US ECOLOGY, INC. General
US Ecology is a leading provider of environmental services to commercial and governmental entities. The Company addresses the complex waste management and response needs of its customers, offering treatment, disposal and recycling of hazardous, non-hazardous and radioactive waste, leading emergency response and standby services, and a wide range of complementary field services.US Ecology's focus on safety, environmental compliance and best-in-class customer service enables us to effectively meet the needs of our customers and to build long-lasting relationships. We have a network of fixed facilities and service centers operating primarily inthe United States ,Canada , theUnited Kingdom andMexico . Our fixed facilities include five RCRA subtitle C hazardous waste landfills, three landfills serving waste streams regulated by the RRC and one LLRW landfill. We also have various other TSDF facilities located throughoutthe United States . These facilities generate revenue from fees charged to transport, recycle, treat and dispose of waste and to perform various field services for our customers. Effective in the fourth quarter of 2020, we made changes to the manner in which we manage our business, make operating decisions and assess our performance. The energy waste business that was acquired through the NRC Merger now comprises our Energy Waste segment. Prior to this change, the energy waste business was included in the Waste Solutions segment (formerly "Environmental Services"). Throughout this Annual Report on Form 10-K, all periods presented have been recast to reflect these changes. Under our new structure our operations are managed in three reportable segments reflecting our internal management reporting structure and nature of services offered as follows: Waste Solutions (formerly "Environmental Services")-This segment provides safe and compliant specialty waste management services including treatment, disposal, beneficial re-use, and recycling of hazardous, non-hazardous, and other specialty waste at Company-owned treatment, storage, and disposal facilities, excluding the services within our Energy Waste segment. Field Services (formerly "Field & Industrial Services")-This segment provides safe and compliant logistics and response solutions focusing on "in-field' service offerings through our network of 10-day transfer facilities. Our logistics solutions include specialty waste packaging, collection, transportation, and total waste management. Our response solutions include land and marine based emergency response, OSRO standby compliance, remediation, and industrial services. The Field Services segment completes our vertically integrated model and serves to increase waste volumes into our Waste Solutions segment. Energy Waste-This segment provides safe and compliant energy waste management and critical support services to up-stream oil and gas customers in the Permian andEagle Ford basins primarily operating inTexas . Services include spill containment and site remediation, equipment cleaning and maintenance services, specialty equipment rental, including tanks, pumps and containment, safety monitoring and management and transportation and disposal. This segment includes all of the energy waste business of the legacy NRC operations and none of the legacyUS Ecology operations. 48 Table of Contents The operations not managed through our three reportable segments are recorded as "Corporate." Corporate selling, general and administrative expenses include typical corporate items of a general nature such as certain labor, information technology, legal, accounting and other expenses not associated with a specific reportable segment. Income taxes are assigned to Corporate, but all other items are included in the segment where they originated. Inter-company transactions have been eliminated from the segment information and are not significant between segments. Effective in the first quarter of 2021, we changed our management structure resulting in the reclassification of certain overhead expenses from our Waste Solutions, Field Services and Energy Waste reportable segments to Corporate. As a result, certain regional overhead costs historically presented within our reportable segments as Direct operating costs were further reclassified to Corporate as Selling, general and administrative expenses to conform to the current period's presentation. Throughout this Annual Report on Form 10-K, all periods presented have been recast to reflect these changes. In order to provide insight into the underlying drivers of our waste volumes and related T&D revenues, we evaluate period-to-period changes in our T&D revenue for our Waste Solutions segment based on the industry of the waste generator, based on North American Industry Classification System codes.
The composition of the Waste Solutions segment T&D revenues by waste generator
industry for the years ended
% of Treatment and Disposal Revenue (1) for the
Years Ended December 31,
Generator Industry 2021 2020
Chemical Manufacturing 17% 19%
Metal Manufacturing 16% 16%
Broker / TSDF 12% 12%
General Manufacturing 12% 11%
Government 8% 8%
Refining 6% 6%Waste Management & Remediation 5%
3%
Utilities 4% 6%
Transportation 3% 4%Mining, Exploration and Production 3%
2%
Other (2) 14% 13%
(1) Excludes all transportation service revenue.
(2) Includes retail and wholesale trade, rate regulated, construction and other
industries.
We also categorize our Waste Solutions T&D revenue as either "Base Business" or "Event Business" based on the underlying nature of the revenue source.
Base Business consists of waste streams from ongoing industrial activities and tends to be reoccurring in nature. We define Event Business as non-recurring projects that are expected to equal or exceed 1,000 tons, with Base Business defined as all other business not meeting the definition of Event Business. The duration of Event Business projects can last from a several-week cleanup of a contaminated site to a multiple year cleanup project. During 2021, Base Business revenue increased 6% compared to 2020. Base Business revenue was approximately 76% of total 2021 T&D revenue, up from 73% in 2020. Our business is highly competitive and no assurance can be given that we will maintain these revenue levels or increase our market share. A significant portion of our disposal revenue is attributable to discrete Event Business projects which vary widely in size, duration and unit pricing. For the year endedDecember 31, 2021 , approximately 24% of our T&D revenue was derived from Event Business projects. The one-time nature of Event Business, diverse spectrum of waste types received and widely varying unit pricing necessarily creates variability in revenue and earnings. This variability may be influenced by general 49 Table of Contents
and industry-specific economic conditions, funding availability, changes in laws and regulations, government enforcement actions or court orders, public controversy, litigation, weather, commercial real estate, closed military bases and other project timing, government appropriation and funding cycles and other factors. The types and amounts of waste received from Base Business also vary from quarter to quarter. This variability can also cause significant quarter-to-quarter and year-to-year differences in revenue, gross profit, gross margin, operating income and net income. While we pursue many projects months or years in advance of work performance, cleanup project opportunities routinely arise with little or no prior notice. These market dynamics are inherent to the waste disposal business and are factored into our projections and externally communicated business outlook statements. Our projections combine historical experience with identified sales pipeline opportunities, new or expanded service line projections and prevailing market conditions. We serve oil refineries, chemical production plants, steel mills, waste brokers/aggregators serving small manufacturers and other industrial customers that are generally affected by the prevailing economic conditions and credit environment. Adverse conditions may cause our customers as well as those they serve to curtail operations, resulting in lower waste production and/or delayed spending on off-site waste shipments, maintenance, waste cleanup projects and other work. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, consumer and industrial spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other global economic factors affecting spending behavior. Market forces may also induce customers to reduce or cease operations, declare bankruptcy, liquidate or relocate to other countries, any of which could adversely affect our business. To the extent business is either government funded or driven by government regulations or enforcement actions, we believe it is less susceptible to general economic conditions. Spending by government agencies may be reduced due to declining tax revenues resulting from a weak economy or changes in policy. Disbursement of funds appropriated byCongress may also be delayed for various reasons.
Geographical Information
For the year endedDecember 31, 2021 , we derived$861.3 million , or 87%, of our revenue inthe United States ,$80.6 million , or 8%, of our revenue inCanada ,$41.2 million , or 4%, of our revenue in theEurope ,Middle East andAfrica ("EMEA") region, and less than 1% of our revenue from other international regions. For the year endedDecember 31, 2020 , we derived$835.3 million , or 89%, of our revenue inthe United States ,$73.3 million , or 8%, of our revenue inCanada ,$19.9 million , or 2%, of our revenue in the EMEA region, and less than 1% of our revenue from other international regions. Additional information about the geographical areas in which our revenues are derived and in which our assets are located is presented in Note 4 and Note 21 to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Significant Events
Our results of operations have been affected by certain significant events during the past two fiscal years including, but not limited to:
2021 Events
COVID-19 Pandemic Update: The COVID-19 pandemic continued to affect our business
in 2021. The impact of temporary closures and staff reductions by industrial
facilities has resulted in delays in mobilization and in regulatory approvals at
our customers' sites. Although we have seen evidence of volume recovery in 2021
as the economy continues to rebound and industrial facilities return to
pre-pandemic levels of production, we have experienced cost and inflationary
pressures in areas such as labor and supplies. We have also experienced delays
and deferments of some of our waste solutions and field services business based
on our customers' own responses to the pandemic including, but not limited to,
delaying services they deem noncritical and limiting on-site visitation. While
uncertainty caused by the COVID-19 pandemic remains, including the spread of new
variants of the virus and government and private sector responses to prevent
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and manage the disease, we expect to continue to see improvements in our business as vaccines become more widely available and vaccination rates increase.
The impact of the COVID-19 pandemic will continue to affect our results of operations for the foreseeable future. See "Part I, Item 1A - Risk Factors" in this Annual Report on Form 10-K.
2020 Events
Impact of the COVID-19 Pandemic: The COVID-19 pandemic affected our business
through the fourth quarter of 2020. We experienced lower waste volumes resulting
from temporary closures and staff reductions by industrial facilities. We also
experienced delays and deferments of industrial cleaning services and some of
our field services as our customers limited on site visitation and delayed
noncritical services based on business conditions. However, the Company's
services-based business remained stable as we experienced growth in our small
quantity generation services and our emergency response business saw an increase
in COVID-19 decontamination projects.
