ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the “Selected Financial Data” included in Item 6 of this Annual Report on Form 10-K, our consolidated financial statements and the related notes included elsewhere in this report.
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 municipal arrangements. We have a presence in 16 states across the Midwest, South and East regions of the United States, serving approximately 2.7 million residential customers and over 200,000 C&I customers through our extensive network of 95 collection operations, 73 transfer stations, 3 MRFs, 19 locations where we receive and bale recyclable material and 41 owned or operated active landfills. We seek to drive financial performance in markets in which we own or operate a landfill or in certain disposal-neutral markets, where the landfill is owned by our municipal customer. In markets in which we own or operate a landfill, 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, with limited exposure to commodity sales. We also benefit from a high degree of customer diversification, with no single customer accounting for more than 2% of revenue for the year ended December 31, 2019. Our business mix and large and diverse customer base, combined with our long term contracts and historically high renewal rates, provide us with significant revenue and earnings stability and visibility.
We intend to grow our business and expand the scope of our operations by adding new C&I customers, securing additional exclusive municipal contracts and executing value enhancing, tuck-in acquisitions, while maintaining a relentless focus on prudent cost management and pricing discipline. To this end, we are committed to investing in strategic infrastructure including the development and enhancement of our landfills, the conversion of our residential collection fleet to automated vehicles and the conversion of our collection fleet to CNG-fueled vehicles in certain markets in which we can achieve an attractive return on our investment. In addition to our focus on growing revenues and enhancing profitability, we remain financially disciplined through our careful management of returns on equity and capital deployed.
Our fiscal year ends December 31 of each year and we refer to the fiscal year ended December 31, 2019 as "fiscal 2019," the fiscal year ended December 31, 2018 as "fiscal 2018" and the fiscal year ended December 31, 2017 as "fiscal 2017".
How We Generate 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 surcharges 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. Our standard C&I service agreement is a five-year renewable agreement. Management believes we maintain 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, and we have historically achieved a renewal rate of approximately 80% to 85% with these customers. Certain of our municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as the consumer price index. We provide commercial front load and temporary and permanent rolloff service offerings to our customers. While the majority of our rolloff services are provided to customers under long-term service agreements, we generally do not enter into contracts with our temporary rolloff customers due to the relatively short-term nature of most 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 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 facility 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 for 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 MSW landfills, management of third-party owned landfills, brokerage revenue, customer service charges relating to overdue payments, compliance fees and customer administrative fees relating to customers who request paper copies of invoices rather than opting for electronic invoices.
Key Factors Affecting Our Results of Operations
Our results of operations are affected by our ability to complete tuck-in acquisitions and retain existing and win new municipal contracts at favorable margins. When we determine to pursue a new acquisition or contract, we focus particularly on operational efficiencies, including route optimization and our ability to leverage our network of landfills and transfer stations. We also seek to divest lower margin businesses that do not conform to our strategic operations model which may result in impairment charges in the period of sale but benefit us by allowing us to redeploy capital to higher margin businesses.
Our results of operations are also affected by the strength of the economy and the level of C&I activity near our collection operations. Economic conditions have a direct effect on construction, demolition, new business formations and roll-off activity which impacts volumes of C&I waste. Residential waste volumes are also impacted by economic conditions, although to a lesser extent. Special waste volume, such as coal ash, energy waste, soil projects and other industrial process waste, which is driven by C&I projects and other general economic conditions, can vary substantially year to year based on economic and industrial conditions as well as the timing and size of projects in proximity to our collection or disposal operations. During periods of strong GDP growth, our business is fueled by increases in the C&D business, new business formations and new residential housing.
Our ability to maintain or increase the price of our services has a significant effect on our results of operations. Our focus on secondary markets enhances our ability to maintain or increase prices. We also intend to enter into contracts or service agreements that permit rate increases and contain favorable pricing structures.
We maintain a focus on prudent cost management and efficiency. We have implemented programs to increase sales productivity and pricing effectiveness, driver productivity, route optimization, maintenance efficiency and effective purchasing. Our ability to manage costs is a significant driver of our results.
Fuel costs represent a significant operating expense. When available, we implement a fuel surcharge that is designed to recover a portion of our direct and indirect increases in fuel costs. Furthermore, we seek to minimize fuel costs through route optimization and the adoption of more CNG vehicles in our fleet. See "Quantitative and Qualitative Disclosures About Market Risk-Fuel Price Risk."
Seasonality and Severe Weather
Based on historic trends, 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 because of decreased construction and demolition activities during the winter months in the U.S., and lower volumes of energy waste due to reduced drilling activity during harsh weather conditions. Conversely, mild winter weather conditions may reduce demand for oil and natural gas, which may cause some of our mining and exploration customers to curtail their drilling programs, which could result in production of lower volumes of waste.
Results of Operations
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for the results of operations discussion for the fiscal year ended December 31, 2018 compared to the fiscal year ended December 31, 2017.
The following table sets forth for the periods indicated our consolidated results of operations and the percentage relationship that certain items from our consolidated financial statements bear to revenue (in millions and as a percentage of our revenue).
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Year ended December 31,
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2019
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|
2018
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|
2017
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Service revenues
|
$
|
1,623.0
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|
|
100.0
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%
|
|
$
|
1,558.2
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|
|
100.0
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%
|
|
$
|
1,507.6
|
|
|
100.0
|
%
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
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Operating
|
1,040.6
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|
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64.1
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%
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|
989.1
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63.5
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%
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|
946.7
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|
|
62.8
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%
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Accretion of landfill retirement obligations
|
18.0
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1.1
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%
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17.0
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1.1
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%
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|
15.4
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|
|
1.0
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%
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Operating expenses
|
1,058.6
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|
|
65.2
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%
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|
1,006.1
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|
|
64.6
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%
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|
962.1
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|
|
63.8
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%
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Selling, general and administrative
|
207.7
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|
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12.8
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%
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|
181.5
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|
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11.6
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%
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|
169.5
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|
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11.2
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%
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Depreciation and amortization
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278.8
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|
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17.2
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%
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|
270.5
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|
|
17.4
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%
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|
269.8
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|
|
17.9
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%
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Acquisition and development costs
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1.1
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|
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0.1
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%
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|
0.8
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|
|
0.1
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%
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|
1.3
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|
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0.1
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%
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Loss (gain) on disposal of assets and asset impairments
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1.7
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0.1
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%
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(2.5
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)
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(0.2
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)%
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|
11.4
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|
|
0.8
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%
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Restructuring charges
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0.6
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|
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—
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%
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0.1
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|
|
—
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%
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3.4
|
|
|
0.2
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%
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Total operating costs and expenses
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1,548.5
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|
|
95.4
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%
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|
1,456.5
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|
|
93.5
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%
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|
1,417.5
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|
|
94.0
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%
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Operating income
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$
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74.5
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|
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4.6
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%
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$
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101.7
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|
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6.5
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%
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$
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90.1
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|
|
6.0
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%
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Revenue
The following table sets forth our consolidated revenues for the periods indicated (in millions and as a percentage of our total revenue).
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Year ended December 31,
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2019
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2018
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2017
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Collection
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$
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1,073.6
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66.1
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%
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$
|
1,035.8
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|
|
66.5
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%
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$
|
1,017.4
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|
|
67.5
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%
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Disposal
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569.2
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|
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35.1
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%
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|
558.8
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|
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35.9
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%
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|
542.5
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|
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36.0
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%
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Sale of recyclables
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10.3
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|
|
0.6
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%
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|
18.1
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|
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1.2
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%
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|
33.2
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|
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2.2
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%
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Fuel and environmental charges
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116.9
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|
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7.2
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%
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|
120.7
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|
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7.7
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%
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|
103.9
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|
|
6.9
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%
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Other
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160.0
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|
|
9.9
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%
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|
132.5
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|
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8.5
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%
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|
104.4
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|
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6.9
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%
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Intercompany eliminations
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(307.0
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)
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(18.9
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)%
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(307.7
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)
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(19.8
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)%
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(293.8
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)
|
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(19.5
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)%
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Total
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$
|
1,623.0
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|
|
100.0
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%
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$
|
1,558.2
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|
|
100.0
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%
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$
|
1,507.6
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|
|
100.0
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%
|
The following table reflects changes in components of our revenue, as a percentage of total revenue, for fiscal 2019, 2018 and 2017:
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Year Ended December 31,
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2019
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2018
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|
2017
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Average yield
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3.3
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%
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3.4
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%
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|
1.2
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%
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Recycling
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(0.4
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)%
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(0.9
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)%
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|
0.8
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%
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Fuel surcharge revenue
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(0.1
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)%
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|
1.0
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%
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|
0.4
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%
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Total yield
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2.8
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%
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3.5
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%
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|
2.4
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%
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Organic volume
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—
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%
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|
0.5
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%
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|
1.4
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%
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Acquisitions
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1.4
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%
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|
1.9
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%
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|
3.9
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%
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Divestitures
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—
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%
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|
(0.3
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)%
|
|
(0.4
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)%
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Impact of revenue recognition standard adoption
|
—
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%
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|
(2.2
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)%
|
|
—
|
%
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Total revenue change
|
4.2
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%
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|
3.4
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%
|
|
7.3
|
%
|
Average yield is defined as aggregate contribution of price changes excluding recycled commodities and fuel surcharge revenue.
Fiscal Year Ended December 31, 2019 compared to 2018
During fiscal 2019, we experienced the following changes in components of our revenue as compared to the same period in fiscal 2018:
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•
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Average yield increased revenue by 3.3% driven by higher price yield in our collection and disposal operations 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;
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•
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Recycling revenue decreased revenue by 0.4% due to a continued decrease in recycling commodity prices;
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|
•
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Fuel surcharge revenue decreased revenue by 0.1% 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;
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•
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Acquisitions increased revenue by 1.4% due to the completion of acquisitions that further enhance our vertical integration strategy.
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Operating Expenses
Our operating expenses include the following:
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•
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Labor and related benefits consist of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes;
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•
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Transfer and disposal costs include tipping fees paid to third-party disposal facilities and transfer stations and transportation and subcontractor costs (which include costs for independent haulers who transport waste from transfer stations to our disposal facilities);
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|
•
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Maintenance and repairs expenses include labor, maintenance and repairs to our vehicles, equipment and containers;
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|
•
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Fuel costs, which include the direct cost of fuel used by our vehicles, net of fuel tax credits. We also incur certain indirect fuel costs in our operations;
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|
•
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Franchise and host fees, which consist of municipal franchise fees, host community fees and royalties;
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•
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Risk management expenses, which include casualty insurance premiums and claim payments and estimates for claims incurred but not reported;
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|
•
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Other expenses, which include expenses such as facility operating costs, equipment rent, leachate treatment and disposal and other landfill maintenance costs;
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|
•
|
Accretion expense related to landfill capping, closure and post-closure is included in “Operating Expenses” in our consolidated income statements, however, it is excluded from the table below (refer to discussion below “Accretion of Landfill Retirement Obligations” for a detailed discussion of the changes in amounts).
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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):
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|
Year ended December 31,
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2019
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|
2018
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|
2017
|
Labor and related benefits
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$
|
351.7
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|
21.7
|
%
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$
|
333.5
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|
|
21.4
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%
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$
|
313.2
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|
|
20.8
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%
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Transfer and disposal costs
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223.4
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|
|
13.8
|
%
|
|
208.2
|
|
|
13.4
|
%
|
|
205.0
|
|
|
13.6
|
%
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Maintenance and repairs
|
165.6
|
|
|
10.2
|
%
|
|
154.0
|
|
|
9.9
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%
|
|
139.3
|
|
|
9.2
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%
|
Fuel
|
72.8
|
|
|
4.5
|
%
|
|
81.0
|
|
|
5.2
|
%
|
|
68.3
|
|
|
4.5
|
%
|
Franchise and host fees
|
42.6
|
|
|
2.6
|
%
|
|
41.4
|
|
|
2.7
|
%
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|
67.8
|
|
|
4.5
|
%
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Risk management
|
36.7
|
|
|
2.3
|
%
|
|
35.6
|
|
|
2.3
|
%
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|
33.8
|
|
|
2.2
|
%
|
Other
|
138.2
|
|
|
8.4
|
%
|
|
111.9
|
|
|
7.1
|
%
|
|
108.2
|
|
|
7.3
|
%
|
Subtotal
|
1,031.0
|
|
|
63.5
|
%
|
|
965.6
|
|
|
62.0
|
%
|
|
935.6
|
|
|
62.1
|
%
|
Greentree expenses, net of insurance recoveries and landfill remediation expenses
|
9.6
|
|
|
0.6
|
%
|
|
23.5
|
|
|
1.5
|
%
|
|
11.1
|
|
|
0.7
|
%
|
Total operating expenses, excluding accretion expense
|
$
|
1,040.6
|
|
|
64.1
|
%
|
|
$
|
989.1
|
|
|
63.5
|
%
|
|
$
|
946.7
|
|
|
62.8
|
%
|
The cost categories shown above may not be comparable to similarly titled categories used by other companies.
Fiscal Year Ended December 31, 2019 compared to 2018
Operating expenses increased by $51.5, or 5.2%, to $1,040.6 for fiscal 2019 from $989.1 in fiscal 2018. The change was due to the following:
|
|
•
|
Labor and related benefits increased by $18.2, or 5.5%, to $351.7 which was primarily attributable to the following: higher labor costs as a result of merit increases, acquisition activity and one additional company paid holiday; higher temporary labor costs primarily as a result of new municipal contract wins and a driver shortage; and an increase in healthcare costs due to increased frequency and severity of claims activity;
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|
|
•
|
Transfer and disposal costs increased by $15.2, or 7.3%, to $223.4 primarily due to the following: a significant increase in processing costs related to single stream recycling; an increase in disposal costs related to higher disposal volumes processed through our transfer stations particularly in our South segment; an increase in costs due to higher reliance on sub-contractors primarily in our South segment; and an increase in transportation costs in our Midwest segment primarily due to diverting waste from one landfill to another;
|
|
|
•
|
Maintenance and repairs expense increased by $11.6, or 7.5%, to $165.6 primarily due to the following: higher labor costs as a result of merit increases, acquisition activity and a mechanic shortage; and an increase in the cost of maintenance and repair parts due to inflation;
|
|
|
•
|
Fuel costs decreased $8.2, or 10.1%, to $72.8 impacted by a decrease in diesel fuel prices and further offset by an increase in the benefit associated with CNG fuel tax credits in fiscal 2019 compared to fiscal 2018;
|
|
|
•
|
Franchise and host fees increased $1.2, or 2.9%, to $42.6 primarily due to the acquisition of a landfill in our South segment during the fourth quarter of 2018;
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|
|
•
|
Risk management expenses increased $1.1, or 3.1%, to $36.7 primarily due to a slight increase in the frequency and severity of automobile and property liability claims;
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|
|
•
|
Other operating costs increased $26.3, or 23.5%, to $138.2 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 fiscal 2018 that did not recur in fiscal 2019; and higher material costs to support an increase in revenue related to our asphalt operation;
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|
|
•
|
We recorded landfill remediation expenses of $9.6 and $23.4 during fiscal 2019 and 2018, respectively, as further described in Note 20 to the audited consolidated financial statements.
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Accretion of Landfill Retirement Obligations
Accretion expense was $18.0, $17.0 and $15.4 for fiscal 2019, 2018 and 2017, respectively. Accretion expense increased by $1.0 in fiscal 2019 from fiscal 2018 which was 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, rebranding and integration costs 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 parties, marketing, directors’ and officers’ insurance, general employee relocation, travel, entertainment and bank charges, but excludes 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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Salaries
|
$
|
117.5
|
|
|
7.2
|
%
|
|
$
|
112.6
|
|
|
7.2
|
%
|
|
$
|
105.5
|
|
|
7.0
|
%
|
Legal and professional
|
31.9
|
|
|
2.0
|
%
|
|
14.8
|
|
|
0.9
|
%
|
|
13.9
|
|
|
0.9
|
%
|
Other
|
58.3
|
|
|
3.6
|
%
|
|
54.1
|
|
|
3.5
|
%
|
|
50.1
|
|
|
3.3
|
%
|
Total selling, general and administrative expenses
|
$
|
207.7
|
|
|
12.8
|
%
|
|
$
|
181.5
|
|
|
11.6
|
%
|
|
$
|
169.5
|
|
|
11.2
|
%
|
Fiscal Year Ended December 31, 2019 compared to 2018
|
|
•
|
Salaries expenses increased by $4.9, or 4.4% primarily due to higher bonus expense due to the guaranteed bonus program adopted as part of the merger as further described in Note 1 to the audited consolidated financial statements, merit increases and increased temporary labor needs partially offset by a decrease to our vacation accrual due to a policy change, lower stock based compensation expense and a one time multi employer pension plan withdrawal fee in fiscal 2018 that did not recur in fiscal 2019;
|
|
|
•
|
Legal and professional fees increased by $17.1 due to a legal case settlement of $9.0 as further discussed in Note 20 to the audited consolidated financial statements and related legal fees of $0.9 and an increase in merger related expenses of $9.4 related to our proposed merger as further described in Note 1 to the audited consolidated financial statements;
|
|
|
•
|
Other selling, general and administrative expenses increased by $4.2, or 7.8% primarily 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Depreciation, amortization and depletion of property and equipment
|
$
|
247.6
|
|
|
15.3
|
%
|
|
$
|
231.2
|
|
|
14.9
|
%
|
|
$
|
228.2
|
|
|
15.1
|
%
|
Amortization of other intangible assets and other assets
|
31.2
|
|
|
1.9
|
%
|
|
39.3
|
|
|
2.5
|
%
|
|
41.6
|
|
|
2.8
|
%
|
Depreciation and amortization
|
$
|
278.8
|
|
|
17.2
|
%
|
|
$
|
270.5
|
|
|
17.4
|
%
|
|
$
|
269.8
|
|
|
17.9
|
%
|
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 method. We depreciate all fixed assets to a zero net book value, and do not apply salvage values.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Depreciation and amortization of property and equipment
|
$
|
141.7
|
|
|
8.7
|
%
|
|
$
|
138.4
|
|
|
8.9
|
%
|
|
$
|
135.6
|
|
|
9.0
|
%
|
Landfill depletion and amortization
|
105.9
|
|
|
6.5
|
%
|
|
92.8
|
|
|
6.0
|
%
|
|
92.6
|
|
|
6.1
|
%
|
Depreciation, amortization and depletion of property and equipment
|
$
|
247.6
|
|
|
15.2
|
%
|
|
$
|
231.2
|
|
|
14.9
|
%
|
|
$
|
228.2
|
|
|
15.1
|
%
|
Fiscal Year Ended December 31, 2019 compared to 2018
|
|
•
|
Depreciation and amortization of property and equipment increased by $3.3, or 2.4%, to $141.7 due mainly to acquisition activity and new municipal contract wins which increased our capital needs;
|
|
|
•
|
Landfill depletion and amortization increased by $13.1, or 14.1%, primarily due to changes in our landfill estimates and acquisition activity.
|
Amortization of Other Intangible Assets and Other Assets
Amortization of other intangibles and other assets was $31.2, $39.3 and $41.6 for fiscal 2019, 2018 and 2017, respectively, or as a percentage of revenue, 1.9% to 2.8% for all years presented. The decrease in amortization expense in fiscal 2019 compared to fiscal 2018 is attributable to certain intangible assets becoming fully amortized partially offset by the impact of acquisition activity. Our other intangible assets and other assets primarily relate to customer lists, municipal and customer contracts, operating permits and non-compete agreements.
