Item 1. Financial Statements
Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
(in millions, except share data)
|
March 31,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
7.6
|
|
|
$
|
6.8
|
|
Accounts receivable, net of allowance for doubtful accounts of $4.6 and $4.6, respectively
|
205.6
|
|
|
211.4
|
|
Prepaid expenses and other current assets
|
42.3
|
|
|
44.8
|
|
Total current assets
|
255.5
|
|
|
263.0
|
|
Other assets
|
53.3
|
|
|
31.7
|
|
Property and equipment, net of accumulated depreciation of $1,608.0 and $1,540.7, respectively
|
1,760.7
|
|
|
1,761.4
|
|
Goodwill
|
1,222.7
|
|
|
1,215.1
|
|
Other intangible assets, net of accumulated amortization of $294.6 and $286.9, respectively
|
258.7
|
|
|
257.1
|
|
Total assets
|
$
|
3,550.9
|
|
|
$
|
3,528.3
|
|
Liabilities and Stockholders' Equity
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
118.9
|
|
|
$
|
107.8
|
|
Accrued expenses
|
120.0
|
|
|
117.7
|
|
Deferred revenue
|
71.3
|
|
|
72.5
|
|
Current maturities of landfill retirement obligations
|
18.6
|
|
|
18.6
|
|
Current maturities of long-term debt
|
84.3
|
|
|
85.9
|
|
Total current liabilities
|
413.1
|
|
|
402.5
|
|
Other long-term liabilities
|
94.9
|
|
|
76.7
|
|
Long-term debt, less current maturities
|
1,812.7
|
|
|
1,817.1
|
|
Accrued landfill retirement obligations, less current maturities
|
232.4
|
|
|
229.4
|
|
Deferred income taxes
|
88.3
|
|
|
91.1
|
|
Total liabilities
|
2,641.4
|
|
|
2,616.8
|
|
Equity
|
|
|
|
Common stock: $.01 par value, 1,000,000,000 shares authorized, 88,795,462 and 88,685,920 issued including shares held in treasury, respectively
|
0.9
|
|
|
0.9
|
|
Treasury stock at cost, 2,274 and 2,274 shares, respectively
|
—
|
|
|
—
|
|
Additional paid-in capital
|
1,507.7
|
|
|
1,501.7
|
|
Accumulated deficit
|
(597.5
|
)
|
|
(591.1
|
)
|
Accumulated other comprehensive loss
|
(1.6
|
)
|
|
—
|
|
Total stockholders' equity
|
909.5
|
|
|
911.5
|
|
Total liabilities and stockholders' equity
|
$
|
3,550.9
|
|
|
$
|
3,528.3
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
(in millions, except share and per share data)
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
Service revenues
|
$
|
384.0
|
|
|
$
|
364.7
|
|
Operating costs and expenses
|
|
|
|
Operating
|
249.6
|
|
|
236.1
|
|
Selling, general and administrative
|
49.7
|
|
|
45.6
|
|
Depreciation and amortization
|
65.9
|
|
|
64.7
|
|
Acquisition and development costs
|
0.7
|
|
|
0.2
|
|
Loss (gain) on disposal of assets and asset impairments
|
0.2
|
|
|
(1.9
|
)
|
Total operating costs and expenses
|
366.1
|
|
|
344.7
|
|
Operating income
|
17.9
|
|
|
20.0
|
|
Other (expense) income
|
|
|
|
Interest expense
|
(26.0
|
)
|
|
(23.0
|
)
|
Other income, net
|
0.7
|
|
|
5.9
|
|
Total other expense
|
(25.3
|
)
|
|
(17.1
|
)
|
(Loss) income before income taxes
|
(7.4
|
)
|
|
2.9
|
|
Income tax (benefit) expense
|
(1.4
|
)
|
|
0.8
|
|
Net (loss) income
|
$
|
(6.0
|
)
|
|
$
|
2.1
|
|
|
|
|
|
Net (loss) income attributable to common stockholders per share
|
|
|
|
Basic (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
0.02
|
|
Diluted (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
0.02
|
|
Basic average shares outstanding
|
88,721,612
|
|
|
88,515,854
|
|
Diluted average shares outstanding
|
88,721,612
|
|
|
89,021,709
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
|
|
|
|
|
|
|
|
|
(in millions)
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
Net (loss) income
|
$
|
(6.0
|
)
|
|
$
|
2.1
|
|
Change in fair value of interest rate caps, net of tax of $0.8 and ($0.7), respectively
|
(2.0
|
)
|
|
2.2
|
|
Comprehensive (loss) income
|
$
|
(8.0
|
)
|
|
$
|
4.3
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital
|
|
Accumulated Deficit
|
|
Accumulated
Other Comprehensive (Loss) Income
|
|