Our Energy Waste segment was adversely impacted as energy companies reduce
capital expenditures as a result of downward pressure on oil, natural gas and
natural gas liquid ("NGL") prices, which were exacerbated during the COVID-19
pandemic. In the first half of 2020, oil prices moved downward to historic lows
due in part to concerns about the COVID-19 pandemic and its impact on near-term
worldwide oil demand and due to the increase in oil production by certain
members of the Organization of Petroleum Exporting Countries ("OPEC"). As a
result, customers in the upstream oil and gas exploration industry and some
downstream refineries in the energy sector have reduced capital expenditures,
which has adversely affected the demand for our energy waste services.
The Company's ability to weather the negative impacts of the COVID-19 pandemic
was bolstered by the Company's cost-saving measures implemented during the 2020
fiscal year, including cost control initiatives, a reduction to planned 2020
capital spending of approximately 35% compared to the budgeted capital spending
levels and suspension of the Company's quarterly dividend, commencing with the
second quarter of 2020 to preserve free cash flow and enhance liquidity. The
Company has also taken advantage of the provision of the Coronavirus Aid, Relief
and Economic Security Act, which was signed into law on March 27, 2020 , to defer
of the payment of the employer portion of payroll tax withholdings, which
yielded approximately $7.5 million of additional cash savings in 2020.
Goodwill and Intangible Asset Impairment Charges: During the year ended December
31, 2020 the Company recorded goodwill impairment charges of $363.9 million
related to its Energy Waste reporting unit, $14.4 million related to its Field
Services reporting unit, $5.5 million related to its International reporting
unit and intangible asset impairment charges of $21.1 million on certain Field
Services segment operating permit intangible assets. See Note 13 to the
Consolidated Financial Statements in "Part II, Item 8. Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for additional
information.
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Results of Operations
This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
Our operating results and percentage of revenues for the years ended
Year Ended December 31, 2021 vs. 2020
$s in thousands 2021 % 2020 % $ Change % Change
Revenue
Waste Solutions $ 451,249 46 % $ 425,413 46 % $ 25,836 6 %
Field Services 500,187 50 % 473,754 50 % 26,433 6 %
Energy Waste 36,565 4 % 34,687 4 % 1,878 5 %
Total $ 988,001 100 % $ 933,854 100 % $ 54,147 6 %
Gross Profit
Waste Solutions $ 154,223 34 % $ 161,341 38 % $ (7,118) (4) %
Field Services 74,087 15 % 87,151 18 % (13,064) (15) %
Energy Waste 4,768 13 % 1,659 5 % 3,109 187 %
Total $ 233,078 24 % $ 250,151 27 % $ (17,073) (7) %
Selling, General & Administrative Expenses
Waste Solutions $ 27,262 6 % $ 26,475 6 % $ 787 3 %
Field Services 48,210 10 % 50,572 11 % (2,362) (5) %
Energy Waste 13,040 36 % 19,722 57 % (6,682) (34) %
Corporate 111,220 n/m 109,400 n/m 1,820 2 %
Total $ 199,732 20 % $ 206,169 22 % $ (6,437) (3) %
Adjusted EBITDA
Waste Solutions $ 170,953 38 % $ 176,702 42 % $ (5,749) (3) %
Field Services 70,578 14 % 81,770 17 % (11,192) (14) %
Energy Waste 11,321 31 % 4,982 14 % 6,339 127 %
Corporate (97,978) n/m (93,295) n/m (4,683) 5 %
Total $ 154,874 16 % $ 170,159 18 % $ (15,285) (9) %
Management uses Adjusted EBITDA as a financial measure to assess segment
performance. Adjusted EBITDA is defined as net income (loss) before interest
expense, interest income, income tax expense, depreciation, amortization,
share-based compensation, accretion of closure and post-closure liabilities,
foreign currency gain/loss, non-cash goodwill and intangible asset impairment
charges, business development and integration expenses and other income/expense.
The reconciliation of Net income (loss) to Adjusted EBITDA for the years ended
December 31, 2021 and 2020 is as follows:
Year Ended December 31, 2021 vs. 2020
$s in thousands 2021 2020 $ Change % Change
Net income (loss) $ 5,337 $ (389,359) $ 394,696 (101) %
Income tax expense (benefit) 4,765 (4,242) 9,007 (212) %
Interest expense 28,966 32,595 (3,629) (11) %
Interest income (1,417) (258) (1,159) 449 %
Foreign currency loss 171 1,134 (963) (85) %
Other income (4,476) (788) (3,688) 468 %
Goodwill and intangible asset impairment
charges - 404,900 (404,900) (100) %
Depreciation and amortization of plant and
equipment 70,799 66,561 4,238 6 %
Amortization of intangible assets 34,614 37,344 (2,730) (7) %
Share-based compensation 7,478 6,651 827 12 %
Accretion and non-cash adjustment of closure &
post-closure liabilities 5,363 4,000 1,363 34 %
Business development and integration expenses 3,274 11,621 (8,347) (72) %
Adjusted EBITDA $ 154,874 $ 170,159 $ (15,285) (9) %
Adjusted EBITDA is a complement to results provided in accordance with
accounting principles generally accepted in the United States ("GAAP") and we
believe that such information provides additional useful information to
analysts, stockholders and other users to understand the Company's operating
performance. Since Adjusted EBITDA is not a measurement determined in accordance
with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as
presented may not be comparable to other similarly titled measures of other
companies. Items excluded from Adjusted
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EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income (loss), cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or a substitute for analyzing our results as reported under GAAP. Some of the limitations are:
? Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
? Adjusted EBITDA does not reflect our interest expense, or the requirements
necessary to service interest or principal payments on our debt;
? Adjusted EBITDA does not reflect our income tax expenses or the cash
requirements to pay our taxes;
? Adjusted EBITDA does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments;
Although depreciation and amortization charges are non-cash charges, the assets
? being depreciated and amortized will often have to be replaced in the future,
and Adjusted EBITDA does not reflect any cash requirements for such
replacements; and
? Adjusted EBITDA does not reflect our business development and integration
expenses. 2021 Compared to 2020 Revenue
Total revenue increased 6% to
Waste Solutions
Waste Solutions segment revenue increased 6% to$451.2 million in 2021, compared to$425.4 million in 2020. T&D revenue increased 5% in 2021 compared to 2020, primarily as a result of a 6% increase in Base Business revenue, partially offset by an 8% decrease in project-based Event Business revenue. Transportation and logistics service revenue increased 11% in 2021 compared to 2020, reflecting Event Business projects utilizing more of the Company's transportation and logistics services. Total tons of waste disposed of or processed across all of our facilities decreased 1% in 2021 compared to 2020. Total tons of waste disposed of or processed at our landfills increased 5% in 2021 compared to 2020. T&D revenue from recurring Base Business waste generators increased 6% in 2021 compared to 2020 and comprised 76% of total T&D revenue. The increase in Base Business T&D revenue compared to the prior year primarily reflects higher T&D revenue from the metal manufacturing, chemical manufacturing, mining, exploration & production, general manufacturing and Other industry groups, partially offset by a decrease in Base Business T&D revenue from the utilities industry group. T&D revenue from Event Business waste generators decreased 8% in 2021 compared to 2020 and comprised 24% of total T&D revenue. The decrease in Event Business T&D revenue compared to the prior year primarily reflects lower T&D revenue from the chemical manufacturing, utilities, metal manufacturing and transportation industry groups, partially offset by increases in Event Business T&D revenue from the waste management & remediation, Other and general manufacturing industry groups. 53 Table of Contents The following table summarizes combined Base Business and Event Business T&D revenue growth, within the Waste Solutions segment, by waste generator industry for 2021 compared to2020: T &D Revenue Growth 2021 vs. 2020 Waste Management & Remediation 71% Mining, Exploration & Production 51% Other 14% General Manufacturing 10% Refining 8% Broker / TSDF 3% Metal Manufacturing 1% Government -3% Chemical Manufacturing -9% Transportation -22% Utilities -33% Field Services Field Services segment revenue increased 6% to$500.2 million in 2021 compared with$473.8 million in 2020. The increase in Field Services segment revenue is primarily attributable to higher revenues from our Remediation, Small Quantity Generation,Total Waste Management and Treatment & Disposal business lines, partially offset by lower revenues from our Transportation and Logistics, Emergency Response and Other business lines.
Energy Waste
Energy Waste segment revenue increased 5% to$36.6 million in 2021 compared with$34.7 million in 2020, primarily attributable to a partial recovery in energy markets and increases in energy-related exploration and production activities in the markets we serve. Gross Profit
Total gross profit decreased 7% to
Waste Solutions Waste Solutions segment gross profit decreased 4% to$154.2 million in 2021, down from$161.3 million in 2020. Total segment gross margin was 34% in 2021 compared with 38% in 2020. The decrease in segment gross margin was primarily attributable to a less favorable service mix and higher transportation, supplies and waste handling expenses in 2021 compared to 2020. T&D gross margin was 39% for 2021 compared with 42% for 2020.