Acquisitions
We completed the acquisitions of two businesses during fiscal 2019. Consideration paid amounted to $24.9 for these acquisitions. Additionally, we made a $2.2 deferred purchase price payment during fiscal 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. We completed twelve acquisitions during fiscal 2018. Consideration paid amounted to $30.1 for these acquisitions. The results of operations of each acquisition are included in our consolidated statements of operations subsequent to the closing date of each acquisition.
Interest Expense
The following table provides the components of interest expense for the periods indicated (in millions and as a percentage of our revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Interest expense on debt and capital lease obligations
|
$
|
95.8
|
|
|
5.9
|
%
|
|
$
|
90.6
|
|
|
5.8
|
%
|
|
$
|
87.5
|
|
|
5.8
|
%
|
Accretion of original issue discounts and loan costs
|
5.7
|
|
|
0.4
|
%
|
|
6.1
|
|
|
0.4
|
%
|
|
6.3
|
|
|
0.4
|
%
|
Less: Capitalized interest
|
(0.6
|
)
|
|
—
|
%
|
|
(0.8
|
)
|
|
(0.1
|
)%
|
|
(0.8
|
)
|
|
(0.1
|
)%
|
Total Interest Expense
|
$
|
100.9
|
|
|
6.3
|
%
|
|
$
|
95.9
|
|
|
6.1
|
%
|
|
$
|
93.0
|
|
|
6.1
|
%
|
Interest expense increased in fiscal 2019 from fiscal 2018 due to the impact of higher average interest rates on our variable rate debt.
Other (expense) income, Net
Changes in the fair value and settlements of our 2016 interest rate caps are recorded in other (expense) income, net in the audited consolidated statements of operations and amounted to expense of $0.8 and income of $5.7 for fiscal 2019 and 2018, respectively. The expense in fiscal 2019 was driven by the impact of decreasing interest rates on the 2016 interest rate caps. The income in fiscal 2018 was driven by the impact of increasing interest rates on the 2016 interest rate caps. Income from equity investee for fiscal 2019 and 2018 was $2.4 and $1.2, respectively. During fiscal 2019, the IRS closed audits of our previously acquired Veolia subsidiaries for tax years 2004-2012 therefore we 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.
Income Taxes
Our benefit from income taxes was $20.4 for fiscal 2019, our expense from income taxes was $4.6 for fiscal 2018 and our benefit from income taxes was $41.2 for fiscal 2017. Our tax rate is affected by recurring items, such as differences in tax rates in state jurisdictions and the relative amount of income we earn in each jurisdiction, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state income taxes, the following items had the most significant impact on the difference between our statutory U.S. federal income tax rate and our effective tax rate:
Fiscal 2019
Our effective income tax rate for fiscal 2019 was a beneficial rate of 75.6%. Our rate is higher than the enacted statutory rate of 21%, primarily due to the favorable impact of the closure of the Veolia IRS audit for years 2004-2012. With the closure of the Veolia audit, we recognized $28.1 of tax benefits which were previously derecognized under ASC 740. This benefit was partially offset by the recording of valuation allowances against certain state tax NOLs, including NOLs which were newly recognized as part of the audit settlement.
Fiscal 2018
Our effective income tax rate for fiscal 2018 was 32.9%. Our rate is higher than the enacted statutory rate of 21%, primarily due to the unfavorable impact of an increase to our valuation allowance for certain state tax NOLs.
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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
Revenues
|
|
Operating
Income (Loss)
|
|
Depreciation
and
Amortization
|
For the Year Ended December 31,
|
|
|
|
|
|
2019
|
|
|
|
|
|
South
|
$
|
645.6
|
|
|
$
|
77.6
|
|
|
$
|
93.9
|
|
East
|
415.0
|
|
|
21.6
|
|
|
82.4
|
|
Midwest
|
562.4
|
|
|
66.4
|
|
|
97.2
|
|
Corporate
|
—
|
|
|
(91.1
|
)
|
|
5.3
|
|
|
$
|
1,623.0
|
|
|
$
|
74.5
|
|
|
$
|
278.8
|
|
For the Year Ended December 31,
|
|
|
|
|
|
2018
|
|
|
|
|
|
South
|
$
|
609.2
|
|
|
$
|
77.9
|
|
|
$
|
85.1
|
|
East
|
400.5
|
|
|
22.5
|
|
|
79.8
|
|
Midwest
|
548.5
|
|
|
72.7
|
|
|
101.1
|
|
Corporate
|
—
|
|
|
(71.4
|
)
|
|
4.5
|
|
|
$
|
1,558.2
|
|
|
$
|
101.7
|
|
|
$
|
270.5
|
|
For the Year Ended December 31,
|
|
|
|
|
|
2017
|
|
|
|
|
|
South
|
$
|
570.5
|
|
|
$
|
89.8
|
|
|
$
|
85.0
|
|
East
|
380.2
|
|
|
(1.5
|
)
|
|
76.8
|
|
Midwest
|
556.9
|
|
|
71.7
|
|
|
98.9
|
|
Corporate
|
—
|
|
|
(69.9
|
)
|
|
9.1
|
|
|
$
|
1,507.6
|
|
|
$
|
90.1
|
|
|
$
|
269.8
|
|
Comparison of Reportable Segments—Fiscal 2019 compared to Fiscal 2018
South Segment
Revenue for fiscal 2019 increased $36.4 or 6.0% from fiscal 2018. The increase in revenue was due to the following: an increase in price yield from our collection and disposal operations of $21.3 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 $12.5; an increase in residential collection volumes of $4.7 due to new municipal contract wins; and an increase in MSW disposal volumes of $3.4. The increases were partially offset by a decrease in commercial and rolloff collection volumes of $6.0 and a reduction in recycled commodity prices of $1.1.
Operating income for fiscal 2019 decreased by $0.3 or 0.4% from fiscal 2018. The decrease was primarily due to the following: an increase in salaries and wages of $10.2 due to higher labor costs primarily attributable to merit increases, acquisition activity, one additional company paid holiday, higher healthcare costs due to increased claims activity and increased temporary labor needs as a result of new municipal contract wins and a driver shortage; an increase of $7.9 in disposal facility costs primarily due to higher leachate and gas treatment costs partially due to weather related impacts, an increase in site maintenance costs and an increase in other facility costs; an increase in maintenance and repair costs of $6.5 primarily due to higher labor costs as a result of merit increases, acquisition activity and a mechanic shortage and an increase in the cost of maintenance and repair parts due to inflation; an increase of $5.9 in various general and administrative expenses including higher bonus expense and higher wages due to the merit increases; an increase in disposal and transportation costs of of $4.8 primarily related to higher volumes processed through our transfer stations, higher reliance on sub-contractors and an increase in third party transportation costs; an increase in vehicle operating costs of $1.5 primarily due to higher reliance on rental equipment and higher vehicle maintenance costs; and an increase of $0.9 due to higher frequency and severity of automobile and property liability claims. We also had an increase in depreciation and amortization of $9.6 due to changes in our landfill estimates, acquisition activity and increased disposal volumes at our landfills partially offset by a reduction in amortization for intangible assets that became fully
amortized. Additionally, we had an unfavorable impact related to gains on sales of fixed assets of $3.8 primarily due to the timing of equipment sales. The increases were largely offset by the revenue increase of $36.4 as described above, a decrease in landfill remediation expenses of $13.8 as further described in Note 20 to the audited consolidated financial statements and a decrease in fuel expense of $2.6 primarily due to a higher benefit associated with fuel tax credits in fiscal 2019 compared to fiscal 2018.
East Segment
Revenue for fiscal 2019 increased $14.5, or 3.6% from fiscal 2018. The increase was primarily due to the following: an increase in disposal volumes of $14.1; an increase in price yield from our collection and disposal operations of $5.8 as we continue to focus on disciplined open market pricing; and an increase in revenue associated with our asphalt operations of $2.2. The increases were partially offset by a decrease in collection volumes of $7.2.
Operating income for fiscal 2019 decreased by $0.9 for fiscal 2019 compared to fiscal 2018. The decrease in operating income was primarily due to the following: an increase in salaries and wages of $3.1 due to higher labor costs primarily attributable to merit increases, higher bonus expense, acquisition activity, one additional company paid holiday, a driver shortage and higher healthcare costs due to increased claims activity; an increase in depreciation and amortization of $2.9 due to changes in our landfill estimates and increased disposal volumes at our landfills partially offset by a reduction in amortization for intangible assets that became fully amortized; an increase in various general and administrative costs of $2.8 including higher bonus expense and higher bad debt expense primarily associated with our brokerage business; an increase in maintenance and repair costs of $2.2 primarily due to higher labor costs as a result of merit increases, acquisition activity and a mechanic shortage and an increase in the cost of maintenance and repair parts due to inflation; an increase of $2.2 in leachate and gas treatment costs partially due to weather related impacts; an increase in site maintenance costs and other facility costs of $1.7; a significant increase in processing costs of $1.4 related to single stream recycling; an increase in material costs of $0.9 to support an increase in revenue related to our asphalt operation; and an increase in vehicle operating costs of $0.8 primarily due to higher reliance on rental equipment and higher vehicle maintenance costs. The decrease was largely offset by the revenue increase of $14.5 described above and a decrease in fuel expense of $3.1 due to a reduction in diesel fuel prices and a higher benefit associated with fuel tax credits in fiscal 2019 compared to fiscal 2018.
Midwest Segment
Revenue for fiscal 2019 increased $13.9 or 2.5% from fiscal 2018. The increase was primarily due to an increase in price yield from our collection and disposal operations of $15.2 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 and an increase in acquisition related revenue of $8.9. The increase was partially offset by a decrease in residential and rolloff collection volumes of $9.9, a reduction in recycled commodity prices of $3.8 and a decrease in disposal volumes of $3.4.
Operating income for fiscal 2019 decreased $6.3 from fiscal 2018. The decrease was primarily due to the following: a significant increase in disposal costs of $6.6 primarily due to higher single stream recycling processing costs; an increase in salaries and wages of $4.8 due to higher labor costs primarily attributable to merit increases, acquisition activity, one additional company paid holiday, a driver shortage and higher healthcare costs due to increased claims activity; an increase of $3.8 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 $3.0 primarily due to higher labor costs as a result of merit increases, acquisition activity and a mechanic shortage and an increase in the cost of maintenance and repair parts due to inflation; an increase in various general and administrative costs of $1.5; a loss contract purchase accounting liability reversal of $1.4 in fiscal 2018 that did not recur in fiscal 2019; an increase in transportation costs of $1.0 primarily due to diverting waste from one landfill to another and an increase in vehicle operating costs of $0.8 primarily due to higher reliance on rental equipment and higher vehicle maintenance costs. The decrease was partially offset by the $13.9 revenue increase as described above, a $3.0 decrease in amortization expense as certain intangible assets became fully amortized and a decrease in fuel expense of $2.6 due to a reduction in diesel fuel prices and a higher benefit associated with fuel tax credits in fiscal 2019 compared to fiscal 2018.
Corporate Segment
Operating loss increased by $19.7 to a loss of $91.1 in fiscal 2019 primarily due to the following: a legal case settlement of $9.0 as further discussed in Note 20 to the audited consolidated financial statements and related legal fees of $0.9; an increase in merger related expenses of $9.4 related to our proposed merger as further described in Note 1 to the audited consolidated financial statements; and an increase in salaries and wages of $6.2 due to merit increases, higher projected bonus expense due to the guaranteed bonus program adopted as part of the merger as further described in Note 1 to the audited consolidated
financial statements and increased temporary labor needs. The increase in operating loss was partially offset by a reduction in our vacation accrual due to a policy change of $3.7.
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 equipment, working capital, acquisitions and debt prepayments. For this reason and since we efficiently manage our working capital requirements, it is common for us to have negative working capital. We believe that our excess cash, cash from operating activities and funds available under our Revolving Credit Facility will provide us with sufficient financial resources to meet our anticipated capital requirements and maturing obligations as they come due. At December 31, 2019, 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 scheduled debt repayments and acquisitions. At December 31, 2018, we had negative working capital which was driven by cash used to fund scheduled debt repayments, debt prepayments and acquisitions during fiscal 2018.
We have more than adequate availability under our Revolving Credit Facility, which was $241.5, $231.7 and $257.9 at December 31, 2019, 2018 and 2017, respectively, to fund short term working capital requirements.
Summary of Cash and Cash Equivalents and Debt Obligations
The table below presents a summary of our cash and cash equivalents and debt balances as of December 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
12.5
|
|
|
$
|
6.8
|
|
Debt:
|
|
|
|
Current portion
|
$
|
76.1
|
|
|
$
|
85.9
|
|
Long-term portion
|
1,792.1
|
|
|
1,817.1
|
|
Total debt
|
$
|
1,868.2
|
|
|
$
|
1,903.0
|
|
The current portion of debt decreased primarily due to a decrease in borrowings on the Revolving Credit Facility of $7.0 and a reduction of $2.9 related to finance/capital leases. Long-term debt decreased due to a reduction of $13.8 related to finance/capital leases and $15.0 in principal payments made on the Term Loan B partially offset by amortization of deferred financing fees of $5.2.
Summary of Cash Flow Activity
The following table sets forth for the periods indicated a summary of our cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net cash provided by operating activities
|
$
|
280.2
|
|
|
$
|
308.3
|
|
|
$
|
306.5
|
|
Net cash used in investing activities
|
$
|
(226.1
|
)
|
|
$
|
(206.8
|
)
|
|
$
|
(285.3
|
)
|
Net cash used in financing activities
|
$
|
(48.4
|
)
|
|
$
|
(101.5
|
)
|
|
$
|
(15.6
|
)
|
Cash Flows Provided by Operating Activities
Fiscal Year Ended December 31, 2019 compared to 2018
We generated $280.2 of cash flows from operating activities during fiscal 2019, compared with $308.3 during fiscal 2018. The decrease was primarily due to the following:
|
|
•
|
An increase of $0.4 in accounts payable during fiscal 2019 compared to an increase of $19.7 during fiscal 2018, resulting in a negative variance of $19.3. We experienced the benefit of an increase in Days Payable Outstanding during the fourth quarter of fiscal 2018 that did not recur in fiscal 2019;
|
|
|
•
|
A decrease of $25.3 in other long-term liabilities during fiscal 2019 compared to an increase of $6.6 during fiscal 2018, resulting in a negative variance of $31.9. Of the $31.9 negative variance, $15.4 relates to the release of unrecognized tax benefits associated with the Veolia audit closure which had no impact on cash provided by operating activities. The remaining negative variance of $16.5 which had an impact on cash provided by operating activities was primarily due to operating lease payments and the reduction of various long term reserves;
|
|
|
•
|
An increase in cash expenditures of $9.9 related to the fee case settlement and related expenses;
|
|
|
•
|
An increase of $8.0 due to merger related cash expenditures;
|
|
|
•
|
An increase in cash interest expense of $4.5;
|
The decrease was partially offset by the following:
|
|
•
|
A increase of $1.8 in accounts receivable during fiscal 2019 compared to an increase of $15.2 during fiscal 2018, resulting in a positive variance of $13.4. The fiscal 2018 balance increased due to the timing of quarterly invoices as well as higher average balances due to price increases when compared to fiscal 2017. Fiscal 2019 timing of quarterly invoices and price increases were in line with fiscal 2018.
|
|
|
•
|
A decrease of $2.4 in other long-term assets during fiscal 2019 compared to an increase of $6.5 during fiscal 2018, resulting in a positive variance of $8.9. The decrease in fiscal 2019 was due to normal amortization of long term prepaid balances. The increase in fiscal 2018 was primarily due to higher long-term insurance receivable balances.
|
|
|
•
|
A decrease in cash expenditures of $5.8 related to the Greentree landfill waste slide and landfill remediation expenses;
|
|
|
•
|
A decrease in capping, closure and post closure expenditures of $3.6.
|
Cash flows from operating activities are used to fund capital expenditures, acquisitions, interest payments and debt.
Cash Flows Used in Investing Activities
We used $226.1 of cash in fiscal 2019 for investing activities, of which $203.8 was utilized to acquire property and equipment and for landfill cell construction and development and $27.1 was utilized for acquisitions. We received $4.8 in proceeds from the sale of property and equipment and insurance recoveries.
We used $206.8 of cash in fiscal 2018 for investing activities, of which $188.6 was utilized to acquire property and equipment and for landfill cell construction and development and $26.3 was utilized for acquisitions. We received $8.1 in proceeds from the sale of property and equipment and businesses.
A breakdown of our capital expenditures to acquire property and equipment and for landfill cell construction and development are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Infrastructure
|
$
|
22.9
|
|
|
$
|
30.9
|
|
|
$
|
39.1
|
|
Replacement
|
135.2
|
|
|
140.5
|
|
|
122.1
|
|
Growth
|
45.7
|
|
|
17.2
|
|
|
25.4
|
|
Total Capital Expenditures
|
$
|
203.8
|
|
|
$
|
188.6
|
|
|
$
|
186.6
|
|
Cash Flows Used in Financing Activities
Cash flows used in financing activities in fiscal 2019 were $48.4, as compared to $101.5 in fiscal 2018. We made payments on our Revolving Credit Facility and long-term debt obligations in the amount of $261.3 and borrowed approximately $201.0 in fiscal 2019. We received proceeds from the exercise of stock options of $11.9 net of tax related stock repurchases.
Cash flows used in financing activities in fiscal 2018 were $101.5, as compared to $15.6 in fiscal 2017. We made payments on our Revolving Credit Facility and long-term debt obligations in the amount of $240.6 and borrowed approximately $136.0 in fiscal 2018. We received proceeds from the exercise of stock options of $3.1.
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.
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 December 31, 2019 and 2018, we had $30.0 and $37.0 in borrowings outstanding under our Revolving Credit Facility. As of December 31, 2019 and 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 December 31, 2019 and 2018, we had remaining capacity under our Revolving Credit Facility of $241.5 and $230.7, respectively. As of December 31, 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 2019, 2018 and 2017 were not significant.
We are subject to a maximum total net leverage ratio of 6.8:1.0. The actual total net leverage ratio at December 31, 2019 and 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 will 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. 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.
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 are 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 December 31, 2019, we were in compliance with the covenants under the Indenture.
Off-Balance Sheet Arrangements
As of December 31, 2019, 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.
Changes made by the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act, signed into law in fiscal 2017, makes significant changes to the U.S. federal income tax rules. These changes include reducing the U.S. corporate income tax rate from 35% to 21%, allowing an immediate expensing of certain tangible assets placed in service before 2023, limiting the deduction for net interest expense, limiting the use of newly-generated net operating losses to offset 80% of future taxable income and substantial changes to the U.S. taxation of foreign operations.
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, letters of credit or trust deposits, which are included in restricted cash and marketable securities. 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 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 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 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.