Total Stockholders' Equity
|
(in millions, except share data)
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
Balance at December 31, 2018
|
88,685,920
|
|
|
$
|
0.9
|
|
|
2,274
|
|
|
—
|
|
|
$
|
1,501.7
|
|
|
$
|
(591.1
|
)
|
|
$
|
—
|
|
|
$
|
911.5
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0
|
)
|
|
—
|
|
|
(6.0
|
)
|
Stock-based compensation
|
18,735
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.1
|
|
|
—
|
|
|
—
|
|
|
4.1
|
|
Stock option exercises
|
90,807
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
Unrealized loss resulting from change in fair value of derivative instruments, net of tax of $0.8
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.0
|
)
|
|
(2.0
|
)
|
Impact of implementing new derivatives standard, net of tax of $0.2
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
0.4
|
|
|
—
|
|
Balance at March 31, 2019
|
88,795,462
|
|
|
$
|
0.9
|
|
|
2,274
|
|
|
—
|
|
|
$
|
1,507.7
|
|
|
$
|
(597.5
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
909.5
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
(in millions)
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Cash flows from operating activities
|
|
|
|
Net (loss) income
|
$
|
(6.0
|
)
|
|
$
|
2.1
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities
|
|
|
|
Depreciation and amortization
|
65.9
|
|
|
64.7
|
|
Change in fair value of derivative instruments
|
2.5
|
|
|
(5.3
|
)
|
Amortization of debt issuance costs and original issue discount
|
1.3
|
|
|
1.6
|
|
Accretion on landfill retirement obligations
|
4.4
|
|
|
3.8
|
|
Other accretion and amortization
|
1.5
|
|
|
1.1
|
|
Provision for doubtful accounts
|
1.1
|
|
|
1.3
|
|
Loss (gain) on disposition of property and equipment
|
0.2
|
|
|
(1.9
|
)
|
Stock based compensation
|
4.1
|
|
|
2.5
|
|
Deferred tax (benefit) expense
|
(1.6
|
)
|
|
1.4
|
|
Earnings in equity investee
|
(0.8
|
)
|
|
(0.5
|
)
|
Changes in operating assets and liabilities, net of businesses acquired
|
|
|
|
Decrease in accounts receivable
|
5.9
|
|
|
7.3
|
|
Increase in prepaid expenses and other current assets
|
(0.1
|
)
|
|
(0.5
|
)
|
Decrease in other assets
|
1.9
|
|
|
0.4
|
|
Increase in accounts payable
|
2.9
|
|
|
5.3
|
|
(Decrease) increase in accrued expenses
|
(1.0
|
)
|
|
3.6
|
|
(Decrease) increase in deferred revenue
|
(1.2
|
)
|
|
0.1
|
|
Decrease in other long-term liabilities
|
(4.8
|
)
|
|
(3.9
|
)
|
Capping, closure and post-closure obligations
|
(3.7
|
)
|
|
(4.6
|
)
|
Net cash provided by operating activities
|
72.5
|
|
|
78.5
|
|
Cash flows from investing activities
|
|
|
|
Purchases of property and equipment and landfill construction and development
|
(32.5
|
)
|
|
(34.8
|
)
|
Proceeds from sale of property and equipment and insurance recoveries
|
1.0
|
|
|
1.6
|
|
Acquisition of businesses, net of cash acquired
|
(26.1
|
)
|
|
(4.5
|
)
|
Net cash used in investing activities
|
(57.6
|
)
|
|
(37.7
|
)
|
Cash flows from financing activities
|
|
|
|
Proceeds from borrowings on debt instruments
|
58.0
|
|
|
10.0
|
|
Repayment on debt instruments, including finance leases
|
(74.0
|
)
|
|
(51.4
|
)
|
Proceeds from issuance of common stock
|
1.9
|
|
|
0.3
|
|
Net cash used in financing activities
|
(14.1
|
)
|
|
(41.1
|
)
|
Net increase (decrease) in cash and cash equivalents
|
0.8
|
|
|
(0.3
|
)
|
Cash and cash equivalents, beginning of period
|
6.8
|
|
|
6.8
|
|
Cash and cash equivalents, end of period
|
$
|
7.6
|
|
|
$
|
6.5
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
Advanced Disposal Services, Inc. together with its consolidated subsidiaries (the "Company"), as a consolidated entity, is a non-hazardous solid waste services company providing collection, transfer, recycling and disposal services to customers in the South, Eastern and Midwest regions of the United States.