Field Services
Field Services segment gross profit decreased 15% to$74.1 million in 2021, down from$87.2 million in 2020. Total segment gross margin was 15% in 2021 compared with 18% in 2020. The decrease in segment gross margin was primarily attributable to a less favorable service mix and higher subcontracted services and supplies expenses in 2021 compared to 2020. 54 Table of Contents Energy Waste Energy Waste segment gross profit increased 187% to$4.8 million in 2021, up from$1.7 million in 2020. Total segment gross margin was 13% in 2021 compared with 5% in 2020. The increase in segment gross margin was primarily attributable to improved operating leverage due to our restructuring activities undertaken in 2020 in response to reduced energy-related exploration and production investments in the markets we serve.
Selling, General and Administrative Expenses ("SG&A")
Total SG&A decreased 3% to
Waste Solutions
Waste Solutions segment SG&A increased 3% to
Field Services
Field Services segment SG&A decreased 5% to$48.2 million , or 10% of segment revenue, in 2021, down from$50.6 million , or 11% of segment revenue, in 2020. Field Services segment SG&A in 2020 includes$3.7 million of gains associated with the settlement and changes in fair value of contingent consideration liabilities. Excluding the impact of these gains, segment SG&A decreased 11% in 2021 compared with 2020, primarily attributable to lower intangible asset amortization expense, lower insurance costs, lower business development and integration expenses and lower employee labor and benefits costs.
Energy Waste
Energy Waste segment SG&A decreased 34% to$13.0 million , or 36% of segment revenue, in 2021, down from$19.7 million , or 57% of segment revenue, in 2020. The decrease in segment SG&A was primarily attributable to lower costs in 2021 due to our restructuring activities undertaken in 2020 in response to reduced energy-related exploration and production investments in the markets we serve.
Corporate
Corporate SG&A increased 2% to$111.2 million , or 11% of total revenue, in 2021, compared with$109.4 million , or 12% of total revenue, in 2020. Corporate SG&A in 2020 includes the recognition of a favorable legal settlement of$2.5 million for the reimbursement of health insurance related overcharges in prior years. Excluding the impact of this settlement, Corporate SG&A decreased 1% in 2021 compared with 2020, primarily attributable lower business development and integration expenses, lower insurance costs and lower equipment and supplies expenses, partially offset by lower bad debt recoveries, higher consulting and professional services expenses, higher information technology and software expenses and higher employee labor and benefit costs in 2021 compared to 2020.
Components of Adjusted EBITDA
Income tax expense
Income tax expense in 2021 was$4.8 million , resulting in a consolidated effective income tax rate of 47.2%. Income tax benefit in 2020 was$4.2 million , resulting in a consolidated effective income tax rate of 1.1%. The increase in our effective tax rate in 2021 compared to 2020 was primarily attributable to foreign rate differential from a higher portion of total earnings from our Canadian operations which are taxed at a higher rate and enhanced impacts on our effective tax rate of state taxes, share-based compensation, and other permanent items as a result of lower pre-tax earnings excluding impairments, partially offset by higher tax credits as a percentage of pre-tax earnings. 55 Table of Contents Interest expense Interest expense was$29.0 million in 2021 compared with$32.6 million in 2020. The decrease is primarily the result of the impact of lower interest rates on the variable portion of our outstanding debt, lower outstanding debt levels and lower interest expense amortization related to terminated swap agreements in 2021 compared to 2020. Interest income
Interest income was
Foreign currency loss We recognized a$171,000 non-cash foreign currency loss in 2021 compared with a$1.1 million non-cash foreign currency loss in 2020. Foreign currency gains and losses reflect changes in business activity conducted in a currency other than the USD, our functional currency. Additionally, we established intercompany loans with certain of our Canadian subsidiaries, whose functional currency is the Canadian dollar ("CAD") as part of a tax and treasury management strategy allowing for repayment of third-party bank debt. These intercompany loans are payable by our Canadian subsidiaries toUS Ecology in CAD requiring us to revalue the outstanding loan balance through our statements of operations based on USD/CAD currency movements from period to period. AtDecember 31, 2021 , we had$7.6 million of intercompany loans subject to currency revaluation.
Other income
Other income was
In 2020, the Company recorded goodwill impairment charges of$363.9 million related to its Energy Waste reporting unit,$14.4 million related to its Field Services reporting unit,$5.5 million related to its International reporting unit and intangible asset impairment charges of$21.1 million on certain operating permit intangible assets. See Note 13 to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information.
Depreciation and amortization of plant and equipment
Depreciation and amortization expense increased 6% to
Amortization of intangibles
Intangible assets amortization expense decreased 7% to$34.6 million in 2021 compared with$37.3 million in 2020, primarily reflecting the full amortization of certain intangible asset in 2021.
Share-based compensation
Share-based compensation expense increased 12% to$7.5 million in 2021, compared with$6.7 million 2020, primarily reflecting an increase in equity-based awards granted to employees. 56 Table of Contents
Accretion and non-cash adjustment of closure and post-closure liabilities
Accretion and non-cash adjustment of closure and post-closure liabilities
increased 34% to
Business development and integration expenses
Business development and integration expenses decreased 72% to$3.3 million in 2021, compared to$11.6 million in 2020, primarily reflecting lower NRC Merger integration expenses incurred in 2021 compared to 2020.
Liquidity and Capital Resources
We are continually evaluating the impact of the COVID-19 pandemic on our financial condition and liquidity. Although the situation remains uncertain, we believe that we have sufficient cash flow from operations and available borrowings under the Revolving Credit Facility to execute our business strategy in the short and longer term. While management continues to closely monitor the impact of the COVID-19 pandemic, including the spread of new variants of the virus and government and private sector responses to it in each of the locations and sectors in which the Company does business, we believe that the Company's strategy during the pandemic has increased the Company's resiliency and positioned the Company to take advantage of any post-pandemic recovery. Our primary sources of liquidity are cash and cash equivalents, cash generated from operations and borrowings under the Credit Agreement. AtDecember 31, 2021 , we had$67.5 million in unrestricted cash and cash equivalents immediately available and$71.2 million of borrowing capacity, subject to our leverage covenant limitation, available under our Revolving Credit Facility. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our primary ongoing cash requirements are funding operations, capital expenditures, paying principal and interest on our long-term debt, and paying declared dividends pursuant to our dividend policy. We believe future operating cash flows will be sufficient to meet our future operating, investing and dividend cash needs for the foreseeable future. Furthermore, existing cash balances and availability of additional borrowings under the Credit Agreement provide additional sources of liquidity should they be required. OnJune 29, 2021 , Predecessor US Ecology amended the Credit Agreement to extend the maturity date for the existing revolving credit facility toJune 29, 2026 . The Credit Agreement was also amended to extend the existing covenant relief period to end on the earlier ofDecember 31, 2022 and the date Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein and to permanently increase Predecessor US Ecology's consolidated total net leverage ratio requirement as of the end of each fiscal quarter ending on and afterDecember 31, 2022 to 4.50 to 1.00. See additional information on the Fourth Amendment under "Amendments to the Credit Agreement," below. Operating Activities. In 2021, net cash provided by operating activities was$116.3 million . This primarily reflects net income of$5.3 million , non-cash depreciation, amortization and accretion of$110.8 million , an increase in accounts payable and accrued liabilities of$16.0 million , share-based compensation expense of$7.5 million , and a decrease in income taxes receivable of$3.8 million , partially offset by an increase in accounts receivable of$14.7 million , an increase in other assets of$5.3 million , a gain of$3.5 million related to a change in the fair value of a minority interest investment and a decrease in closure and post-closure obligations of$3.3 million . Impacts on net income are due to the factors discussed above under "Results of Operations." Changes in accounts receivable and accounts payable and accrued liabilities are attributable to the timing of payments from customers and payments to vendors for products and services. The decrease in income taxes receivable is primarily attributable to the timing of prior year income tax refund claims received and current year income tax payments. The increase in other assets is primarily attributable to prepaid insurance costs and refundable deposits associated with our annual renewal process. The decrease in closure and post-closure obligations is primarily attributable to payments for planned landfill cell closure activities primarily at ourKarnes County, Texas andBelleville, Michigan facilities. We calculate days sales outstanding ("DSO") as a rolling four quarter average of our net accounts receivable divided by our quarterly revenue. Our net accounts receivable balance for the DSO calculation includes trade accounts receivable, net 57 Table of Contents of allowance for doubtful accounts and unbilled accounts receivable, adjusted for changes in deferred revenue. DSO was 84 days as ofDecember 31, 2021 and 2020. In 2020, net cash provided by operating activities was$107.1 million . This primarily reflects net loss of$389.4 million , non-cash goodwill and intangible asset impairment charges of$404.9 million , non-cash depreciation, amortization and accretion of$107.9 million , a decrease in accounts receivable of$8.4 million and share-based compensation and business development and integration expenses of$7.8 million , partially offset by a decrease in accounts payable and accrued liabilities of$13.6 million , an increase in income taxes receivable of$7.0 million and an increase in other assets of$5.4 million . Impacts on net loss are due to the factors discussed above under "Results of Operations." Changes in accounts receivable and accounts payable and accrued liabilities are attributable to the timing of payments from customers and payments to vendors for products and services. The