease was due to increased equity-based compensation expenses, increased travel, meeting, training and community activity expenses, increased direct acquisition expenses, increased legal expenses and the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of COVID-19, partially offset by increased allocations of corporate overhead expenses to our segments, decreased deferred compensation expenses and decreased cash incentive compensation expense to our management.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain cash flow information for the three months ended March 31, 2022 and 2021 (in thousands of U.S. dollars):
Three Months Ended
March 31,
2022
2021
Net cash provided by operating activities
$
440,897
$
400,396
Net cash used in investing activities
(489,881)
(100,553)
Net cash provided by (used in) financing activities
292,058
(165,482)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
595
403
Net increase in cash, cash equivalents and restricted cash
243,669
134,764
Cash, cash equivalents and restricted cash at beginning of period
219,615
714,389
Cash, cash equivalents and restricted cash at end of period
$
463,284
$
849,153
Operating Activities Cash Flows
For the three months ended March 31, 2022, net cash provided by operating activities was $440.9 million. For the three months ended March 31, 2021, net cash provided by operating activities was $400.4 million. The $40.5 million increase was due primarily to the following:
1) Increase in earnings — Our increase in net cash provided by operating activities was favorably impacted by $54.4 million from an increase in net income, excluding depreciation, amortization of intangibles, share-based compensation, adjustments to and payments of contingent consideration recorded in earnings and loss on disposal of assets and impairments, due primarily to price increases, earnings from acquisitions closed during, or subsequent to, the three months ended March 31, 2021, earnings generated from the increased sales of recyclable commodities and renewal energy credits associated with the generation of landfill gas and an increase in earnings at our E&P waste operations.
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2) Deferred income taxes — Our increase in net cash provided by operating activities was favorably impacted by $30.0 million from deferred income taxes as changes in deferred income taxes resulted in an increase to operating cash flows of $38.4 million for the three months ended March 31, 2022, compared to an increase to operating cash flows of $8.4 million for the three months ended March 31, 2021. The increase in deferred taxes for each of the three months ended March 31, 2022 and 2021 was attributable to capital expenditures providing tax benefits resulting from accelerated tax depreciation.
3) Accounts payable and accrued liabilities — Our increase in net cash provided by operating activities was favorably impacted by $20.8 million from accounts payable and accrued liabilities as changes in accounts payable and accrued liabilities resulted in an increase to operating cash flows of $3.6 million for the three months ended March 31, 2022, compared to a decrease to operating cash flows of $17.2 million for the three months ended March 31, 2021. The increase for the three months ended March 31, 2022 was due primarily to increases in operating expenses during the period which remained as outstanding obligations at March 31, 2022, partially offset by the payment of annual cash incentive compensation to our management, which was accrued as a liability at year end. The decrease for the three months ended March 31, 2021 was due primarily to the payment of annual cash incentive compensation to our management, which was accrued as a liability at year end .
4) Deferred revenue — Our increase in net cash provided by operating activities was favorably impacted by $7.7 million from deferred revenue as changes in deferred revenue resulted in an increase to operating cash flows of $16.6 million for the three months ended March 31, 2022, compared to an increase to operating cash flows of $8.9 million for the three months ended March 31, 2021. For both comparative periods, deferred revenue increased due to price increases on our advanced billed residential and commercial collection services.
5) Accounts receivable – Our increase in net cash provided by operating activities was unfavorably impacted by $33.2 million from accounts receivable as changes in accounts receivable resulted in a decrease to operating cash flows of $11.2 million for the three months ended March 31, 2022, compared to an increase to operating cash flows of $22.0 million for the three months ended March 31, 2021. The decrease for the three months ended March 31, 2022 was due to increases in revenues, which remained as outstanding receivables at March 31, 2022. The increase for the three months ended March 31, 2021 was attributable to improved accounts receivable turnover resulting in lower uncollected receivable compared to the prior period end.