The Company manages and evaluates its principal operations through
three
reportable operating segments on a regional basis. Those operating segments are the South, East and Midwest regions which provide collection, transfer, recycling and disposal services. Additional information related to segments can be found in Note 10.
Two
acquisitions were completed during the
three months ended March 31, 2019
for aggregate consideration consisting of a cash purchase price of
$23.9
and notes payable of
$1.0
subject to net working capital adjustments and other commitments, which are expected to be completed within approximately one year. Additionally, the Company made a
$2.2
deferred purchase price payment during the three months ended March 31, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018.
Five
acquisitions were completed during the
three months ended March 31, 2018
for a cash purchase price of
$4.5
and notes payable of
$0.5
. The results of operations of each acquisition are included in the Company's unaudited condensed consolidated statements of operations subsequent to the closing date of each acquisition. Our acquisition accounting and valuation processes with respect to property and equipment, intangible assets, current liabilities and long-term liabilities related to acquisitions completed subsequent to October 1, 2018 are preliminary and subject to adjustments.
The Company’s condensed consolidated financial statements include its wholly-owned subsidiaries and their respective subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements as of
March 31, 2019
and for the
three months ended March 31, 2019
and 2018 are unaudited. In the opinion of management, these condensed consolidated financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair statement of the balance sheet, results of operations, comprehensive (loss) income, cash flows, and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
In conformity with accounting principles generally accepted in the United States of America, the Company uses estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. The Company must make these estimates and assumptions because certain information that it uses is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In preparing the Company's financial statements, the more subjective areas that deal with the greatest amount of uncertainty relate to: accounting for long-lived assets, including recoverability; landfill development costs; final capping, closure and post-closure costs; valuation allowances for accounts receivable and deferred tax assets; liabilities for potential litigation, claims and assessments; liabilities for environmental remediation; stock compensation; accounting for goodwill and intangible asset impairments; deferred taxes; uncertain tax positions; self-insurance reserves; and estimates of the fair value of assets acquired and liabilities assumed in any acquisition. Actual results could differ materially from the estimates and assumptions that the Company uses in preparation of its financial statements.
Recently Adopted Accounting Standards
In August 2017, the FASB issued ASU 2017-12 which intends to address concerns through changes to hedge accounting guidance which will accomplish the following: a) expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company's risk management activities; b) decrease the complexity of preparing and understanding hedge results through eliminating the separate measurement and reporting of hedge ineffectiveness; c) enhance transparency, comparability and understandability of hedge results through enhanced disclosures and changing the presentation of hedge results to align the effects of the hedging instrument and the hedged item; and d) reduce the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company's adoption of this guidance during the first quarter of fiscal 2019 required a
$0.4
adjustment to opening accumulated deficit, net of tax.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in July 2018 the FASB issued ASU 2018-11, Leases: Targeted Improvements, in December 2018 the FASB issued ASU 2018-20, Leases: Narrow Scope Improvements for Lessors and in March 2019 the FASB issued ASU 2019-1, Leases: Codification Improvements. Lessees are required to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors are required to recognize a net lease investment. Additional qualitative and quantitative disclosures are also required to increase transparency and comparability among organizations. The Company adopted Topic 842 and applicable technical updates as of January 1, 2019 using the modified retrospective transition method. See Note 13 for further details.
Revenue by Segment
See Note 10 for information related to revenue by reportable segment and major line of business.
