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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
 
FORM 10-Q
 
(Mark One)                    
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file no: 001-37904
 
Advanced Disposal Services, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
90-0875845
(State or other jurisdiction
of incorporation)
 
(IRS Employer
Identification No.)
90 Fort Wade Road
Ponte Vedra, Florida 32081
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (904737-7900
 
 

Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
ADSW
 
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit).    Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at October 18, 2019 was 89,404,646 shares.
 

1


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. All statements other than statements of historical facts in this document, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects and objectives of management for future operations (including development plans and objectives relating to our activities), are forward-looking statements. Many, but not all, of these statements can be found by looking for words like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “will,” “may,” “forecast,” “estimate,” “intend,” “future” and similar words. Statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are subject to safe harbor created by those sections. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, which could cause actual results to differ materially from the forward-looking statements contained in this report. Such risks, uncertainties and factors include those set forth in "Risk Factors" in our 2018 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the three months ended March 31, 2019.

Examples of these risks, uncertainties and other factors include, but are not limited to:

our ability to achieve future profitability will depend on us executing our strategy and controlling costs;

future results may be impacted by the expiration of net operating losses (NOLs);

our tax position may be affected by recent changes in U.S. tax law;       

operating in a highly competitive industry and the inability to compete effectively with larger and better capitalized companies and governmental service providers;

our results are vulnerable to economic conditions;

we may lose contracts through competitive bidding, early termination or governmental action;

some of our customers, including governmental entities, have suffered financial difficulties affecting their credit risk, which could negatively impact our operating results;

our financial and operating performance may be affected by the inability, in some instances, to renew or expand existing landfill permits or acquire new landfills. Further, the cost of operation and/or future construction of our existing landfills may become economically unfeasible causing us to abandon or cease operations;

we could be precluded from maintaining permits or entering into certain contracts if we are unable to obtain sufficient third-party financial assurance or adequate insurance coverage;

our accruals for our landfill site closure, post-closure and contamination related costs may be inadequate;

our cash flow may not be sufficient to finance our high level of capital expenditures;

our acquisitions, including our ability to integrate acquired businesses, or that acquired businesses may have unexpected risks or liabilities;

the seasonal nature of our business and "event-driven" waste projects that could cause our results to fluctuate;

adverse and destructive weather conditions that could result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs;


2


we may be subject in the normal course of business to judicial, administrative or other third-party proceedings that could interrupt or limit our operations, result in adverse judgments, settlements or fines and create negative publicity;

fuel supply and prices may fluctuate significantly and we may not be able to pass on cost increases to our customers;

fluctuations in the prices of commodities may adversely affect our financial condition, results of operations and cash flows;

increases in labor and disposal costs and related transportation costs could adversely impact our financial results;

efforts by labor unions could divert management attention and adversely affect operating results;

we depend significantly on the services of the members of our senior, regional and local management teams, and the departure of any of those persons could cause our operating results to suffer;

we are increasingly dependent on technology in our operations and, if our technology fails, our business could be adversely affected;

a cybersecurity incident could negatively impact our business and our relationships with customers;

operational and safety risks, including the risk of personal injury to employees and others;

we are subject to substantial governmental regulation and failure to comply with these requirements, as well as enforcement actions and litigation arising from an actual or perceived breach of such requirements, could subject us to fines, penalties and judgments, and impose limits on our ability to operate and expand;

our operations being subject to environmental, health and safety laws and regulations, as well as contractual obligations that may result in significant liabilities;

future changes in laws or renewed enforcement of laws regulating the flow of solid waste in interstate commerce could adversely affect our operating results;

fundamental change in the waste management industry as traditional waste streams are increasingly viewed as renewable resources and changes in laws and environmental policies may limit the items that enter the waste stream, any of which may adversely impact volumes and tipping fees at our landfills. Alternatives to landfill disposal may cause our revenues and operating results to decline;

risks associated with our substantial indebtedness and working capital deficit;

risks associated with our ability to implement our growth strategy as and when planned; and

the other risks described in the "Risk Factors" section of our 2018 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the three months ended March 31, 2019.

In addition, actual results may vary materially from those expressed or implied by forward-looking statements based on a number of factors related to the pending acquisition of Advanced Disposal, including, without limitation (1) risks related to the consummation of the merger, including the risks that (a) the merger may not be consummated within the anticipated time period, or at all, (b) the parties may fail to secure the termination or expiration of any waiting period applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (c) other conditions to the consummation of the merger under the merger agreement may not be satisfied; (2) the effects that any termination of the merger agreement may have on Advanced Disposal or its business, including the risks that (a) Advanced Disposal’s stock price may decline significantly if the merger is not completed, (b) the merger agreement may be terminated in circumstances requiring Advanced Disposal to pay Waste Management a termination fee, or (c) the circumstances of the termination, including the possible imposition of a 12-month tail period during which the termination fee could be payable upon certain subsequent transactions, may have a chilling effect on alternatives to the merger; (3) the effects that the announcement or pendency of the merger may have on Advanced Disposal and its business, including the risks that as a result (a) Advanced Disposal’s business, operating results or stock price

3


may suffer, (b) Advanced Disposal’s current plans and operations may be disrupted, (c) Advanced Disposal’s ability to retain or recruit key employees may be adversely affected, (d) Advanced Disposal’s business relationships (including, customers and suppliers) may be adversely affected, or (e) Advanced Disposal’s management’s or employees’ attention may be diverted from other important matters; (4) the effect of limitations that the merger agreement places on Advanced Disposal’s ability to operate its business, return capital to stockholders or engage in alternative transactions; (5) the nature, cost and outcome of pending and future litigation and other legal proceedings, including any such proceedings related to the merger and instituted against Advanced Disposal and others; (6) the risk that the merger and related transactions may involve unexpected costs, liabilities or delays; and (7) other economic, business, competitive, legal, regulatory, and/or tax factors.
The above examples are not exhaustive and new risks may emerge from time to time. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we will operate in the future. These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based.


4


Advanced Disposal Services, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended September 30, 2019
Table of Contents
 
 
 
 
 
 
 
 
Item 1.
6
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
 
9
 
 
 
 
11
 
 
 
 
12
 
 
 
Item 2.
25
 
 
 
Item 3.
41
 
 
 
Item 4.
41
 
 
 
 
 
 
Item 1.
43
 
 
 
Item 1a.
43
 
 
 
Item 2.
43
 
 
 
Item 3.
43
 
 
 
Item 4.
43
 
 
 
Item 5.
43
 
 
 
Item 6.
44
 
 
 


5


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
(in millions, except share data)
September 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
11.8

 
$
6.8

Accounts receivable, net of allowance for doubtful accounts of $4.6 and $4.6, respectively
212.4

 
211.4

Prepaid expenses and other current assets
34.1

 
44.8

Total current assets
258.3

 
263.0

Other assets
50.8

 
31.7

Property and equipment, net of accumulated depreciation of $1,684.1 and $1,540.7, respectively
1,773.2

 
1,761.4

Goodwill
1,224.8

 
1,215.1

Other intangible assets, net of accumulated amortization of $310.3 and $286.9, respectively
241.1

 
257.1

Total assets
$
3,548.2

 
$
3,528.3

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
115.1

 
$
107.8

Accrued expenses
134.9

 
117.7

Deferred revenue
70.4

 
72.5

Current maturities of landfill retirement obligations
27.1

 
18.6

Current maturities of long-term debt
73.4

 
85.9

Total current liabilities
420.9

 
402.5

Other long-term liabilities
85.4

 
76.7

Long-term debt, less current maturities
1,800.6

 
1,817.1

Accrued landfill retirement obligations, less current maturities
231.1

 
229.4

Deferred income taxes
88.5

 
91.1

Total liabilities
2,626.5

 
2,616.8

Equity
 
 
 
Common stock: $.01 par value, 1,000,000,000 shares authorized, 89,200,011 and 88,685,920 issued including shares held in treasury, respectively
0.9

 
0.9

Treasury stock at cost, 18,636 and 2,274 shares, respectively
(0.6
)


Additional paid-in capital
1,519.6

 
1,501.7

Accumulated deficit
(594.9
)
 
(591.1
)
Accumulated other comprehensive loss
(3.3
)
 

Total stockholders' equity
921.7

 
911.5

Total liabilities and stockholders' equity
$
3,548.2

 
$
3,528.3

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
(in millions, except share and per share data)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Service revenues
$
419.5

 
$
400.6

 
$
1,222.5

 
$
1,163.4

Operating costs and expenses
 
 
 
 

 
 
Operating
270.1

 
268.2

 
796.7

 
755.1

Selling, general and administrative
48.1

 
45.4

 
160.0

 
135.4

Depreciation and amortization
70.4

 
68.9

 
206.6

 
202.8

Acquisition and development costs
0.1

 
0.1

 
1.1

 
0.4

Loss (gain) on disposal of assets and asset impairments
1.3

 
0.5

 
2.0

 
(2.8
)
Total operating costs and expenses
390.0

 
383.1

 
1,166.4

 
1,090.9

Operating income
29.5

 
17.5

 
56.1

 
72.5

Other (expense) income
 
 
 
 
 
 
 
Interest expense
(25.0
)
 
(24.4
)
 
(77.2
)
 
(71.0
)
Other income (expense), net
0.5

 
0.8

 
(2.3
)
 
8.7

Total other expense
(24.5
)
 
(23.6
)
 
(79.5
)
 
(62.3
)
Income (loss) before income taxes
5.0

 
(6.1
)
 
(23.4
)
 
10.2

Income tax expense (benefit)
1.4

 
(1.2
)
 
(20.0
)
 
3.3

              Net income (loss)
$
3.6

 
$
(4.9
)
 
$
(3.4
)
 
$
6.9

 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders per share
 
 
 
 
 
 
 
Basic income (loss) per share
$
0.04

 
$
(0.06
)
 
$
(0.04
)
 
$
0.08

Diluted income (loss) per share
$
0.04

 
$
(0.06
)
 
$
(0.04
)
 
$
0.08

Basic average shares outstanding
89,019,841

 
88,614,747

 
88,867,559

 
88,562,445

Diluted average shares outstanding
90,932,142

 
88,614,747

 
88,867,559

 
89,326,755

The accompanying notes are an integral part of these condensed consolidated financial statements.


7


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
(in millions)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income (loss)
$
3.6

 
$
(4.9
)
 
$
(3.4
)
 
$
6.9

Change in fair value of interest rate caps, net of tax for the three months ended September 30, 2019 and 2018 of $0.2 and ($0.3), respectively and for the nine months ended September 30, 2019 and 2018 of $1.5 and ($1.4), respectively
(0.4
)
 
0.7

 
(3.7
)
 
3.9

Comprehensive income (loss)
$
3.2

 
$
(4.2
)
 
$
(7.1
)
 
$
10.8

The accompanying notes are an integral part of these condensed consolidated financial statements.