6) Prepaid expenses – Our increase in net cash provided by operating activities was unfavorably impacted by $29.8 million from prepaid expenses as changes in prepaid expenses resulted in a decrease to operating cash flows of $21.2 million for the three months ended March 31, 2022, compared to an increase to operating cash flows of $8.6 million for the three months ended March 31, 2021. The decrease for the three months ended March 31, 2022 was due primarily to inflation-led increases in inventory, prepaid income taxes for our Canadian operations and prepaid information technology application licenses. The increase for the three months ended March 31, 2021 was due primarily to the benefit of utilizing prior period prepaid vendor payments.
7) Other long-term liabilities – Our increase in net cash provided by operating activities was unfavorably impacted by $11.6 million from other long-term liabilities as changes in other long-term liabilities resulted in a decrease to operating cash flows of $5.5 million for the three months ended March 31, 2022, compared to an increase to operating cash flows of $6.1 million for the three months ended March 31, 2021. The decrease for the three months ended March 31, 2022 was due primarily to distributions to employees from our deferred compensation plan. The increase for the three months ended March 31, 2021 was primarily attributable to the receipt of funds associated with the eminent domain purchase of an operating facility that will be replaced with a newly constructed facility in a future period.
As of March 31, 2022, we had a working capital surplus of $155.1 million, including cash and equivalents of $391.4 million. Our working capital increased $355.1 million from a working capital deficit of $200.0 million at December 31, 2021 including cash and equivalents of $147.4 million, due primarily to an increase in cash balance and current income tax benefits. To date, we have experienced no loss or lack of access to our cash and equivalents; however, we can provide no assurances that access to our cash and equivalents will not be impacted by adverse conditions in the financial markets. Our strategy in managing our working capital is generally to apply the cash generated from our operations that remains after satisfying our working capital and capital expenditure requirements, along with share repurchase and dividend programs, to reduce the unhedged portion of our indebtedness under our Credit Agreement and to minimize our cash balances.
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Investing Activities Cash Flows
Net cash used in investing activities increased $389.3 million to $489.9 million for the three months ended March 31, 2022, from $100.6 million for the three months ended March 31, 2021. The significant components of the increase included the following:
1) An increase in cash paid for acquisitions of $346.7 million;
2) An increase in capital expenditures at operations owned in the comparable periods of $42.1 million due to increases in land and buildings, landfill site costs, trucks and containers; and
3) An increase in capital expenditures at operations acquired during the comparative periods of $13.4 million due to additional trucks and containers; less
4) An increase in proceeds from disposal of assets of $12.9 million due to additional disposal of non-strategic assets to provide funding toward new capital expenditures.
Financing Activities Cash Flows
Net cash provided by financing activities increased $457.6 million to $292.1 million for the three months ended March 31, 2022, from net cash used in financing activities of $165.5 million for the three months ended March 31, 2021. The significant components of the increase included the following:
1) An increase from the net change in long-term borrowings of $805.6 million (long-term borrowings increased $800.2 million during the three months ended March 31, 2022 and decreased $5.4 million during the three months ended March 31, 2021); and
2) An increase from the change in book overdraft of $16.9 million due primarily to maintaining, in the prior year period, additional funds in our bank accounts that were used to fund outstanding checks; less
3) A decrease from higher payments to repurchase our common shares of $359.0 million due to an increased volume of shares repurchased; less
4) A decrease from higher cash dividends paid of $5.5 million due primarily to an increase in our quarterly dividend rate for the three months ended March 31, 2022 to $0.23 per share, from $0.205 per share for the three months ended March 31, 2021; less
5) A decrease from higher debt issuance costs of $4.4 million attributable to senior note offerings completed in the comparative periods.
Our business is capital intensive. Our capital requirements include acquisitions and capital expenditures for landfill cell construction, landfill development, landfill closure activities and intermodal facility construction in the future.