Contractual Commitments
We have various contractual obligations in the normal course of our operations and financing activities. The following table summarizes our contractual cash obligations as of December 31, 2019 (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Final Capping,
Closure and
Post-Closure
(a)
|
|
Debt
Payments
(b) (c)
|
|
Scheduled Interest Payment Obligations
(d)
|
|
Unconditional
Purchase
Commitments
(e)
|
|
Total
|
2020
|
$
|
5.6
|
|
|
$
|
28.1
|
|
|
$
|
46.1
|
|
|
$
|
80.2
|
|
|
$
|
41.3
|
|
|
$
|
201.3
|
|
2021
|
5.0
|
|
|
28.4
|
|
|
63.1
|
|
|
78.2
|
|
|
13.7
|
|
|
188.4
|
|
2022
|
3.3
|
|
|
26.3
|
|
|
21.7
|
|
|
75.6
|
|
|
11.8
|
|
|
138.7
|
|
2023
|
2.5
|
|
|
20.3
|
|
|
1,329.9
|
|
|
66.5
|
|
|
10.0
|
|
|
1,429.2
|
|
2024
|
2.0
|
|
|
27.4
|
|
|
426.8
|
|
|
12.1
|
|
|
5.1
|
|
|
473.4
|
|
Thereafter
|
21.5
|
|
|
343.2
|
|
|
0.6
|
|
|
0.2
|
|
|
53.4
|
|
|
418.9
|
|
Total
|
$
|
39.9
|
|
|
$
|
473.7
|
|
|
$
|
1,888.2
|
|
|
$
|
312.8
|
|
|
$
|
135.3
|
|
|
$
|
2,849.9
|
|
|
|
(a)
|
The estimated remaining final capping, closure and post-closure expenditures presented above are not inflated or discounted and reflect the estimated future payments for liabilities incurred and recorded as of December 31, 2019.
|
|
|
(b)
|
Debt payments include principal payments on debt and finance lease obligations.
|
|
|
(c)
|
Our recorded debt obligations include non-cash adjustments associated with discounts and deferred loan costs. These amounts have been excluded as they will not impact our liquidity in future periods.
|
|
|
(d)
|
Interest on variable rate debt was calculated at 3.9%, which is the 1 week LIBOR rate plus applicable margin in effect as of December 31, 2019.
|
|
|
(e)
|
Unconditional purchase commitments consist of disposal related agreements that include fixed or minimum royalty payments, disposal related host agreements, capital expenditure commitments, payments for premiums on interest rate caps, waste relocation obligations and landfill remediation expenses.
|
Critical Accounting Policies and Estimates
General
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the following accounting policies and estimates are the most critical and could have the most impact on our results of operations. For a discussion of these and other accounting policies, see the notes to the consolidated financial statements included elsewhere in this Form 10-K.
We have noted examples of the residual accounting and business risks inherent in the accounting for these areas. Residual accounting and business risks are defined as the inherent risks that we face after the application of our policies and processes that are generally outside of our control or ability to forecast.
Revenue Recognition
Revenues are generally recognized as the services are provided. Revenue is recognized as waste is collected, as tons are received at the landfill or transfer stations, as recycled commodities are delivered to a customer or as services are rendered to customers. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. Recycling rebates paid to customers, franchise fees paid to customers and state landfill taxes are excluded from revenues. No single customer individually accounted for more than 2% of our consolidated revenue for the year ending December 31, 2019. See Note 3, Revenue Recognition, to the audited consolidated financial statements for further details.
Landfill Accounting
Costs Basis of Landfill Assets
Landfills are typically developed in a series of cells, each of which is constructed, filled and capped in sequence over the operating life of the landfill. When the final cell is filled and the operating life of the landfill is completed, the cell must be capped and then closed and post-closure care and monitoring activities begin. Capitalized landfill costs include expenditures for land (which includes the land of the landfill footprint and landfill buffer property and setbacks) and related airspace associated with the permitting, development and construction of new landfills, expansions at existing landfills, landfill gas systems and landfill cell development. Landfill permitting, development and construction costs represent direct costs related to these activities, including land acquisition, engineering, legal and construction. These costs are deferred until all permits are obtained and operations have commenced at which point they are capitalized and amortized. If necessary permits are not obtained, costs are charged to operations. The cost basis of our landfill assets also includes asset retirement costs, which represent estimates of future costs associated with landfill final capping, closure and post-closure activities.
Final Capping, Closure and Post-Closure Costs
The following is a description of our asset retirement activities and related accounting:
Final Capping
Includes installing flexible membrane and geosynthetic clay liners, drainage and compact soil layers, and topsoil, and is constructed over an area of the landfill where total airspace capacity has been consumed and waste disposal operations have ceased. These final capping activities occur in phases as needed throughout the operating life of a landfill as specific areas are filled to capacity and the final elevation for that specific area is reached in accordance with the provisions of the operating permit. Final capping asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed related to the specific final capping event with a corresponding increase in the landfill asset. Each final capping event is accounted for as a discrete obligation and recorded as an asset and a liability based on estimates of the discounted cash flows and capacity associated with each final capping event.
Closure and post-closure
These activities involve methane gas control, leachate management and groundwater monitoring, surface water monitoring and control, and other operational and maintenance activities that occur after the site ceases to accept waste. The post-closure period generally runs for 30 years after final site closure for landfills. Landfill costs related to closure and post-closure are recorded as
an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Obligations are recorded over the life of the landfill based on estimates of the discounted cash flows associated with performing closing and post-closure activities.
Annually we update our estimates for these obligations considering the respective State regulatory requirements, input from our internal engineers, operations, and accounting personnel and external consulting engineers. The closure and post-closure requirements are established under the standards of the EPA’s Subtitle D regulations as implemented and applied on a state-by-state basis. These estimates involve projections of costs that will be incurred as portions of the landfill are closed and during the post-closure monitoring period.
Capping, closure and post-closure costs are estimated assuming such costs would be incurred by a third party contractor in present day dollars and are inflated by 2.5% (an estimate based on the 25-year average change in the historical Consumer Price Index from 1994 to 2019) to the time periods within which it is estimated the capping, closure and post-closure costs will be expended. We discount these costs to present value using the credit-adjusted, risk-free rate effective at the time an obligation is incurred, consistent with the expected cash flow approach. Any change that results in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate while downward revisions are discounted at the historical weighted-average rate of the recorded obligation. As a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each individual asset retirement obligation. The range of rates utilized within the calculation of our asset retirement obligations at December 31, 2019 is between 4.2% and 7.7%.
We record the estimated fair value of the final capping, closure and post-closure liabilities for our landfills based on the capacity consumed in the current period. The fair value of the final capping obligations is developed based on our estimates of the airspace consumed to date for each final capping event and the expected timing of each final capping event. The fair value of closure and post-closure obligations is developed based on our estimates of the airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure and post-closure activities could result in a material change in these liabilities, related assets and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more often if significant facts change.
Changes in inflation rates or the estimated costs, timing or extent of future final capping, closure and post-closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset; and (ii) a change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the related discrete final capping event or the remaining permitted and expansion airspace (as defined below) of the landfill. Any changes related to the capitalized and future cost of the landfill assets are then recognized in accordance with our amortization policy, which would generally result in amortization expense being recognized prospectively over the remaining capacity of the final capping event or the remaining permitted and expansion airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully utilized result in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace amortization expense.
Interest accretion on final capping, closure and post-closure liabilities is recorded using the effective interest method and is recorded in operating expenses in the consolidated statements of operations.
Amortization of Landfill Assets
The amortizable basis of a landfill includes (i) amounts previously expended and capitalized; (ii) capitalized and projected landfill final capping, closure and post-closure costs; (iii) projections of future acquisition and development costs required to develop the landfill site to its remaining permitted and expansion capacity; and (iv) land underlying both the footprint of the landfill and the surrounding required setbacks and buffer land.
Amortization is recorded on a units-of-consumption basis, applying expense at a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset’s airspace. For landfills that we do not own, but operate through a management operating agreement, the rate per ton is calculated based on expected capacity to be utilized over the lesser of the contractual term of the underlying agreement or the life of the landfill.
Landfill site costs are depleted to zero upon final closure of a landfill. We develop our estimates of the obligations using input from our operations personnel, engineers and accountants and the obligations are based upon interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. The estimate of fair value is based
upon present value techniques using historical experience and, where available, quoted or actual market prices paid for similar work.
The determination of airspace usage and remaining airspace is an essential component in the calculation of landfill asset depletion. This estimation is performed by conducting periodic topographic surveys, using aerial survey techniques, of our landfill facilities to determine remaining airspace in each landfill. The surveys are reviewed by our external consulting engineers, internal operating staff, management, and financial and accounting staff.
Remaining airspace includes additional “deemed permitted” or unpermitted expansion airspace if the following criteria are met:
|
|
(1)
|
The company must either own the property for the expansion or have a legal right to use or obtain property to be included in the expansion plan;
|
|
|
(2)
|
Conceptual design of the expansion must have been completed;
|
|
|
(3)
|
Personnel are actively working to obtain land use and local and state approvals for an expansion of an existing landfill and the application for expansion must reasonably be expected to be received within the normal application and processing time periods for approvals in the jurisdiction in which the landfill is located;
|
|
|
(4)
|
There are no known significant technical, community, business, or political restrictions or similar issues that would likely impair the success of the expansion; and
|
|
|
(5)
|
Financial analysis has been completed and the results demonstrate that the expansion has a positive financial and operational impact.
|
Senior management must have reviewed and approved all of the above. Of our 41 active landfills, 16 included deemed permitted airspace at December 31, 2019.
Upon successfully meeting the preceding criteria, the costs associated with developing, constructing, closing and monitoring the total additional future capacity are considered in the calculation of the amortization and closure and post-closure rates.
Once expansion airspace meets these criteria for inclusion in our calculation of total available disposal capacity, management continuously monitors each site’s progress in obtaining the expansion permit. If at any point it is determined that an expansion area no longer meets the required criteria, the probable expansion airspace is removed from the landfill’s total available capacity, and the rates used at the landfill to amortize costs to acquire, construct, close and monitor the site during the post-closure period are adjusted prospectively. In addition, any amounts related to the probable expansion are charged to expense in the period in which it is determined that the criteria are no longer met.
Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor (“AUF”) is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement that is forecasted will take into account several site-specific factors including: current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate and operating practices. In addition, the initial selection of the AUF is subject to a subsequent multi-level review by our engineering group, and the AUF used is reviewed on a periodic basis and revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.
After determining the costs and remaining permitted and expansion capacity at each of our landfills, we determine the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons. We calculate per ton amortization rates for each landfill for assets associated with each final capping event, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change.
It is possible that our estimates or assumptions could ultimately be significantly different from actual results. In some cases we may be unsuccessful in obtaining an expansion permit or we may determine that an expansion permit that we previously thought was probable has become unlikely. To the extent that such estimates, or the assumptions used to make those estimates, prove to be significantly different than actual results, or the belief that we will receive an expansion permit changes adversely in a significant manner, the costs of the landfill, including the costs incurred in the pursuit of the expansion, may be subject to impairment testing and lower profitability may be experienced due to higher amortization rates, higher capping, closure and post-closure rates, and higher expenses or asset impairments related to the removal of previously included expansion airspace.
The assessment of impairment indicators and the recoverability of our capitalized costs associated with landfills and related expansion projects require significant judgment due to the unique nature of the waste industry, the highly regulated permitting process and the estimates involved. During the review of a landfill expansion application, a regulator may initially deny the expansion application although the permit is ultimately granted. In addition, management may periodically divert waste from one landfill to another to conserve remaining permitted landfill airspace, or a landfill may be required to cease accepting waste, prior to receipt of the expansion permit. However, such events occur in the ordinary course of business in the waste industry and do not necessarily result in an impairment of our landfill assets because, after consideration of all facts, such events may not affect our belief that we will ultimately obtain the expansion permit. As a result, our tests of recoverability, which generally make use of a cash flow estimation approach, may indicate that no impairment loss should be recorded. No landfill impairments were recorded for fiscal 2019, 2018 and 2017.
Landfill Remediation Liabilities
We are subject to various laws and regulations relating to our landfill operations. Our landfill remediation liabilities primarily include costs associated with remediating surface anomalies, groundwater, surface water and soil contamination, as well as controlling and containing methane gas migration. To estimate our ultimate liability at these sites, we evaluate several factors, including the required remediation efforts and related costs, required remediation methods and timing of expenditures. We accrue for costs associated with landfill remediation obligations when such costs are probable and reasonably estimable in accordance with accounting for loss contingencies. We periodically review the status of all environmental matters and update our estimates of the likelihood of and future expenditures for remediation as necessary. Changes in the liabilities resulting from these reviews are recognized currently in earnings in the period in which the adjustment is known.
Self-Insurance Reserves and Related Costs
Our insurance programs for workers’ compensation, general liability, vehicle liability and employee-related health care benefits are effectively self-insured. Accruals for self-insurance reserves are based on claims filed and estimates of claims incurred but not reported. We maintain self-insured retentions and/or high deductibles for commercial general liability, vehicle liability and workers’ compensation coverage at $0.5, $1.0 and $0.8, respectively as of December 31, 2019.
Accruals for self-insurance reserves are based on claims filed and estimate of claims incurred but not reported and are recorded gross of expected recoveries. The accruals for these liabilities could be revised if future occurrences of loss development differ significantly from our assumptions.
Loss Contingencies
We are subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty. We determine whether to disclose or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable, and whether it can be reasonably estimated. We analyze our litigation and regulatory matters based on available information to assess the potential liabilities. Management’s assessment is developed based on an analysis of possible outcomes under various strategies. We record and disclose loss contingencies pursuant to the applicable accounting guidance for such matters.
We record losses related to contingencies in cost of operations or selling, general and administrative expenses, depending on the nature of the underlying transaction leading to the loss contingency.
Asset Impairment
We monitor the carrying value of our long-lived assets for potential impairment and test the recoverability of such assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. Typical indicators that an asset may be impaired include (i) a significant adverse change in legal factors in the business climate, (ii) an adverse action or assessment by a regulator, and (iii) a significant adverse change in the extent or manner in which a long-lived asset is being utilized or in its physical condition. If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the asset group for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value. Fair value is generally determined by considering: (i) an internally developed discounted projected cash flow
analysis of the asset or asset group; (ii) third-party valuations; and/or (iii) information available regarding the current market for similar assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value exceeds the fair value of the asset.
Goodwill
Goodwill is the excess of the purchase price over the fair value of the net identifiable assets of acquired businesses. We do not amortize goodwill. We assess whether a goodwill impairment exists using both qualitative and quantitative assessments. Our reporting units are equivalent to our operating segments and when an individual business within an integrated operating segment is divested, goodwill is allocated to that business based on its fair value relative to the fair value of its operating segment. During fiscal 2017, $0.9 of goodwill was disposed of related to the divestiture of our Charlotte, North Carolina operations in the East segment.
Our qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we will not perform a quantitative assessment. Regardless of the results of our qualitative assessments, we perform a quantitative assessment at least every three years. Our last quantitative assessment was completed as of October 1, 2018.
When we perform a quantitative assessment, we determine whether goodwill is impaired at the reporting unit level. We compare the fair value with its carrying amount to determine if there is an impairment of goodwill. Fair value is estimated using the combination of a market approach and an income approach based on forecasted cash flows. Fair value computed via these methods are arrived at using a number of factors, including projected future operating results, economic projections, anticipated future cash flows and comparable marketplace data. There are inherent uncertainties related to these factors and to our judgment in applying them to this analysis. However, we believe that this method provides a reasonable approach to estimating the fair value of its reporting units.
During the fourth quarter of 2018, we voluntarily changed the date of our annual goodwill impairment testing from December 31, the last day of the fiscal year, to October 1, the first day of the fourth quarter. This change provides us with additional time to complete our annual goodwill impairment testing in advance of our year-end reporting and results in better alignment with our strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date did not delay, accelerate or cause an impairment charge. This change was applied retrospectively, as it would have required application of significant estimates and assumptions with the use of hindsight. Accordingly, the change was applied prospectively.
The Company performed a qualitative assessment in fiscal 2019. The impairment test as of October 1, 2019 determined that no events or circumstances existed that indicated it was more likely than not that the fair value of any reporting unit was less than its carrying amount. If we do not achieve our anticipated disposal volumes in future periods, our collection or disposal rates decline, our costs or capital expenditures exceed our forecasts, costs of capital increase, or we do not receive landfill expansions, the estimated fair value could decrease and potentially result in an impairment charge. We recorded no goodwill impairment charges for fiscal 2019, 2018 and 2017 in connection with our assessments.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets (other than non-deductible goodwill) and liabilities. Deferred tax assets and liabilities are measured using the income tax rate in effect during the year in which the differences are expected to reverse.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we will make an adjustment to the valuation allowance which would reduce our provision for income taxes.
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to U.S. federal income taxes and numerous state jurisdictions. Significant judgments and estimates are required in determining the combined income tax expense.
Regarding the accounting for uncertainty in income taxes recognized in the financial statements, we record a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We recognize interest and penalties related to uncertain tax positions within the provision for income taxes in our consolidated statements of operations. Accrued interest and penalties are included within other accrued liabilities and deferred income taxes and other long-term tax liabilities in our consolidated balance sheets. Refer to Note 18, Income Taxes, for details regarding adjustments to our valuation allowance.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provision of the Tax Cuts and Jobs Act. The GILTI provision imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicated that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs were both acceptable methods subject to an accounting policy election. Effective the first quarter of 2018, we elected to treat any potential GILTI inclusions as a period cost as we are not projecting any material impact from GILTI inclusions and any deferred taxes related to any inclusion are expected to be immaterial.
Recently Issued and Proposed Accounting Standards
For a description of new accounting standards that may affect us, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in Item 8 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Advanced Disposal Services, Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited Advanced Disposal Services, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Advanced Disposal Services, Inc. and Subsidiaries (the Company) has not maintained effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in the design and operating effectiveness of controls involving the initiation and recording of revenue and related accounts receivable, net of allowance for doubtful accounts and deferred revenue.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Advanced Disposal Services, Inc. and Subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income, stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report dated February 24, 2020, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Jacksonville, Florida
February 24, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Advanced Disposal Services, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Advanced Disposal Services, Inc. and Subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income, stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2020 expressed an adverse opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 3 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of the Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
|
|
Valuation of Accrued Landfill Retirement Obligations
|
Description of the Matter
|
At December 31, 2019, the carrying value of the Company’s accrued landfill retirement obligations totaled $264.2 million. As discussed in Note 2 of the consolidated financial statements, the Company assesses the appropriateness of the estimates used to develop its recorded balances annually, or more often if significant facts change.
Auditing accrued landfill asset retirement obligations is complex due to the highly judgmental nature of the assumptions used in the valuation process. These assumptions included the timing or extent and estimate of future costs associated with the capping, closure and post-closure activities at each landfill, airspace consumed to date in relation to total estimated airspace, which determines estimated remaining capacity.
|
How We Addressed the Matter in Our Audit
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the valuation of the Company’s accrued landfill retirement obligations. For example, we tested controls over management’s review of the timing or extent and estimate of the future costs and remaining capacity.
To test the accrued landfill retirement obligations, we performed audit procedures that included, among others, assessing the methodology used by the Company, testing the completeness of activities included in the estimate, and testing the significant assumptions discussed above, inclusive of the underlying data used by the Company in its development of these assumptions. We evaluated the competency of management’s external consulting engineers charged with developing the cost estimates, remaining capacity, and underlying assumptions. We involved EY engineering specialists to assist us with these procedures. Specifically, we utilized the EY engineering specialists to evaluate the projection of costs for future capping, closure and post-closure activities and the estimation of remaining capacity. We also performed a hindsight analysis by comparing prior year projections to current year actual costs.
|
|
Amortization of Landfill Assets
|
Description of the Matter
|
At December 31, 2019, the net book value of the Company’s landfill assets totaled $796.0 million, and the associated amortization expense for 2019 was $105.9 million. As discussed in Note 2 of the consolidated financial statements, the Company updates the assumptions used to calculate individual landfill amortization expense annually, or more often if significant facts change. Amortization expense is recorded on a units-of-consumption basis, applying expense as a rate per ton.
Auditing the landfill asset amortization expense is complex due to the highly judgmental nature of determining the assumptions used in the calculation of the expense. Significant assumptions included estimated remaining permitted and deemed permitted expansion airspace and the amount of expected future settlement (density), which determines estimated remaining capacity.
|
How We Addressed the Matter in Our Audit
|
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement of the Company’s landfill asset amortization expense. For example, we tested controls over management’s review and recalculation of the current period amortization rates, amortization expense, accumulated amortization, and the significant assumptions including permitted and deemed permitted expansion airspace and density.