increase in other assets is primarily attributable to prepaid insurance costs and refundable deposits associated with our annual renewal process. The increase in income taxes receivable is primarily attributable to net operating losses in 2020 that will be carried back to prior years with taxable income for a refund of taxes paid in those prior tax years, which were at higher tax rates. Investing Activities. In 2021, net cash used in investing activities was$64.6 million , primarily related to capital expenditures of$68.7 million , and a$712,000 investment in the preferred stock of a privately held company, partially offset by$2.4 million in proceeds from the sale of property and equipment and$2.1 million in proceeds from the sale of short-term investments. Capital projects consisted primarily of landfill cell development and infrastructure upgrades at our operating facilities. In 2020, net cash used in investing activities was$57.6 million , primarily related to capital expenditures of$57.4 million and the acquisition ofImpact Environmental, Inc. for$3.3 million inJanuary 2020 . Capital projects consisted primarily of equipment purchases and infrastructure upgrades at our corporate and operating facilities. Financing Activities. During 2021, net cash used in financing activities was$58.1 million , consisting primarily of$44.0 million in payments on our revolving credit facility,$5.6 million in payments on our equipment financing obligations,$4.5 million in quarterly payments on our term loan and$2.6 million in payments to settle acquired contingent consideration liabilities. During 2020, net cash used in financing activities was$18.5 million , consisting primarily of$90.0 million in borrowings on our revolving credit facility, partially offset by$74.5 million in payments on our revolving credit facility and term loan, repurchases of our common stock of$18.3 million ,$6.3 million in payments on our equipment financing obligations and dividend payments to our stockholders of$5.7 million . Quarterly cash dividends were suspended commencing with the second quarter of 2020 and no dividends have been paid since the first quarter 2020. Credit Agreement OnApril 18, 2017 ,US Ecology Holdings, Inc. (f/k/aUS Ecology, Inc. ) ("Predecessor US Ecology"), now a wholly-owned subsidiary of the Company, entered into the Credit Agreement that provides for a$500.0 million revolving credit facility (the "Revolving Credit Facility"), including a$75.0 million sublimit for the issuance of standby letters of credit and a$40.0 million sublimit for the issuance of swingline loans used to fund short-term working capital requirements. The Credit Agreement also contains an accordion feature whereby Predecessor US Ecology may request up to$200.0 million of additional funds through an increase to the Revolving Credit Facility, through incremental term loans, or some combination thereof. As described herein, the Credit Agreement was amended in August andNovember 2019 in connection with the NRC Merger; and further amended onJune 26, 2020 andJune 29, 2021 pursuant to the Third Amendment and Fourth Amendment (each as defined herein), respectively. During the year endedDecember 31, 2021 , the effective interest rate on the Revolving Credit Facility, after giving effect to the impact of our interest rate swap and the amortization of the loan discount and debt issuance costs, was 4.00%. Interest only payments are due either quarterly or on the last day of any interest period, as applicable. InMarch 2020 , the Company entered into an interest rate swap agreement, effectively fixing the interest rate on$440.0 million , or approximately 59%, of the Revolving Credit Facility and term loan borrowings outstanding as ofDecember 31, 2021 . 58
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As modified by the Fourth Amendment as described herein, Predecessor US Ecology is required to pay a commitment fee ranging from 0.175% to 0.40% on the average daily unused portion of the Revolving Credit Facility, with such commitment fee to be based upon Predecessor US Ecology's total net leverage ratio (as defined in the Credit Agreement). The maximum letter of credit capacity under the Revolving Credit Facility is$75.0 million and the Credit Agreement provides for a letter of credit fee equal to the applicable margin for LIBOR loans under the Revolving Credit Facility. AtDecember 31, 2021 , there were$303.0 million of revolving credit loans outstanding on the Revolving Credit Facility. These revolving credit loans are due onJune 29, 2026 (or such earlier date as the revolving credit facility may otherwise terminate pursuant to the terms of the Credit Agreement) and are presented as long-term debt in the consolidated balance sheets. PredecessorUS Ecology has entered into a sweep arrangement whereby day-to-day cash requirements in excess of available cash balances are advanced to the Company on an as-needed basis with repayments of these advances automatically made from subsequent deposits to our cash operating accounts (the "Sweep Arrangement"). Total advances outstanding under the Sweep Arrangement are subject to the$40.0 million swingline loan sublimit under the Revolving Credit Facility. PredecessorUS Ecology's revolving credit loans outstanding under the Revolving Credit Facility are not subject to repayment through the Sweep Arrangement. As ofDecember 31, 2021 , there were no borrowings outstanding subject to the Sweep Arrangement. As ofDecember 31, 2021 , the availability under the Revolving Credit Facility was$71.2 million , subject to our leverage covenant limitation, with$12.2 million of the Revolving Credit Facility issued in the form of standby letters of credit utilized as collateral for closure and post-closure financial assurance and other assurance obligations.
Amendments to the Credit Agreement
OnAugust 6, 2019 , Predecessor US Ecology entered into the First Amendment (as defined herein). EffectiveNovember 1, 2019 , the First Amendment, among other things, extended the expiration of the Revolving Credit Facility toNovember 1, 2024 , permitted the issuance of a$400.0 million incremental term loan to be used to refinance the indebtedness of NRC and pay related transaction expenses in connection with the NRC Merger, modified the accordion feature allowing Predecessor US Ecology to request up to the greater of (x)$250.0 million and (y) 100% of Consolidated EBITDA (as defined in the credit agreement) plus certain additional amounts, increased the sublimit for the issuance of swingline loans to$40.0 million and increased the maximum consolidated total net leverage ratio to 4.00 to 1.00. OnNovember 1, 2019 , Predecessor US Ecology entered into the Second Amendment (as defined herein). EffectiveNovember 1, 2019 , the Second Amendment, among other things, amended the Credit Agreement to increase the capacity for incremental term loans by$50.0 million and provided for Wells Fargo lending$450.0 million in incremental term loans to Predecessor US Ecology to pay off the existing debt of NRC in connection with the NRC Merger, to pay certain fees, costs and expenses incurred in connection with the NRC Merger and to repay outstanding borrowings under the Revolving Credit Facility. The seven-year incremental term loan maturesNovember 1, 2026 , requires principal repayment of 1% annually, and bears interest at LIBOR plus 2.25% or a base rate plus 1.25% (with a step-up to LIBOR plus 2.50% or a base rate plus 1.50% in the event thatUS Ecology credit ratings are not BB (with a stable or better outlook) or better from S&P and Ba2 (with a stable or better outlook) or better from Moody's). During the year endedDecember 31, 2021 , the effective interest rate on the term loan, including the impact of the amortization of debt issuance costs, was 2.86%. OnJune 26, 2020 , Predecessor US Ecology entered into the Third Amendment. Among other things, the Third Amendment amended the Credit Agreement to provide a covenant relief period through the earlier ofMarch 31, 2022 and the date Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein. During the covenant relief period, the Third Amendment increased Predecessor US Ecology's consolidated total net leverage ratio requirement as of the end of each fiscal quarter to certain ratios above the 4.00 to 1.00 ratio in effect immediately before giving effect to the Third Amendment, subject to compliance with certain restrictions on restricted payments and permitted acquisitions during such covenant relief period. Furthermore, during the covenant relief period, under the Revolving Credit Facility, revolving credit loans are available based on a base rate (as defined in the Credit Agreement) or LIBOR, at the Company's option, plus an applicable margin, which is determined according to a pricing grid under which the interest rate decreases or increases based on our ratio of funded debt to Consolidated EBITDA (as defined in the
Credit Agreement).
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OnJune 29, 2021 , Predecessor US Ecology entered into the Fourth Amendment. Among other things, the Fourth Amendment amends the Credit Agreement to extend the maturity date for the existing revolving credit facility toJune 29, 2026 (or such earlier date as the revolving credit facility may otherwise terminate pursuant to the terms of the Credit Agreement). The Fourth Amendment also amends the Credit Agreement (i) to extend the existing covenant relief period to end on the earlier ofDecember 31, 2022 and the date Predecessor US Ecology elects to end such covenant relief period pursuant to the terms therein and (ii) to permanently increase Predecessor US Ecology's consolidated total net leverage ratio requirement as of the end of each fiscal quarter ending on and afterDecember 31, 2022 to 4.50 to 1.00. During the covenant relief period until the fiscal quarter endingDecember 31, 2022 , the Fourth Amendment increases Predecessor US Ecology's consolidated total net leverage ratio requirement as of the end of each fiscal quarter to certain ratios above the 4.50 to 1.00 ratio otherwise in effect after giving effect to the Fourth Amendment, subject to compliance with certain restrictions on restricted payments and permitted acquisitions during such covenant relief period. Furthermore, after giving effect to the Fourth Amendment and whether or not the covenant relief period is in effect, (i) if the Borrower's consolidated total net leverage ratio is equal to or greater than 4.00 to 1.00 but less than 4.50 to 1.00, the interest rate on all outstanding borrowings of revolving credit loans under the Credit Agreement will step-up to the LIBOR plus 2.25% or a base rate plus 1.25% and the commitment fee will step-up to 0.375% and (ii) if Predecessor US Ecology's consolidated total net leverage ratio is greater than 4.50 to 1.00, the interest rate on all outstanding borrowings of revolving credit loans under the Credit Agreement will step-up to LIBOR plus 2.50% or a base rate plus 1.50% and the commitment fee will step-up to 0.40%, in each case, pursuant to the terms of the Credit Agreement. The Fourth Amendment also reset any outstanding usage of certain negative covenant baskets, including baskets in connection with the indebtedness, liens, investments, asset dispositions, restricted payments and affiliate transactions negative covenants.