On July 27, 2021, our Board of Directors approved, subject to receipt of regulatory approvals, the annual renewal of our normal course issuer bid, or the NCIB, to purchase up to 13,025,895 of our common shares during the period of August 10, 2021 to August 9, 2022 or until such earlier time as the NCIB is completed or terminated at our option. Shareholders may obtain a copy of our TSX Form 12 – Notice of Intention to Make a Normal Course Issuer Bid, without charge, by request directed to our Executive Vice President and Chief Financial Officer at (832) 442-2200. The timing and amounts of any repurchases pursuant to the NCIB will depend on many factors, including our capital structure, the market price of our common shares and overall market conditions. All common shares purchased under the NCIB will be immediately cancelled following their repurchase. Information regarding our NCIB can be found under the “Normal Course Issuer Bid” section in Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
Our Board of Directors authorized the initiation of a quarterly cash dividend in October 2010 and has increased it on an annual basis. In October 2021, our Board of Directors authorized an increase to our regular quarterly cash dividend of $0.025, from $0.205 to $0.230 per share. Cash dividends of $59.4 million and $53.9 million were paid during the three months ended March 31, 2022 and 2021, respectively. We cannot assure you as to the amounts or timing of future dividends.
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We made $152.3 million in capital expenditures for property and equipment during the three months ended March 31, 2022, and we expect to make total capital expenditures for property and equipment of approximately $850 million in 2022. We have funded and intend to fund the balance of our planned 2022 capital expenditures principally through cash on hand, internally generated funds and borrowings under our Credit Agreement. In addition, we may make substantial additional capital expenditures in acquiring land and solid waste businesses. If we acquire additional landfill disposal facilities, we may also have to make significant expenditures to bring them into compliance with applicable regulatory requirements, obtain permits or expand our available disposal capacity. We cannot currently determine the amount of these expenditures because they will depend on the number, nature, condition and permitted status of any acquired landfill disposal facilities. We believe that our cash and equivalents, Credit Agreement and the funds we expect to generate from operations will provide adequate cash to fund our working capital and other cash needs for the foreseeable future. However, disruptions in the capital and credit markets could adversely affect our ability to draw on our Credit Agreement or raise other capital. Our access to funds under the Credit Agreement is dependent on the ability of the banks that are parties to the agreement to meet their funding commitments. Those banks may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time.
As of March 31, 2022, $650.0 million under the term loan and $1.087 billion under the revolving credit facility were outstanding under the Credit Agreement, exclusive of outstanding standby letters of credit of $44.7 million. We also had $81.6 million of letters of credit issued and outstanding at March 31, 2022 under a facility other than the Credit Agreement. Our Credit Agreement matures in July 2026.
On March 9, 2022, we completed an underwritten public offering (the “Offering”) of $500.0 million aggregate principal amount of 3.20% Senior Notes due 2032 (the “New 2032 Senior Notes”). We issued the New 2032 Senior Notes under the Indenture, dated as of November 16, 2018, by and between the Company and U.S. Bank Trust Company, National Association, as successor in interest to U.S. Bank National Association, as trustee, as supplemented by the Sixth Supplemental Indenture, dated as of March 9, 2022.
We will pay interest on the New 2032 Senior Notes semi-annually in arrears. The New 2032 Senior Notes will mature on June 1, 2032. The New 2032 Senior Notes are our senior unsecured obligations, ranking equally in right of payment with our other existing and future unsubordinated debt and senior to any of our future subordinated debt. The New 2032 Senior Notes are not guaranteed by any of our subsidiaries.
See Note 9 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for further details on the debt agreements.
We are a well-known seasoned issuer with an effective shelf registration statement on Form S-3 filed in September 2021, which registers an unspecified amount of debt securities, including debentures, notes or other types of debt. In the future, we may issue debt securities under our shelf registration statement or in private placements from time to time on an opportunistic basis, based on market conditions and available pricing. Unless otherwise indicated in the relevant offering documents, we expect to use the proceeds from any such offerings for general corporate purposes, including repaying, redeeming or repurchasing debt, acquiring additional assets or businesses, capital expenditures and increasing our working capital.