8


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)

(in millions, except share data)
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated
Other Comprehensive (Loss) Income
 
Total Stockholders' Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
88,493,468

 
$
0.9

 
2,274

 
$

 
$
1,487.4

 
$
(603.3
)
 
$
(0.4
)
 
$
884.6

Net income

 

 

 

 

 
2.1

 

 
2.1

Stock-based compensation
22,565

 

 

 

 
2.5

 

 

 
2.5

Stock option exercises
21,295

 

 

 

 
0.3

 

 

 
0.3

Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $0.7

 

 

 

 

 

 
2.2

 
2.2

Impact of implementing new revenue recognition standard, net of tax of ($1.1)

 

 

 

 

 
2.8

 

 
2.8

Balance at March 31, 2018
88,537,328

 
$
0.9

 
2,274

 
$

 
$
1,490.2

 
$
(598.4
)
 
$
1.8

 
$
894.5

Net income

 

 

 

 

 
9.7

 

 
9.7

Stock-based compensation

 

 

 

 
2.4

 

 

 
2.4

Stock option exercises
40,323

 

 

 

 
0.7

 

 

 
0.7

Unrealized loss resulting from change in fair value of derivative instruments, net of tax of ($0.4)

 

 

 

 

 

 
1.0

 
1.0

Balance at June 30, 2018
88,577,651

 
$
0.9

 
2,274

 
$

 
$
1,493.3

 
$
(588.7
)
 
$
2.8

 
$
908.3

Net loss

 

 

 

 

 
(4.9
)
 

 
(4.9
)
Stock-based compensation

 

 

 

 
3.6

 

 

 
3.6

Stock option exercises
79,195

 

 

 

 
1.5

 

 

 
1.5

Unrealized loss resulting from change in fair value of derivative instruments, net of tax of ($0.3)

 

 

 

 

 

 
0.7

 
0.7

Balance at September 30, 2018
88,656,846

 
$
0.9

 
2,274

 
$

 
$
1,498.4

 
$
(593.6
)
 
$
3.5

 
$
909.2

Net income

 

 

 

 

 
2.5

 

 
2.5

Stock-based compensation

 

 

 

 
2.7

 

 

 
2.7

Stock option exercises
29,074

 

 

 

 
0.6

 

 

 
0.6

Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $1.4

 

 

 

 

 

 
(3.5
)
 
(3.5
)
Balance at December 31, 2018
88,685,920

 
$
0.9

 
2,274

 
$

 
$
1,501.7

 
$
(591.1
)
 
$

 
$
911.5





9


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)





 
 
 
 

Additional Paid-In Capital

Accumulated Deficit
 
Accumulated
Other Comprehensive (Loss) Income

Total Stockholders' Equity
(in millions, except share data)
Common Stock
 
Treasury Stock


 

 
Shares

Amount
 
Shares

Amount


 

Balance at December 31, 2018
88,685,920


$
0.9

 
2,274


$


$
1,501.7


$
(591.1
)
 
$


$
911.5

Net loss



 






(6.0
)
 


(6.0
)
Stock-based compensation
18,735



 




4.1



 


4.1

Stock option exercises
90,807



 




1.9



 


1.9

Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $0.8



 



 

 

 
(2.0
)
 
$
(2.0
)
Impact of implementing new derivatives standard, net of tax of ($0.2)



 



 

 
(0.4
)
 
0.4

 
$

Balance at March 31, 2019
88,795,462


$
0.9

 
2,274


$


$
1,507.7


$
(597.5
)
 
$
(1.6
)

$
909.5

Net loss



 



 

 
(1.0
)
 

 
(1.0
)
Stock-based compensation



 



 
2.2

 

 

 
2.2

Stock option exercises and performance stock units vested
138,781



 



 
2.0

 

 

 
2.0

Stock repurchases (a)



 
16,362


$
(0.6
)
 
$

 
$

 

 
(0.6
)
Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $0.5



 



 

 

 
(1.3
)
 
(1.3
)
Balance at June 30, 2019
88,934,243


$
0.9

 
18,636


$
(0.6
)
 
$
1,511.9

 
$
(598.5
)
 
$
(2.9
)
 
$
910.8

Net income

 

 

 

 

 
3.6

 

 
$
3.6

Stock-based compensation

 

 

 

 
2.0

 

 

 
$
2.0

Stock option exercises
265,768

 

 

 

 
5.7

 

 

 
$
5.7

Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $0.2

 

 

 

 

 

 
(0.4
)
 
(0.4
)
Balance at September 30, 2019
89,200,011

 
$
0.9

 
18,636

 
$
(0.6
)
 
$
1,519.6

 
$
(594.9
)
 
$
(3.3
)
 
$
921.7


(a) Stock repurchases represent shares withheld by the Company to pay employee taxes associated with performance stock unit vesting.
The accompanying notes are an integral part of these condensed consolidated financial statements.


10


Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in millions)
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities

 

Net (loss) income
$
(3.4
)
 
$
6.9

Adjustments to reconcile net (loss) income to net cash provided by operating activities

 

Depreciation and amortization
206.6

 
202.8

Change in fair value of derivative instruments
5.8

 
(4.8
)
Amortization of debt issuance costs and original issue discount
4.3

 
5.0

Accretion on landfill retirement obligations
13.2

 
11.4

Other accretion and amortization
5.3

 
3.2

Provision for doubtful accounts
4.2

 
3.6

Loss (gain) on disposition of property and equipment
2.0

 
(2.6
)
Stock based compensation
8.3

 
8.5

Deferred tax (benefit) expense
(16.7
)
 
3.2

Earnings in equity investee
(1.2
)
 
(1.0
)
Write-off of 2012 Veolia acquisition related indemnification receivable
3.9

 

Changes in operating assets and liabilities, net of businesses acquired

 

Increase in accounts receivable
(4.0
)
 
(20.5
)
Decrease in prepaid expenses and other current assets
4.8

 
6.3

Decrease (increase) in other assets
2.1

 
(9.0
)
Increase in accounts payable
0.2

 
16.7

Increase in accrued expenses
13.4

 
8.1

Decrease in deferred revenue
(2.1
)
 
(0.4
)
(Decrease) increase in other long-term liabilities
(4.7
)
 
12.3

Capping, closure and post-closure obligations
(12.8
)
 
(15.3
)
Net cash provided by operating activities
229.2

 
234.4

Cash flows from investing activities

 

Purchases of property and equipment and landfill construction and development
(157.6
)
 
(133.3
)
Proceeds from sale of property and equipment and insurance recoveries
3.7

 
7.3

Acquisition of businesses, net of cash acquired
(27.1
)
 
(6.1
)
Net cash used in investing activities
(181.0
)
 
(132.1
)
Cash flows from financing activities

 

Proceeds from borrowings on debt instruments
140.9

 
84.0

Repayment on debt instruments, including finance leases
(193.1
)
 
(187.3
)
Proceeds from issuance of common stock net of stock repurchases
9.0

 
2.5

Net cash used in financing activities
(43.2
)
 
(100.8
)
Net increase in cash and cash equivalents
5.0

 
1.5

Cash and cash equivalents, beginning of period
6.8

 
6.8

Cash and cash equivalents, end of period
$
11.8

 
$
8.3


The accompanying notes are an integral part of these condensed consolidated financial statements.

11

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)



1.
Business Operations
Advanced Disposal Services, Inc. together with its consolidated subsidiaries (the "Company"), as a consolidated entity, is a non-hazardous solid waste services company which provides collection, transfer, recycling and disposal services. The Company manages and evaluates its principal operations through three reportable operating segments on a regional basis. Those operating segments are the South, East and Midwest regions. Additional information related to segments can be found in Note 10.
Two acquisitions were completed during the nine months ended September 30, 2019 for aggregate consideration consisting of a cash purchase price of $24.9. Additionally, the Company made a $2.2 deferred purchase price payment during the nine months ended September 30, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. Nine acquisitions were completed during the nine months ended September 30, 2018 for a cash purchase price of $6.1 and notes payable of $0.7. The results of operations of each acquisition are included in the Company's unaudited condensed consolidated statements of operations subsequent to the closing date of each acquisition. Our acquisition accounting and valuation processes with respect to property and equipment, intangible assets, current liabilities and long-term liabilities related to acquisitions completed subsequent to January 1, 2019 are preliminary and subject to adjustments.

2.
Basis of Presentation
The Company’s condensed consolidated financial statements include its wholly-owned subsidiaries and their respective subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 are unaudited. In the opinion of management, these condensed consolidated financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair statement of the balance sheet, results of operations, comprehensive income (loss), cash flows, and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
In conformity with accounting principles generally accepted in the United States of America, the Company uses estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. The Company must make these estimates and assumptions because certain information that it uses is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In preparing the Company's financial statements, the more subjective areas that deal with the greatest amount of uncertainty relate to: accounting for long-lived assets, including recoverability; landfill development costs; final capping, closure and post-closure costs; valuation allowances for accounts receivable and deferred tax assets; liabilities for potential litigation, claims and assessments; liabilities for environmental remediation; stock compensation; accounting for goodwill and intangible asset impairments; deferred taxes; uncertain tax positions; self-insurance reserves; and estimates of the fair value of assets acquired and liabilities assumed in any acquisition. Actual results could differ materially from the estimates and assumptions that the Company uses in preparation of its financial statements.
Recently Adopted Accounting Standards

In August 2017, the FASB issued Accounting Standards Update ("ASU") 2017-12 which intends to address concerns through changes to hedge accounting guidance which will accomplish the following: a) expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company's risk management activities; b) decrease the complexity of preparing and understanding hedge results through eliminating the separate measurement and reporting of hedge ineffectiveness; c) enhance transparency, comparability and understandability of hedge results through enhanced disclosures and changing the presentation of hedge results to align the effects of the hedging instrument and the hedged item; and d) reduce the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company's adoption of this guidance during the first quarter of fiscal 2019 required a $0.4 adjustment to opening accumulated deficit, net of tax.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in July 2018 the FASB issued ASU 2018-11, Leases: Targeted Improvements, in December 2018 the FASB issued ASU 2018-20, Leases: Narrow Scope Improvements for Lessors and in March 2019 the FASB issued ASU 2019-1, Leases: Codification Improvements. Lessees are required to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors are required to recognize a net lease investment. Additional qualitative and quantitative disclosures are also required to increase transparency and comparability among organizations. The Company adopted Topic 842 and applicable technical updates as of January 1, 2019 using the modified retrospective transition method. See Note 12 for further details.

3.
Revenue Recognition
Revenue by Segment
See Note 10 for information related to revenue by reportable segment and major line of business.
Capitalized Sales Commissions
Under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company capitalizes sales commissions as contract assets related to commercial and permanent rolloff collection customers and amortizes those sales commissions over the estimated customer life. The balance of capitalized sales commissions as of September 30, 2019 and December 31, 2018 were $4.6 and $4.4, respectively. The Company recorded amortization expense of $0.4 and $0.3 related to capitalized sales commissions for the three months ended September 30, 2019 and 2018, respectively. The Company recorded amortization expense of $1.2 and $1.0 related to capitalized sales commissions for the nine months ended September 30, 2019 and 2018, respectively.
Deferred Revenues
The Company records deferred revenue when cash payments are received or are due in advance of the Company's performance. The increase in the deferred revenue balance from December 31, 2018 to September 30, 2019 is primarily driven by cash payments received or due in advance of the Company satisfying its performance obligations, offset by $71.6 of revenues recognized that were included in the deferred revenue balance at December 31, 2018.
Practical Expedients
As allowed by ASC 606, the Company does not disclose the value of unsatisfied performance obligations related to its contracts and service agreements as the Company accounts for its revenue as variable consideration and has the right to invoice for services performed each period.

4.
Landfill Liabilities
Liabilities for final closure and post-closure costs for the year ended December 31, 2018 and for the nine months ended September 30, 2019 are shown in the table below:
Balance at December 31, 2017
$
225.9

Increase in retirement obligation
9.7

Accretion of closure and post-closure costs
17.0

Acquisition
4.9

Asset retirement obligation adjustments
10.7

Costs incurred
(20.2
)
Balance at December 31, 2018
248.0

Increase in retirement obligation
8.4

Accretion of closure and post-closure costs
13.2

Costs incurred
(11.4
)
Balance at September 30, 2019
258.2

Less: Current portion
(27.1
)

$
231.1








12

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

5. Earnings (Loss) Per Share

The following table sets forth the computation of basic earnings (loss) per share and earnings (loss) per share, assuming dilution:

 
Three Months Ended September 30,

Nine Months Ended September 30,

 
2019

2018

2019

2018
Numerator:











Net income (loss)
$
3.6


$
(4.9
)

$
(3.4
)

$
6.9

Denominator:









Average common shares outstanding
89,019,841


88,614,747


88,867,559


88,562,445


Other potentially dilutive common shares
1,912,301






764,310


Average common shares outstanding, assuming dilution
90,932,142


88,614,747


88,867,559


89,326,755















Basic net income (loss) per share
$
0.04


$
(0.06
)

$
(0.04
)

$
0.08


Diluted net income (loss) per share
$
0.04


$
(0.06
)

$
(0.04
)

$
0.08


Basic net income (loss) per share is based on the weighted-average number of shares of common stock outstanding for each of the periods presented. Diluted net income (loss) per share is based on the weighted-average number of shares of common stock equivalents outstanding adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. The Company's potentially dilutive instruments are made up of equity awards, which include stock options, restricted stock units and performance stock units.
Pursuant to the FASB’s ASC Topic 260, Earnings Per Share, the Company includes additional shares in the computation of diluted net income per share. The additional shares included in diluted net income per share represent the number of shares that would be issued if all of the above potentially dilutive instruments were converted into common stock. When calculating diluted net income per share, the ASC requires the Company to include the potential shares that would be outstanding if dilutive outstanding stock options were exercised. This number is different from outstanding stock options because it is offset by shares the Company could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.
Approximately 0.2 million and 4.9 million of outstanding stock awards were excluded from the diluted net income (loss) per share calculation for the three months ended September 30, 2019 and September 30, 2018, respectively, because their effect was antidilutive. Approximately 5.3 million and 1.8 million of outstanding stock awards were excluded from the diluted net income (loss) per share calculation for the nine months ended September 30, 2019 and September 30, 2018, respectively, because their effect was antidilutive.



