See Note 16 to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information on the Company's debt.
Contractual Obligations and Guarantees
Contractual Obligations
US Ecology's contractual obligations atDecember 31, 2021 become due as follows: Payments Due by Period $s in thousands Total 2022 2023-2024 2025-2026 Thereafter Closure and post-closure obligations (1)$ 393,660 $ 6,004 $ 21,183 $ 19,061 $ 347,412 Credit agreement obligations (2) 744,000 4,500 9,000 730,500 - Interest expense (3) 99,405 22,306 43,373 33,726 - Total contractual obligations (4)$ 1,237,065 $ 32,810 $ 73,556 $ 783,287 $ 347,412
For the purposes of the table above, closure and post-closure obligations are (1) shown on an undiscounted basis and inflated using an estimated annual
inflation rate of 2.6%. Cash payments for closure and post-closure obligation
extend to the year 2130.
At
outstanding on the Revolving Credit Facility. These revolving credit loans
are due on
Agreement). At December 31, 2021 there were $441.0 million of term loan
borrowings outstanding. The term loan matures on November 1, 2026 and
requires principal repayment of 1% annually.
Interest expense has been calculated using the interest rate of 2.59% in
effect at
Revolving Credit Facility borrowings and 3.33% on the fixed rate hedged
portion of the Revolving Credit Facility borrowings. Interest expense has
(3) been calculated using the interest rate of 2.59% in effect at
2021 on the unhedged variable-rate portion of the term loan borrowings and
3.33% on the fixed rate hedged portion of the term loan borrowings. The
interest expense calculation reflects assumed payments on the Revolving
Credit Facility and the term loan borrowings consistent with the disclosures
in footnote (2) above.
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As we are not able to reasonably estimate when we would make any cash
(4) payments to settle unrecognized tax benefits of
not been included in the table above.
Guarantees
We enter into a wide range of indemnification arrangements, guarantees and assurances in the ordinary course of business and have evaluated agreements that contain guarantees and indemnification clauses. These include tort indemnities, tax indemnities, indemnities against third-party claims arising out of arrangements to provide services to us and indemnities related to the sale of our securities. We also indemnify individuals made party to any suit or proceeding if that individual was acting as an officer or director ofUS Ecology or was serving at the request ofUS Ecology or any of its subsidiaries during their tenure as a director or officer. We also provide guarantees and indemnifications for the benefit of our wholly-owned subsidiaries to satisfy performance obligations, including closure and post-closure financial assurances. It is difficult to quantify the maximum potential liability under these indemnification arrangements; however, we are not currently aware of any material liabilities to the Company or any of its subsidiaries arising from these arrangements.
Environmental Matters
We maintain funded trust agreements, surety bonds and insurance policies for future closure and post-closure obligations at both current and formerly operated disposal facilities. These funded trust agreements, surety bonds and insurance policies are based on management estimates of future closure and post-closure monitoring using engineering evaluations and interpretations of regulatory requirements which are periodically updated. Accounting for closure and post-closure costs includes final disposal cell capping and revegetation, soil and groundwater monitoring and routine maintenance and surveillance required after a site is closed. We estimate that our undiscounted future closure and post-closure costs for all facilities was approximately$393.7 million atDecember 31, 2021 , with a median payment year of 2076. Our future closure and post-closure estimates are our best estimate of current costs and are updated periodically to reflect current technology, cost of materials and services, applicable laws, regulations, permit conditions or orders and other factors. These current costs are adjusted for anticipated annual inflation, which we assumed to be 2.6% as ofDecember 31, 2021 . These future closure and post-closure estimates are discounted to their present value for financial reporting purposes using our credit-adjusted risk-free interest rate, which approximates our incremental long-term borrowing rate in effect at the time the obligation is established or when there are upward revisions to our estimated closure and post-closure costs. AtDecember 31, 2021 , our weighted-average credit-adjusted risk-free interest rate was 5.3%. For financial reporting purposes, our recorded closure and post-closure obligations were$98.9 million and$95.9 million as ofDecember 31, 2021 and 2020, respectively.
Through
We cover our closure and post-closure obligations for ourU.S. operating facilities through the use of third-party insurance policies, surety bonds and standby letters of credit. As ofDecember 31, 2021 , we had provided collateral of$721,000 in funded trust agreements,$13.8 million in surety bonds, issued$2.8 million in letters of credit for financial assurance and have insurance policies of approximately$120.5 million for closure and post-closure obligations at coveredU.S. operating and non-operating facilities. Cash held in funded trust agreements for our closure and post-closure obligations is identified as Restricted cash and investments on our consolidated balance sheets. All closure and post-closure funding obligations for ourBeatty, Nevada andRichland, Washington facilities revert to the respective state. Volume based fees are collected from our customers and remitted to state-controlled trust funds to cover the estimated cost of closure and post-closure obligations.
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Stablex
We use commercial surety bonds to cover our closure obligations for our Stablex
facility located in Blainville, Québec, Canada . Our lease agreement with the
Province of Québec requires that the surety bond be maintained for 25 years
after the lease expires in 2023. At December 31, 2021 we had $873,000 in
commercial surety bonds dedicated for closure obligations. These bonds were
renewed in November and December 2021 and expire in November and December 2022 .
Post-closure funding obligations for the Stablex landfill revert back to the
Province of Québec through a dedicated trust account that is funded based on a
per-metric-ton disposed fee by Stablex.
We expect to renew insurance policies and commercial surety bonds in the future.
If we are unable to obtain adequate closure, post-closure or environmental
liability insurance and/or commercial surety bonds in future years, any partial
or completely uninsured claim against us, if successful and of sufficient
magnitude, could have a material adverse effect on our financial condition,
results of operations or cash flows. Additionally, continued access to casualty
and pollution legal liability insurance with sufficient limits, at acceptable
terms, is important to obtaining new business. Failure to maintain adequate
financial assurance could also result in regulatory action including early
closure of facilities. While we believe we will be able to maintain the
requisite financial assurance policies at a reasonable cost, premium and
collateral requirements may materially increase.
Operation of disposal facilities creates operational, closure and post-closure
obligations that could result in unplanned monitoring and corrective action
costs. We cannot predict the likelihood or effect of all such costs, new laws or
regulations, litigation or other future events affecting our facilities. We do
not believe that continuing to satisfy our environmental obligations will have a
material adverse effect on our financial condition or results of operations.
Seasonal Effects
Seasonal fluctuations due to weather and budgetary cycles can influence the timing of customer spending for our services. Typically, in the first quarter of each calendar year there is less demand for our services due to weather-related reduced construction and business activities while we experience improvement in our second and third quarters of each calendar year as weather conditions and other business activity improves.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates included in our critical accounting policies discussed below and those accounting policies and use of estimates discussed in Notes 2 and 3 to the Consolidated Financial Statements located in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. We base our estimates on historical experience and on various assumptions and other factors we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We make adjustments to judgments and estimates based on current facts and circumstances on an ongoing basis. Historically, actual results have not deviated significantly from those determined using the estimates described below or in Notes 2 and 3 to the Consolidated Financial Statements located in "Part II, Item 8. Financial Statements and Supplementary Data" to this Annual Report on Form 10-K. However, actual amounts could differ materially from those estimated at the time the consolidated financial statements are prepared.
We believe the following critical accounting policies are important to understand our financial condition and results of operations and require management's most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain.
Revenue Recognition
Revenues are recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
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We recognize revenue from three primary sources: (1) waste treatment, recycling and disposal services, (2) field and industrial waste management services and (3) waste transportation services. Our waste treatment and disposal customers are legally obligated to properly treat and dispose of their waste in accordance with local, state and federal laws and regulations. As our customers do not possess the resources to properly treat and dispose of their waste independently, they contract with the Company to perform the services. Waste treatment, recycling, and disposal revenue results primarily from fixed fees charged to customers for treatment and/or disposal or recycling of specified wastes. Waste treatment, recycling, and disposal revenue is generally charged on a per-ton or per-yard basis at contracted prices and is recognized over time as the services are performed. Our treatment and disposal services are generally performed as the waste is received and considered complete upon final disposal. Field and industrial waste management services revenue results primarily from specialty onsite services such as high-pressure cleaning, tank cleaning, decontamination, remediation, transportation, spill cleanup and emergency response at refineries, chemical plants, steel and automotive plants, and other government, commercial and industrial facilities. We also provide hazardous waste packaging and collection services and total waste management solutions at customer sites and through our 10-day transfer facilities. These services are provided based on purchase orders or agreements with the customer and include prices based upon daily, hourly or job rates for equipment, materials and personnel. Generally, the pricing in these types of contracts is fixed, but the quantity of services to be provided during the contract term is variable and revenues are recognized over the term of the agreements or as services are performed. As we have a right to consideration from our customers in an amount that corresponds directly with the value to the customer of the Company's performance completed to date, we have applied the practical expedient to recognize revenue in the amount to which we have the right to invoice. Additionally, we have customers that pay annual retainer fees, primarily for our standby services, under long-term or evergreen contracts. Such retainer fees are recognized over time as the services are performed and it is probable that a significant reversal in the amount of cumulative revenue recognized on the contracts will not occur. Transportation and logistics revenue results from delivering customer waste to a disposal facility for treatment and/or disposal or recycling. Transportation services are generally not provided on a stand-alone basis and instead are bundled with other Company services. However, in some instances we provide transportation and logistics services for shipment of waste from cleanup sites to disposal facilities operated by other companies. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customer or using expected cost-plus margin. Transportation revenue is recognized over time as the waste is transported.