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As of March 31, 2022, we had the following contractual obligations:
Payments Due by Period
(amounts in thousands of U.S. dollars)
Less Than
1 to 3
Over 5
Recorded Obligations
Total
1 Year
Years
3 to 5 Years
Years
Long-term debt
$
5,904,926
$
28,070
$
12,639
$
1,748,327
$
4,115,890
Cash interest payments
$
2,091,742
$
168,089
$
342,605
$
300,200
$
1,280,848
Contingent consideration
$
114,244
$
64,480
$
12,962
$
3,224
$
33,578
Operating leases
$
197,049
$
30,396
$
63,344
$
36,185
$
67,124
Final capping, closure and post-closure
$
1,655,241
$
18,468
$
38,670
$
14,643
$
1,583,460
____________________
Long-term debt payments include:
1) $1.087 billion in principal payments due July 2026 related to our revolving credit facility under our Credit Agreement. We may elect to draw amounts on our Credit Agreement in U.S. dollar LIBOR rate loans, U.S. dollar base rate loans, Canadian-based bankers’ acceptances or BA equivalent notes, and Canadian dollar prime rate loans. At March 31, 2022, $824.5 million of the outstanding borrowings drawn under the revolving credit facility were in U.S. LIBOR rate loans, which bear interest at the LIBOR rate plus the applicable margin (for a total rate of 1.46% on such date). At March 31, 2022, $100.0 million of the outstanding borrowings drawn under the revolving credit facility were in U.S. base rate loans, which bear interest at the base rate plus the applicable margin (for a total rate of 3.50% on such date). At March 31, 2022, $162.1 million of the outstanding borrowings drawn under the revolving credit facility were in Canadian-based bankers’ acceptances, which bear interest at the Canadian Dollar Offered Rate plus the applicable acceptance fee (for a total rate of 1.96% on such date).
2) $650.0 million in principal payments due July 2026 related to our term loan under our Credit Agreement. Outstanding amounts on the term loan can be either base rate loans or LIBOR loans. At March 31, 2022, all amounts outstanding under the term loan were in LIBOR loans which bear interest at the LIBOR rate plus the applicable margin (for a total rate of 1.46% on such date).
3) $500.0 million in principal payments due 2028 related to our 2028 Senior Notes. The 2028 Senior Notes bear interest at a rate of 4.25%.
4) $500.0 million in principal payments due 2029 related to our 2029 Senior Notes. The 2029 Senior Notes bear interest at a rate of 3.50%.
5) $600.0 million in principal payments due 2030 related to our 2030 Senior Notes. The 2030 Senior Notes bear interest at a rate of 2.60%.
6) $650.0 million in principal payments due 2032 related to our 2032 Senior Notes. The 2032 Senior Notes bear interest at a rate of 2.20%.
7) $500.0 million in principal payments due 2032 related to our New 2032 Senior Notes. The New 2032 Senior Notes bear interest at a rate of 3.20%.
8) $500.0 million in principal payments due 2050 related to our 2050 Senior Notes. The 2050 Senior Notes bear interest at a rate of 3.05%.
9) $850.0 million in principal payments due 2052 related to our 2052 Senior Notes. The 2052 Senior Notes bear interest at a rate of 2.95%.
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10) $58.4 million in principal payments related to our notes payable to sellers and other third parties. Our notes payable to sellers and other third parties bear interest at rates between 2.42% and 10.35% at March 31, 2022, and have maturity dates ranging from 2022 to 2036.
11) $10.0 million in principal payments related to our financing leases. Our financing leases bear interest at a rate of 1.89% at March 31, 2022, and have expiration dates ranging from 2026 to 2027.
The following assumptions were made in calculating cash interest payments:
1) We calculated cash interest payments on the Credit Agreement using the LIBOR rate plus the applicable LIBOR margin, the base rate plus the applicable base rate margin, the Canadian Dollar Offered Rate plus the applicable acceptance fee and the Canadian prime rate plus the applicable prime rate margin at March 31, 2022. We assumed the Credit Agreement is paid off when it matures in July 2026.
2) We calculated cash interest payments on our interest rate swaps using the stated interest rate in the swap agreement less the LIBOR rate through the earlier expiration of the term of the swaps or the term of the credit facility.
Contingent consideration payments include $96.0 million recorded as liabilities in our Condensed Consolidated Financial Statements at March 31, 2022, and $18.2 million of future interest accretion on the recorded obligations.
We are party to operating lease agreements and finance leases. These lease agreements are established in the ordinary course of our business and are designed to provide us with access to facilities and equipment at competitive, market-driven prices.
The estimated final capping, closure and post-closure expenditures presented above are in current dollars.