13

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

6.
Debt
The following table summarizes the major components of debt at each balance sheet date and provides the maturities and interest rate ranges of each major category of debt:
 
September 30,
2019
 
December 31,
2018
Revolving line of credit with lenders (Revolver), interest at applicable rate plus margin, as defined (6.75% and 6.69% at September 30, 2019 and December 31, 2018, respectively) due quarterly; balance due at maturity in November 2021
$
25.0

 
$
37.0

Term loans (Term Loan B); quarterly payments of $3.75 commencing March 31, 2017 through September 30, 2023 with final payment due November 10, 2023; interest at an alternate base rate or adjusted LIBOR rate with a 0.75% floor plus an applicable margin
1,376.3

 
1,387.5

Senior notes (Senior Notes) payable; interest at 5.625% payable in arrears semi-annually commencing May 15, 2017; maturing on November 15, 2024
425.0

 
425.0

Finance lease obligations, maturing through 2024
60.9

 
69.2

Other debt
8.2

 
9.5

 
1,895.4

 
1,928.2

Less: Original issue discount and debt issuance costs classified as a reduction to long-term debt
(21.4
)
 
(25.2
)
Less: Current portion
(73.4
)
 
(85.9
)
 
$
1,800.6

 
$
1,817.1



All borrowings under the Term Loan B, Revolver and Senior Notes are guaranteed by each of the Company's current and future domestic subsidiaries, subject to certain agreed-upon exemptions. All guarantors are jointly, severally, fully and unconditionally liable. There are no significant restrictions on the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan.

Revolver and Letter of Credit Facilities

As of September 30, 2019, the Company had an aggregate committed capacity of $300.0, of which $100.0 was available for letters of credit under its credit facilities. The Company’s Revolver is its primary source of letter of credit capacity and expires in 2021. As of September 30, 2019 and December 31, 2018, the Company had $25.0 and $37.0 of borrowings outstanding on the Revolver, respectively. As of September 30, 2019 and December 31, 2018, the Company had an aggregate of $28.5 and $32.3, respectively, of letters of credit outstanding under its credit facilities.

7. Derivative Instruments and Hedging Activities
The following table summarizes the fair values of derivative instruments recorded in the Company’s condensed consolidated balance sheets:


Balance Sheet Location

September 30, 2019

December 31,
2018
Derivatives Designated as Hedging Instruments








2017 Interest rate caps

Other assets

$


$
0.7

2017 Interest rate caps

Accrued expenses

(2.2
)


2017 Interest rate caps

Other long-term liabilities

(2.4
)


Derivatives Not Designated as Hedging Instruments








2016 Interest rate caps

Prepaid expenses and other current assets



5.8

Total derivatives



$
(4.6
)

$
6.5


The Company has not offset fair value of assets and liabilities recognized for its derivative instruments.

14

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

Interest Rate Caps

In November 2017, the Company entered into two interest rate cap agreements as cash flow hedges (the "2017 interest rate caps") to hedge the risk of a rise in interest rates and associated cash flows on its variable rate debt. The Company has applied hedge accounting to the 2017 interest rate caps; therefore, changes in the fair value of the 2017 interest rate caps are recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive income (loss). The 2017 interest rate caps commence in 2019 and expire in 2021. The Company will pay the $4.9 premium on the 2017 interest rate caps in monthly installments beginning in October 2019. The Company recorded a loss of $0.4 and a gain of $0.7 related to the 2017 interest rate caps for the three months ended September 30, 2019 and 2018, respectively, which was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statement of comprehensive income (loss). The Company recorded a loss related to the 2017 interest rate caps of $3.7 for the nine months ended September 30, 2019 which was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive income (loss). The Company recorded a gain related to the 2017 interest rate caps of $4.5 for the nine months ended September 30, 2018 of which the effective portion of $3.9 was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statement of comprehensive income (loss) and the ineffective portion of $0.6 was recorded in other income, net in the consolidated statement of operations. The notional value of the 2017 interest rate cap contracts aggregated were $600.0 as of September 30, 2019 and will remain constant through maturity in 2021.
In May 2016, the Company entered into three interest rate cap agreements (the "2016 interest rate caps") as economic hedges against the risk of a rise in interest rates and the associated cash flows on its variable rate debt. The Company paid the $5.5 premium of the 2016 interest rate caps equally over eleven quarters beginning on March 31, 2017. The Company elected not to apply hedge accounting to the 2016 interest rate caps; therefore, changes in the fair value of the 2016 interest rate caps were recorded in other (expense) income, net in the condensed consolidated statements of operations. The Company recorded no gain or loss related to the 2016 interest rate caps and a gain of $0.4 for the three months ended September 30, 2019 and 2018, respectively. The Company recorded a loss related to the 2016 interest rate caps of $0.9 and a gain of $6.4 for the nine months ended September 30, 2019 and 2018, respectively. The notional value of the 2016 interest rate cap contracts aggregated were constant at $800.0 over their term and matured on September 30, 2019.

8. Income Taxes

The Company’s effective income tax rate for the three months ended September 30, 2019 and 2018 was 28.0% and 19.7%, respectively. The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended September 30, 2019 was primarily due to the unfavorable change in recorded valuation allowance. The difference between income taxes computed at the federal statutory rate of 21% and reported income tax benefit for the three months ended September 30, 2018 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses.
The Company’s effective income tax rate for the nine months ended September 30, 2019 and 2018 was 85.5% and 32.4%, respectively. The difference between income taxes computed at the federal statutory rate of 21% and reported income tax benefit for the nine months ended September 30, 2019 was primarily due to the favorable impact of the settlement of the IRS audit of the Veolia subsidiaries for tax years 2004 - 2012 during the second quarter of 2019. The difference between income taxes computed at the federal statutory rate of 21% and reported income tax benefit for the nine months ended September 30, 2018 was primarily due to unfavorable impact of the change in recorded valuation allowance.

As of September 30, 2019 and December 31, 2018, the Company had liabilities of $0.0 and $31.3, respectively, associated with unrecognized tax benefits and related interest. The reduction to the unrecognized tax benefits and related interest from December 31, 2018 to September 30, 2019 is the result of the Veolia settlement with the IRS for tax years 2004 - 2012 during the second quarter of 2019.

9.
Commitments and Contingencies
Financial Instruments
The Company has obtained letters of credit, performance bonds and insurance policies for the performance of the following: landfill final capping, closure and post-closure requirements; certain collection, landfill and transfer station contracts; environmental remediation; and other obligations. Letters of credit are supported by the Company’s Revolver (Note 6).

15

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

The Company does not expect that any claims against or draws on these instruments would have a material adverse effect on the Company’s condensed consolidated financial statements. The Company has not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for its current operations. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, the Company continues to evaluate various options to access cost-effective sources of financial assurance.
Insurance
The Company carries insurance coverage for protection of its assets and operations from certain risks including automobile liability, general liability, real and personal property, workers' compensation, directors' and officers' liability, pollution, legal liability and other coverages the Company believes are customary to the industry. The Company's exposure to loss for insurance claims is generally limited to the per incident deductible, or self-insured retention, under the related insurance policy. Its exposure, however, could increase if its insurers are unable to meet their commitments on a timely basis.
The Company has retained a significant portion of the risks related to its automobile, general liability, workers' compensation and health claims programs. For its self-insured retentions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation and internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from the Company's assumptions used. The Company does not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on its financial condition, results of operations or cash flows.
Landfill Remediation
In fiscal 2018, the Company observed surface anomalies in specific areas of a landfill and received a proposed consent order, from a state environmental regulatory agency, outlining conditions required to be met at the landfill. The consent order was finalized during the nine months ended September 30, 2019 and the Company was assessed a penalty of $0.2. Based on the Company's best estimate during fiscal 2018, the Company recorded remediation accruals of $16.2 for required engineering enhancements related to leachate and gas infrastructure at the site. These accruals included costs for an enhanced de-watering system and the removal, treatment, and disposal of leachate at the site. Based on updated engineering studies completed in May 2019, the expected costs and the time-frame related to this matter increased therefore the Company recorded additional remediation accruals of $9.6 during the second quarter of 2019. No additional remediation accruals were recorded in the third quarter of 2019. As of September 30, 2019, $11.9 of expenditures related to the remediation accrual estimates have been incurred and $14.7 remains on the consolidated balance sheet. This amount could increase or decrease as a result of actual costs incurred to completion. Although it is reasonably possible this amount could change as a result of actual cost incurred to completion, the Company is unable to estimate a range of potential exposure due to the uncertainty of the remediation efforts required due to the early stage of the process being undertaken.

Litigation and Other Matters

The Company and certain of its subsidiaries have been named as defendants in various class action suits. Past suits have been brought against the Company and certain of its subsidiaries in the following jurisdictions: (i) 2009, Circuit Court of Macon County, Alabama (the "Tiger Pride" suit), (ii) 2011, Duval County, Florida (the "JWG" suit), (iii) 2013, Quitman County, Georgia and Barbour County, Alabama (the "Bach" suit), (iv) 2014, Chester County, Pennsylvania (the "Flaccus" suit), and (v) 2015, Gwinnett County, Georgia (the "Sims" suit). The plaintiffs in these cases primarily allege that the defendants charged improper charges (fuel, administrative and environmental charges) that were in breach of the plaintiffs' service agreements with the Company and seek damages for unspecified amounts. The 2013 Quitman County, Georgia complaint was dismissed in March 2014. The Company has reached a settlement for $9.0 (inclusive of plaintiff attorneys’ fees and costs), resolving the Tiger Pride, JWG, Bach and Sims suits. As of September 30, 2019, $5.7 of this settlement has been paid and the remaining amount is expected to be paid in the fourth quarter of 2019. The Flaccus suit has not been settled and is still pending. Given the inherent uncertainties of litigation, including the early stage of the Flaccus case, the unknown size of any potential class, and legal and factual issues in dispute, the outcome of this case cannot be predicted and a range of loss, if any, cannot currently be estimated.

In February 2017, a waste slide occurred in one cell at the Company’s Greentree Landfill in Kersey, Pennsylvania. No benefit or charge was recorded in operating expenses during the three and nine months ended September 30, 2019. A $3.7 benefit was recorded during the second quarter of 2018 due to higher insurance recoveries than previously estimated. A $3.8 charge was

16

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

recorded in operating expenses during the first quarter of 2018 to adjust the reserve related to this matter to the remaining probable costs to relocate displaced material and restore infrastructure, net of insurance recoveries. The Company does expect to incur further benefits or charges related to this matter.
The Company is subject to various other proceedings, lawsuits, disputes and claims and regulatory investigations arising in the ordinary course of its business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against the Company include commercial, customer, and employment-related claims. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered in part by insurance. Although the Company cannot predict the ultimate outcome and the range of loss cannot be currently estimated, the Company does not believe that the eventual outcome of any such action could have a material adverse effect on its business, financial condition, results of operations, or cash flows.     
Multiemployer Defined Benefit Pension Plans
Approximately 14.2% of the Company’s workforce is covered by collective bargaining agreements with various local unions across its operating regions. As a result of some of these agreements, certain of the Company’s subsidiaries are participating employers in a number of trustee-managed multiemployer, defined benefit pension plans for the affected employees.

In connection with its ongoing renegotiation of various collective bargaining agreements, the Company may discuss and negotiate for the complete or partial withdrawal from one or more of these pension plans. As of September 30, 2018, the Southwest Pennsylvania & Western Maryland Area Teamsters & Employers Pension Fund agreed to use September 30, 2018 as the termination date for the Company's contribution obligation to this multiemployer pension plan and the Company estimated and recorded a withdrawal liability of $0.8 during the three months ended September 30, 2018.
A complete or partial withdrawal from a multiemployer pension plan may occur if employees covered by a collective bargaining agreement vote to decertify a union from continuing to represent them. The Company is not aware of any such actions in connection with continuing operations. As a result of certain prior discontinued operations, the Company is potentially exposed to certain withdrawal liabilities.
The Company does not believe that any future withdrawals, individually or in the aggregate, from the multiemployer plans to which it contributes could have a material adverse effect on the Company's business, financial condition or liquidity. However, such withdrawals could have a material adverse effect on the Company's results of operations for a particular reporting period, depending on the number of employees withdrawn in any future period and the financial condition of the multiemployer plan(s) at the time of such withdrawal(s).

