Taxes and fees collected from customers concurrent with revenue-producing transactions to be remitted to governmental authorities are excluded from revenue.
OurRichland, Washington disposal facility is regulated by the WUTC, which approves our rates for disposal of LLRW. Annual revenue levels are established based on a rate agreement with the WUTC at amounts sufficient to cover our costs of operation, including facility maintenance, equipment replacement and related costs, and provide us with a reasonable profit. Per-unit rates charged to LLRW customers during the year are based on our evaluation of disposal volume and radioactivity projections submitted to us by waste generators. Our proposed rates are then reviewed and approved by the WUTC. If annual revenue exceeds the approved levels set by the WUTC, we are required to refund excess collections to facility users on a pro-rata basis. Refundable excess collections, if any, are recorded in Accrued liabilities in the consolidated balance sheets. The current rate agreement with the WUTC was extended in 2019 and is effective untilDecember 31, 2025 .
Disposal Facility Accounting
We amortize landfill and disposal assets and certain related permits over their estimated useful lives. The units-of-consumption method is used to amortize landfill cell construction and development costs and asset retirement costs. Under the units-of-consumption method, we include costs incurred to date as well as future estimated construction costs in the amortization base of the landfill assets. Additionally, where appropriate, as discussed below, we also include probable expansion airspace that has yet to be permitted in the calculation of the total remaining useful life of the landfill asset. If we determine that expansion capacity should no longer be considered in calculating the total
remaining useful life
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of a landfill asset, we may be required to recognize an asset impairment or incur significantly higher amortization expense over the remaining estimated useful life of the landfill asset. If at any time we make the decision to abandon the expansion effort, the capitalized costs related to the expansion effort would be expensed in the period of abandonment.
Our landfill assets and liabilities fall into the following two categories, each of which require accounting judgments and estimates:
? Landfill assets comprised of capitalized landfill development costs.
? Disposal facility retirement obligations relating to our capping, closure and
post-closure liabilities that result in corresponding retirement assets.
Landfill Assets
Landfill assets include the costs of landfill site acquisition, permits and cell design and construction incurred to date. Landfill cells represent individual disposal areas within the overall treatment and disposal site and may be subject to specific permit requirements in addition to the general permit requirements associated with the overall site. To develop, construct and operate a landfill cell, we must obtain permits from various regulatory agencies at the local, state and federal levels. The permitting process requires an initial site study to determine whether the location is feasible for landfill operations. The initial studies are reviewed by our environmental management group and then submitted to the regulatory agencies for approval. During the development stage we capitalize certain costs that we incur after site selection but before the receipt of all required permits if we believe that it is probable that the landfill cell will be permitted. Upon receipt of regulatory approval, technical landfill cell designs are prepared. The technical designs, which include the detailed specifications to develop and construct all components of the landfill cell including the types and quantities of materials that will be required, are reviewed by our environmental management group. The technical designs are submitted to the regulatory agencies for approval. Upon approval of the technical designs, the regulatory agencies issue permits to develop and operate the landfill cell. The types of costs that are detailed in the technical design specifications generally include excavation, natural and synthetic liners, construction of leachate collection systems, installation of groundwater monitoring wells, construction of leachate management facilities and other costs associated with the development of the site. We review the adequacy of our cost estimates at least annually. These development costs, together with any costs incurred to acquire, design and permit the landfill cell, including personnel costs of employees directly associated with the landfill cell design, are recorded to the landfill asset on the balance sheet as incurred. To match the expense related to the landfill asset with the revenue generated by the landfill operations, we amortize the landfill asset on a units-of-consumption basis over its operating life, typically on a cubic yard or cubic meter of disposal space consumed. The landfill asset is fully amortized at the end of a landfill cell's operating life. The per-unit amortization rate is calculated by dividing the sum of the landfill asset net book value plus estimated future development costs (as described above) for the landfill cell, by the landfill cell's estimated remaining disposal capacity. Amortization rates are influenced by the original cost basis of the landfill cell, including acquisition costs, which in turn is determined by geographic location and market values. We have secured significant landfill assets through business acquisitions and valued them at the time of acquisition based on fair value. Included in the technical designs are factors that determine the ultimate disposal capacity of the landfill cell. These factors include the area over which the landfill cell will be developed, such as the depth of excavation, the height of the landfill cell elevation and the angle of the side-slope construction. Landfill cell capacity used in the determination of amortization rates of our landfill assets includes both permitted and unpermitted disposal capacity. Unpermitted disposal capacity is included when management believes achieving final regulatory approval is probable based on our analysis of site conditions and interactions with applicable regulatory agencies.
We review the estimates of future development costs and remaining disposal capacity for each landfill cell at least annually. These costs and disposal capacity estimates are developed using input from independent engineers and internal technical
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and accounting managers and are reviewed and approved by our environmental management group. Any changes in future estimated costs or estimated disposal capacity are reflected prospectively in the landfill cell amortization rates.
We assess our long-lived landfill assets for impairment when an event occurs or circumstances change that indicate the carrying amount may not be recoverable. Examples of events or circumstances that may indicate impairment of any of our landfill assets include, but are not limited to, the following:
Changes in legislative or regulatory requirements impacting the landfill site
? permitting process making it more difficult and costly to obtain and/or
maintain a landfill permit;
Actions by neighboring parties, private citizen groups or others to oppose our
efforts to obtain, maintain or expand permits, which could result in denial,
revocation or suspension of a permit and adversely impact the economic
? viability of the landfill. As a result of opposition to our obtaining a permit,
improved technical information as a project progresses, or changes in the
anticipated economics associated with a project, we may decide to reduce the
scope of, or abandon, a project, which could result in an asset impairment; and
Unexpected significant increases in estimated costs, significant reductions in
? prices we are able to charge our customers or reductions in disposal capacity
that affect the ongoing economic viability of the landfill.
Disposal Facility Retirement Obligations
Disposal facility retirement obligations include the cost to close, maintain and monitor landfill cells and support facilities. As individual landfill cells reach capacity, we must cap and close the cells in accordance with the landfill cell permits. These capping and closure requirements are detailed in the technical design of each landfill cell and included as part of our approved regulatory permit. After the entire landfill cell has reached capacity and is certified closed, we must continue to maintain and monitor the landfill cell for a post-closure period, which generally extends for 30 years. Costs associated with closure and post-closure requirements generally include maintenance of the landfill cell and groundwater systems, and other activities that occur after the landfill cell has ceased accepting waste. Costs associated with post-closure monitoring generally include groundwater sampling, analysis and statistical reports, transportation and disposal of landfill leachate and erosion control costs related to the final cap. We have a legally enforceable obligation to operate our landfill cells in accordance with the specific requirements, regulations and criteria set forth in our permits. This includes executing the approved closure/post-closure plan and closing/capping the entire landfill cell in accordance with the established requirements, design and criteria contained in the permit. As a result, we record the fair value of our disposal facility retirement obligations as a liability in the period in which the regulatory obligation to retire a specific asset is triggered. For our individual landfill cells, the required closure and post-closure obligations under the terms of our permits and our intended operation of the landfill cell are triggered and recorded when the cell is placed into service and waste is initially disposed in the landfill cell. The fair value is based on the total estimated costs to close the landfill cell and perform post-closure activities once the landfill cell has reached capacity and is no longer accepting waste, discounted using a credit-adjusted risk-free rate. Retirement obligations are increased each year to reflect the passage of time by accreting the balance at the weighted average credit-adjusted risk-free rate that is used to calculate the recorded liability, with accretion charged to direct operating costs. Actual cash expenditures to perform closure and post-closure activities reduce the retirement obligation liabilities as incurred. After initial measurement, asset retirement obligations are adjusted at the end of each period to reflect changes, if any, in the estimated future cash flows underlying the obligation. Disposal facility retirement assets are capitalized as the related disposal facility retirement obligations are incurred. Disposal facility retirement assets are amortized on a units-of-consumption basis as the disposal capacity is consumed. Our disposal facility retirement obligations represent the present value of current cost estimates to close, maintain and monitor landfills and support facilities as described above. Cost estimates are developed using input from independent engineers, internal technical and accounting managers, as well as our environmental management group's interpretation of current legal and regulatory requirements, and are intended to approximate fair value. We estimate the timing of future payments based on expected annual disposal airspace consumption and then inflate the current cost estimate by an inflation rate, estimated atDecember 31, 2021 to be 2.6%. Inflated current costs are then discounted using our credit-adjusted risk-free interest rate, which approximates our incremental borrowing rate in effect at the time the obligation is established or when there are upward revisions to our estimated closure and post-closure costs. Our weighted-average credit-adjusted 65
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risk-free interest rate atDecember 31, 2021 was approximately 5.3%. Final closure and post-closure obligations are currently estimated as being paid through the year 2130. During 2021 we updated several assumptions, including estimated costs and timing of closing our disposal cells. These updates resulted in a net increase to our post-closure obligations of$732,000 in 2021. We update our estimates of future capping, closure and post-closure costs and of future disposal capacity for each landfill cell on an annual basis. Changes in inflation rates or the estimated costs, timing or extent of the required future activities to close, maintain and monitor landfills and facilities result in both: (i) a current adjustment to the recorded liability and related asset and (ii) a change in accretion and amortization rates which are applied prospectively over the remaining life of the asset. A hypothetical 1% increase in the inflation rate would increase our closure/post-closure obligation by$24.4 million . A hypothetical 10% increase in our cost estimates would increase our closure/post-closure obligation by$10.5 million .