Amount of Commitment Expiration Per Period
(amounts in thousands of U.S. dollars)
Less Than
1 to 3
3 to 5
Over 5
Unrecorded Obligations (1)
Total
1 Year
Years
Years
Years
Unconditional purchase obligations
$
135,363
$
93,820
$
41,543
$
—
$
—
____________________
(1) We are party to unconditional purchase obligations. These purchase obligations are established in the ordinary course of our business and are designed to provide us with access to products at competitive, market-driven prices. At March 31, 2022, our unconditional purchase obligations consisted of multiple fixed-price fuel purchase contracts under which we have 51.9 million gallons remaining to be purchased for a total of $135.4 million. The current fuel purchase contracts expire on or before December 31, 2024. These arrangements have not materially affected our financial position, results of operations or liquidity during the three months ended March 31, 2022, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
We have obtained financial surety bonds, primarily to support our financial assurance needs and landfill and E&P operations. We provided customers and various regulatory authorities with surety bonds in the aggregate amounts of approximately $1.361 billion and $1.301 billion at March 31, 2022 and December 31, 2021, respectively. These arrangements have not materially affected our financial position, results of operations or liquidity during the three months ended March 31, 2022, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
From time to time, we evaluate our existing operations and their strategic importance to us. If we determine that a given operating unit does not have future strategic importance, we may sell or otherwise dispose of those operations. Although we believe our reporting units would not be impaired by such dispositions, we could incur losses on them.
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The disposal tonnage that we received in the three month periods ended March 31, 2022 and 2021, at all of our landfills during the respective period, is shown below (tons in thousands):
Three Months Ended March 31,
2022
2021
Number
Total
Number
Total
of Sites
Tons
of Sites
Tons
Owned operational landfills and landfills operated under life-of-site agreements
89
10,987
87
10,189
Operated landfills
5
150
4
127
94
11,137
91
10,316
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NON-GAAP FINANCIAL MEASURES
Adjusted Free Cash Flow
We present adjusted free cash flow, a non-GAAP financial measure, supplementally because it is widely used by investors as a valuation and liquidity measure in the solid waste industry. Management uses adjusted free cash flow as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define adjusted free cash flow as net cash provided by operating activities, plus or minus change in book overdraft, plus proceeds from disposal of assets, less capital expenditures for property and equipment and distributions to noncontrolling interests. We further adjust this calculation to exclude the effects of items management believes impact the ability to assess the operating performance of our business. This measure is not a substitute for, and should be used in conjunction with, GAAP liquidity or financial measures. Other companies may calculate adjusted free cash flow differently. Our adjusted free cash flow for the three month periods ended March 31, 2022 and 2021, are calculated as follows (amounts in thousands of U.S. dollars):
Three Months Ended
March 31,
2022
2021
Net cash provided by operating activities
$
440,897
$
400,396
Plus (less): Change in book overdraft
87
(16,849)
Plus: Proceeds from disposal of assets
15,012
2,080
Less: Capital expenditures for property and equipment
(152,318)
(96,793)
Adjustments:
Payment of contingent consideration recorded in earnings (a)
—
520
Cash received for divestitures (b)
(5,671)
—
Transaction-related expenses (c)
23,404
526
Pre-existing Progressive Waste share-based grants (d)
76
97
Tax effect (e)
(1,110)
(188)
Adjusted free cash flow
$
320,377
$
289,789
____________________
(a) Reflects the addback of acquisition-related payments for contingent consideration that were recorded as expenses in earnings and as a component of cash flows from operating activities as the amounts paid exceeded the fair value of the contingent consideration recorded at the acquisition date.
(b) Reflects the elimination of cash received in conjunction with the divestiture of certain operations.
(c) Reflects the addback of acquisition-related transaction costs and the settlement of an acquired tax liability .
(d) Reflects the cash settlement of pre-existing Progressive Waste share-based awards during the period.
(e) The aggregate tax effect of footnotes (a) through (d) is calculated based on the applied tax rates for the respective periods.