17

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)


10. Segment and Related Information
The Company manages and evaluates its operations primarily through its South, East and Midwest regional segments. These three groups are presented below as the Company’s reportable segments. The Company’s three geographic operating segments provide collection, transfer, disposal and recycling services. The Company serves residential, commercial and industrial, and municipal customers throughout its operating segments.
Service revenues, operating income/(loss) and depreciation and amortization for the Company's reportable segments for the periods indicated are shown in the following tables:
 
Service
Revenues
 
Operating
Income
(Loss)
 
Depreciation
and
Amortization
 
 
 
 
 
 
Three Months Ended September 30, 2019
 
 
 
 
 
South
$
160.6

 
$
19.9

 
$
21.8

East
111.4

 
10.1

 
21.7

Midwest
147.5

 
19.0

 
25.5

Corporate

 
(19.5
)
 
1.4

 
$
419.5

 
$
29.5

 
$
70.4

 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
South
$
154.0

 
$
7.3

 
$
21.0

East
104.8

 
6.1

 
20.4

Midwest
141.8

 
20.2

 
26.4

Corporate

 
(16.1
)
 
1.1

 
$
400.6

 
$
17.5

 
$
68.9

 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
 
 
 
 
South
$
482.5


$
58.3


$
66.2

East
315.8


18.6


62.4

Midwest
424.2


52.0


74.0

Corporate


(72.8
)

4.0

 
$
1,222.5


$
56.1


$
206.6

 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
South
$
455.5

 
$
54.6

 
$
64.2

East
298.3

 
17.0

 
58.8

Midwest
409.6

 
52.7

 
76.4

Corporate

 
(51.8
)
 
3.4

 
$
1,163.4

 
$
72.5

 
$
202.8








18

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

The following table presents the Company's revenues disaggregated by major line of business. Recycling rebates paid to customers, franchise fees paid to customers and state landfill taxes are excluded from revenues.


Three Months Ended September 30,
 
Nine Months Ended September 30,


2019

2018
 
2019

2018
Residential Collection Revenue

$
101.8


$
100.3

 
$
304.8


$
301.5

Commercial Collection Revenue

100.1


95.4

 
297.6


281.5

Rolloff Collection Revenue

70.0


66.7

 
201.6


192.7

Disposal Revenue

78.2


72.9

 
216.3


203.4

Fuel and Environmental Charges

28.7


30.3

 
85.4


86.3

Sale of Recyclables

1.4


3.7

 
6.8


13.0

Other Revenue

39.3


31.3

 
110.0


85.0



$
419.5


$
400.6

 
$
1,222.5


$
1,163.4



Fluctuations in the Company's operating results may be caused by many factors, including period-to-period changes in the relative contribution of revenue by each line of business and operating segment and by general economic conditions. In addition, its revenues and income from operations typically reflect seasonal patterns. The Company expects its operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring in the East and Midwest segments because of decreased construction and demolition activities during winter months in these regions of the United States. In addition, some of the Company's operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.
Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as hurricanes that most often impact the South region, can increase the Company’s revenues in the areas affected. While weather-related and other occurrences can boost revenues through additional work, the earnings generated can be moderated as a result of significant start-up costs and other factors, resulting in earnings at comparatively lower margins. These destructive weather conditions can result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs in disposal neutral markets. Certain weather conditions, including severe winter storms, may result in the temporary suspension of the Company’s operations, which can significantly affect the operating results of the affected regions.
























19

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

11. Fair Value Measurements
Assets and Liabilities Accounted for at Fair Value
In measuring fair values of assets and liabilities, the Company uses valuation techniques that maximize the use of observable inputs (Level 1) and minimize the use of unobservable inputs (Level 3). The Company does not have any assets or liabilities measured using unobservable Level 3 inputs. The Company also uses market data or assumptions that it believes market participants would use in pricing an asset or liability, including assumptions about risk when appropriate. The carrying value for certain of the Company's financial instruments approximate fair value because of their short-term nature. The Company’s assets and liabilities that are measured at fair value on a recurring basis include the following:
 
 
 
Fair Value Measurement at September 30, 2019
Reporting Date Using
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Carrying
Value
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
Cash and cash equivalents
$
11.8

 
$
11.8

 
$

 
$
11.8

Interest rate caps - liability position
(4.6
)
 

 
(4.6
)
 
(4.6
)
Total recurring fair value measurements
$
7.2

 
$
11.8

 
$
(4.6
)
 
$
7.2

 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement at December 31, 2018
Reporting Date Using
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Carrying
Value
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
Cash and cash equivalents
$
6.8

 
$
6.8

 
$

 
$
6.8

Interest rate caps - asset position
6.5




6.5


6.5

Total recurring fair value measurements
$
13.3


$
6.8


$
6.5


$
13.3


The fair value of the interest rate caps are determined using standard option valuation models with assumptions about interest rates based on those observed in underlying markets (Level 2 in fair value hierarchy).
Fair Value of Debt
The fair value of the Company’s debt (Level 2) is estimated using indirectly observable market inputs, except for the Revolver for which cost approximates fair value due to the short-term nature of the interest rate. Although the Company has determined the estimated fair value amounts using quoted market prices, considerable judgment is required in interpreting the information and in developing the estimated fair values. Therefore, these estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. The fair value estimates are based on information available as of September 30, 2019 and December 31, 2018, respectively.






20

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

The estimated fair value of the Company’s debt is as follows:
 
September 30,
2019
 
December 31,
2018
Revolver
$
25.0


$
37.0

Senior Notes
445.3


418.6

Term Loan B
1,381.4


1,332.0


$
1,851.7


$
1,787.6


The carrying value of the Company’s debt at September 30, 2019 and December 31, 2018 was $1,826.3 and $1,849.5, respectively.

12. Leases

The Company adopted ASC Topic 842, Leases, as of January 1, 2019 and has applied its transition provisions at the beginning of the period of adoption (i.e. on the effective date), and did not restate comparative periods. Under this transition provision, the Company has applied the legacy guidance under ASC Topic 840, Leases, including its disclosure requirements, in the comparative periods presented.
Under ASC Topic 842, a lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration. The Company’s contracts determined to be, or contain, a lease include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Leases are classified as either operating or financing. For operating leases, the Company has recognized a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for prepaid rents. The Company used its incremental borrowing rate to determine the present value of the lease payments. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company determined the incremental borrowing rates for its leases by applying its applicable borrowing rate, with adjustment as appropriate for lease currency and lease term.
Upon adoption, the Company recognized right-of-use assets and lease liabilities for operating leases in the amount of $23.5 and $24.3, respectively.
The Company enters into contracts to lease real estate, equipment and vehicles. The Company’s most individually significant lease liabilities relate to real estate leases that have initial contract lease terms ranging from 8 to 55 years. The Company’s most significant lease liabilities in aggregate value relate to equipment and vehicle leases that have initial contract lease terms of 3 years. Certain leases include renewal, termination or purchase options that were not deemed reasonably assured of exercise under ASC 840. Under ASC Topic 842, the lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option, and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the option is controlled by the lessor. The Company considered a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.
Operating leases result in a straight-line lease expense, while finance leases result in a front-loaded expense pattern. The assets associated with financing leases have been included in Property, Plant and Equipment in the consolidated balance sheet. Depreciation on financing lease assets is included in Depreciation and amortization on the consolidated statement of operations. The Company does not sublease any of its material leased assets to third parties and the Company is not party to any lease contracts with related parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
ASC Topic 842 includes practical expedient and policy election choices. The Company elected the package of practical expedients available in the standard and as a result, did not reassess the lease classification of existing leases, did not reassess

21

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

whether existing contracts are or contain leases and did not reassess the initial direct costs associated with existing leases. The Company did not elect the hindsight practical expedient, and so did not re-evaluate lease term for existing leases.
The Company has made an accounting policy election not to recognize right of use assets and lease liabilities for leases with a lease term of 12 months or less, including renewal options that are reasonably certain to be exercised, that also do not include an option to purchase the underlying asset that is reasonably certain of exercise. Instead, lease payments for these leases are recognized as lease cost on a straight-line basis over the lease term.
ASC Topic 842 includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and assessment of the discount rate. The Company reviewed the reassessment and re-measurement requirements and did not identify any events or conditions during the nine months ended September 30, 2019 that required a reassessment or re-measurement. In addition, there were no impairment indicators identified during the nine months ended September 30, 2019 that required an impairment test for the Company’s right-of-use assets or other long-lived assets in accordance with ASC 360-10.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected not to separate the accounting for lease components and non-lease components, for all classes of leased assets.
The components of lease expense and supplemental cash flow information related to leases for the periods are as follows:


Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Lease cost


 
 
Finance lease cost


 
 
    Amortization of right-of-use assets

$
3.9

 
$
11.8

    Interest on lease liabilities

0.8

 
2.4

Operating lease cost

1.4

 
4.3

Short-term lease cost

1.8

 
4.9

    Total lease cost

$
7.9

 
$
23.4




 
 
Other information


 
 
Cash paid for amounts included in the measurement of lease liabilities


 
 
    Operating cash flows from finance leases

$
0.8

 
$
2.4

    Operating cash flows from operating leases

$
1.4

 
$
4.3

    Financing cash flows from finance leases

$
9.1

 
$
26.9

Right-of-use assets obtained in exchange for new finance lease liabilities

$
1.2

 
$
18.7

Right-of-use assets obtained in exchange for new operating lease liabilities

$
1.6

 
$
4.4

The weighted average lease terms as of the end of period are as follows:
 
 
September 30, 2019
Weighted average remaining lease terms
 
 
Weighted-average remaining lease term (in years) - finance leases
 
2.17
Weighted-average remaining lease term (in years) - operating leases
 
16.34

22

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

The weighted average discount rates for the periods are as follows:
 
 
September 30, 2019
Discount rates
 
 
Weighted-average discount rate - finance leases

4.9
%
Weighted-average discount rate - operating leases

5.0
%


The supplemental balance sheet information related to leases for the period is as follows:


September 30, 2019
Operating leases


Operating lease right-of-use assets

$
24.7




Accrued expenses

$
4.4

Other long-term liabilities

20.7

    Total operating lease liabilities

$
25.1




Finance leases


Property and equipment, at cost

$
115.5

Accumulated depreciation

(28.8
)
    Property and equipment, net

$
86.7




Current maturities of long-term debt

$
33.0

Long term debt, less current maturities

27.9

    Total finance lease liabilities

$
60.9


Maturities of the Company’s lease liabilities are as follows:
Year Ending

Operating Leases

Finance Leases
2019 (October through December)

$
1.2


$
9.4

2020

5.1


31.5

2021

3.7


17.3

2022

3.0


4.6

2023

2.4


1.3

2024

1.9


0.7

Thereafter

21.5



    Total lease payments

38.8


64.8

Less: Imputed interest

(13.7
)

(3.9
)
    Present value of lease liabilities

$
25.1


$
60.9



13. Merger

Agreement and Plan of Merger

On April 14, 2019, the Company entered into an Agreement and Plan of Merger with Waste Management, Inc., a Delaware corporation (“Parent”), and Everglades Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent. Further details can be found in the Company's Form 8-K related to this matter, filed with the Securities and Exchange

23

Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)

Commission on April 15, 2019 and the Company's definitive proxy statement, filed with the Securities and Exchange Commission on May 23, 2019.

14. Subsequent Events

Subsequent to September 30, 2019, the Company made a $20.0 payment on its Revolver.

24



Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the unaudited condensed consolidated financial statements and notes thereto included under Item 1. In addition, you should refer to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our 2018 Annual Report on Form 10-K. All dollar amounts are presented in millions, unless otherwise stated.
Overview
We are a leading integrated provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating primarily in secondary markets or under exclusive arrangements. We have a presence in 16 states across the South, East and Midwest regions of the United States, serving approximately 2.7 million residential and over 200,000 commercial and industrial (C&I) customers through our extensive network of 95 collection operations, 73 transfer stations, 22 owned or operated recycling facilities and 41 owned or operated landfills. We have 18 active landfill gas operations at solid waste landfills where landfill gas is captured and utilized for its renewable energy value rather than flared. We also have post-closure responsibility for six closed landfills. We seek to drive financial performance in markets in which we own or operate a disposal facility or in certain disposal-neutral markets, where the disposal facility is owned by our municipal customer. In markets in which we own or operate a disposal facility, we aim to create and maintain vertically integrated operations through which we manage a majority of our customers' waste from the point of collection through the point of disposal, a process we refer to as internalization. By internalizing a majority of the waste in these markets, we are able to deliver high quality customer service while also ensuring a stable revenue stream and maximizing profitability and cash flow from operations. In disposal-neutral markets, we focus selectively on opportunities where we can negotiate exclusive arrangements with our municipal customers, facilitating highly efficient and profitable collection operations with lower capital requirements.
Geographically, we focus our business principally in secondary, or less densely populated non-urban, markets where the presence of large national providers is generally more limited. We also compete selectively in primary, or densely populated urban, markets where we can capitalize on opportunities for vertical integration through our high-quality transfer and disposal infrastructure and where we can benefit from highly efficient collection route density. We maintain an attractive mix of revenue from varying sources, including residential collections, C&I collections, landfill gas and special waste streams, and fees charged to third parties for disposal in our network of transfer stations and landfills.
Merger
On April 14, 2019, we entered into an Agreement and Plan of Merger with Waste Management, Inc., a Delaware corporation (“Parent”), and Everglades Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent. Further details can be found in our Form 8-K related to this matter, filed with the Securities and Exchange Commission on April 15, 2019 and our definitive proxy statement, filed with the Securities and Exchange Commission on May 23, 2019.