To test the landfill asset amortization expense, we performed audit procedures that included, among others, assessing the methodology used by the Company and testing the significant assumptions discussed above inclusive of the underlying data used by the Company in its development of these assumptions. We evaluated the competency of management’s external consulting engineers charged with developing these assumptions. We involved EY engineering specialists to assist us with procedures to test the methodology and certain assumptions determined by management’s external consulting engineers regarding the estimate of remaining permitted capacity. We also evaluated that the Company’s determination of deemed permitted airspace met the criteria for inclusion in remaining airspace in accordance with the Company’s policy.
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Jacksonville, Florida
February 24, 2020
Consolidated Financial Statements
Advanced Disposal Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions of dollars, except shares and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
12.5
|
|
|
$
|
6.8
|
|
Accounts receivable, net of allowance for doubtful accounts of $4.5 and $4.6, respectively
|
208.3
|
|
|
211.4
|
|
Prepaid expenses and other current assets
|
44.0
|
|
|
44.8
|
|
Total current assets
|
264.8
|
|
|
263.0
|
|
Other assets
|
53.3
|
|
|
31.7
|
|
Property and equipment, net of accumulated depreciation of $1,720.7 and $1,540.7, respectively
|
1,767.6
|
|
|
1,761.4
|
|
Goodwill
|
1,224.8
|
|
|
1,215.1
|
|
Other intangible assets, net of accumulated amortization of $318.1 and $286.9, respectively
|
233.0
|
|
|
257.1
|
|
Total assets
|
$
|
3,543.5
|
|
|
$
|
3,528.3
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
120.7
|
|
|
$
|
107.8
|
|
Accrued expenses
|
124.5
|
|
|
117.7
|
|
Deferred revenue
|
71.3
|
|
|
72.5
|
|
Current maturities of accrued landfill retirement obligations
|
28.0
|
|
|
18.6
|
|
Current maturities of long-term debt
|
76.1
|
|
|
85.9
|
|
Total current liabilities
|
420.6
|
|
|
402.5
|
|
Other long-term liabilities
|
82.7
|
|
|
76.7
|
|
Long-term debt, less current maturities
|
1,792.1
|
|
|
1,817.1
|
|
Accrued landfill retirement obligations, less current maturities
|
236.2
|
|
|
229.4
|
|
Deferred income taxes
|
88.5
|
|
|
91.1
|
|
Total liabilities
|
2,620.1
|
|
|
2,616.8
|
|
Equity
|
|
|
|
Common stock: $.01 par value, 1,000,000,000 shares authorized, 89,836,069 and 88,685,920 issued including shares held in treasury, respectively
|
0.9
|
|
|
0.9
|
|
Additional paid-in capital
|
1,527.7
|
|
|
1,501.7
|
|
Accumulated other comprehensive loss
|
(3.0
|
)
|
|
—
|
|
Accumulated deficit
|
(598.1
|
)
|
|
(591.1
|
)
|
Treasury stock at cost, 132,930 and 2,274 shares, respectively
|
(4.1
|
)
|
|
—
|
|
Total stockholders’ equity
|
923.4
|
|
|
911.5
|
|
Total liabilities and stockholders’ equity
|
$
|
3,543.5
|
|
|
$
|
3,528.3
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(In millions of dollars, except shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Service revenues
|
$
|
1,623.0
|
|
|
$
|
1,558.2
|
|
|
$
|
1,507.6
|
|
Operating costs and expenses
|
|
|
|
|
|
Operating (exclusive of items shown separately below)
|
1,058.6
|
|
|
1,006.1
|
|
|
962.1
|
|
Selling, general and administrative
|
207.7
|
|
|
181.5
|
|
|
169.5
|
|
Depreciation and amortization
|
278.8
|
|
|
270.5
|
|
|
269.8
|
|
Acquisition and development costs
|
1.1
|
|
|
0.8
|
|
|
1.3
|
|
Loss (gain) on disposal of assets and asset impairments
|
1.7
|
|
|
(2.5
|
)
|
|
11.4
|
|
Restructuring charges
|
0.6
|
|
|
0.1
|
|
|
3.4
|
|
Total operating costs and expenses
|
1,548.5
|
|
|
1,456.5
|
|
|
1,417.5
|
|
Operating income
|
74.5
|
|
|
101.7
|
|
|
90.1
|
|
Other (expense) income
|
|
|
|
|
|
Interest expense
|
(100.9
|
)
|
|
(95.9
|
)
|
|
(93.0
|
)
|
Loss on debt extinguishments and modifications
|
—
|
|
|
(0.9
|
)
|
|
(3.7
|
)
|
Other (expense) income, net
|
(0.6
|
)
|
|
9.1
|
|
|
3.7
|
|
Total other expense
|
(101.5
|
)
|
|
(87.7
|
)
|
|
(93.0
|
)
|
(Loss) income before income taxes
|
(27.0
|
)
|
|
14.0
|
|
|
(2.9
|
)
|
Income tax (benefit) expense
|
(20.4
|
)
|
|
4.6
|
|
|
(41.2
|
)
|
Net (loss) income
|
$
|
(6.6
|
)
|
|
$
|
9.4
|
|
|
$
|
38.3
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders per share
|
|
|
|
|
|
Basic (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
0.11
|
|
|
$
|
0.43
|
|
Diluted (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
0.11
|
|
|
$
|
0.43
|
|
Basic average shares outstanding
|
89,022,531
|
|
|
88,590,491
|
|
|
88,323,213
|
|
Diluted average shares outstanding
|
89,022,531
|
|
|
89,446,917
|
|
|
88,887,812
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(In millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net (loss) income
|
$
|
(6.6
|
)
|
|
$
|
9.4
|
|
|
$
|
38.3
|
|
Change in fair value of interest rate caps, net of tax
|
(3.4
|
)
|
|
0.4
|
|
|
(0.4
|
)
|
Comprehensive (loss) income
|
$
|
(10.0
|
)
|
|
$
|
9.8
|
|
|
$
|
37.9
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In millions of dollars, except shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
Paid-In
|
|
Accumulated
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
Stockholders'
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
(Loss)
|
|
Equity
|
Balance at December 31, 2016
|
88,034,813
|
|
|
$
|
0.8
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
1,470.3
|
|
|
$
|
(641.6
|
)
|
|
$
|
—
|
|
|
$
|
829.5
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38.3
|
|
|
—
|
|
|
38.3
|
|
Stock based compensation expense
|
53,177
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.2
|
|
|
—
|
|
|
—
|
|
|
10.2
|
|
Stock option exercises and other
|
405,478
|
|
|
0.1
|
|
|
2,274
|
|
|
—
|
|
|
6.9
|
|
|
—
|
|
|
—
|
|
|
7.0
|
|
Unrealized loss resulting from change in fair value of derivative instruments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Balance at December 31, 2017
|
88,493,468
|
|
|
$
|
0.9
|
|
|
2,274
|
|
|
$
|
—
|
|
|
$
|
1,487.4
|
|
|
$
|
(603.3
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
884.6
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9.4
|
|
|
—
|
|
|
9.4
|
|
Stock-based compensation
|
22,565
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11.2
|
|
|
—
|
|
|
—
|
|
|
11.2
|
|
Stock option exercises
|
169,887
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.1
|
|
|
—
|
|
|
—
|
|
|
3.1
|
|
Unrealized gain resulting from change in fair value of derivative instruments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
Impact of implementing new revenue recognition standard, net of tax of $1.1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
|
—
|
|
|
2.8
|
|
Balance at December 31, 2018
|
88,685,920
|
|
|
0.9
|
|
|
2,274
|
|
|
—
|
|
|
1,501.7
|
|
|
(591.1
|
)
|
|
—
|
|
|
911.5
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.6
|
)
|
|
—
|
|
|
(6.6
|
)
|
Stock-based compensation
|
18,735
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.0
|
|
|
—
|
|
|
—
|
|
|
10.0
|
|
Stock option exercises, PSU vesting and RSU vesting
|
1,131,414
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16.0
|
|
|
—
|
|
|
—
|
|
|
16.0
|
|
Stock repurchases (a)
|
—
|
|
|
—
|
|
|
130,656
|
|
|
(4.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.1
|
)
|
Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $1.4
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.4
|
)
|
|
(3.4
|
)
|
Impact of implementing new derivative standard, net of tax of ($0.2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
0.4
|
|
|
—
|
|
Balance at December 31, 2019
|
89,836,069
|
|
|
$
|
0.9
|
|
|
132,930
|
|
|
$
|
(4.1
|
)
|
|
$
|
1,527.7
|
|
|
$
|
(598.1
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
923.4
|
|
(a) Stock repurchases represent shares withheld by the Company to pay employee taxes associated with performance stock unit vesting and restricted stock unit vesting.
The accompanying notes are an integral part of these consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(6.6
|
)
|
|
$
|
9.4
|
|
|
$
|
38.3
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities
|
|
|
|
|
|
Depreciation and amortization
|
278.8
|
|
|
270.5
|
|
|
269.8
|
|
Change in fair value of derivative instruments
|
5.8
|
|
|
(2.7
|
)
|
|
(1.5
|
)
|
Amortization of debt issuance costs and original issue discount
|
5.7
|
|
|
6.1
|
|
|
6.3
|
|
Loss on debt extinguishments and modifications
|
—
|
|
|
0.9
|
|
|
3.7
|
|
Accretion on landfill retirement obligations
|
18.0
|
|
|
17.0
|
|
|
15.4
|
|
Other accretion and amortization
|
6.7
|
|
|
4.0
|
|
|
3.5
|
|
Provision for doubtful accounts
|
6.1
|
|
|
5.1
|
|
|
5.4
|
|
Loss (gain) on disposition of property and equipment
|
1.7
|
|
|
(2.5
|
)
|
|
1.6
|
|
Impairment of assets
|
—
|
|
|
—
|
|
|
13.0
|
|
Gain on disposition of business
|
—
|
|
|
—
|
|
|
(2.8
|
)
|
Stock based compensation
|
10.0
|
|
|
11.2
|
|
|
10.2
|
|
Deferred tax (benefit) expense
|
(1.4
|
)
|
|
4.6
|
|
|
(41.3
|
)
|
Earnings in equity investee
|
(2.4
|
)
|
|
(1.2
|
)
|
|
(1.6
|
)
|
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
|
(1.8
|
)
|
|
(15.2
|
)
|
|
(17.7
|
)
|
Increase in prepaid expenses and other current assets
|
(5.2
|
)
|
|
(0.7
|
)
|
|
(5.9
|
)
|
Decrease (increase) in other assets
|
2.4
|
|
|
(6.5
|
)
|
|
2.4
|
|
Increase in accounts payable
|
0.4
|
|
|
19.7
|
|
|
4.1
|
|
Increase (decrease) in accrued expenses
|
3.5
|
|
|
2.7
|
|
|
(2.6
|
)
|
(Decrease) increase in deferred revenue
|
(1.2
|
)
|
|
1.8
|
|
|
2.2
|
|
(Decrease) increase in other long-term liabilities
|
(25.3
|
)
|
|
6.6
|
|
|
(1.7
|
)
|
Capping, closure and post-closure expenditures
|
(18.9
|
)
|
|
(22.5
|
)
|
|
(18.3
|
)
|
Assumption of long-term care and closure reserve
|
—
|
|
|
—
|
|
|
24.0
|
|
Net cash provided by operating activities
|
280.2
|
|
|
308.3
|
|
|
306.5
|
|
Cash flows from investing activities
|
|
|
|
|
|
Purchases of property and equipment and construction and development
|
(203.8
|
)
|
|
(188.6
|
)
|
|
(186.6
|
)
|
Proceeds from sale of property and equipment and insurance recoveries
|
4.8
|
|
|
8.1
|
|
|
4.5
|
|
Acquisition of businesses, net of cash acquired
|
(27.1
|
)
|
|
(26.3
|
)
|
|
(111.9
|
)
|
Proceeds from sale of businesses
|
—
|
|
|
—
|
|
|
8.7
|
|
Net cash used in investing activities
|
(226.1
|
)
|
|
(206.8
|
)
|
|
(285.3
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Proceeds from borrowings on debt instruments
|
201.0
|
|
|
136.0
|
|
|
326.2
|
|
Repayments on debt instruments including finance/capital leases
|
(261.3
|
)
|
|
(240.6
|
)
|
|
(347.0
|
)
|
Costs associated with debt extinguishments and modifications
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
Proceeds from stock option exercises net of stock repurchases
|
11.9
|
|
|
3.1
|
|
|
7.0
|
|
Net cash used in financing activities
|
(48.4
|
)
|
|
(101.5
|
)
|
|
(15.6
|
)
|
Net increase in cash and cash equivalents
|
5.7
|
|
|
—
|
|
|
5.6
|
|
Cash and cash equivalents, beginning of year
|
6.8
|
|
|
6.8
|
|
|
1.2
|
|
Cash and cash equivalents, end of year
|
$
|
12.5
|
|
|
$
|
6.8
|
|
|
$
|
6.8
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
1. Business Operations
Advanced Disposal Services, Inc. together with its consolidated subsidiaries, as a consolidated entity, is a regional environmental services company providing nonhazardous solid waste collection, transfer, recycling and disposal services to customers in the Southeast, Midwest and Eastern regions of the United States, as well as in the Commonwealth of the Bahamas.
The Company currently 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 which provide collection, transfer, disposal (in both solid waste and non-hazardous waste landfills), recycling services and billing services. Additional information related to the Company's segments can be found in Note 22, Segments and Related Information.
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.
In fiscal 2019, the Company completed the acquisitions of two businesses. Consideration paid amounted to $24.9 for these acquisitions. Additionally, the Company made a $2.2 deferred purchase price payment during fiscal 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. In fiscal 2018, the Company completed the acquisitions of twelve businesses. Consideration paid amounted to $30.1 for these acquisitions. In fiscal 2017, the Company completed the acquisitions of fourteen businesses. Consideration paid, net of cash acquired, amounted to approximately $115.9 for these acquisitions. The results of operations of each acquisition are included in the Company's consolidated statements of operations subsequent to the closing date of each acquisition.
During fiscal 2017, the Company divested of its non-integrated collection services operation in Charlotte, North Carolina for consideration received of $8.7. A $1.4 gain on the sale of that business is included in the Company's consolidated statements of operations for fiscal 2017. Goodwill of $0.9 was disposed of related to this divestiture.
The Company also has non-integrated collection operations in South Carolina, included in the East segment, which operate in a competitor-owned disposal market that does not align with the Company's long-term market strategy of vertically integrated operations with Company owned disposal sites or marketplace neutral disposal sites. During April of fiscal 2017, changes in facts and circumstances led the Company to evaluate the long-term market for the South Carolina collection operations and re-evaluate the expected cash flows provided by this market. The Company compared the carrying value of the South Carolina assets to their fair value and determined it appropriate to impair certain intangible assets that were recorded as part of the purchase accounting when these entities were acquired. Based on the Company's evaluation, an intangible asset impairment of $13.0 was recorded during fiscal 2017.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements include its wholly-owned subsidiaries and their respective subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
In preparing its financial statements that conform with accounting principles generally accepted in the United States of America, the Company uses estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The Company must make these estimates and assumptions because certain information 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 its financial statements, the more subjective areas that deal with the greatest amount of uncertainty relate to accounting for the following: 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; goodwill and intangible asset impairments; deferred taxes; uncertain tax positions; self-insurance reserves; and estimates of the fair values of assets acquired and liabilities assumed in acquisitions. Each of these items is discussed in more detail elsewhere
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
in these Notes to the consolidated financial statements. The Company's actual results may differ significantly from our estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, bank demand deposit accounts, and overnight sweep accounts. Cash equivalents include highly liquid investments with original maturities of three months or less when purchased.
Revenue Recognition
The Company recognizes revenues as the services are provided. Revenue is recognized as waste is collected, as tons are received at the landfill or transfer stations, as recycled commodities are delivered to a customer, or as services are rendered to customers. Certain customers payments are due or paid in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. See Note 3, Revenue Recognition, for further details.
Trade Receivables
The Company records trade receivables when billed or when services are performed, as they represent claims against third parties that will be settled in cash. The carrying value of receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. The Company estimates losses for uncollectible accounts based on an evaluation of the aged accounts receivable and the likelihood of collection of the receivable based on historical collection data and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances.
Insurance Reserves
The Company uses a combination of insurance with high deductibles and self-insurance for various risks including workers' compensation, vehicle liability, general liability and employee group health claims. The exposure for unpaid claims and associated expenses, including incurred but not reported losses, is estimated by factoring in pending claims and historical trends data and other actuarial assumptions. In estimating its claims liability, the Company analyzes its historical trends, including loss development and applies appropriate loss development factors to the incurred costs associated with the claims. The discounted estimated liability associated with settling unpaid claims is included in accrued expenses and other long-term liabilities in the consolidated balance sheets.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, accounts receivable and derivative instruments. The Company maintains cash and cash equivalents with banks that at times exceed applicable insurance limits. The Company reduces its exposure to credit risk by maintaining such deposits with high quality financial institutions. The Company has not experienced any losses in such accounts. The maximum loss the Company would incur related to credit risk is the asset balances recorded in the balance sheets.
The Company generally does not require collateral on its trade receivables. Credit risk on accounts receivable is minimized as a result of the large customer base of the Company and its ability to discontinue service, to the extent allowable, to non-paying customers.
Asset Impairments
The Company monitors the carrying value of its long-lived assets for potential impairment and test the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. Typical indicators that an asset may be impaired include (i) a significant adverse change in legal factors in the business climate, (ii) an adverse action or assessment by a regulator, and (iii) a significant adverse change in the extent or manner in which a long-lived asset is being utilized or in its physical condition. If an impairment indicator occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether an impairment has occurred for the asset group for which it can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
projected cash flow analysis of the asset or asset group; (ii) third-party valuations; and/or (iii) information available regarding the current market for similar assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value exceeds the fair value of the asset.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation. Expenditures for major additions and improvements are capitalized and maintenance activities are expensed as incurred. When property and equipment are retired, sold, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the results of operations. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Depreciation expense is calculated using the straight-line method over the estimated useful lives or the expected lease term, whichever is shorter. Estimated useful lives are as follows:
|
|
|
|
Years
|
Vehicles
|
5–10
|
Machinery and equipment
|
3–10
|
Containers
|
5–15
|
Furniture and fixtures
|
5–7
|
Building and improvements
|
5–39
|
Leases
The Company leases property and equipment in the ordinary course of its business. The most significant lease obligations are for property and equipment specific to the waste industry, including real property operated as landfills and transfer stations. The Company's leases have varying terms. Some may include renewal or purchase options, escalation clauses, restrictions, penalties or other obligations that are considered in determining minimum lease payments. The leases are classified as either operating leases or finance leases, as appropriate.
The classification of the Company's operating leases can be attributed to either (i) relatively low fixed minimum lease payments as a result of real property lease obligations that vary based on the volume of waste we receive or process or (ii) minimum lease terms that are much shorter than the assets’ economic useful lives. The Company expects that in the normal course of business, its operating leases will be renewed, replaced by other leases, or replaced with fixed asset expenditures. For operating leases, the Company recognizes 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. The Company capitalizes assets acquired under finance leases at lease commencement and amortizes them to depreciation expense over the lesser of the useful life of the asset or the lease term on a straight-line basis. The Company records the present value of the related lease payments as a debt obligation.
See Note 14, Leases, for further details.