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Adjusted EBITDA
We present adjusted EBITDA, a non-GAAP financial measure, supplementally because it is widely used by investors as a performance and valuation measure in the solid waste industry. Management uses adjusted EBITDA as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define adjusted EBITDA as net income attributable to Waste Connections, plus or minus net income (loss) attributable to noncontrolling interests, plus income tax provision, plus interest expense, less interest income, plus depreciation and amortization expense, plus closure and post-closure accretion expense, plus or minus any loss or gain on impairments and other operating items, plus other expense, less other income. We further adjust this calculation to exclude the effects of other items management believes impact the ability to assess the operating performance of our business. This measure is not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate adjusted EBITDA differently. Our adjusted EBITDA for the three month periods ended March 31, 2022 and 2021, are calculated as follows (amounts in thousands of U.S. dollars):
Three Months Ended
March 31,
2022
2021
Net income attributable to Waste Connections
$
180,324
$
160,309
Plus (less): Net income (loss) attributable to noncontrolling interests
44
(2)
Plus: Income tax provision
48,839
40,291
Plus: Interest expense
41,324
42,425
Less: Interest income
(137)
(1,103)
Plus: Depreciation and amortization
217,585
189,594
Plus: Closure and post-closure accretion
4,096
3,709
Plus: Impairments and other operating items
1,878
634
Plus (less): Other expense (income), net
3,466
(3,548)
Adjustments:
Plus: Transaction-related expenses (a)
4,540
526
Plus: Fair value changes to equity awards (b)
161
339
Adjusted EBITDA
$
502,120
$
433,174
____________________
(a) Reflects the addback of acquisition-related transaction costs.
(b) Reflects fair value accounting changes associated with certain equity awards .
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Adjusted Net Income Attributable to Waste Connections and Adjusted Net Income per Diluted Share Attributable to Waste Connections
We present adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections, both non-GAAP financial measures, supplementally because they are widely used by investors as a valuation measure in the solid waste industry. Management uses adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income attributable to Waste Connections to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income attributable to Waste Connections has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections for the three month periods ended March 31, 2022 and 2021, are calculated as follows (amounts in thousands of U.S. dollars, except per share amounts):
Three Months Ended
March 31,
2022
2021
Reported net income attributable to Waste Connections
$
180,324
$
160,309
Adjustments:
Amortization of intangibles (a)
37,635
32,192
Impairments and other operating items (b)
1,878
634
Transaction-related expenses (c)
4,540
526
Fair value changes to equity awards (d)
161
339
Tax effect (e)
(11,092)
(8,543)
Adjusted net income attributable to Waste Connections
$
213,446
$
185,457
Diluted earnings per common share attributable to Waste Connections’ common shareholders:
Reported net income
$
0.69
$
0.61
Adjusted net income
$
0.82
$
0.70
____________________
(a) Reflects the elimination of the non-cash amortization of acquisition-related intangible assets .
(b) Reflects the addback of impairments and other operating items.
(c) Reflects the addback of acquisition-related transaction costs.
(d) Reflects fair value accounting changes associated with certain equity awards.
(e) The aggregate tax effect of the adjustments in footnotes (a) through (d) is calculated based on the applied tax rates for the respective periods.
INFLATION
In the current environment, we have seen inflationary pressures resulting from higher fuel, materials and labor costs in certain markets and higher resulting third-party costs in areas such as brokerage, repairs and construction. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers, including increases in landfill tipping fees and, in some cases, fuel costs. To the extent that there are decreases in fuel costs, in some cases, a portion of these reductions are passed through to customers in the form of lower fuel and material surcharges. Therefore, we believe that we should be able to increase prices to offset many cost increases that result from inflation in the ordinary course of business. However, competitive pressures or delays in the timing of rate increases under certain of our contracts may require us to absorb at least part of these cost increases, especially if cost increases exceed the average rate of inflation. Management’s estimates associated with inflation have an impact on our accounting for landfill liabilities.
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SEASONALITY
Based on historic trends, excluding any impact from the COVID-19 pandemic or an economic recession, we would expect our operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects (a) the lower volume of solid waste generated during the late fall, winter and early spring because of decreased construction and demolition activities during winter months in Canada and the U.S. and (b) reduced E&P activity during harsh weather conditions, with expected fluctuation due to such seasonality between our highest and lowest quarters of approximately 10%. In addition, some of our operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.
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