25


Results of Operations
The following table sets forth for the periods indicated our consolidated results of operations and the percentage relationship that certain items from our condensed consolidated financial statements bear to revenue (in millions and as a percentage of our revenue).
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Service revenues
$
419.5

 
100.0
%
 
$
400.6

 
100.0
%
 
$
1,222.5

 
100.0
%
 
$
1,163.4

 
100.0
 %
Operating costs and expenses
 
 
 
 
 
 
 
 

 
 
 

 
 
Operating
265.6

 
63.3
%
 
264.4

 
66.0
%
 
783.5

 
64.1
%
 
743.7

 
63.9
 %
Accretion of landfill retirement obligations
4.5

 
1.1
%
 
3.8

 
0.9
%
 
13.2

 
1.1
%
 
11.4

 
1.0
 %
       Operating expenses
270.1

 
64.4
%
 
268.2

 
66.9
%
 
796.7

 
65.2
%
 
755.1

 
64.9
 %
Selling, general and administrative
48.1

 
11.5
%
 
45.4

 
11.3
%
 
160.0

 
13.1
%
 
135.4

 
11.6
 %
Depreciation and amortization
70.4

 
16.8
%
 
68.9

 
17.2
%
 
206.6

 
16.9
%
 
202.8

 
17.4
 %
Acquisition and development costs
0.1

 
0.1
%
 
0.1

 
%
 
1.1

 
0.1
%
 
0.4

 
 %
Loss (gain) on disposal of assets and asset impairments
1.3

 
0.2
%
 
0.5

 
0.1
%
 
2.0

 
0.1
%
 
(2.8
)
 
(0.2
)%
Total operating costs and expenses
390.0

 
93.0
%
 
383.1

 
95.6
%
 
1,166.4

 
95.4
%
 
1,090.9

 
93.8
 %
Operating income
$
29.5

 
7.0
%
 
$
17.5

 
4.4
%
 
$
56.1

 
4.6
%
 
$
72.5

 
6.2
 %
Revenue

Through our subsidiaries, we generate revenue primarily by providing collection and disposal services to commercial, industrial, municipal and residential customers. Our remaining revenue is generated from recycling, fuel and environmental charges, landfill gas-to-energy operations and other ancillary revenue-generating activities. Revenues from our collection operations consist of fees we receive from municipal, subscription, residential and C&I customers and are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the recycling, transfer station or disposal facilities and our disposal costs. Standard C&I service agreements are typically three to five years, and we have historically maintained strong relationships with our C&I customers. Our municipal customer relationships are generally supported by exclusive contracts ranging from three to ten years in initial duration with subsequent renewal periods. Certain municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as the consumer price index (CPI). We provide commercial front load and temporary and permanent rolloff service offerings to our commercial customers. While the majority of our rolloff services are provided to customers under long-term service agreements, we generally do not enter into written contracts with our temporary rolloff customers due to the relatively short-term nature of most construction and demolition (C&D) projects.

Our transfer stations and landfills generate revenue from disposal or tipping fees. Revenues from our landfill operations consist of fees which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenue consists of disposal or tipping fees and proceeds from the sale of recyclable commodities to third parties.

The amounts charged for collection, disposal and recycling services may include fuel charges and environmental charges. Fuel charges and environmental charges are not designed to be specific to the direct costs and expenses to service an individual customer's account, but rather are designed to address and to help recover changes in our overall cost structure and to achieve an operating margin acceptable to us.

Other revenue is comprised of ancillary revenue-generating activities, such as trucking, landfill gas-to-energy operations at municipal solid waste (MSW) landfills, management of third-party owned landfills, customer service charges relating to overdue payments, customer administrative charges relating to customers who request paper copies of invoices rather than opting for electronic invoices and compliance and business impact charges.

26



The following table sets forth our consolidated revenues by line of business for the periods indicated (in millions and as a percentage of total service revenues).
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Collection
$
280.1

 
66.8
 %
 
$
262.7

 
65.6
 %
 
$
827.7

 
67.7
 %
 
$
776.2

 
66.7
 %
Disposal
152.4

 
36.3
 %
 
146.8

 
36.6
 %
 
432.0

 
35.3
 %
 
418.9

 
36.0
 %
Sale of recyclables
2.0

 
0.5
 %
 
4.0

 
1.0
 %
 
8.3

 
0.7
 %
 
13.9

 
1.2
 %
Fuel and environmental charges
29.8

 
7.1
 %
 
31.6

 
7.9
 %
 
89.0

 
7.3
 %
 
90.1

 
7.7
 %
Other revenue
35.0

 
8.3
 %
 
34.5

 
8.6
 %
 
97.0

 
7.9
 %
 
94.9

 
8.2
 %
Intercompany eliminations
(79.8
)
 
(19.0
)%
 
(79.0
)
 
(19.7
)%
 
(231.5
)
 
(18.9
)%
 
(230.6
)
 
(19.8
)%
Total service revenues
$
419.5

 
100.0
 %
 
$
400.6

 
100.0
 %
 
$
1,222.5

 
100.0
 %
 
$
1,163.4

 
100.0
 %
The following table reflects changes in components of our revenue, as a percentage of total revenue, for the three and nine months ended September 30, 2019 and 2018:

Three Months Ended September 30,
 
Nine Months Ended September 30,

2019
 
2018
 
2019
 
2018
Average yield
3.0
 %
 
4.3
 %
 
3.4
 %
 
3.2
 %
Recycling
(0.5
)%
 
(1.3
)%
 
(0.3
)%
 
(1.1
)%
Fuel surcharge revenue
(0.4
)%
 
1.2
 %
 
 %
 
1.0
 %
Total yield
2.1
 %
 
4.2
 %
 
3.1
 %
 
3.1
 %
Organic volume
1.1
 %
 
(1.1
)%
 
0.5
 %
 
0.8
 %
Acquisitions
1.5
 %
 
1.1
 %
 
1.5
 %
 
2.4
 %
Divestitures
 %
 
 %
 
 %
 
(0.4
)%
Impact of revenue recognition standard adoption
 %
 
(2.2
)%
 
 %
 
(2.3
)%
Total revenue growth
4.7
 %
 
2.0
 %
 
5.1
 %
 
3.6
 %
Average yield is defined as aggregate contribution of price changes excluding recycled commodities and fuel surcharge revenue.
During the three months ended September 30, 2019, we experienced the following changes in components of our revenue as compared to the same period in fiscal 2018:
Average yield increased revenue by 3.0% driven by higher open market price yield as we continue to focus on disciplined pricing and higher price yield in our municipal residential collection business due to the positive impact of higher CPI contract resets;
Recycling revenue decreased revenue by 0.5% due to a continued decrease in recycling commodity prices;
Fuel surcharge revenue decreased revenue by 0.4% due to a decrease in diesel fuel prices. These charges fluctuate in response to changes in prices for diesel fuel on which the surcharge is based and, consequently, any decrease in fuel prices results in a decrease in our revenue. Our fuel surcharges reset on a monthly basis therefore a decrease in our fuel surcharge revenue is delayed in comparison to the decrease in our fuel expense when diesel fuel prices decrease;
Organic volume increased revenue by 1.1% due to an increase in special waste, MSW and C&D disposal volumes and the impact of one extra workday during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase was partially offset by lower rolloff, commercial and residential collection volumes;
Acquisitions increased revenue by 1.5% due to the completion of acquisitions that further enhance our vertical integration strategy.



27


During the nine months ended September 30, 2019, we experienced the following changes in components of our revenue as compared to the same period in fiscal 2018:
Average yield increased revenue by 3.4% driven by higher open market price yield as we continue to focus on disciplined pricing and higher price yield in our municipal residential collection business due to the positive impact of higher CPI contract resets;
Recycling revenue decreased revenue by 0.3% due to a continued decrease in recycling commodity prices;
Organic volume increased revenue by 0.5% due to an increase in special waste, MSW and C&D disposal volumes. The increase was partially offset by lower commercial, residential and rolloff collection volumes;
Acquisitions increased revenue by 1.5% due to the completion of acquisitions that further enhance our vertical integration strategy.

Operating Expenses
Our operating expenses include the following:
 
Labor and related benefits, which consist of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes;

Transfer and disposal costs which include tipping fees paid to third-party disposal facilities and transfer stations as well as transportation and subcontractor costs (which include costs for independent haulers who transport waste from transfer stations to our disposal facilities and costs for local operators who provide waste handling services associated with markets outside our standard operating areas);

Maintenance and repairs expenses which include labor, maintenance and repairs to our vehicles, equipment and containers;

Fuel costs which include the direct cost of fuel used by our vehicles, net of fuel tax credits;

Franchise and host fees which consist of municipal franchise fees not paid to customers, host community fees and royalties;

Risk management expenses which include casualty insurance premiums, claims payments, estimates for claims incurred but not reported and casualty losses;

Other expenses which include expenses such as facility operating costs, equipment rent, leachate and sulfate treatment and disposal and other landfill maintenance costs;

Accretion expense related to landfill capping, closure and post-closure is included in operating expenses in our condensed consolidated statement of operations, but it is excluded from the table below (refer to “Accretion of Landfill Retirement Obligations” below for a detailed discussion of the changes in amounts).


28


The following table summarizes the major components of our operating expenses, excluding accretion expense on our landfill retirement obligations (in millions and as a percentage of our revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor and related benefits
$
88.9

 
21.2
%
 
$
84.0

 
21.0
%
 
$
262.8

 
21.5
%
 
$
249.2

 
21.4
%
Transfer and disposal costs
58.0

 
13.8
%
 
52.9

 
13.2
%
 
165.9

 
13.6
%
 
155.0

 
13.3
%
Maintenance and repairs
43.0

 
10.3
%
 
40.8

 
10.2
%
 
124.6

 
10.2
%
 
116.5

 
10.0
%
Fuel
18.9

 
4.5
%
 
20.7

 
5.2
%
 
57.8

 
4.7
%
 
60.1

 
5.2
%
Franchise and host fees
11.7

 
2.8
%
 
11.0

 
2.7
%
 
32.3

 
2.6
%
 
30.7

 
2.6
%
Risk management
9.1

 
2.2
%
 
10.4

 
2.6
%
 
27.7

 
2.3
%
 
27.0

 
2.3
%
Other
36.0

 
8.5
%
 
28.3

 
7.0
%
 
102.8

 
8.4
%
 
83.4

 
7.3
%
Subtotal
$
265.6

 
63.3
%
 
$
248.1

 
61.9
%
 
$
773.9

 
63.3
%
 
$
721.9

 
62.1
%
Greentree expenses, net of insurance recoveries and landfill remediation expenses


%

16.3


4.1
%
 
9.6


0.8
%

21.8


1.8
%
Total operating expenses, excluding accretion expense
$
265.6


63.3
%

$
264.4


66.0
%
 
$
783.5


64.1
%

$
743.7


63.9
%
The cost categories shown above may not be comparable to similarly titled categories used by other companies. Thus, you should exercise caution when comparing our operating expenses by cost component to that of other companies.
Three months ended September 30, 2019 compared to 2018
Operating expenses increased by $1.2 to $265.6 for the three months ended September 30, 2019 from $264.4 for the three months ended September 30, 2018. Operating expenses, excluding landfill remediation expenses, increased $17.5 or 7.1% to $265.6 for the three months ended September 30, 2019 from $248.1 for the three months ended September 30, 2018. The change was due to the following:

Labor and related benefits increased by $4.9 or 5.8% to $88.9 which was primarily attributable to higher labor costs as a result of merit increases, acquisition activity, increased temporary labor needs primarily as a result of new municipal contract wins and a labor shortage and the impact of one extra workday during the third quarter 2019 compared to the third quarter 2018;