Landfill Accounting
Costs Basis of Landfill Assets
Landfills are typically developed in a series of cells, each of which is constructed, filled and capped in sequence over the operating life of the landfill. When the final cell is filled and the operating life of the landfill is completed, the cell must be capped and then closed and post-closure care and monitoring activities begin. Capitalized landfill costs include expenditures for land (which includes the land of the landfill footprint and landfill buffer property and setbacks) and related airspace associated with the permitting, development and construction of new landfills, expansions at existing landfills, landfill gas systems and landfill cell development. Landfill permitting, development and construction costs represent direct costs related to these activities, including land acquisition, engineering, legal and construction. These costs are deferred until all permits are obtained and operations have commenced at which point they are capitalized and amortized. If necessary permits are not obtained, costs are charged to operations. The cost basis of our landfill assets also includes asset retirement costs, which represent estimates of future costs associated with landfill final capping, closure and post-closure activities.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
Final Capping, Closure and Post-Closure Costs
The following is a description of the Company's asset retirement activities and related accounting:
Final Capping
Includes installing flexible membrane and geosynthetic clay liners, drainage and compact soil layers, and topsoil, and is constructed over an area of the landfill where total airspace capacity has been consumed and waste disposal operations have ceased. These final capping activities occur in phases as needed throughout the operating life of a landfill as specific areas are filled to capacity and the final elevation for that specific area is reached in accordance with the provisions of the operating permit. Final capping asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed related to the specific final capping event with a corresponding increase in the landfill asset. Each final capping event is accounted for as a discrete obligation and recorded as an asset and a liability based on estimates of the discounted cash flows and capacity associated with each final capping event.
Closure and post-closure
These activities involve methane gas control, leachate management and groundwater monitoring, surface water monitoring and control, and other operational and maintenance activities that occur after the site ceases to accept waste. The post-closure period generally runs for 30 years or longer after final site closure for landfills. Landfill costs related to closure and post-closure are recorded as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Obligations are recorded over the life of the landfill based on estimates of the discounted cash flows associated with performing the closure and post-closure activities.
The Company annually updates its estimates for these obligations considering the respective state regulatory requirements, input from its internal engineers, operations, accounting personnel and external consulting engineers. The closure and post-closure requirements are established under the standards of the U.S. Environmental Protection Agency’s Subtitle D regulations as implemented and applied on a state-by-state basis. These estimates involve projections of costs that will be incurred as portions of the landfill are closed and during the post-closure monitoring period.
Capping, closure and post-closure costs are estimated assuming such costs would be incurred by a third party contractor in present day dollars and are inflated by 2.5% (an estimate based on the 25-year average change in the historical Consumer Price Index from 1994 to 2019) to the time periods within which it is estimated the capping, closure and post-closure costs will be expended. The Company discounts these costs to present value using the credit-adjusted, risk-free rate effective at the time an obligation is incurred, consistent with the expected cash flow approach. Any change that results in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate while downward revisions are discounted at the historical weighted-average rate of the recorded obligation. As a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each individual asset retirement obligation. The range of rates utilized within the calculation of the asset retirement obligations at December 31, 2019 is between 4.2% and 7.7%.
The Company records the estimated fair value of the final capping, closure and post-closure liabilities for its landfills based on the capacity consumed in the current period. The fair value of the final capping obligations is developed based on the Company’s estimates of the airspace consumed to date for each final capping event and the expected timing of each final capping event. The fair value of closure and post-closure obligations is developed based on the Company’s estimates of the airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure and post-closure activities could result in a material change in these liabilities, related assets and results of operations. The Company assesses the appropriateness of the estimates used to develop its recorded balances annually, or more often if significant facts change.
Changes in inflation rates or the estimated costs, timing or extent of future final capping, closure and post-closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset; and (ii) a change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the related discrete final capping event or the remaining permitted and expansion airspace (as defined below) of the landfill. Any changes related to the capitalized and future cost of the landfill assets are then recognized in accordance with the Company's amortization policy, which would generally result in amortization expense being recognized prospectively over the remaining capacity of the final capping event or the
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
remaining permitted and expansion airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully utilized result in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace amortization expense.
Interest accretion on final capping, closure and post-closure liabilities is recorded using the effective interest method and is recorded in operating expenses in the consolidated statements of operations.
Amortization of Landfill Assets
The amortizable basis of a landfill includes (i) amounts previously expended and capitalized; (ii) capitalized and projected landfill final capping, closure and post-closure costs; (iii) projections of future acquisition and development costs required to develop the landfill site to its remaining permitted and expansion capacity; and (iv) land underlying both the footprint of the landfill and the surrounding required setbacks and buffer land.
Amortization is recorded on a units-of-consumption basis, applying expense as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset’s airspace. For landfills that the Company does not own, but operates through a management operating agreement, the rate per ton is calculated based on expected capacity to be utilized over the lesser of the contractual term of the underlying agreement or the life of the landfill.
Landfill site costs are depleted to zero upon final closure of a landfill. The Company develops its estimates of the obligations using input from its operations personnel, engineers and accountants. The obligations are based upon interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. The estimate of fair value is based upon present value techniques using historical experience and, where available, quoted or actual market prices paid for similar work.
The determination of airspace usage and remaining airspace is an essential component in the calculation of landfill asset depletion. This estimation is performed by conducting periodic topographic surveys, using aerial survey techniques, of the Company’s landfill facilities to determine remaining airspace in each landfill. The surveys are reviewed by the Company’s external consulting engineers, internal operating staff, and its management, financial and accounting staff.
Remaining airspace will include additional “deemed permitted” or unpermitted expansion airspace if the following criteria are met:
|
|
(1)
|
The Company must either own the property for the expansion or have a legal right to use or obtain property to be included in the expansion plan;
|
|
|
(2)
|
Conceptual design of the expansion must have been completed;
|
|
|
(3)
|
Personnel are actively working to obtain land use and local and state approvals for an expansion of an existing landfill and the application for expansion must reasonably be expected to be received within the normal application and processing time periods for approvals in the jurisdiction in which the landfill is located;
|
|
|
(4)
|
There are no known significant technical, community, business, or political restrictions or similar issues that would likely impair the success of the expansion; and
|
|
|
(5)
|
Financial analysis has been completed and the results demonstrate that the expansion has a positive financial and operational impact.
|
Senior management must have reviewed and approved all of the above. Of the Company's 41 active landfills, 16 include deemed permitted airspace at December 31, 2019.
Upon successful meeting of the preceding criteria, the costs associated with developing, constructing, closing and monitoring the total additional future capacity are considered in the calculation of the amortization and closure and post-closure rates.
Once expansion airspace meets these criteria for inclusion in the Company’s calculation of total available disposal capacity, management continuously monitors each site’s progress in obtaining the expansion permit. If at any point it is determined that
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
an expansion area no longer meets the required criteria, the deemed expansion airspace is removed from the landfill’s total available capacity, and the rates used at the landfill to amortize costs to acquire, construct, close and monitor the site during the post-closure period are adjusted prospectively. In addition, any amounts related to the probable expansion are charged to expense in the period in which it is determined that the criteria are no longer met.
Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor (“AUF”) is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement that is forecasted will take into account several site-specific factors including: current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate and operating practices. In addition, the initial selection of the AUF is subject to a subsequent multi-level review by the Company's engineering group, and the AUF used is reviewed on a periodic basis and revised as necessary. The Company's historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.
After determining the costs and remaining permitted and expansion capacity at each of its landfills, the Company determines the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons. The Company calculates per ton amortization rates for each landfill for assets associated with each final capping event, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change.
It is possible that the Company’s estimates or assumptions could ultimately be significantly different from actual results. In some cases the Company may be unsuccessful in obtaining an expansion permit or the Company may determine that an expansion permit that it previously thought was probable has become unlikely. To the extent that such estimates, or the assumptions used to make those estimates, prove to be significantly different than actual results, or the belief that the Company will receive an expansion permit changes adversely in a significant manner, the costs of the landfill, including the costs incurred in the pursuit of the expansion, may be subject to impairment testing and lower profitability may be experienced due to higher amortization rates, higher capping, closure and post-closure rates, and higher expenses or asset impairments related to the removal of previously included expansion airspace.
The assessment of impairment indicators and the recoverability of the Company's capitalized costs associated with landfills and related expansion projects require significant judgment due to the unique nature of the waste industry, the highly regulated permitting process and the estimates involved. During the review of a landfill expansion application, a regulator may initially deny the expansion application although the permit is ultimately granted. In addition, the Company may periodically divert waste from one landfill to another to conserve remaining permitted landfill airspace, or a landfill may be required to cease accepting waste, prior to receipt of the expansion permit. However, such events occur in the ordinary course of business in the waste industry and do not necessarily result in an impairment of the landfill assets because, after consideration of all facts, such events may not affect the belief that the Company will ultimately obtain the expansion permit. As a result, the Company's tests of recoverability, which generally make use of a cash flow estimation approach, may indicate that no impairment loss should be recorded. No landfill impairments were recorded for the years ended December 31, 2019, 2018 and 2017.
Landfill Remediation Liabilities
The Company is subject to various laws and regulations relating to its landfill operations. The Company's landfill remediation liabilities primarily include costs associated with remediating surface anomalies, groundwater, surface water and soil contamination, as well as controlling and containing methane gas migration. To estimate its ultimate liability at these sites, the Company evaluates several factors, including the required remediation efforts and related costs, required remediation methods and timing of expenditures. The Company accrues for costs associated with landfill remediation obligations when such costs are probable and reasonably estimable in accordance with accounting for loss contingencies. The Company periodically reviews the status of all environmental matters and updates its estimates of the likelihood of and future expenditures for remediation as necessary. Changes in the liabilities resulting from these reviews are recognized currently in earnings in the period in which the adjustment is known.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
Derivative Financial Instruments
The Company uses interest rate caps to manage interest rate risk on its variable rate debt. The Company may use commodity futures contracts as an economic hedge to reduce the exposure of changes in diesel fuel and natural gas prices. The 2017 interest rate caps qualify for hedge accounting treatment and have been designated as cash flow hedges for accounting purposes with changes in fair value recognized in accumulated other comprehensive (loss) income within the equity section of the consolidated balance sheets. Amounts are reclassified into earnings when the forecasted transaction affects earnings. The 2016 interest rate caps do not qualify for hedge accounting and as such changes in fair value are recognized in other (expense) income, net in the consolidated statements of operations. The fair values of the derivatives are included in other current or long-term assets or other current or long term liabilities as appropriate. The Company obtains current valuations of its interest rate caps based on a current forward fixed price swap curve.
Original Issue Discount and Debt Issuance Costs
Original issue discount and debt issuance costs related to the issuance of debt are deferred and recorded as a reduction to the carrying value of debt and amortized to interest expense using the effective interest method. Previously recorded original issue discount and debt issuance costs are expensed when debt is extinguished prior to maturity.
Third party costs incurred in relation to a modification of term loans or senior notes are expensed as incurred. For modifications of debt, previously recorded original issue discount and debt issuance costs are amortized over the life of the modified debt instrument using the effective interest method.
Acquisitions
The Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair values as of the date of acquisition. Any excess of purchase price over the fair value of the net assets acquired is recorded as goodwill.
In certain acquisitions, the Company agrees to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain negotiated goals, such as targeted revenue levels, targeted disposal volumes or the issuance of permits for expanded landfill airspace. The Company has recognized liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized as an adjustment to income from operations.
Assets and liabilities arising from contingencies such as pre-acquisition environmental matters and litigation are recognized at their acquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies cannot be determined, the Company reports provisional amounts for which the accounting is incomplete.
Acquisition date fair value estimates are revised as necessary and accounted for as an adjustment to the purchase accounting balances prior to the close of the purchase accounting window. If the purchase accounting window has closed, these estimates are accounted for as adjustments to income from operations if, and when, additional information becomes available to further define and quantify assets acquired and liabilities assumed. All acquisition-related transaction costs have been expensed as incurred.
Goodwill
Goodwill is the excess of the purchase price over the fair value of the net identifiable assets of acquired businesses. The Company does not amortize goodwill. The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The Company's reporting units are equivalent to its operating segments and when an individual business within an integrated operating segment is divested, goodwill is allocated to that business based on its fair value relative to the fair value of its operating segment. The Company's qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will not perform a quantitative assessment. Regardless of the results of its qualitative assessments, the Company performs a quantitative assessment at least every three years. The Company performed it last quantitative assessment on October 1, 2018.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
When the Company performs a quantitative assessment, the Company determines whether goodwill is impaired at the reporting unit level. The Company compares the fair value with its carrying amount to determine if there is an impairment of goodwill. Fair value is estimated using the combination of a market approach and income approach based on forecasted cash flows. Fair value computed via these methods are arrived at using a number of factors, including projected future operating results, economic projections, anticipated future cash flows and comparable marketplace data. There are inherent uncertainties related to these factors and to the Company's judgment in applying them to this analysis. However, the Company believes that this method provides a reasonable approach to estimating the fair value of its reporting units.
During the fourth quarter of 2018, the Company voluntarily changed the date of its annual goodwill impairment testing from December 31, the last day of the fiscal year, to October 1, the first day of the fourth quarter. This change provides the Company with additional time to complete its annual goodwill impairment testing in advance of its year-end reporting and results in better alignment with the Company’s strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date did not delay, accelerate or cause an impairment charge. This change was not applied retrospectively, as it would have required application of significant estimates and assumptions with the use of hindsight. Accordingly, the change was applied prospectively.
The Company performed a qualitative assessment in fiscal 2019. The impairment test as of October 1, 2019 determined that no events or circumstances existed that indicated it was more likely than not that the fair value of any reporting unit was less than its carrying amount. If the Company does not achieve its anticipated disposal volumes, its collection or disposal rates decline, costs or capital expenditures exceed forecasts, costs of capital increase, or the Company does not receive landfill expansions, the estimated fair value could decrease and potentially result in an impairment charge in the future. The Company recorded no goodwill impairment charges for fiscal 2019, 2018 and 2017 in connection with the assessments.
Intangible Assets, Net
Definite lived intangible assets are stated at cost less accumulated amortization and consist of noncompete agreements, tradenames, customer contracts and customer lists and are amortized over their estimated useful lives. Definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying value of a definite lived intangible is not recoverable and exceeds its estimated fair value, an impairment charge would be recognized in the amount of the excess. Fair value is typically estimated using an income approach for the respective asset.
Income Taxes
The Company is subject to income tax in the United States. Current tax obligations associated with the provision for income taxes are reflected in the accompanying consolidated balance sheets as a component of accrued expenses and the deferred tax obligations are reflected in deferred income tax asset or liability. Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred income taxes are classified as noncurrent in accordance with current accounting guidance. Significant judgment is required in assessing the timing and amounts of deductible and taxable items. The Company establishes reserves for uncertain tax positions, when despite its belief that its tax return positions are fully supportable, the Company believes that certain positions may be challenged and potentially disallowed. When facts and circumstances change, the Company adjusts these reserves through its provision for income taxes. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and are classified as a component of tax expense in the consolidated statements of operations.
The Company monitors changes in tax legislation and accounting developments which could impact the timing and amounts of deductible or taxable items. In connection with the implementation of the Tax Cuts and Jobs Act, the Company recognized the estimated impact of this legislation as a component of the benefit for income taxes. Refer to Note 18, Income Taxes.
Contingencies
The Company is subject to various legal proceedings, claims and regulatory matters, the outcomes of which are subject to significant uncertainty. In general, the Company determines whether to disclose or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable, and whether it can be reasonably estimated. The Company assesses its potential liability relating to litigation and regulatory matters based on information available. The Company develops its assessment based on an analysis of possible outcomes under various strategies. The Company accrues
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
for loss contingencies when such amounts are probable and reasonably estimable. If a contingent liability is only reasonably possible, the Company discloses the potential range of the loss, if estimable.
Equity Method Investments
The Company’s investments where it can exert significant influence on the investee, but does not have effective control over the investee, are accounted for using the equity method of accounting. The Company’s equity in the net income from equity method investments is recorded as other income with a corresponding increase in other assets. Distributions received from the equity investee reduces other assets. Distributions from equity investees representing the Company's share of the equity investee's earnings are treated as cash proceeds from operations while distributions in excess of the equity investee's earnings are considered a return of capital and treated as cash proceeds from investing activities in the Company's consolidated statement of cash flows.
New Accounting Standards Adopted
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 was effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company's adoption of this guidance during 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 14 for further details.
New Accounting Standards Pending Adoption
In June 2016, the FASB issued ASU 2016-13 associated with the measurement of credit losses on financial instruments. The amended guidance replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. The amended guidance is effective for the Company on January 1, 2020. The Company has assessed the provisions of this amended guidance and determined it will not have a material impact on its consolidated financial statements.
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Further discussion of revenue for each major line of business is provided below.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
Residential Collection Revenue
The Company's residential collection operations consist of curbside collection of residential refuse from small carts or containers into collection vehicles for transport to a disposal/recycling site. These services are typically performed either under long-term contracts with local government entities or on a subscription basis, whereby individual households contract directly with the Company for collection services. The Company's residential collection service fees are typically quoted in its contracts on a weekly or monthly basis and revenue is recognized as the services are provided each month. The Company's residential contracts generally allow for annual rate increases and the number of households serviced under the Company's municipal contracts change throughout the contract period. For these reasons, revenue associated with the Company's residential collection service contracts is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Commercial Collection Revenue
The Company's commercial collection operations consist of collection of commercial refuse from Company supplied waste containers for transport to a disposal/recycling site. Standard service agreements with commercial customers are typically three to five years in length with pricing based on estimated disposal weight and time required to service the account. The Company's commercial collection service fees are typically quoted in its service agreements on a weekly or monthly basis and revenue is recognized as the services are provided each month. The Company's commercial service agreements generally allow for rate increases and it is not uncommon for the collection needs of the customer to change throughout the contract period. For these reasons, revenue associated with the Company's commercial collection service agreements is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Rolloff Collection Revenue
The Company's rolloff collection operations consist of providing construction and demolition sites with rolloff containers and collecting, transporting and disposing of the customers' waste at a disposal site. Rolloff services are typically provided pursuant to arrangements in which the customer provides 24-hour advance notice of its disposal needs and is billed on a "per pull" plus disposal basis. The Company typically has written service agreements with permanent rolloff customers but does not enter into written service agreements with customers that utilize temporary rolloff containers due to the relatively short-term nature of their needs. The Company's permanent rolloff service agreements generally allow for rate increases and number of pulls plus disposal weight vary throughout the contract period. For these reasons, revenue associated with the Company's rolloff collection service agreements is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Disposal Revenue
Transfer stations provide collection operations with a cost-effective means to consolidate waste and reduce transportation costs while providing the Company's landfill sites with an additional “gate” to extend the geographic reach of its landfills. Disposal revenue at transfer stations is primarily generated by charging tipping or disposal fees to third party customers.
Landfill disposal services represent the final stage in the Company's vertically integrated waste collection and disposal services solution. The Company generates disposal revenue at its landfills by charging tipping or disposal fees to third party customers.
The Company's landfill and transfer station tipping fees are quoted to customers on a per ton basis and disposal weight varies each time the customer disposes of waste at a Company facility. For these reasons, revenue associated with the Company's disposal services is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Sale of Recyclables
The Company has a network of 3 MRFs and 19 locations where we receive and bale recyclable material. These facilities generate revenue through the collection, processing and sale of old corrugated cardboard, old newspaper, mixed paper, aluminum, glass and other materials. These recyclable materials are internally collected by the Company's residential, commercial and industrial collection operations as well as third-party haulers. The Company's sale of recyclables are quoted to customers on a per ton basis and recyclable weight varies each time the Company sells recyclables to its customers. For these reasons, revenue associated with the Company's sale of recyclables is accounted for as variable consideration and the amounts recorded represent the value of the performance obligations completed.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
Fuel and Environmental Charges
The amounts charged for collection, disposal and recycling services may include fuel and environmental charges. These charges are not designed to be specific to the direct costs to service an individual customer’s account, but rather are designed to help recover changes in the Company's overall cost structure and to achieve an acceptable operating margin. Fuel and environmental charges vary each month in relation to the variable consideration of collection, disposal and recycling services. For this reason, fuel and environmental charges are accounted for as variable consideration.