As ofDecember 31, 2021 , the Company's goodwill balance was$413.1 million . We assess goodwill for impairment during the fourth quarter as ofOctober 1 of each year, and also if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The assessment consists of comparing the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit, including goodwill. Some of the factors that could indicate impairment include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, or failure to generate sufficient cash flows at the reporting unit. For example, field services represents an emerging business for the Company and has been the focus of a shift in strategy since the acquisition of NRC and EQ. Failure to execute on planned growth initiatives within this business could lead to the impairment of goodwill and intangible assets in future periods. We determine our reporting units by identifying the components of each operating segment, and then aggregate components having similar economic characteristics based on quantitative and/or qualitative factors. AtDecember 31, 2021 , we had seven reporting units, six of which had allocated goodwill. Fair values are generally determined by an income approach, discounting projected future cash flows based on our expectations of the current and future operating environment, using a market approach, applying a multiple of earnings based on guideline for publicly traded companies, or a combination thereof. Estimating future cash flows requires significant judgment about factors such as general economic conditions and projected growth rates, and our estimates often vary from the cash flows eventually realized. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on our industry, capital structure and risk premiums including those reflected in the current market capitalization. In the event the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit is considered impaired, and an impairment charge would be recognized during the period in which the determination has been made for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Assessing impairment inherently involves management judgments as to the assumptions used to calculate fair value of the reporting units and the impact of market conditions on those assumptions. The key inputs that management uses in its assumptions to estimate the fair value of our reporting units under the income-based approach are as follows:
Projected cash flows of the reporting unit, with consideration given to
? projected revenues, operating margins and the levels of capital investment
required to generate the corresponding revenues; and
? Weighted average cost of capital ("WACC"), the risk-adjusted rate used to
discount the projected cash flows.
To develop the projected cash flows of our reporting units, management considers
factors that may impact the revenue streams within each reporting unit. These
factors include, but are not limited to, economic conditions on both a global
scale and specifically in the regions in which the reporting units operate,
customer relationships, strategic plans and
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opportunities, required returns on invested capital and competition from other service providers. With regard to operating margins, management considers its historical reporting unit operating margins on the revenue streams within each reporting unit, adjusting historical margins for the projected impact of current market trends on both fixed and variable costs. Expected future after-tax operating cash flows of each reporting unit are discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions regarding future operating performance including the projected mix of revenue streams within each reporting unit, projected operating margins, the amount and timing of capital investments and the overall probability of achieving the projected cash flows, as well as future economic conditions, which may result in actual future cash flows that are different than management's estimates. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in estimating the present value of future cash flows, is based on estimates of the WACC of market participants relative to the reporting units. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC.
The result of the annual assessment of goodwill undertaken in the fourth quarter of 2021 indicated that the fair value of each of our reporting units was in excess of its respective carrying value.
In connection with our financial review and forecasting procedures performed
during the first quarter of 2020, management determined that the projected
future cash flows of our Energy Waste ("EW") reporting unit and our
International reporting unit (described below) indicated that the fair value of
such reporting units may be below their respective carrying amounts.
Accordingly, we performed an interim assessment of each reporting unit's fair
value as of March 31, 2020 (the "Interim Assessment"). Based on the results of
the Interim Assessment, we recognized goodwill impairment charges of $283.6
million related to our EW reporting unit and $16.7 million related to our
International reporting unit in the first quarter of 2020. During the fourth
quarter of 2020, the Company finalized the purchase price allocation related to
the NRC Merger. The finalization of fair value estimates during the fourth
quarter of 2020, and resulting final determination of goodwill by reporting
unit, resulted in an increase in the amount of goodwill assigned to the EW
reporting unit and a decrease in the amount of goodwill assigned to the
International reporting unit. $80.3 million of additional goodwill assigned to
the EW reporting unit was immediately impaired in the fourth quarter of 2020
based on the fair value of the reporting unit determined in the Interim
Assessment. The decrease in goodwill assigned to the International reporting
unit resulted in the reversal in the fourth quarter of 2020 of $11.2 million of
International reporting unit goodwill impairment charges recorded in the first
quarter of 2020.
Our EW reporting unit, the sole component of our Energy Waste segment, provides
energy-related services including solid and liquid waste treatment and disposal,
equipment cleaning and maintenance, specialty equipment rental, spill
containment and site remediation for a full complement of oil and gas waste
streams, predominately to upstream energy customers currently concentrated in
the Eagle Ford and Permian Basins in Texas . Our International reporting unit, a
component of our Field Services segment, provides industrial and emergency
response services to the offshore oil and gas sector in the North Sea and
land-based industries across the EMEA region. Both our EW and International
reporting units are dependent on energy-related exploration and production
investments and expenditures by our energy industry customers. Lower crude oil
prices and the volatility of such prices affect the level of investment as it
impacts the ability of energy companies to access capital on economically
advantageous terms or at all. In addition, energy companies decrease investments
when the projected profits are inadequate or uncertain due to lower crude oil
prices or volatility in crude oil prices. Such reductions in capital spending
negatively impact energy waste generation and therefore the demand for our
services.
The principal factors contributing to the goodwill impairment charges for both
the EW and International reporting units related to historically-low energy
commodity prices reducing anticipated energy-related exploration and production
investments and expenditures by our energy industry customers, which negatively
impacted each reporting unit's prospective cash flows and each reporting unit's
estimated fair value. A longer-than-expected recovery in crude oil pricing and
energy-related exploration and production investments became evident during the
first quarter of 2020 as we assessed the projected impact of the COVID-19
pandemic and foreign oil production increases on the global demand for oil and
updated the long-term projections for each reporting unit which, as a result,
decreased each reporting unit's anticipated future cash flows as compared to
those estimated previously.
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Consistent with our annual impairment testing methodology, we utilized a weighted average of (1) an income approach and (2) a market approach to determine the fair value of each of the reporting units for the Interim Assessment. The income approach is based on the estimated present value of future cash flows for each reporting unit. The market approach is based on assumptions about how market data relates to each reporting unit.
The rapid and sustained decline in the energy markets served by our EW and International reporting units, exacerbated by the uncertainty surrounding the impact of the COVID-19 pandemic and foreign oil production increases, has inherently increased the risk associated with the future cash flows of these reporting units. Accordingly, when performing the Interim Assessment, we increased the discount rates and decreased the projected capital investment for each reporting unit compared to the assumptions used in the initial fair value assessment in connection with the NRC Merger onNovember 1, 2019 . We also considered the estimated fair value of our EW and International reporting units under a market-based approach by applying industry-comparable multiples of revenues and operating earnings to reporting unit revenues and operating earnings. The lack of a broad base of publicly available market data specific to the industry in which we operate, combined with the general market volatility attributable to the COVID-19 pandemic, results in a wide range of currently observable market multiples. Accordingly, we applied less weight to the estimated fair value of our reporting units calculated under the market-based approach (10%) compared to the income approach (90%) described above.
The result of the annual assessment of goodwill undertaken in the fourth quarter of 2020 indicated that the fair value of each of our reporting units was in excess of its respective carrying value, with the exception of our Field Services reporting unit.