Transfer and disposal costs increased by $5.1 or 9.6% to $58.0 primarily due to a significant increase in processing costs related to single stream recycling, an increase in third-party transportation costs in our Midwest segment as a result of diverting waste from one of our landfills, an increase in costs due to higher reliance on sub-contractors in the South segment and the impact of one extra workday during the third quarter 2019 compared to the third quarter 2018;

Maintenance and repairs expense increased by $2.2 or 5.4% to $43.0 primarily due to higher labor costs as a result of merit increases and acquisition activity, an increase in the cost of maintenance and repair parts due to inflation and the impact of one extra workday during the third quarter 2019 compared to the third quarter 2018;

Fuel costs decreased $1.8 or 8.7% to $18.9 as a result of lower diesel fuel costs per gallon partially offset by the impact of one extra workday during the third quarter 2019 compared to the third quarter 2018;

Franchise and host fees increased $0.7 or 6.4% to $11.7 primarily due to the acquisition of a landfill in our South segment during fourth quarter of 2018;

Risk management expense decreased $1.3 or 12.5% to $9.1 primarily due to lower frequency of automobile and property liability claims;

Other operating costs increased $7.7 or 27.2% to $36.0 primarily due to an increase in the following: higher leachate and gas treatment costs at several of our landfills partially due to weather related impacts; a loss contract purchase accounting

29


liability reversal in the prior year quarter that did not recur in the current year quarter; higher site maintenance costs and other facility costs; an increase in vehicle operating costs primarily due to higher reliance on rental equipment and higher vehicle maintenance costs; and higher material costs to support an increase in revenue related to our asphalt operation.
Nine months ended September 30, 2019 compared to 2018
Operating expenses increased by $39.8 or 5.4% to $783.5 for the nine months ended September 30, 2019 from $743.7 for the nine months ended September 30, 2018. Operating expenses, excluding the Greentree expenses and landfill remediation expenses, increased $52.0 or 7.2% to $773.9 for the nine months ended September 30, 2019 from $721.9 for the nine months ended September 30, 2018. The change was due to the following:

Labor and related benefits increased by $13.6 or 5.5% to $262.8 which was primarily attributable to the following: higher labor costs as a result of merit increases, acquisition activity, the addition of one company paid holiday and increased temporary labor needs primarily as a result of new municipal contract wins and a labor shortage; an increase in healthcare costs due to an increase in claims activity; and an increase in workers compensation costs due to the severity of claims;

Transfer and disposal costs increased by $10.9 or 7.0% to $165.9 primarily due to the following: a significant increase in processing costs related to single stream recycling; an increase in disposal costs related to higher volumes coming through our transfer stations in the South segment; and an increase in costs due to higher reliance on sub-contractors in the South segment;

Maintenance and repairs expense increased by $8.1 or 7.0% to $124.6 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation;

Fuel costs decreased $2.3 or 3.8% to $57.8 as a result of lower diesel fuel costs per gallon partially offset by a CNG tax credit received in the first quarter of fiscal 2018 that did not recur in the first quarter of fiscal 2019;

Franchise and host fees increased $1.6 or 5.2% to $32.3 primarily due to an increase in landfill host fees as a result of higher disposal volumes and the acquisition of a landfill in our South segment during fourth quarter of 2018;

Risk management expense increased $0.7 or 2.6% to $27.7 primarily due to a slight increase in the frequency and severity of automobile and property liability claims;

Other operating costs increased $19.4 or 23.3% to $102.8 primarily due to an increase in the following: higher leachate and gas treatment costs at several of our landfills partially due to weather related impacts; higher site maintenance costs and other facility costs; an increase in vehicle operating costs primarily due to higher reliance on rental equipment and higher vehicle maintenance costs; a loss contract purchase accounting liability reversal in the nine months ended September 30, 2018 that did not recur in the nine months ended September 30, 2019; and higher material costs to support an increase in revenue related to our asphalt operation;
We recorded Greentree expenses, net of insurance recoveries and landfill remediation expenses of $9.6 and $21.8 during the nine months ended September 30, 2019 and 2018, respectively, as further described in Note 9 to the unaudited consolidated financial statements.
Accretion of Landfill Retirement Obligations
Accretion expense was $4.5 and $3.8 for the three months ended September 30, 2019 and 2018, respectively. Accretion expense was $13.2 and $11.4 for the nine months ended September 30, 2019 and 2018, respectively. The increases were primarily attributable to the acquisition of a landfill during the fourth quarter of fiscal 2018.
Selling, General and Administrative
Selling, general and administrative expenses include salaries, legal and professional fees and other expenses. Salaries expenses include salaries and wages, health and welfare benefits and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems, and clerical and administrative departments. Other expenses include rent and office costs, fees for professional services provided by third

30


parties, marketing, directors’ and officers’ insurance, general employee relocation, travel, entertainment and bank charges, but exclude any such amounts recorded as restructuring charges.
The following table provides the components of our selling, general and administrative expenses for the periods indicated (in millions and as a percentage of our revenue):
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
2019
 
2018
 
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
$
29.8

 
7.1
%
 
$
27.6

 
6.9
%
 
 
$
92.2

 
7.5
%
 
$
84.9

 
7.3
%
Legal and professional
4.6

 
1.1
%
 
3.4

 
0.8
%
 
 
24.7

 
2.0
%
 
10.6

 
0.9
%
Other
13.7

 
3.3
%
 
14.4

 
3.6
%
 
 
43.1

 
3.6
%
 
39.9

 
3.4
%
Total selling, general and administrative expenses
$
48.1

 
11.5
%
 
$
45.4

 
11.3
%
 
 
$
160.0

 
13.1
%
 
$
135.4

 
11.6
%
Three months ended September 30, 2019 compared to 2018
Our salaries expense increased by $2.2 or 8.0% to $29.8 primarily due to merit increases, higher projected bonus expense and increased temporary labor needs partially offset by lower stock based compensation expense and a one time multi-employer pension plan withdrawal fee in the third quarter of 2018 that did not recur in the third quarter of 2019;
Legal and professional fees increased $1.2 to $4.6 due to fees associated with the proposed merger as further described in Note 13 to the unaudited consolidated financial statements.
Other selling, general and administrative expenses decreased $0.7 or 4.9% to $13.7 primarily due to lower bad debt expense.
Nine months ended September 30, 2019 compared to 2018
Our salaries expense increased by $7.3 or 8.6% to $92.2 primarily due to merit increases, higher projected bonus expense and increased temporary labor needs partially offset by a one time multi employer pension plan withdrawal fee in the nine months ended September 30, 2018 that did not recur in the nine months ended September 30, 2019;
Legal and professional fees increased $14.1 to $24.7 due to a legal case settlement of $9.0 as further discussed in Note 9 to the unaudited consolidated financial statements and related legal fees of $0.9 and an increase in merger related expenses of $5.7 related to our proposed merger as further described in Note 13 to the unaudited consolidated financial statements.
Other selling, general and administrative expenses increased $3.2 or 8.0% to $43.1 due to an increase in computer hardware and software maintenance costs and an increase in bad debt expense primarily associated with our brokerage business.

Depreciation and Amortization
The following table summarizes the components of depreciation and amortization expense by asset type (in millions and as a percentage of our revenue). For a detailed discussion of depreciation and amortization by asset type refer to the discussion included in the following two sections herein.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019

2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, amortization and depletion of property and equipment
$
62.5

 
14.9
%
 
$
59.1

 
14.8
%
 
$
183.2

 
15.0
%
 
$
172.3

 
14.8
%
Amortization of other intangible assets
7.9

 
1.9
%
 
9.8

 
2.4
%
 
23.4

 
1.9
%
 
30.5

 
2.8
%
Depreciation and amortization
$
70.4

 
16.8
%
 
$
68.9

 
17.2
%
 
$
206.6

 
16.9
%
 
$
202.8

 
17.4
%

Depreciation, Amortization and Depletion of Property and Equipment
Depreciation, amortization and depletion expense includes depreciation of fixed assets over the estimated useful life of the assets using the straight-line method, and amortization and depletion of landfill airspace assets under the units-of-consumption

31


method. Refer to the footnotes to the consolidated financial statements in our 2018 Annual Report on Form 10-K for a further discussion of our accounting policies.
The following table summarizes depreciation, amortization and depletion of property and equipment for the periods indicated (in millions and as a percentage of our revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization of property and equipment
$
35.0

 
8.3
%
 
$
34.7

 
8.7
%
 
$
105.1

 
8.6
%
 
$
103.6

 
8.9
%
Landfill depletion and amortization
27.5

 
6.6
%
 
24.4

 
6.1
%
 
78.1

 
6.4
%
 
68.7

 
5.9
%
Depreciation, amortization and depletion of property and equipment
$
62.5

 
14.9
%
 
$
59.1

 
14.8
%
 
$
183.2

 
15.0
%
 
$
172.3

 
14.8
%

Three months ended September 30, 2019 compared to 2018
Depreciation and amortization of property and equipment increased $0.3 or 0.9% to $35.0 due mainly to acquisition activity;
Landfill depletion and amortization increased $3.1 or 12.7% to $27.5 due to changes in our landfill estimates, acquisition activity and increased disposal volumes.

Nine months ended September 30, 2019 compared to 2018
Depreciation and amortization of property and equipment increased $1.5 or 1.4% to $105.1 due mainly to acquisition activity;
Landfill depletion and amortization increased $9.4 or 13.7% to $78.1 due to changes in our landfill estimates, acquisition activity and increased disposal volumes.
Amortization of Other Intangible Assets
Amortization of other intangible assets was $7.9 and $9.8, or as a percentage of revenue, 1.9% and 2.4%, for the three months ended September 30, 2019 and 2018, respectively. Amortization of other intangible assets was $23.4 and $30.5, or as a percentage of revenue, 1.9% and 2.6%, for the nine months ended September 30, 2019 and 2018, respectively. The decreases were due to certain intangible assets becoming fully amortized partially offset by the impact of acquisition activity.
Acquisitions and Divestitures
In the ordinary course of our business, we regularly evaluate and pursue acquisition opportunities that further enhance our vertical integration strategy. We also regularly evaluate our current operations and consider divesting of those operations that do not provide us with an acceptable profit margin.

We completed two acquisitions during the nine months ended September 30, 2019 for a cash purchase price of $24.9. Additionally, we made a $2.2 deferred purchase price payment during the nine months ended September 30, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. Nine tuck-in acquisitions were completed during the nine months ended September 30, 2018 for a cash purchase price of $6.1 and notes payable of $0.7. The results of operations of each acquisition are included in our condensed consolidated statements of operations subsequent to the closing date of each acquisition.
Other (expense) income, net
Changes in the fair value and settlements of derivative instruments that do not qualify for hedge accounting are recorded in other (expense) income, net in the condensed consolidated statements of operations and amounted to no gain or loss and a gain of $0.4 for the three months ended September 30, 2019 and 2018, respectively. Changes in the fair value and settlements of

32


derivative instruments that do not qualify for hedge accounting amounted to a loss of $0.9 and income of $6.4 for the nine months ended September 30, 2019 and 2018, respectively. Additionally, $0.6 of ineffectiveness for derivatives that qualify for hedge accounting was recorded in other (expense) income, net in the condensed consolidated statements of operations for the nine months ended September 30, 2018. Income from equity investee for the three months ended September 30, 2019 and 2018, respectively, was $0.2 and $0.1. Income from equity investee for the nine months ended September 30, 2019 and 2018, respectively, was $1.2 and $1.0. During the nine months ended September 30, 2019, the IRS closed audits of our previously acquired Veolia subsidiaries for tax years 2004-2012 therefore the Company recorded a charge to other expense of $3.9 to write off an indemnification receivable that was recorded as part of the 2012 purchase accounting.

Interest Expense
Interest expense increased by $0.6 or 2.5% to $25.0 for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. Interest expense increased by $6.2 or 8.7% to $77.2 for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increases were due to the impact of increasing interest rates on our variable rate debt.
Cash paid for interest was $17.5 and $16.7 for the three months ended September 30, 2019 and 2018, respectively. Cash paid for interest was $65.8 and $60.0 for the nine months ended September 30, 2019 and 2018, respectively.
Income Taxes
Our effective income tax rate for the three months ended September 30, 2019 and 2018 was 28.0% and 19.7%, respectively. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended September 30, 2019 was primarily due to the unfavorable change in recorded valuation allowance. The difference between income taxes computed at the federal statutory rate of 21% and reported income tax benefit for the three months ended September 30, 2018 was primarily due to the unfavorable impact of the change in recorded valuation allowance and permanently non-deductible expenses.
Our effective income tax rate for the nine months ended September 30, 2019 and 2018 was 85.5% and 32.4%, respectively. The difference between income taxes computed at the federal statutory rate of 21% and reported income tax benefit for the nine months ended September 30, 2019 was primarily due to the favorable impact of the settlement of the IRS audit of the Veolia subsidiaries for tax years 2004 - 2012 during the second quarter of 2019. The difference between income taxes computed at the federal statutory rate of 21% and reported income tax benefit for the nine months ended September 30, 2018 was primarily due to unfavorable impact of the change in recorded valuation allowance.