Other Revenue
Other revenue is comprised of the following:
|
|
•
|
Landfill management fee revenue;
|
|
|
•
|
Sale of landfill gas revenue;
|
|
|
•
|
Sale of asphalt revenue;
|
|
|
•
|
Service charges, administrative charges and compliance charges.
|
Other revenue typically varies based on volume of the related service therefore the Company accounts for this revenue as variable consideration.
Revenue by Segment
See Note 22, Segment and Related Information, for additional information related to revenue by reportable segment and major line of business.
Variable Consideration
As described above, the Company accounts for revenue for each line of business as variable consideration. The Company believes that there will not be significant changes to its estimates of variable consideration as revenue recognized is recorded in accordance with the terms of the related contracts or verbal agreements.
Capitalized Sales Commissions
Under Topic 606, 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. Capitalized sales commissions as of December 31, 2019 and December 31, 2018 were $4.7 and $4.4, respectively. The Company recorded amortization expense of $1.6 and $1.4 related to capitalized sales commissions for fiscal 2019 and 2018, respectively.
Deferred Revenues
The Company records deferred revenue when cash payments are received or due in advance of the Company's performance. The increase in the deferred revenue balance from December 31, 2018 to December 31, 2019 is primarily driven by cash payments received or due in advance of the Company satisfying its performance obligations, offset by $72.5 of revenues recognized that were included in the deferred revenue balance at December 31, 2018. The increase in the deferred revenue balance from December 31, 2017 to December 31, 2018 is primarily driven by cash payments received or due in advance of the Company satisfying its performance obligations, offset by $69.1 of revenues recognized that were included in the deferred revenue balance at December 31, 2017.
Practical Expedients
As allowed by Topic 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. Acquisitions
In fiscal 2019, the Company completed the acquisitions of two businesses. Consideration paid amounted to $24.9 for these acquisitions. Additionally, the Company made a $2.2 deferred purchase price payment during fiscal 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. The goodwill recognized of $8.7 represents synergies from the combined operations of the acquired entities and the Company. Transaction costs related to these acquisitions were not significant for fiscal 2019.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
In fiscal 2018, the Company completed the acquisitions of twelve businesses. Consideration paid amounted to $30.1 for these acquisitions. The goodwill recognized of $7.0 represents synergies from the combined operations of the acquired entities and the Company. Transaction costs related to these acquisitions were not significant for fiscal 2018.
In fiscal 2017, the Company completed the acquisitions of fourteen businesses. Consideration paid, net of cash acquired, amounted to approximately $115.9 for these acquisitions. The goodwill recognized of $35.2 represents synergies from the combined operations of the acquired entities and the Company. Transaction costs related to these acquisitions were not significant for fiscal 2017.
The results of operations of each acquisition are included in the consolidated statements of operations of the Company subsequent to the closing date of each acquisition.
The following table summarizes the estimated fair values of the assets acquired by year of acquisition:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Current assets
|
$
|
1.2
|
|
|
$
|
2.3
|
|
Property and equipment
|
7.6
|
|
|
24.1
|
|
Goodwill
|
8.7
|
|
|
7.0
|
|
Other intangible assets
|
7.5
|
|
|
7.7
|
|
Total assets acquired
|
25.0
|
|
|
41.1
|
|
Current liabilities
|
0.1
|
|
|
2.0
|
|
Other long-term liabilities
|
—
|
|
|
9.0
|
|
Total liabilities assumed
|
0.1
|
|
|
11.0
|
|
Net assets acquired
|
$
|
24.9
|
|
|
$
|
30.1
|
|
The following table presents the allocation of the purchase price to other intangible assets:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Customer lists and contracts
|
$
|
7.0
|
|
|
$
|
7.2
|
|
Noncompete
|
0.5
|
|
|
0.5
|
|
|
$
|
7.5
|
|
|
$
|
7.7
|
|
The amount of goodwill recorded related to 2019 acquisitions for the South Segment, East Segment, and Midwest Segment was $4.6, $0.0, and $4.1, respectively. The amount of goodwill deductible for tax purposes related to acquisitions in fiscal 2019 and fiscal 2018 was $8.7 and $7.0, respectively. The total amount of consolidated goodwill deductible for tax purposes was $69.4 and $70.0 at December 31, 2019 and 2018, respectively.
The weighted average life of other intangible assets in years is as follows:
|
|
|
Customer lists and contracts
|
22
|
Noncompete
|
5
|
Goodwill increased by $1.0, decreased by $0.1 and did not change for the years ended December 31, 2019, 2018 and 2017, respectively, as a result of purchase accounting adjustments of acquisitions from the previous year. The changes were primarily related to finalizing the purchase accounting for the acquisitions.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
5. (Loss) Income Per Share (In millions of dollars, except shares and per share data)
The following table sets forth the computation of basic (loss) income per share and (loss) income per share, assuming dilution for the following years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Numerator: (Dollars in millions)
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6.6
|
)
|
|
$
|
9.4
|
|
|
$
|
38.3
|
|
Denominator:
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
89,022,531
|
|
|
88,590,491
|
|
|
88,323,213
|
|
|
Other potentially dilutive common shares
|
|
—
|
|
|
856,426
|
|
|
564,599
|
|
|
Average common shares outstanding, assuming dilution
|
|
89,022,531
|
|
|
89,446,917
|
|
|
88,887,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, basic
|
|
$
|
(0.07
|
)
|
|
$
|
0.11
|
|
|
$
|
0.43
|
|
|
Net (loss) income per share, assuming dilution
|
|
$
|
(0.07
|
)
|
|
$
|
0.11
|
|
|
$
|
0.43
|
|
Basic net (loss) income per share is based on the weighted-average number of shares of common stock outstanding for each of the periods presented. Net (loss) income per share, assuming dilution, 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 share units and performance share units. All potentially dilutive common shares were excluded from the diluted loss per share calculation for fiscal 2019, because the Company was in a net loss position and their effect would have been antidilutive
When calculating diluted net income per share, ASC 260 requires the Company to include the potential shares that would be outstanding if all outstanding stock options were exercised. This number would be 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 5.1 million, 1.4 million and 1.7 million of outstanding stock awards for fiscal 2019, 2018 and 2017, respectively, were excluded from the diluted (loss) income per share calculation because their effect was antidilutive.
6. Allowance for Doubtful Accounts
Allowance for doubtful accounts consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
4.6
|
|
|
$
|
5.4
|
|
|
$
|
4.0
|
|
Provision for doubtful accounts
|
6.1
|
|
|
5.1
|
|
|
5.4
|
|
Recovery of bad debts
|
2.4
|
|
|
1.9
|
|
|
—
|
|
Write-offs of bad debt
|
(9.1
|
)
|
|
(8.1
|
)
|
|
(4.6
|
)
|
Other
|
0.5
|
|
|
0.3
|
|
|
0.6
|
|
Balance at December 31,
|
$
|
4.5
|
|
|
$
|
4.6
|
|
|
$
|
5.4
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Prepaid insurance
|
|
$
|
11.0
|
|
|
$
|
7.8
|
|
Prepaid expenses
|
|
18.4
|
|
|
21.3
|
|
Other receivables and current assets
|
|
5.3
|
|
|
6.4
|
|
Parts and supplies inventory
|
|
9.3
|
|
|
9.3
|
|
|
|
$
|
44.0
|
|
|
$
|
44.8
|
|
8. Derivative Instruments and Hedging Activities
The following table summarizes the fair value of derivative instruments recorded in our consolidated balance sheets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
2019
|
|
2018
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
2017 interest rate caps
|
Other assets
|
|
$
|
—
|
|
|
$
|
0.7
|
|
2017 interest rate caps
|
Accrued expenses
|
|
(2.4
|
)
|
|
—
|
|
2017 interest rate caps
|
Other long-term liabilities
|
|
(1.7
|
)
|
|
—
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
2016 interest rate caps
|
Prepaid expenses and other current assets
|
|
—
|
|
|
5.8
|
|
Total derivatives
|
|
|
$
|
(4.1
|
)
|
|
$
|
6.5
|
|
The Company has not offset fair value amounts recognized for its derivative instruments.
Interest Rate Caps
In November 2017, the Company entered into two interest rate cap agreements as cash flow hedges to hedge the risk of a rise in interest rates and associated cash flows on its variable rate debt. These interest rate caps become in the money when one month LIBOR rates exceed 2.25%. The Company has applied hedge accounting to the interest rate caps; therefore, changes in the fair value of the interest rate caps are recorded in other comprehensive (loss) income, net of tax in the consolidated statements of comprehensive (loss) income. The interest rate caps commence in 2019 and expire in 2021. The Company began paying the $4.9 premium on the caps in monthly installments in October 2019. The notional value of the contracts aggregated were $600.0 as of December 31, 2019 and will remain constant through maturity in 2021. The company recorded a realized loss related to the 2017 interest rate caps of $0.6 in interest expense in the consolidated statements of operations for fiscal 2019. The Company recorded an unrealized loss for the 2017 interest rate caps of $3.4 in change in fair value of interest rate caps, net of tax in the consolidated statements of comprehensive (loss) income for fiscal 2019. The Company recorded a gain related to the 2017 interest rate caps of $1.0 for fiscal 2018 of which the effective portion of $0.4 was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive (loss) income and the ineffective portion of $0.6 was recorded in other (expense) income, net in the condensed consolidated statement of operations. The Company recorded a loss related to the 2017 interest rate caps of $0.4 in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive (loss) income for fiscal 2017.
In May 2016, the Company entered into three interest rate cap agreements as economic hedges against the risk of a rise in interest rates and the associated cash flows on its variable rate debt. These interest rate caps become in the money when three month LIBOR rates exceed 1.5%. The Company began paying the $5.5 premium of the caps equally over eleven quarters beginning on March 31, 2017. The Company elected not to apply hedge accounting to these interest rate caps therefore changes in the fair value of the interest rate caps are recorded in other (expense) income, net in the consolidated statements of operations. The notional value of the contracts aggregated remained constant at $800.0 through maturity in September 2019.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
The Company recorded a loss related to the 2016 interest rate caps of $0.8 in other (expense) income, net in the consolidated statements of operations for fiscal 2019. The Company recorded a gain related to the 2016 interest rate caps of $5.7 in other (expense) income, net in the consolidated statements of operations for fiscal 2018. The Company recorded a loss related to the 2016 interest rate caps of $0.5 in other (expense) income, net in the consolidated statements of operations for fiscal 2017.
9. Property and Equipment, Net
Property and equipment, net consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Land
|
$
|
224.5
|
|
|
$
|
217.0
|
|
Landfill site costs
|
1,651.1
|
|
|
1,542.9
|
|
Vehicles
|
803.4
|
|
|
736.7
|
|
Containers
|
317.0
|
|
|
304.3
|
|
Machinery and equipment
|
228.8
|
|
|
210.1
|
|
Furniture and fixtures
|
29.3
|
|
|
34.1
|
|
Building and improvements
|
203.7
|
|
|
196.9
|
|
Construction in process
|
30.5
|
|
|
60.1
|
|
|
3,488.3
|
|
|
3,302.1
|
|
Less: Accumulated depreciation on property and equipment
|
(865.6
|
)
|
|
(785.5
|
)
|
Less: Accumulated landfill airspace amortization
|
(855.1
|
)
|
|
(755.2
|
)
|
|
$
|
1,767.6
|
|
|
$
|
1,761.4
|
|
Gross assets under finance/capital lease amount to approximately $111.8 and $143.8 at December 31, 2019 and 2018, respectively. Accumulated amortization for finance/capital leases at December 31, 2019 and 2018 was $30.5 and $42.5, respectively. Amortization expense of assets under finance/capital lease was $15.5, $17.3 and $11.6 for fiscal 2019, 2018 and 2017, respectively.
Depreciation, landfill amortization and depletion expense was $247.6, $231.2 and $228.2 for fiscal 2019, 2018 and 2017, respectively.
10. Landfill Accounting
Liabilities for final closure and post-closure costs consist of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at January 1
|
$
|
248.0
|
|
|
$
|
225.9
|
|
Increase in retirement obligation
|
11.0
|
|
|
9.7
|
|
Accretion of closure and post-closure costs
|
18.0
|
|
|
17.0
|
|
Acquisition
|
—
|
|
|
4.9
|
|
Asset retirement obligation adjustments
|
6.9
|
|
|
10.7
|
|
Costs incurred
|
(19.7
|
)
|
|
(20.2
|
)
|
|
264.2
|
|
|
248.0
|
|
Less: Current portion
|
(28.0
|
)
|
|
(18.6
|
)
|
Balance at December 31
|
$
|
236.2
|
|
|
$
|
229.4
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
11. Other Intangible Assets, Net and Goodwill
Intangible assets, net consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net
Carrying
Value
|
|
Weighted
Average
Remaining
Life
(Years)
|
Noncompete agreements
|
|
$
|
6.4
|
|
|
$
|
(4.4
|
)
|
|
$
|
—
|
|
|
$
|
2.0
|
|
|
3.6
|
Tradenames
|
|
15.5
|
|
|
(8.4
|
)
|
|
—
|
|
|
7.1
|
|
|
11.3
|
Customer lists and contracts
|
|
526.5
|
|
|
(305.1
|
)
|
|
—
|
|
|
221.4
|
|
|
13.4
|
Operating permits
|
|
2.3
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
|
N/A
|
Above/below market leases
|
|
0.4
|
|
|
(0.2
|
)
|
|
—
|
|
|
0.2
|
|
|
6.6
|
|
|
$
|
551.1
|
|
|
$
|
(318.1
|
)
|
|
$
|
—
|
|
|
$
|
233.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net
Carrying
Value
|
|
Weighted
Average
Remaining
Life
(Years)
|
Noncompete agreements
|
|
$
|
5.9
|
|
|
$
|
(3.4
|
)
|
|
$
|
—
|
|
|
$
|
2.5
|
|
|
3.5
|
Tradenames
|
|
15.5
|
|
|
(7.6
|
)
|
|
—
|
|
|
7.9
|
|
|
12.2
|
Customer lists and contracts
|
|
519.9
|
|
|
(275.7
|
)
|
|
—
|
|
|
244.2
|
|
|
13.4
|
Operating permits
|
|
2.3
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
|
N/A
|
Above/below market leases
|
|
0.4
|
|
|
(0.2
|
)
|
|
—
|
|
|
0.2
|
|
|
7.6
|
|
|
$
|
544.0
|
|
|
$
|
(286.9
|
)
|
|
$
|
—
|
|
|
$
|
257.1
|
|
|
|
Amortization expense recorded on intangible assets for the years ended December 31, 2019, 2018 and 2017 was $31.2, $39.3 and $41.6, respectively.
Future amortization expense for intangible assets for the year ending December 31 is estimated to be:
|
|
|
|
|
|
2020
|
|
$
|
30.8
|
|
2021
|
|
30.6
|
|
2022
|
|
28.3
|
|
2023
|
|
11.8
|
|
2024
|
|
11.5
|
|
Thereafter
|
|
117.7
|
|
|
|
$
|
230.7
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Accumulated
Impairment
|
|
Goodwill,
Net
|
December 31, 2017
|
$
|
1,301.9
|
|
|
$
|
(93.7
|
)
|
|
$
|
1,208.2
|
|
Acquisition
|
7.0
|
|
|
—
|
|
|
7.0
|
|
Purchase price adjustments
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
December 31, 2018
|
1,308.8
|
|
|
(93.7
|
)
|
|
1,215.1
|
|
Acquisition
|
8.7
|
|
|
—
|
|
|
8.7
|
|
Purchase accounting adjustments
|
1.0
|
|
|
—
|
|
|
1.0
|
|
December 31, 2019
|
$
|
1,318.5
|
|
|
$
|
(93.7
|
)
|
|
$
|
1,224.8
|
|
12. Accrued Expenses
Accrued expenses consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Accrued compensation and benefits
|
$
|
36.4
|
|
|
$
|
36.3
|
|
Accrued waste disposal costs
|
43.7
|
|
|
41.9
|
|
Accrued insurance and self-insurance reserves
|
14.9
|
|
|
13.2
|
|
Accrued severance
|
0.1
|
|
|
0.4
|
|
Derivative valuation
|
2.4
|
|
|
—
|
|
Other accrued expenses
|
27.0
|
|
|
25.9
|
|
|
$
|
124.5
|
|
|
$
|
117.7
|
|
13. Long-Term Debt
Long-term debt consists of the following at December 31:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Revolving line of credit with lenders; interest at base rate plus margin, as defined (5.43% and 6.69% at December 31, 2019 and 2018, respectively) due quarterly; balance due at maturity in 2021
|
$
|
30.0
|
|
$
|
37.0
|
|
Term loans; quarterly principal payments 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
|
1,372.5
|
|
1,387.5
|
|
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/capital lease obligations, interest rates between 3.70% and 7.73%, maturing through 2024
|
52.6
|
|
69.2
|
|
Other debt
|
8.1
|
|
9.5
|
|
|
1,888.2
|
|
1,928.2
|
|
Less: Original issue discount and debt issuance costs classified as a reduction to long-term debt
|
(20.0
|
)
|
(25.2
|
)
|
Less: Current portion
|
(76.1
|
)
|
(85.9
|
)
|
|
$
|
1,792.1
|
|
$
|
1,817.1
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
Annual aggregate principal maturities at December 31, 2019 are as follows:
|
|
|
|
|
2020
|
$
|
46.1
|
|
2021
|
63.1
|
|
2022
|
21.7
|
|
2023
|
1,329.9
|
|
2024
|
426.8
|
|
Thereafter
|
0.6
|
|
|
$
|
1,888.2
|
|
Senior Secured Credit Facilities
On November 21, 2017, the Company entered into Amendment No. 1 (the “Amendment”) to its 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 the Company’s applicable margin on its Term Loan B by 0.50% per annum.
On November 10, 2016, the Company 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 million Revolving Credit Facility maturing 2021 (together "Senior Secured Credit Facilities"). The Revolving Credit Facility allows for up to $100.0 of letters of credit outstanding. The proceeds were used to repay borrowings under the Existing Credit Agreement and to call the Company's 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 the Company's total net leverage ratio is greater than 4.0:1.0. If the Company's 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 the Company’s existing and future domestic restricted subsidiaries (subject to certain exceptions) and are secured by a first-priority security interest in substantially all the personal property assets, and certain real property assets, of the Company and the guarantors, including all or a portion of the equity interests of certain of the Company’s 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
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
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 the Company’s 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 the Company's Senior Secured Credit Facilities can be used for working capital, capital expenditures, acquisitions and other general corporate purposes. As of December 31, 2019 and 2018, the Company had $30.0 and $37.0 in borrowings outstanding under its Revolving Credit Facility. As of December 31, 2019 and 2018, the Company had an aggregate of approximately $28.5 and $32.3 of letters of credit outstanding under its Senior Secured Credit Facilities. As of December 31, 2019 and 2018, the Company had remaining capacity under its Revolving Credit Facility of $241.5 and $230.7, respectively. As of December 31, 2019, the Company was in compliance with the covenants under the Senior Secured Credit Facilities. The Company's ability to maintain compliance with its covenants will be highly dependent on results of operations and, to the extent necessary, its 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 fees for 2019, 2018 and 2017 were not significant. The Company is subject to a maximum total net leverage ratio of 6.8:1.0.