Our Field Services reporting unit, a component of our Field Services segment, offers specialty field services and total waste management solutions to commercial and industrial facilities and to government entities through our 10-day transfer facilities and at customer sites. Consistent with prior assessments, we utilized a weighted average of (1) an income approach and (2) a market approach to determine the fair value of each of the Field Services reporting unit. The income approach is based on the estimated present value of future cash flows for the reporting unit. The market approach is based on assumptions about how market data relates to the reporting unit. The estimated fair value of the Field Services reporting unit was then compared to the reporting unit's carrying amount as ofOctober 1, 2020 . Based on the results of that comparison, the carrying amount of the Field Services reporting unit exceeded the estimated fair value of the reporting unit by$14.4 million and, as a result, we recognized a corresponding goodwill impairment charge in the fourth quarter of 2020. The factors contributing to the$14.4 million goodwill impairment charge principally related to an increase in the risk-adjusted rate used to discount the projected cash flows of the reporting unit as a result of the decline in our share price since the last annual assessment as well as a slower than expected recovery to cash flow levels forecasted prior to the COVID-19 pandemic, which negatively impacted the reporting unit's prospective financial information in its discounted cash flow model and the reporting unit's estimated fair value as compared to previous estimates.
The result of the annual assessment of goodwill undertaken in the fourth quarter of 2019 indicated that the fair value of each of our reporting units was in excess of its respective carrying value.
Non-amortizing Intangible Assets
We review non-amortizing intangible assets for impairment during the fourth quarter as ofOctober 1 of each year. Fair value is generally determined by considering an internally developed discounted projected cash flow analysis. Estimating future cash flows requires significant judgment about factors such as general economic conditions and projected growth rates, and our estimates often vary from the cash flows eventually realized. If the fair value of an asset is determined to be less than the carrying amount of the intangible asset, an impairment in the amount of the difference is recorded in the period in which the annual assessment occurs.
The results of the annual assessment of non-amortizing intangible assets undertaken in the fourth quarter of 2021 indicated no impairment charges were required.
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The results of the annual assessment of non-amortizing intangible assets
undertaken in the fourth quarter of 2020 indicated no impairment charges were
required, with the exception of certain non-amortizing permit intangibles within
our Field Services segment.
Our Field Services segment provides government-mandated, commercial standby oil
spill compliance solutions to companies that store, transport, produce or handle
petroleum and certain nonpetroleum oils on or near U.S. waters. A company's
ability to provide these standby services is subject to significant regulatory
certification requirements and other high barriers to entry. As such, the
Company assigned $57.1 million of fair value to non-amortizing standby services
permit intangible assets upon finalization of the purchase accounting allocation
related to the NRC Merger. In performing the annual indefinite-lived intangible
assets impairment tests, the estimated fair value of the standby services
permits was determined under an income approach using discounted projected
future cash flows associated with the permits and then compared to the $57.1
million carrying amount of the permits as of October 1, 2020 . Based on the
results of that evaluation, the carrying amount of the permits exceeded the
estimated fair value of the permits and, as a result, we recognized a $21.1
million impairment charge in the fourth quarter of 2020. The factors
contributing to the impairment charge principally related to a less favorable
outlook on the potential for both significant oil spill events and growth
opportunities, which negatively impacted the discounted projected cash flows
associated with the standby services permits and their estimated fair value as
compared to previous estimates.
The results of the annual assessment of non-amortizing intangible assets undertaken in the fourth quarter of 2019 indicated no impairment charges were required.
Amortizing Tangible and Intangible Assets
We also review amortizing tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to assess whether a potential impairment exists, the assets' carrying values are compared with their undiscounted expected future cash flows. Estimating future cash flows requires significant judgment about factors such as general economic conditions and projected growth rates, and our estimates often vary from the cash flows eventually realized. Impairments are measured by comparing the fair value of the asset to its carrying value. Fair value is generally determined by considering: (i) the internally developed discounted projected cash flow analysis; (ii) a third-party valuation; and/or (iii) information available regarding the current market environment for similar assets. If the fair value of an asset is determined to be less than the carrying amount of the asset, an impairment in the amount of the difference is recorded in the period in which the events or changes in circumstances that indicated the carrying value of the asset may not be recoverable occurred. In connection with the interim goodwill impairment assessment of the EW and International reporting units in the first quarter of 2020, and the annual goodwill impairment assessment of the EW and Field Services reporting units in the fourth quarter of 2020, we also assessed the reporting units' amortizing tangible and intangible assets for impairment. Based on the results of the assessment, the carrying amounts of the amortizing tangible and intangible assets did not exceed the estimated undiscounted cash flows of the asset groups and, as a result, no additional impairment charges were recorded in 2020. Our acquired permits and licenses generally have renewal terms of approximately 5-10 years. We have a history of renewing these permits and licenses as demonstrated by the fact that each of the sites' treatment permits and licenses have been renewed regularly since the facility began operations. We intend to continue to renew our permits and licenses as they come up for renewal for the foreseeable future. Costs incurred to renew or extend the term of our permits and licenses are recorded in Selling, general and administrative expenses in our consolidated statements of operations.
Share-Based Payments
OnMay 27, 2015 , the stockholders of Predecessor US Ecology approved the Omnibus Incentive Plan (as amended, "Pre-Merger Omnibus Plan"), which was approved by Predecessor US Ecology's Board of Directors onApril 7, 2015 . In connection with the closing of the NRC Merger, the Company assumed the Pre-Merger Omnibus Plan, amended and restated such plan and renamed it theAmended and Restated US Ecology, Inc. Omnibus Incentive Plan (the "Omnibus 69
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Plan") for the purpose of issuing replacement awards to award recipients under the Omnibus Plan pursuant to the NRC Merger Agreement and for the issuance of additional awards in the future. The Omnibus Plan was developed to provide additional incentives through equity ownership inUS Ecology and, as a result, encourage employees, consultants and non-employee directors to contribute to our success. The Omnibus Plan provides, among other things, the ability for the Company to grant restricted stock, performance stock, options, stock appreciation rights, restricted stock units, performance stock units and other share-based awards or cash awards to employees, consultants and non-employee directors. The Omnibus Plan expires onMarch 31, 2031 and authorizes 3,272,000 shares of common stock for grant over the life of the Omnibus Plan. As ofDecember 31, 2021 , 2,088,750 shares of common stock remain available for grant under the Omnibus Plan. Subsequent to the approval of the Pre-Merger Omnibus Plan by Predecessor US Ecology inMay 2015 , we stopped granting equity awards under theAmerican Ecology Corporation 2008 Stock Option Incentive Plan ("Pre-Merger 2008 Stock Option Plan"). However, in connection with the closing of the NRC Merger, the Company assumed the Pre-Merger 2008 Stock Option Plan, amended and restated such plan and renamed it in theAmended and Restated US Ecology, Inc. 2008 Stock Option Incentive Plan (the "2008 Stock Option Plan") solely for the purpose of issuing replacement awards to award recipients thereunder and remains in effect solely for the settlement of awards granted under such plan and no future grants may be made under such plan. No shares that are reserved but unissued under the 2008 Stock Option Plan or that are outstanding under the 2008 Stock Option Plan and reacquired by the Company for any reason will be available for issuance under the Omnibus Plan. In addition, in connection with the closing of the NRC Merger, the Company assumed theNRC Group Holdings Corp. 2018 Equity Incentive Plan previously maintained by NRC by adopting theAmended and Restated US Ecology, Inc. 2018 Equity and Incentive Compensation Plan solely for the purpose of issuing replacement awards to award recipients thereunder pursuant to the NRC Merger Agreement, and no future grants may be made under such plan. As ofDecember 31, 2021 , we have PSU awards outstanding under the Omnibus Plan. Each PSU represents the right to receive, on the settlement date, one share of the Company's common stock. The total number of PSUs each participant is eligible to earn ranges from 0% to 200% of the target number of PSUs granted. The actual number of PSUs that will vest and be settled in shares is determined based on total stockholder return relative to a set of peer companies, over a 2.5-year performance period. Refer to Note 19 to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a summary of the assumptions utilized in theMonte Carlo valuation of PSU awards at the date of grant.
As of
The determination of fair value of stock option awards on the date of grant using the Black-Scholes model is affected by our stock price and subjective assumptions. These assumptions include, but are not limited to, the expected term of stock options and expected stock price volatility over the term of the awards. Refer to Note 19 to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a summary of the assumptions utilized in 2021, 2020 and 2019. Our stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.
The Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures.
Income Taxes
Our income tax expense, deferred tax assets "DTAs" and deferred tax liabilities "DTLs", and liabilities for uncertain tax benefits "UTBs" reflect management's best estimate of current and future taxes to be paid. We are subject to income taxes inthe United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. 70 Table of Contents We account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our subsidiaries' assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax laws and tax rates on deferred tax assets and liabilities are recognized in operations in the period that includes the enactment date. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets on a jurisdictional basis to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. Examples of positive and negative evidence include future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law and prudent, and feasible tax planning strategies. We apply the provisions of ASC 740 related to income tax uncertainties which clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We record an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. As ofDecember 31, 2021 , the Company had accumulated undistributed earnings generated by our foreign subsidiaries of approximately$79.1 million . Any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign withholding taxes and state income taxes. We intend, however, to indefinitely reinvest these earnings and expect futureU.S. cash generation to be sufficient to meet futureU.S. cash needs.
See Note 17 to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding income taxes.
Litigation
Information with respect to this item may be found in Note 18 to the Consolidated Financial Statements included in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, under the caption "Litigation and Regulatory Proceedings" which information is incorporated herein by reference.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or interests in variable
interest entities that would require consolidation.
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