Cash paid for income taxes (net of refunds) was ($2.3) and $1.0 for the three months ended September 30, 2019 and 2018, respectively. Cash paid for income taxes (net of refunds) was ($0.9) and $2.0 for the nine months ended September 30, 2019 and 2018, respectively.





















33


Reportable Segments
Our operations are managed through three geographic regions (South, East and Midwest) that we designate as our reportable segments. Service revenues, operating income/(loss) and depreciation and amortization for our reportable segments for the periods indicated are shown in the following tables:
 
Service
Revenues
 
Operating
Income
(Loss)
 
Depreciation
and
Amortization
 
 
 
 
 
 
Three Months Ended September 30, 2019

 

 

South
$
160.6

 
$
19.9

 
$
21.8

East
111.4

 
10.1

 
21.7

Midwest
147.5

 
19.0

 
25.5

Corporate

 
(19.5
)
 
1.4

 
$
419.5

 
$
29.5

 
$
70.4

 


 


 


Three Months Ended September 30, 2018

 

 

South
$
154.0

 
$
7.3

 
$
21.0

East
104.8

 
6.1

 
20.4

Midwest
141.8

 
20.2

 
26.4

Corporate

 
(16.1
)
 
1.1

 
$
400.6

 
$
17.5

 
$
68.9

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019

 

 

South
$
482.5


$
58.3


$
66.2

East
315.8


18.6


62.4

Midwest
424.2


52.0


74.0

Corporate


(72.8
)

4.0

 
$
1,222.5


$
56.1


$
206.6

 
 
 
 
 
 
Nine Months Ended September 30, 2018

 

 

South
$
455.5

 
$
54.6

 
$
64.2

East
298.3

 
17.0

 
58.8

Midwest
409.6

 
52.7

 
76.4

Corporate

 
(51.8
)
 
3.4

 
$
1,163.4

 
$
72.5

 
$
202.8

Comparison of Reportable Segments—Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018
South Segment
Revenue increased $6.6 or 4.3% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase in revenue was due to the following: an increase in price yield from our collection and disposal operations of $6.3 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business; an increase in acquisition related revenue of $3.2; and an increase in revenue of $0.8 from one more workday in the third quarter of 2019 compared to the third quarter of 2018. The increases were partially offset by a decrease in rolloff, commercial and residential collection volumes of $2.3 and a decrease in special waste and C&D disposal volumes of $1.1.

34


Operating income from our South Segment increased by $12.6 for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase was primarily due to lower landfill remediation expenses of $16.3 as further described in Note 9 to the unaudited consolidated financial statements and the revenue increase of $6.6 as described above. The increases were partially offset by the following: an increase in salaries and wages of $2.6 due to higher labor costs primarily attributable to merit increases, acquisition activity and increased temporary labor needs primarily as a result of new municipal contract wins; an increase in site maintenance costs of $1.7; an increase in maintenance and repair costs of $1.4 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation; an increase in depreciation and depletion expense of $1.4 due mainly to acquisition activity and new truck purchases; an increase of $1.0 in leachate and gas treatment costs partially due to weather related impacts; an increase in disposal costs of $0.8 related to higher volumes coming through our transfer stations; and an increase of $0.6 due to higher reliance on sub-contractors.
East Segment
Revenue increased by $6.6, or 6.3% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase was primarily due to the following: an increase in disposal volumes of $5.4; an increase associated with our asphalt operations of $1.2; and an increase of $0.7 from one more workday in the third quarter of 2019 compared to the third quarter of 2018. The increases were partially offset by a decrease in commercial and residential collection volumes of $0.9.
Operating income from our East Segment increased $4.0 for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase was primarily due to the following: the revenue increase of $6.6 as described above; a decrease in fuel expense of $0.8 as a result of the decline in diesel fuel prices; and a decrease in insurance expense of $0.5 primarily due to lower frequency of automobile and property liability claims. The increase in operating income was partially offset by the following: an increase in depreciation and depletion of $1.9 due to changes in our landfill estimates, acquisition activity and increased disposal volumes; an increase in salaries and wages of $0.6 due to higher labor costs primarily attributable to merit increases, higher projected bonus expense and acquisition activity; an increase in material costs of $0.6 to support an increase in revenue related to our asphalt operation; and a significant increase in processing costs of $0.4 related to single stream recycling.
Midwest Segment
Revenue increased $5.7 or 4.0% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase was primarily due to the following: an increase in price yield from our collection and disposal operations of $4.2 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business; an increase in acquisition related revenue of $2.6; and an increase of $0.8 from one more workday in the third quarter of 2019 compared to the third quarter of 2018. The increase was partially offset by a decrease in rolloff, residential and commercial collection volumes of $2.0.
Operating income from our Midwest Segment decreased $1.2 for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The decrease was primarily due to the following: a significant increase in processing costs of $2.4 related to single stream recycling; an increase in salaries and wages of $1.7 due to higher labor costs primarily attributable to merit increases and acquisition activity; a loss contract purchase accounting liability reversal of $1.4 in the prior year quarter that did not recur in the current year quarter; an increase of $0.7 in disposal facility costs primarily due to leachate and gas treatment costs as a result of weather related impacts and mix of disposal volumes; an increase in maintenance and repair costs of $0.7 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation. The decreases were largely offset by the revenue increase of $5.7 as described above.





35


Corporate
Operating loss increased $3.4 for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to an increase in salaries and wages of $2.4 primarily due to higher projected bonus expense, merit increases and increased temporary labor needs partially offset by lower stock based compensation expense and higher legal and consulting fees of $1.6 associated with the proposed merger as further described in Note 13 to the unaudited consolidated financial statements. The increase in operating loss was partially offset by a $0.8 multi employer pension plan withdrawal fee during third quarter of 2018 that did not recur in the third quarter of 2019.
Comparison of Reportable Segments—Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018
South Segment
Revenue increased $27.0 or 5.9% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase in revenue was due to the following: an increase in price yield from our collection and disposal operations of $17.3 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business; an increase in acquisition related revenue of $9.4; and an increase in MSW disposal volumes of $3.1. The increases were partially offset by a decrease in commercial and rolloff collection volumes of $3.3.
Operating income from our South Segment increased by $3.7 or 6.8% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase was primarily due to the revenue increase of $27.0 as described above and a decrease in landfill remediation expenses of $12.0 as further described in Note 9 to the unaudited consolidated financial statements. The increase was largely offset by the following: an increase in salaries and wages of $7.0 due to higher labor costs primarily attributable to merit increases, acquisition activity, higher healthcare costs due to increased claims activity and increased temporary labor needs primarily as a result of new municipal contract wins; an increase in depreciation and depletion expense of $4.6 due mainly to acquisition activity; an increase in maintenance and repair costs of $4.4 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation; a decrease in gains on sales of fixed assets of $4.3 primarily due to the timing of equipment sales; an increase of $3.5 in leachate and gas treatment costs partially due to weather related impacts; an increase in site maintenance costs and other facility costs of $3.2; an increase of $2.2 in various general and administrative expenses; an increase of $1.7 due to higher reliance on sub-contractors; an increase in third party transportation costs of $1.5; an increase in vehicle operating costs of $1.3 primarily due to higher reliance on rental equipment and higher vehicle maintenance costs; an increase in disposal costs of $1.3 related to higher volumes coming through our transfer stations; and an increase of $0.7 due to higher frequency and severity of automobile and property liability claims.
East Segment
Revenue increased by $17.5 or 5.9% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase was primarily due to the following: an increase in disposal volumes of $13.2; an increase in price yield from our collection and disposal operations of $4.5 as we continue to focus on disciplined open market pricing; and an increase in revenue associated with our asphalt operations of $2.5. The increases were partially offset by a decrease in residential and commercial collection volumes of $3.4.
Operating income from our East Segment increased $1.6 for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase was primarily due to the following: the revenue increase of $17.5 described above, a decrease in amortization expense of $2.0 as certain intangible assets became fully amortized; and a decrease in fuel expense of $1.3 due to the reduction in diesel fuel prices. The increase in operating income was largely offset by the following: an increase in depreciation and depletion of $5.6 due to changes in our landfill estimates, acquisition activity and increased disposal volumes; an increase in salaries and wages of $3.4 due to higher labor costs primarily attributable to merit increases, higher projected bonus expense, acquisition activity and higher healthcare costs due to increased claims activity; an increase in various general and administrative costs of $1.8 including higher bad debt expense primarily associated with our brokerage business; an increase in maintenance and repair costs of $1.5 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation; an increase of $1.5 in leachate and gas treatment costs partially due to weather related impacts; an increase in site maintenance costs and other facility

36


costs of $1.5; an increase in material costs of $1.3 to support an increase in revenue related to our asphalt operation; and a significant increase in processing costs of $1.1 related to single stream recycling.
Midwest Segment
Revenue increased $14.6 or 3.6% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase was primarily due to an increase in price yield from our collection and disposal operations of $14.6 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business and an increase in acquisition related revenue of $6.6. The increase was partially offset by a decrease in residential and rolloff collection volumes of $6.3.
Operating income from our Midwest Segment decreased $0.7 for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The decrease was primarily due to the following: a significant increase in disposal costs of $7.0 primarily due to higher single stream recycling processing costs; an increase in salaries and wages of $3.2 due to higher labor costs primarily attributable to merit increases, acquisition activity and higher healthcare costs due to increased claims activity; an increase of $2.9 in disposal facility costs primarily due to leachate and gas treatment costs as a result of weather related impacts and mix of disposal volumes; an increase in maintenance and repair costs of $2.1 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation; and a loss contract purchase accounting liability reversal of $1.4 in the nine months ended September 30, 2018 that did not recur in the nine months ended September 30, 2019. The decrease was largely offset by the $14.6 revenue increase as described above and a $2.5 decrease in amortization expense as certain intangible assets became fully amortized.
Corporate
Operating loss increased $21.0 for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to the following: a legal case settlement of $9.0 as further discussed in Note 9 to the unaudited consolidated financial statements and related legal fees of $0.9; an increase in merger related expenses of $5.7 related to our proposed merger as further described in Note 13 to the unaudited consolidated financial statements; and an increase in salaries and wages of $5.1 due to merit increases, higher projected bonus expense and increased temporary labor needs.
Liquidity and Capital Resources
Our primary sources of cash are cash flows from operations, bank borrowings, debt offerings and equity offerings. We intend to use excess cash on hand and cash from operating activities, together with bank borrowings, to fund purchases of property and equipment, working capital, acquisitions and debt repayments. For this reason and since we efficiently manage our working capital requirements, it is common for us to have negative working capital. Actual debt repayments may include purchases of our outstanding indebtedness in the secondary market or otherwise. We believe that our current cash balances, cash from operating activities and funds available under our Revolver will provide us with sufficient financial resources to meet our anticipated capital requirements and maturing obligations as they come due. At September 30, 2019 and December 31, 2018, we had negative working capital which was driven by purchases of property and equipment and landfill construction and development as well as the use of our cash to fund debt repayments and acquisitions.

Summary of Cash and Cash Equivalents and Debt Obligations
The table below presents a summary of our cash and cash equivalents and debt balances (in millions):
 
September 30,
2019
 
December 31,
2018
 
 
 
 
Cash and cash equivalents
$
11.8

 
$
6.8




 


Debt:

 

Current portion
73.4

 
85.9

Long-term portion
1,800.6

 
1,817.1

Total debt
$
1,874.0

 
$
1,903.0


37



Summary of Cash Flow Activity
The following table sets forth for the periods indicated a summary of our cash flows (in millions):
 
Nine months ended September 30,
 
2019
 
2018
Net cash provided by operating activities
$
229.2

 
$
234.4

Net cash used in investing activities
$
(181.0
)
 
$
(132.1
)
Net cash used in financing activities
$
(43.2
)
 
$
(100.8
)
Cash Flows Provided by Operating Activities
We generated $229.2 of cash flows from operating activities during the nine months ended September 30, 2019, compared with $234.4 during the nine months ended September 30, 2018. The decrease was primarily due to the following:
An increase in cash interest expense of $5.8;
An increase in cash expenditures of $5.7 related to the fee case settlement and related expenses;
An increase of $4.0 due to merger related cash expenditures;
The decrease was partially offset by the following:
A decrease in cash paid for taxes of $2.9;
An increase of $2.8 in realized gains associated with the 2016 interest rate caps;
A decrease in cash expenditures of $2.6 related to the Greentree landfill waste slide;
A decrease in capping, closure and post closure expenditures of $2.5.