5.625% Senior Notes due 2024
On November 10, 2016, the Company 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”).
The Company 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 will 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. At any time on or after November 15, 2019, the Company may redeem the Notes, in whole or in part, at the applicable redemption prices set forth in the Indenture, plus accrued interest. 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 the ability of the Company and its restricted subsidiaries 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 the Company’s assets; transfer and sell assets; and create restrictions on dividends or other payments by the Company’s 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 the Company’s current and future U.S. subsidiaries that guarantee the Amended and Restated Credit Agreement. As of December 31, 2019, the Company was in compliance with the covenants under the Indenture.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
Original Issue Discount and Debt Issuance Costs
During fiscal 2018, the Company prepaid $57.5 of principal on its Term Loan B and as a result, recorded $0.9 of losses on extinguishments of debt.
In November 2017, the Company repriced its Term Loan B and as a result, recorded $3.7 of losses on extinguishments and modifications of debt.
When the Company refinanced the Term Loan B facility in November 2017, 93% was accounted for as a modification and 7% was accounted for as an extinguishment based on an analysis of the participation of each lender in the syndicate before and after the repricing. As a result of the 7% that was accounted for as an extinguishment, $1.9 of the unamortized original issue discount and deferred debt issuance costs were recorded as a loss on extinguishment of debt. In relation to the modification, the Company incurred $1.8 of third party fees which were recorded as a loss on modification of debt. The Company incurred $0.1 of third party fees related to new lenders in the syndicate which were recorded as a reduction to the carrying value of debt and are being amortized to interest expense using the effective interest method.
Fair Value of Debt
The fair value of the Company’s debt is estimated based on rates the Company would currently pay for similar types of instruments (Level 2 inputs). Although the Company has determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, 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 December 31, 2019 and 2018 respectively.
The estimated fair value of the Company's debt is as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Revolving Credit Facility
|
|
$
|
30.0
|
|
|
$
|
37.0
|
|
Senior Notes
|
|
443.4
|
|
|
418.6
|
|
Term Loan B Facility
|
|
1,379.4
|
|
|
1,332.0
|
|
|
|
$
|
1,852.8
|
|
|
$
|
1,787.6
|
|
The carrying value of the debt at December 31, 2019 is approximately $1,827.5 compared to $1,849.5 at December 31, 2018.
Unconditional Purchase Commitments
The Company has unconditional purchase commitments not recorded on the balance sheet which consist of disposal related agreements that include fixed or minimum royalty payments, disposal related host agreements, capital expenditure commitments and payments for premiums on interest rate caps. The Company has unconditional purchase commitments recorded on the balance sheet which consist of waste relocation obligations and landfill remediation expenses.
The following table summarizes the Company's unconditional purchase commitments as of December 31, 2019:
|
|
|
|
|
2020
|
$
|
41.3
|
|
2021
|
13.7
|
|
2022
|
11.8
|
|
2023
|
10.0
|
|
2024
|
5.1
|
|
Thereafter
|
53.4
|
|
|
$
|
135.3
|
|
14. 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 containing 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 7 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 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 year ended December 31, 2019 that required a reassessment or re-measurement. In addition, there were no impairment indicators identified during the year ended December 31, 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:
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Lease cost
|
|
|
Finance lease cost
|
|
|
Amortization of right-of-use assets
|
|
$
|
15.5
|
|
Interest on lease liabilities
|
|
3.1
|
|
Operating lease cost
|
|
6.0
|
|
Short-term lease cost
|
|
6.2
|
|
Total lease cost
|
|
$
|
30.8
|
|
|
|
|
Other information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from finance leases
|
|
$
|
3.1
|
|
Operating cash flows from operating leases
|
|
$
|
5.0
|
|
Financing cash flows from finance leases
|
|
$
|
35.7
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
19.2
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
7.0
|
|
The weighted average lease terms as of the end of period are as follows:
|
|
|
|
|
|
December 31, 2019
|
Weighted average remaining lease terms
|
|
|
Weighted-average remaining lease term (in years) - finance leases
|
|
2.02
|
Weighted-average remaining lease term (in years) - operating leases
|
|
15.51
|
The weighted average discount rates for the periods are as follows:
|
|
|
|
|
|
|
December 31, 2019
|
Discount rates
|
|
|
Weighted-average discount rate - finance leases
|
|
5.0
|
%
|
Weighted-average discount rate - operating leases
|
|
4.8
|
%
|
The supplemental balance sheet information related to leases for the period is as follows:
|
|
|
|
|
|
|
|
December 31, 2019
|
Operating leases
|
|
|
Operating lease right-of-use assets
|
|
$
|
26.1
|
|
|
|
|
Accrued expenses
|
|
$
|
4.9
|
|
Other long-term liabilities
|
|
21.4
|
|
Total operating lease liabilities
|
|
$
|
26.3
|
|
|
|
|
Finance leases
|
|
|
Property and equipment, at cost
|
|
$
|
111.8
|
|
Accumulated depreciation
|
|
(30.5
|
)
|
Property and equipment, net
|
|
$
|
81.3
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
29.7
|
|
Long term debt, less current maturities
|
|
22.9
|
|
Total finance lease liabilities
|
|
$
|
52.6
|
|
Maturities of the Company’s lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
Year Ending
|
|
Operating Leases
|
|
Finance Leases
|
2020
|
|
5.6
|
|
|
31.5
|
|
2021
|
|
5.0
|
|
|
17.5
|
|
2022
|
|
3.3
|
|
|
4.8
|
|
2023
|
|
2.5
|
|
|
1.3
|
|
2024
|
|
2.0
|
|
|
0.7
|
|
Thereafter
|
|
21.5
|
|
|
—
|
|
Total lease payments
|
|
39.9
|
|
|
55.8
|
|
Less: Imputed interest
|
|
(13.6
|
)
|
|
(3.2
|
)
|
Present value of lease liabilities
|
|
$
|
26.3
|
|
|
$
|
52.6
|
|
15. Stockholders' Equity and Stock Awards
(Share and per share amounts not in millions)
2012 Plan
In October 2012, the former Parent’s Board of Directors adopted the 2012 Stock Incentive Plan (the “ 2012 Plan”) under which an aggregate of 7,154,711 shares of the former Parent’s common stock was reserved for issuance. The 2012 Plan provided for employees of the Company to participate in the plan and provided that the options or stock purchase rights have a term of ten years and vest equally over four years at a rate of 20% with 20% of the options being vested at the date of grant for all options except the Strategic grants which vest 100% after five years.
During fiscal 2016, the Board of Directors of the former Parent amended the 2012 Plan to allow for the grant of performance shares, restricted shares, restricted share units, and other equity awards in addition to stock options and stock purchase rights as originally provided for under the 2012 Plan. Upon completion of the Company's initial public offering during the fourth quarter of fiscal 2016, no further awards will be issued under the 2012 Plan.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
2016 Plan
The Company's Board of Directors adopted the Advanced Disposal Services, Inc. 2016 Omnibus Equity Plan (the "2016 Plan") on January 29, 2016 under which an aggregate of 5,030,000 shares of common stock was reserved for issuance. The 2016 Plan became effective on October 4, 2016 and will terminate on the tenth anniversary of the 2016 Plan effective date, unless sooner terminated by the Company's board of directors. Awards under the 2016 Plan may consist of stock options, restricted shares, restricted share units, stock appreciation rights, performance stock, PSUs, cash performance units and other awards. The Compensation Committee shall set the vesting criteria applicable to each award, which will determine the extent to which the award becomes exercisable. The terms and conditions of each award shall be set forth in an award document in a form approved by the Compensation Committee for such Award.
Stock Option Grants
The fair value of the options granted is estimated using the Black-Scholes option pricing model using the following assumptions:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Average expected term (years)
|
6.3
|
|
6.3
|
|
6.2
|
Risk-free interest rate
|
2.52% - 2.53%
|
|
2.69% - 2.71%
|
|
1.93% - 2.16%
|
Expected volatility
|
20.0%
|
|
18.0%
|
|
18.0% - 19.0%
|
Since the Company does not have enough historical exercise data that is indicative of expected future exercise performance, it has elected to use the “simplified method” to estimate the options expected term by taking the average of each vesting-tranche and the contractual term. The Company used the average ten day historical volatility for the Company to estimate volatility used in the Black-Scholes model. The risk-free rate used was based on the US Treasury security rate estimated for the expected term of the option at the date of grant. No dividends are expected to be issued. The company estimates stock option forfeitures based on historical experience. The Company issues new shares when stock options are exercised.
Stock Option Grants
During fiscal 2019, there were 546,057 annual options granted under the 2016 Plan for employees other than the Named Executive Officers ("NEOs"). Each option had an estimated fair value of $7.06 per option on the date of grant and each option had an exercise price of $26.69. The options will vest 20% on date of grant and 20% in four equal installments over each of the first four anniversaries of the date of the grant, provided that upon closing of the Merger, vesting of options will accelerate. For a discussion of how options will vest and be treated in connection with the Merger, see “Compensation Discussion and Analysis-Effect of the Merger Agreement”. The contractual term of each option is 10 years.
During fiscal 2019, there were 170,298 NEO options granted under the 2016 Plan. Each option had an estimated fair value of $7.23 per option on the date of grant and each option had an exercise price of $26.69. The options will vest in full on the third anniversary of the date of the grant, provided that upon closing of the Merger, vesting of options will accelerate. For a discussion of how options will vest and be treated in connection with the Merger, see “Compensation Discussion and Analysis-Effect of the Merger Agreement on NEO Compensation.” The contractual term of each option is 10 years.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
Stock Options Outstanding
A summary of the stock options outstanding for the year ended December 31, 2019 (in millions, except share and per share amounts) is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted -
Average
Exercise Price
|
|
Weighted -
Average
Remaining
Contractual
Term
|
Outstanding at January 1, 2019
|
4,150,112
|
|
|
$
|
20.48
|
|
|
|
Granted
|
716,355
|
|
|
26.69
|
|
|
|
Exercised
|
(788,868
|
)
|
|
20.24
|
|
|
|
Expired or forfeited
|
(61,152
|
)
|
|
23.99
|
|
|
|
Outstanding at December 31, 2019
|
4,016,447
|
|
|
21.57
|
|
|
6.69
|
Exercisable at December 31, 2019
|
2,274,524
|
|
|
$
|
19.86
|
|
|
5.65
|
The weighted-average grant-date fair value of options granted per share was $7.10, $5.64 and $5.35 during 2019, 2018, and 2017, respectively. The total fair value of options vested was $5.0, $5.1 and $5.1 during fiscal 2019, 2018, and 2017, respectively. The intrinsic value of the options outstanding at December 31, 2019 was approximately $45.4. The intrinsic value of options exercised during fiscal 2019 was $10.0. The intrinsic value of exercisable options at December 31, 2019 was approximately $29.6.
Restricted Stock Grants
During fiscal 2019, there were 18,735 restricted stock awards granted under the 2016 Plan to non-employee directors with a weighted average grant date fair value $26.69 per share. The restricted stock awards will vest in full on the third anniversary of the date of the grant, provided that upon closing of the Merger, vesting of the restricted stock awards will accelerate. For a discussion of how restricted stock will vest and be treated in connection with the Merger, see “Non-Employee Director Compensation”.
A summary of the status of non-vested restricted stock awards as of December 31, 2019, including changes during fiscal 2019 is presented below:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted -
Average
Grant Price
|
Nonvested at January 1, 2019
|
75,698
|
|
|
$
|
22.96
|
|
Granted
|
18,735
|
|
|
26.69
|
|
Vested
|
(35,940
|
)
|
|
23.31
|
|
Forfeited
|
—
|
|
|
—
|
|
Nonvested at December 31, 2019
|
58,493
|
|
|
$
|
23.93
|
|
Restricted Stock Unit Grants
During fiscal 2019, there were 46,130 NEO restricted stock units ("RSUs") granted under the 2016 Plan with a fair value of $26.69 per share. The RSUs will vest in full on the third anniversary of the date of the grant, provided that upon closing of the Merger, vesting of the RSUs will accelerate. For a discussion of how RSUs will vest and be treated in connection with the Merger, see “Compensation Discussion and Analysis-Effect of the Merger Agreement on NEO Compensation.”
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
A summary of the status of non-vested RSUs as of December 31, 2019, including changes during fiscal 2019 is presented below:
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted -
Average
Grant Price
|
Nonvested at January 1, 2019
|
443,818
|
|
|
$
|
19.33
|
|
Granted
|
46,130
|
|
|
26.69
|
|
Vested
|
(300,001
|
)
|
|
18.00
|
|
Forfeited
|
—
|
|
|
—
|
|
Nonvested at December 31, 2019
|
189,947
|
|
|
$
|
23.22
|
|
Performance Share Unit Grants
During fiscal 2019, there were 92,264 NEO performance stock units (PSUs) granted under the 2016 Plan with a fair value of $26.69 per share. The PSUs will vest in full on the third anniversary of the date of the grant, provided that upon closing of the Merger, vesting of the PSUs will accelerate. For a discussion of how PSUs will vest and be treated in connection with the Merger, see “Compensation Discussion and Analysis-Effect of the Merger Agreement on NEO Compensation”. Prior to the Merger, the PSUs shall be measured based on the Company's budget and are weighted as follows: Adjusted EBITDA: 50%; Adjusted EBITDA less capital expenditures: 30%; and Revenue: 20%. The measurement criteria begins with an attainment of 90% of the budget which results in vesting of 25% of the shares underlying the PSUs granted and ends with an attainment of 110% of the budget which results in vesting of 175% of the shares underlying the PSUs granted. Performance is ordinarily measured separately for each of the three years in the performance period and the total number of PSUs earned at the conclusion of the three-year performance period would be the sum of the PSUs earned with respect to each individual year.
A summary of the status of non-vested PSUs as of December 31, 2019, including changes during fiscal 2019 is presented below:
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted -
Average
Grant Price
|
Nonvested at January 1, 2019
|
213,383
|
|
|
$
|
22.53
|
|
Granted
|
92,264
|
|
|
26.69
|
|
Vested
|
(41,927
|
)
|
|
24.28
|
|
Forfeited
|
(14,314
|
)
|
|
23.61
|
|
Nonvested at December 31, 2019
|
249,406
|
|
|
$
|
23.71
|
|
Compensation Expense
Compensation expense is recognized ratably over the vesting period for those awards that vest. For fiscal 2019, 2018 and 2017, the Company recognized share-based compensation expense as a component of selling, general and administrative expenses of $10.0, $11.2 and $9.7, respectively. As of December 31, 2019, the Company estimates that a total of approximately $8.8 of currently unrecognized compensation expense will be recognized over a weighted average period of approximately 1.97 years for unvested awards issued and outstanding.
Payment to Former Director
During fiscal 2017, the Company made the final payment to a former director under an equity compensation arrangement in the amount of $6.2.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
16. 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 damage, workers’ compensation claims, directors’ and officers’ liability, pollution liability, employee group health claims and other coverages that are customary in the industry. The Company’s exposure to loss for insurance claims is generally limited to the per incident deductible under the related insurance policy. As of December 31, 2019, the Company’s insurance programs carried self-insurance exposures of up to $0.5, $1.0 and $0.8 per incident for general liability, automobile and workers’ compensation, respectively. Certain self-insurance claims reserves are recorded at present value using a 1.62% and a 2.46% discount rate as of December 31, 2019 and 2018, respectively.
The Company has a partially self-insured employee group health insurance program that carries an aggregate stop loss amount. The amount recorded for the health insurance liability at December 31, 2019 and 2018 for unpaid claims, including an estimate for IBNR claims, was $2.4 and $3.1, respectively. Liabilities are recorded gross of expected recoveries.
The self-insured portion of workers’ compensation liability for unpaid claims and associated expenses, including IBNR claims, is based on an actuarial valuation and internal estimates. The amount recorded for workers’ compensation liability at December 31, 2019 and 2018 for unpaid claims, including an estimate for IBNR claims, is $28.1 and $21.4, respectively.
The self-insured portion of general liability and automobile liability for unpaid claims and associated expenses, including IBNR claims, is based on an actuarial valuation and internal estimates. The amount recorded for general and automobile liability at December 31, 2019 and 2018 for unpaid claims, including an estimate for IBNR claims, was $19.9 and $18.6, respectively.
Of the above amounts, $17.2 and $16.4 is included in accrued expenses and the remainder is included in other long-term liabilities at December 31, 2019 and 2018, respectively.
17. Benefit Plans
The Company has 401(k) Savings Plans (“401(k) Plan”) for the benefit of qualifying full-time employees who have more than 90 days of service and are over 21 years of age. Employees make pre-tax contributions to the 401(k) Plan with a partial matching contribution made by the Company. The Company’s matching contributions to the 401(k) Plan were $3.8, $3.7 and $3.5 for fiscal 2019, 2018 and 2017, respectively. Contributions by the Company are included in operating costs and expenses in the accompanying consolidated statements of operations.
The Company is a participating employer in a number of trustee-managed multiemployer, defined benefit pension plans for employees who participate in collective bargaining agreements. Approximately 14% of the Company’s workforce is subject to a collective bargaining agreement and none of the collective bargaining agreements will expire within one year. The risks of participating in the multiemployer plans are different from single-employer plans in that (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be required to be assumed by the remaining participating employers; and (iii) if the Company chooses to stop participating in any of the multiemployer plans, it may be required to pay those plans a withdrawal amount based on the underfunded status of the plan. 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. During fiscal 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. The total contributions made to all plans for fiscal 2019 was $5.7, of which $5.5 is related to plans considered to be individually significant that are included in the table below and $0.2 is related to plans that are not considered to be individually significant.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
The following table outlines the Company's participation in multiemployer plans considered to be individually significant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
EIN/Pension
Plan Number
|
|
Pension Protection
Act Zone Status
|
|
FIP/RP
Status Pending/
Implemented
(B)
|
|
Contributions
|
|
Expiration
Date of
Collective-
Bargaining
Agreement
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
Suburban Teamsters of Northern IL Pension Fund
|
36-6155778-001
|
|
Endangered as of 1/1/2018
|
|
Endangered as of 1/1/2017
|
|
Implemented
|
|
$
|
0.7
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
1/31/2024
|
Pension Fund of Automobile Mechanics Local No. 701
|
36-6042061-001
|
|
Endangered as of 1/1/2018
|
|
Endangered as of 1/1/2017
|
|
Implemented
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
12/31/2023
|
Local 731 Private Scavengers and Garage Attendants Pension Fund
|
36-6513567-001
|
|
Not Endangered or Critical as of 10/1/2018
|
|
Not Endangered or Critical as of 10/1/2017
|
|
Implemented
|
|
$
|
1.9
|
|
|
$
|
1.8
|
|
|
$
|
1.8
|
|
|
9/30/2023
|
Midwest Operating Engineers Pension Fund
|
36-6140097-001
|
|
Endangered as
of 4/1/2018
|
|
Endangered as
of 4/1/2017
|
|
Implemented
|
|
$
|
1.0
|
|
|
$
|
0.9
|
|
|
$
|
0.7
|
|
|
9/30/2022
|
Teamsters Local Union No. 301 Union Pension Fund (A)
|
36-6492992-001
|
|
Not Endangered or Critical as of 1/1/2018
|
|
Not Endangered or Critical as of 1/1/2017
|
|
No
|
|
$
|
1.3
|
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
|
9/30/2023
|
Central States Southeast and Southwest Areas Pension Fund
|
36-6044243-001
|
|
Critical and Declining as of 1/1/2018
|
|
Critical as of 1/1/2017
|
|
Implemented
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
2/1/2022
|
Local 705 Int’l Brotherhood of Teamsters Pension TR. FD.
|
36-6492502-001
|
|
Endangered as of 1/1/2017
|
|
Critical as of 1/1/2017
|
|
Implemented
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
N/A
|
|
|
(A)
|
The employers' contributions to the plan represent greater than 5% of the total contributions to the plan for the most recent plan year available.
|
|
|
(B)
|
A multi-employer defined benefit pension plan that has been certified as endangered, seriously endangered, or critical may begin to levy a statutory surcharge on contribution rates. Once authorized, the surcharge is at the rate of 5% for the first 12 months and 10% for any periods thereafter. Contributing employers, however, may eliminate the surcharge by entering into a collective bargaining agreement that meets the requirements of the applicable funding improvement plan or rehabilitation plan.
|
18. Income Taxes
The components of the (benefit) expense from income taxes are comprised of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
(6.4
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(1.1
|
)
|
State
|
(12.6
|
)
|
|
3.2
|
|
|
1.2
|
|
|
(19.0
|
)
|
|
—
|
|
|
0.1
|
|
Deferred
|
|
|
|
|
|
Federal
|
(5.8
|
)
|
|
6.2
|
|
|
(44.8
|
)
|
State
|
4.4
|
|
|
(1.6
|
)
|
|
3.5
|
|
|
(1.4
|
)
|
|
4.6
|
|
|
(41.3
|
)
|
(Benefit) expense from income taxes
|
$
|
(20.4
|
)
|
|
$
|
4.6
|
|
|
$
|
(41.2
|
)
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
For fiscal 2019, 2018 and 2017, the federal statutory rate in effect was 21%, 21% and 35%, respectively. A reconciliation between the benefit or expense from income taxes and the expected tax benefit or expense using the federal statutory rate in effect for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Amount computed using statutory rates
|
$
|
(5.7
|
)
|
|
$
|
3.0
|
|
|
$
|
(1.0
|
)
|
State income taxes, net of federal benefit
|
(4.1
|
)
|
|
(1.8
|
)
|
|
(3.3
|
)
|
Benefit from stock option exercises
|
(2.4
|
)
|
|
—
|
|
|
—
|
|
Acquisition related costs
|
1.9
|
|
|
—
|
|
|
—
|
|
Net effect of changes in tax rates
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Uncertain tax positions and interest
|
(28.1
|
)
|
|
0.5
|
|
|
0.5
|
|
Nondeductible expenses
|
1.6
|
|
|
0.5
|
|
|
1.5
|
|
Net effect of change in U.S. Tax Law
|
—
|
|
|
—
|
|
|
(40.4
|
)
|
Other
|
0.2
|
|
|
0.2
|
|
|
0.6
|
|
Valuation allowance
|
16.2
|
|
|
2.2
|
|
|
1.2
|
|
(Benefit) expense from income taxes
|
$
|
(20.4
|
)
|
|
$
|
4.6
|
|
|
$
|
(41.2
|
)
|
The Company’s deferred tax assets and liabilities relate to the following sources and differences between financial accounting and the tax basis of the Company’s assets and liabilities at December 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets
|
|
|
|
Allowance for doubtful accounts
|
$
|
1.2
|
|
|
$
|
1.2
|
|
Insurance reserve
|
12.9
|
|
|
12.5
|
|
Net operating loss
|
115.5
|
|
|
100.7
|
|
Accrued bonus and vacation
|
4.7
|
|
|
4.1
|
|
Stock compensation
|
5.2
|
|
|
6.0
|
|
Tax credits
|
1.9
|
|
|
1.7
|
|
Other
|
9.9
|
|
|
12.0
|
|
Total deferred tax assets
|
151.3
|
|
|
138.2
|
|
Valuation allowance
|
(23.0
|
)
|
|
(15.4
|
)
|
Deferred tax assets less valuation allowance
|
128.3
|
|
|
122.8
|
|
Deferred tax liabilities
|
|
|
|
Fixed asset basis
|
(101.2
|
)
|
|
(82.9
|
)
|
Intangible basis
|
(69.9
|
)
|
|
(70.9
|
)
|
Landfill and environmental remediation liabilities
|
(41.1
|
)
|
|
(52.3
|
)
|
Other
|
(4.6
|
)
|
|
(7.8
|
)
|
Deferred tax liabilities
|
(216.8
|
)
|
|
(213.9
|
)
|
Net deferred tax liability
|
$
|
(88.5
|
)
|
|
$
|
(91.1
|
)
|
The amounts recorded as deferred tax assets as of December 31, 2019 and 2018 represent the amounts of tax benefits of existing deductible temporary differences or net operating loss carryforwards ("NOLs"). Realization of deferred tax assets is dependent upon the generation of sufficient taxable income prior to expiration of any loss carryforwards. The Company has established valuation allowances for uncertainties in realizing the benefit of certain tax loss and credit carryforwards. A valuation allowance has been recorded against deferred tax assets as of December 31, 2019 in the amount of $23.0. The valuation allowance for the year ended December 31, 2018 was $15.4. While the company expects to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
On December 22, 2017, the Tax Cut and Jobs Act (the "Act") was signed into law. In accordance with SAB-118, The Company recognized the estimated impact of this legislation as a component of the benefit for income taxes during the fourth quarter of 2017. During the fourth quarter of 2018, the company completed its analysis of the impacts of the Act, and no additional impacts were identified.
The Company had available federal NOL carryforwards of approximately $406.3 and $349.1 at December 31, 2019 and 2018 respectively. The Company has $358.9 of federal NOLs that have expiration dates beginning in the year 2021 through 2036 if not utilized against taxable income. The Company has $47.4 of federal NOLs that have an indefinite carryforward.
With the completion of the IPO in the fourth quarter of 2016, the Company experienced an ownership change pursuant to Section 382 of the Internal Revenue Code ("IRC"). This limitation is not expected to have an impact in the Company's ability to fully utilize its NOLs before expiration. Additionally, the Company has grown through a series of acquisitions and mergers and has had historic change of control events that resulted in limitations on the utilization of certain NOLs. Approximately $71.9 of the NOLs from continuing operations are limited under the SRLY rules of the IRC. These NOLs are only available to be utilized against taxable income of the HWStar Waste Holdings Corp. and subsidiaries thereof, a wholly-owned subsidiary of the Company. At this time, the Company expects to utilize these NOLs.
A predecessor of the Company had a transaction on November 1, 2005 that was treated as a reorganization. The Company estimates that it is subject to an annual limitation of approximately $4.2 on NOLs of approximately $30.8 originating prior to November 1, 2005.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for fiscal 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Balance at January 1,
|
$
|
27.6
|
|
|
$
|
27.5
|
|
|
$
|
7.5
|
|
Additions based on tax positions of prior years
|
—
|
|
|
—
|
|
|
20.4
|
|
Change to prior tax positions due to tax rate changes
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
Additions based on tax positions of current year
|
—
|
|
|
0.1
|
|
|
—
|
|
Reduction due to settlements with tax authorities
|
(27.6
|
)
|
|
—
|
|
|
—
|
|
Balance at December 31,
|
$
|
—
|
|
|
$
|
27.6
|
|
|
$
|
27.5
|
|
Prior to the acquisition in fiscal 2012, Veolia ES Solid Waste division was part of a consolidated group and was subject to IRS and state examinations dating back to 2004. Pursuant to the terms of the acquisition of Veolia ES Solid Waste, Inc., the Company is entitled to certain indemnifications for Veolia ES Solid Waste Division's pre-acquisition tax liabilities. During fiscal 2019, the IRS and Veolia reached closure on the open tax matters which included open matters related to the Veolia ES Solid Waste division. This settlement will effectively close out the open tax years of 2004 - 2012 for Veolia ES Solid Waste division creating a net tax benefit for the Company. The settlement was the primary driver of the $20.4 net tax benefit during fiscal 2019. Also, as a result of the settlement, 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.
The Company recognizes interest expense related to unrecognized tax benefits in tax expense. During the tax years ended December 31, 2019, 2018 and 2017, respectively, the Company recognized approximately $0.0, $0.4, and $0.5, respectively, of such interest expense as a component of the “Provision for Income Taxes”.
The Company had approximately $0.0 and $3.2 of accrued interest and $0.0 and $0.6 of accrued penalties in its balance sheet as of December 31, 2019 and 2018, respectively.
The Company and its subsidiaries are subject to income tax in the United States at the federal, state, and local jurisdictional levels. The company has open tax years dating back to 2003. During 2018, the state of Florida completed an audit of the company's 2014-2016 tax years with no changes identified.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
19. Fair Value of Financial Instruments
As a basis for considering assumptions, the fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
|
|
Level 1
|
|
Observable inputs such as quoted prices in active markets;
|
|
|
Level 2
|
|
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3
|
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of three valuation techniques noted in the guidance. The three valuation techniques are as follows:
Market approach
Prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities;
Cost approach
Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and
Income approach
Techniques to convert future amounts to a single present amount are based on market expectations (including present value techniques, option-pricing models, and lattice models).
The Company’s financial assets and liabilities recorded at fair value on a recurring basis include derivative instruments and cash equivalents. The Company’s interest rate caps are recorded at their estimated fair values based on a current forward fixed price swap curve.
All instruments were valued using the market approach. The Company's interest rate caps are valued using a third-party pricing model that incorporates information about LIBOR yield curves, which is considered observable market data, for each instrument’s respective term. Counterparties to the Company's interest rate caps are highly rated financial institutions. Valuations of those interest rate caps may fluctuate significantly from period to period due to volatility in the valuation of interest rates which are driven by market conditions and the scheduled maturities of the caps.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
The Company’s assets and liabilities that are measured at fair value on a recurring basis approximate the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 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
|
$
|
12.5
|
|
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
12.5
|
|
Derivative instruments - Liability position
|
(4.1
|
)
|
|
$
|
—
|
|
|
(4.1
|
)
|
|
(4.1
|
)
|
Total recurring fair value measurements
|
$
|
8.4
|
|
|
$
|
12.5
|
|
|
$
|
(4.1
|
)
|
|
$
|
8.4
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Derivative instruments - Asset position
|
6.5
|
|
|
—
|
|
|
6.5
|
|
|
6.5
|
|
Total recurring fair value measurements
|
$
|
13.3
|
|
|
$
|
6.8
|
|
|
$
|
6.5
|
|
|
$
|
13.3
|
|
Refer to Note 13, Long-Term Debt for disclosures regarding the fair value of long-term debt.
20. Commitments and Contingencies
Financial Instruments
Municipal solid waste service and other service contracts, permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. To secure its obligations, the Company has provided customers, various regulatory authorities and the Company’s insurer with such bonds totaling to approximately $867.8 and $774.0 as of December 31, 2019 and 2018, respectively. The majority of these obligations expire each year and are automatically renewed. Additionally, letters of credit have been issued to fulfill such obligations and are included in the total letters of credit outstanding disclosed in Note 13, Long-Term Debt, in the notes to the consolidated financial statements herein. The Company has an obligation as part of the purchase of one of its C&D landfills for payments of 6% of net revenue generated from the landfill that began at the commencement of landfill operations and continues through the life of the landfill.
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 fiscal 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 expense of $16.2 for required on-site engineering enhancements related to leachate and gas infrastructure at the landfill. These accruals included costs for an enhanced de-watering system and the associated removal, treatment, and disposal of leachate at the landfill. 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 expense of $9.6 during the second quarter of fiscal 2019. As of December 31, 2019, $13.7 of expenditures related to the remediation accrual estimates have been incurred and $12.9 remains on the consolidated balance sheet which are expected to be incurred through 2023. 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
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
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 December 31, 2019, all of this settlement has been paid. 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. During fiscal 2018 and 2017, the Company recorded a charge in operating expenses of $0.1 and $11.1, respectively. These charges were recorded 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 not 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.
21. Restructuring
For fiscal 2017, the Company incurred $3.4 of restructuring costs related to elimination of positions at the corporate office. Of the $3.4 of restructuring charges, $2.1 related to the acceleration of stock-based compensation and $1.3 related to severance expense.
The costs associated with the actions described above are included in accrued expenses in the accompanying consolidated financial statements and include the amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
0.5
|
|
|
$
|
1.5
|
|
|
$
|
1.0
|
|
Expense
|
0.6
|
|
|
0.1
|
|
|
3.4
|
|
Cash expenditures
|
|
|
|
|
|
Severance and relocation
|
(1.1
|
)
|
|
(1.1
|
)
|
|
(0.7
|
)
|
Other
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Non-cash acceleration of options
|
—
|
|
|
—
|
|
|
(2.1
|
)
|
Ending balance
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
1.5
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
22. Segment and Related Information
The Company's operations are managed through three operating segments: South, East and Midwest regions. These three operating segments and corporate entities are presented below as its reportable segments. The historical results, discussion and presentation of the Company's reportable segments are the result of its integrated waste management services consisting of collection, transfer, recycling and disposal of non-hazardous solid waste.
Summarized financial information concerning the Company's reportable segments for fiscal 2019, 2018 and 2017 is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
Revenues
|
|
Operating
Income (Loss)
|
|
Depreciation
and
Amortization
|
|
Capital
Expenditures
|
|
Total
Assets
|
2019
|
|
|
|
|
|
|
|
|
|
South
|
$
|
645.6
|
|
|
$
|
77.6
|
|
|
$
|
93.9
|
|
|
$
|
90.3
|
|
|
$
|
1,301.9
|
|
East
|
415.0
|
|
|
21.6
|
|
|
82.4
|
|
|
51.6
|
|
|
819.7
|
|
Midwest
|
562.4
|
|
|
66.4
|
|
|
97.2
|
|
|
54.0
|
|
|
1,367.6
|
|
Corporate
|
—
|
|
|
(91.1
|
)
|
|
5.3
|
|
|
7.9
|
|
|
54.3
|
|
|
$
|
1,623.0
|
|
|
$
|
74.5
|
|
|
$
|
278.8
|
|
|
$
|
203.8
|
|
|
$
|
3,543.5
|
|
2018
|
|
|
|
|
|
|
|
|
|
South
|
$
|
609.2
|
|
|
$
|
77.9
|
|
|
$
|
85.1
|
|
|
$
|
70.1
|
|
|
$
|
1,261.4
|
|
East
|
400.5
|
|
|
22.5
|
|
|
79.8
|
|
|
59.4
|
|
|
837.4
|
|
Midwest
|
548.5
|
|
|
72.7
|
|
|
101.1
|
|
|
54.1
|
|
|
1,379.9
|
|
Corporate
|
—
|
|
|
(71.4
|
)
|
|
4.5
|
|
|
5.0
|
|
|
49.6
|
|
|
$
|
1,558.2
|
|
|
$
|
101.7
|
|
|
$
|
270.5
|
|
|
$
|
188.6
|
|
|
$
|
3,528.3
|
|
2017
|
|
|
|
|
|
|
|
|
|
South
|
$
|
570.5
|
|
|
$
|
89.8
|
|
|
$
|
85.0
|
|
|
$
|
65.0
|
|
|
$
|
1,219.7
|
|
East
|
380.2
|
|
|
(1.5
|
)
|
|
76.8
|
|
|
57.0
|
|
|
837.6
|
|
Midwest
|
556.9
|
|
|
71.7
|
|
|
98.9
|
|
|
62.7
|
|
|
1,400.2
|
|
Corporate
|
—
|
|
|
(69.9
|
)
|
|
9.1
|
|
|
1.9
|
|
|
35.8
|
|
|
$
|
1,507.6
|
|
|
$
|
90.1
|
|
|
$
|
269.8
|
|
|
$
|
186.6
|
|
|
$
|
3,493.3
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Residential Collection Revenue
|
|
$
|
410.9
|
|
|
$
|
402.9
|
|
Commercial Collection Revenue
|
|
396.5
|
|
|
376.3
|
|
Rolloff Collection Revenue
|
|
266.2
|
|
|
256.6
|
|
Disposal Revenue
|
|
283.9
|
|
|
271.2
|
|
Fuel and Environmental Charges
|
|
112.1
|
|
|
115.5
|
|
Sale of Recyclables
|
|
8.1
|
|
|
16.9
|
|
Other Revenue (1)
|
|
145.3
|
|
|
118.8
|
|
Total Service Revenue
|
|
$
|
1,623.0
|
|
|
$
|
1,558.2
|
|
(1) Refer to Note 3, Revenue Recognition, for definition of other revenue.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
23. Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash paid for interest
|
$
|
93.7
|
|
|
$
|
89.2
|
|
|
$
|
86.2
|
|
Cash paid for taxes (net of refunds)
|
$
|
(3.0
|
)
|
|
$
|
2.7
|
|
|
$
|
1.4
|
|
Assets acquired under finance/capital lease
|
$
|
19.2
|
|
|
$
|
36.7
|
|
|
$
|
45.2
|
|
24. Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive (loss) income, net of tax, which is included as a component of stockholders' equity, are as follows:
|
|
|
|
|
|
Gains and (Losses) on Derivative Instruments
|
Balance, December 31, 2016
|
—
|
|
Other comprehensive income before reclassifications, net of tax
|
(0.4
|
)
|
Net current period other comprehensive loss
|
(0.4
|
)
|
Balance, December 31, 2017
|
(0.4
|
)
|
Other comprehensive income before reclassifications, net of tax
|
0.4
|
|
Net current period other comprehensive loss
|
0.4
|
|
Balance, December 31, 2018
|
—
|
|
Other comprehensive loss before reclassifications, net of tax
|
(3.4
|
)
|
Impact of implementing new derivative standard, net of tax
|
0.4
|
|
Net current period other comprehensive loss
|
(3.0
|
)
|
Balance, December 31, 2019
|
$
|
(3.0
|
)
|
The significant amounts either added to or reclassified out of each component of accumulated other comprehensive (loss) income are included in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Derivative Gain (loss)
Recognized in OCI – Effective for the
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Derivatives Designated as Cash Flow Hedges
|
|
|
|
|
|
Interest rate caps
|
$
|
(4.1
|
)
|
|
$
|
0.4
|
|
|
$
|
(0.4
|
)
|
Total before tax
|
(4.1
|
)
|
|
0.4
|
|
|
(0.4
|
)
|
Tax expense
|
1.1
|
|
|
—
|
|
|
—
|
|
Net of tax
|
$
|
(3.0
|
)
|
|
$
|
0.4
|
|
|
$
|
(0.4
|
)
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions, unless otherwise indicated)
25. Quarterly Financial Data (Unaudited)
The following table summarizes the unaudited quarterly results of operations for the respective quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2019
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
384.0
|
|
|
$
|
419.1
|
|
|
$
|
419.5
|
|
|
$
|
400.4
|
|
Income from operations
|
$
|
17.9
|
|
|
$
|
8.7
|
|
|
$
|
29.5
|
|
|
$
|
18.4
|
|
Consolidated net (loss) income
|
$
|
(6.0
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
3.6
|
|
|
$
|
(3.2
|
)
|
Basic (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
Diluted (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
2018
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
364.7
|
|
|
$
|
398.1
|
|
|
$
|
400.6
|
|
|
$
|
394.8
|
|
Income from operations
|
$
|
20.0
|
|
|
$
|
35.0
|
|
|
$
|
17.5
|
|
|
$
|
29.2
|
|
Consolidated net income (loss)
|
$
|
2.1
|
|
|
$
|
9.7
|
|
|
$
|
(4.9
|
)
|
|
$
|
2.5
|
|
Basic income (loss) per share
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|
Diluted income (loss) per share
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|