Cash Flows Used in Investing Activities
We used $181.0 of cash in investing activities during the nine months ended September 30, 2019 compared with $132.1 during the nine months ended September 30, 2018, an increase of $48.9. The variance was due to the following:
Higher cash expenditures of $24.3 used to fund the purchase of property and equipment and landfill construction and development;
An increase of $21.0 in cash expenditures used to fund acquisitions;
Lower proceeds of $3.6 from sale of property and equipment and insurance proceeds.
Cash Flows Used In Financing Activities
During the nine months ended September 30, 2019, net cash used in financing activities was $43.2 compared to net cash used in financing activities of $100.8 during the nine months ended September 30, 2018, a decrease of $57.6. The variance was primarily due to the following:
A decrease in net payments on debt instruments of $51.1 as we used excess cash to fund purchases of property and equipment, landfill construction and development and acquisitions during the nine months ended September 30, 2019 compared to using the majority of our excess cash to make debt repayments during the nine months ended September 30, 2018;
An increase in proceeds from stock option exercises of $6.5.
Senior Secured Credit Facilities

On November 21, 2017, we entered into Amendment No. 1 (the “Amendment”) to our Credit Agreement, dated as of October 9, 2012 (as amended and restated as of November 10, 2016, the “Amended and Restated Credit Agreement”) among the Company, the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent and as collateral agent. The Amendment reduces our applicable margin on the Term Loan B by 0.50% per annum.

38



On November 10, 2016, we entered into the Amended and Restated Credit Agreement by and among the Company, the guarantors party thereto, the lenders party thereto (the “Lenders”) and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (respectively, the “Administrative Agent” and the “Collateral Agent”), to the Credit Agreement, by and among the Company, the lenders party thereto, the Administrative Agent and the Collateral Agent, dated as of October 9, 2012 (as amended, supplemented or modified from time to time prior to the date hereof, the “Existing Credit Agreement” and as amended and restated in accordance with the Amended and Restated Credit Agreement).
 
The Amended and Restated Credit Agreement includes a $1.5 billion Term Loan B facility maturing 2023, and a $300.0 Revolving Credit Facility maturing 2021 (together our "Senior Secured Credit Facilities"). The Revolving Credit Facility allows for up to $100.0 million of letters of credit outstanding. The proceeds were used to repay borrowings under the Existing Credit Agreement and to call a portion of our 8.25% Senior Notes due 2020. All outstanding borrowings under the Existing Credit Agreement were either repaid in full or converted to the new Senior Secured Credit Facility. At the Company’s option, borrowings under the Amended and Restated Credit Agreement will bear interest at an alternate base rate or adjusted LIBOR rate in each case plus an applicable margin. The alternate base rate is defined as the greater of the prime rate, the federal funds rate plus 50 basis points, or the adjusted LIBOR rate plus 100 basis points. The LIBOR base rate is subject to a 0.75% floor.

In the case of the Term Loan B, the applicable margin, as amended, is 1.25% per annum for ABR Loans and 2.25% per annum for Eurodollar Loans. In the case of the Revolving Credit Facility, the applicable margin is 1.75% per annum for ABR Loans and 2.75% per annum for Eurodollar Loans if our total net leverage ratio is greater than 4.0:1.0. If our total net leverage ratio is less than 4.0:1.0, the applicable margin on the Revolving Credit Facility is 1.25% per annum for ABR Loans and 2.25% per annum for Eurodollar Loans.

Obligations under the Amended and Restated Credit Agreement are guaranteed by our existing and future domestic restricted subsidiaries (subject to certain exceptions) and are secured by a first-priority security interest in substantially all our personal property assets, and certain real property assets, including all or a portion of the equity interests of certain of our domestic subsidiaries (in each cases, subject to certain limited exceptions).
 
Borrowings under the Amended and Restated Credit Agreement may be prepaid at any time without premium. The Amended and Restated Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as a total net leverage ratio financial covenant (for the benefit of lenders under the revolving credit facility only). The Amended and Restated Credit Agreement also contains usual and customary events of default, including non-payment of principal, interest, fees and other amounts, material breach of a representation or warranty, nonperformance of covenants and obligations, default on other material debt, bankruptcy or insolvency, material judgments, incurrence of certain material ERISA liabilities, impairment of loan documentation or security and change of control. Compliance with these covenants is a condition to any incremental borrowings under our Senior Secured Credit Facilities and failure to meet these covenants would enable the lenders to require repayment of any outstanding loans (which would adversely affect our liquidity).
The Term Loan B has payments due quarterly of $3.75 with mandatory prepayments due to the extent net cash proceeds from the sale of assets exceed $25.0 in any fiscal year and are not reinvested in the business within 365 days from the date of sale, upon notification of our intent to take such action or in accordance with excess cash flow, as defined. Further prepayments are due when there is excess cash flow, as defined.

Borrowings under our Senior Secured Credit Facilities can be used for working capital, capital expenditures, acquisitions and other general corporate purposes. As of September 30, 2019 and December 31, 2018, we had $25.0 and $37.0 in borrowings outstanding under our Revolving Credit Facility. As of September 30, 2019 and December 31, 2018, we had an aggregate of approximately $28.5 and $32.3 of letters of credit outstanding under our Senior Secured Credit Facilities. As of September 30, 2019 and December 31, 2018, we had remaining capacity under our Revolving Credit Facility of $246.5 and $230.7, respectively. As of September 30, 2019, we were in compliance with the covenants under the Senior Secured Credit Facilities. Our ability to maintain compliance with our covenants will be highly dependent on our results of operations and, to the extent necessary, our ability to implement remedial measures such as reductions in operating costs. The Revolving Credit Facility has an annual commitment fee equal to 0.50% per annum if the total net leverage ratio is greater than 4.0:1.0, or if otherwise, 0.375% per annum. The amount of commitment fees for the three and nine months ended September 30, 2019 and 2018 were not significant.

39


We are subject to a maximum total net leverage ratio of 6.8:1.0. The actual total net leverage ratio at September 30, 2019 and December 31, 2018 was 4.3:1.0 and 4.4:1.0, respectively.
5.625% Senior Notes due 2024

On November 10, 2016, we closed a 144A offering (the “Notes Offering”) exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), of $425.0 aggregate principal amount of 5.625% senior notes due 2024 (the “Notes”).
 
We issued the Notes under an indenture dated November 10, 2016 (the “Indenture”) among the Company, the guarantors party thereto, and Wells Fargo Bank, National Association, as trustee (the “Trustee”). The Notes bear interest at the rate of 5.625% per year. Interest on the Notes is payable on May 15 and November 15 of each year, beginning on May 15, 2017. The Notes will mature on November 15, 2024. Before November 15, 2019, we may redeem the Notes, in whole or in part, at a redemption price equal to 100% of their principal amount plus a make-whole premium and accrued and unpaid interest to the date of redemption. At any time on or after November 15, 2019, we may redeem the Notes, in whole or in part, at the applicable redemption prices set forth in the Indenture, plus accrued interest. In addition, before November 15, 2019, we may, from time to time, redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 105.625% of the principal amount thereof, plus accrued and unpaid interest to the redemption date.

The redemption prices set forth in the indenture for the twelve month periods beginning on November 15 of the years indicated below are as follows:
Year
Percentage

2019
104.219
%
2020
102.813
%
2021
101.406
%
2022 and thereafter
100.000
%

The Indenture contains covenants that, among other things, restrict our ability to incur additional debt or issue certain preferred stock; pay dividends (subject to certain exceptions) or make certain redemptions, repurchases or distributions or make certain other restricted payments or investments; create liens; enter into transactions with affiliates; merge, consolidate or sell, transfer or otherwise dispose of all or substantially all of our assets; transfer and sell assets; and create restrictions on dividends or other payments by our restricted subsidiaries. Certain covenants will cease to apply to the Notes for so long as the Notes have investment grade ratings. The Notes will be unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of our current and future U.S. subsidiaries that guarantee the Amended and Restated Credit Agreement. As of September 30, 2019, we were in compliance with the covenants under the Indenture.
Off-Balance Sheet Arrangements
As of September 30, 2019 and December 31, 2018, we had no off-balance sheet debt or similar obligations, other than financial assurance instruments, which are not classified as debt. We do not guarantee any third-party debt.
Seasonality
We expect our operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring in the East and Midwest segments because of decreased construction and demolition activities during winter months in these regions of the U.S. In addition, some of our operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.
Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as hurricanes that most often impact the South region, can increase the Company’s revenues in the areas affected. While weather-related and other occurrences can boost revenues through additional work, the earnings generated can be moderated as a result of significant start-up costs and other factors, resulting in earnings at comparatively lower margins. These destructive weather

40


conditions can result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs in disposal neutral markets.


Financial Assurance
We must provide financial assurance to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations for capping, closure and post-closure costs, and related to our performance under certain collection, landfill and transfer station contracts. We satisfy these financial assurance requirements by providing surety bonds and letters of credit. The amount of the financial assurance requirements for capping, closure and post-closure costs is determined by applicable state environmental regulations. The financial assurance requirements for capping, closure and post-closure costs may be associated with a portion of the landfill or the entire landfill. Generally, states require a third-party engineering specialist to determine the estimated capping, closure and post-closure costs that are used to determine the required amount of financial assurance for a landfill. The amount of financial assurance required can, and generally will, differ from the obligation determined and recorded under U.S. GAAP. The amount of the financial assurance requirements related to contract performance varies by contract. Additionally, we must provide financial assurance for our insurance program and collateral for certain performance obligations. We do not expect a material increase in financial assurance requirements in the foreseeable future, although the mix of financial assurance instruments may change.
These financial instruments are issued in the normal course of business and are not considered company indebtedness. Because we currently have no liability for these financial assurance instruments, they are not reflected in our condensed consolidated balance sheets. However, we record capping, closure and post-closure liabilities and self-insurance liabilities as they are incurred. The underlying obligations of the financial assurance instruments, in excess of those already reflected in our condensed consolidated balance sheets, would be recorded if it is probable that we would be unable to fulfill our related obligations. We do not expect this to occur.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP requires our management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Our estimates and assumptions are based on historical experience and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments. A summary of significant accounting policies is disclosed in Note 1 to the Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption “Discussion of Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.
Recently Issued and Proposed Accounting Standards
For a description of new accounting standards that may affect us, see Note 2, Basis of Presentation, to our unaudited condensed consolidated financial statements in Part 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information about market risks as of September 30, 2019 does not differ materially from that included in our 2018 Annual Report on Form 10-K.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including ensuring that such information is accumulated and communicated to management (including the principal executive and financial officers) as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were

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not effective as of September 30, 2019 (the end of the period covered by this Quarterly Report on Form 10-Q), due to a material weakness in internal control over financial reporting, as described further in our 2018 Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting
The material weakness, identified during the fourth quarter of fiscal 2018, as described further in our 2018 Annual Report on Form 10-K, remains unremediated as of September 30, 2019. To date, we have made enhancements to our control environment, but the remediation efforts are ongoing and are not expected to be completed until after 2019.


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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding our legal proceedings can be found under the Litigation and Other Matters section of Note 9 to the unaudited condensed consolidated financial statements.
Item 1A. Risk Factors

There have been no material changes from risk factors previously disclosed in our 2018 Annual Report on Form 10-K in response to Item 1A to Part I of Form 10-K or previously disclosed in our 2019 First Quarter Report on Form 10-Q in response to Item 1A to Part II of Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.

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Item 6. Exhibits
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Exhibit 101
 
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
 
 
 
Exhibit 101.INS
  
XBRL Instance Document
 
 
Exhibit 101.SCH
  
XBRL Extension Schema Document
 
 
Exhibit 101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
Exhibit 101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
Exhibit 101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
Exhibit 101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
Exhibit 104
 
The cover page from this Report on Form 10-Q, formatted as Inline XBRL.



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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
October 30, 2019
 
 
 
Advanced Disposal Services, Inc.
 
 
 
 
 
 
 
 
By:
 
/s/ Steven R. Carn
 
 
 
 
 
 
Steven R. Carn
 
 
 
 
 
 
Chief Financial Officer

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