Capitalized Sales Commissions
Under ASC 606, Revenue from Contracts with Customers, the Company capitalizes sales commissions as contract assets related to commercial and permanent rolloff collection customers and amortizes those sales commissions over the estimated customer life. The balance of capitalized sales commissions as of March 31, 2019 and December 31, 2018 were
$4.5
and
$4.4
, respectively. The Company recorded amortization expense of
$0.4
and
$0.3
related to capitalized sales commissions for the three months ended March 31, 2019 and 2018, respectively.
Deferred Revenues
The Company records deferred revenue when cash payments are received in advance of the Company's performance. The increase in the deferred revenue balance from December 31, 2018 to March 31, 2019 is primarily driven by cash payments received or due in advance of the Company satisfying its performance obligations, offset by
$69.2
of revenues recognized that were included in the deferred revenue balance at December 31, 2018.
Practical Expedients
As allowed by ASC 606, the Company does not disclose the value of unsatisfied performance obligations related to its contracts and service agreements as the Company accounts for its revenue as variable consideration and has the right to invoice for services performed each period.
Liabilities for final closure and post-closure costs for the year ended December 31, 2018 and for the
three months ended
March 31, 2019
are shown in the table below:
|
|
|
|
|
Balance at December 31, 2017
|
$
|
225.9
|
|
Increase in retirement obligation
|
9.7
|
|
Accretion of closure and post-closure costs
|
17.0
|
|
Acquisition
|
4.9
|
|
Asset retirement obligation adjustments
|
10.7
|
|
Costs incurred
|
(20.2
|
)
|
Balance at December 31, 2018
|
248.0
|
|
Increase in retirement obligation
|
2.3
|
|
Accretion of closure and post-closure costs
|
4.4
|
|
Costs incurred
|
(3.7
|
)
|
Balance at March 31, 2019
|
251.0
|
|
Less: Current portion
|
(18.6
|
)
|
|
$
|
232.4
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
5. (Loss) Earnings Per Share
The following table sets forth the computation of basic (loss) earnings per share and (loss) earnings per share, assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(6.0
|
)
|
|
$
|
2.1
|
|
Denominator:
|
|
|
|
|
|
Average common shares outstanding
|
88,721,612
|
|
|
88,515,854
|
|
|
Other potentially dilutive common shares
|
—
|
|
|
505,855
|
|
|
Average common shares outstanding, assuming dilution
|
88,721,612
|
|
|
89,021,709
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
0.02
|
|
|
Diluted net (loss) income per share
|
$
|
(0.07
|
)
|
|
$
|
0.02
|
|
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. Diluted net (loss) income per share is based on the weighted-average number of shares of common stock equivalents outstanding adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. The Company's potentially dilutive instruments are made up of equity awards, which include stock options, restricted stock units and performance stock units.
Pursuant to the FASB’s Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share, the Company includes additional shares in the computation of diluted net income per share. The additional shares included in diluted net income per share represent the number of shares that would be issued if all of the above potentially dilutive instruments were converted into common stock. When calculating diluted net income per share, the ASC requires the Company to include the potential shares that would be outstanding if dilutive outstanding stock options were exercised. This number is different from outstanding stock options because it is offset by shares the Company could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.
Approximately
5.5
million and
2.3
million of outstanding stock awards were excluded from the diluted net (loss) income per share calculation for the three months ended March 31, 2019 and March 31, 2018, respectively, because their effect was antidilutive.
The following table summarizes the major components of debt at each balance sheet date and provides the maturities and interest rate ranges of each major category of debt:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Revolving line of credit with lenders (Revolver), interest at applicable rate plus margin, as defined (6.06% and 6.69% at March 31, 2019 and December 31, 2018, respectively) due quarterly; balance due at maturity in November 2021
|
$
|
35.0
|
|
|
$
|
37.0
|
|
Term loans (Term Loan B); quarterly payments of $3.75 commencing March 31, 2017 through September 30, 2023 with final payment due November 10, 2023; interest at an alternate base rate or adjusted LIBOR rate with a 0.75% floor plus an applicable margin
|
1,383.8
|
|
|
1,387.5
|
|
Senior notes (Senior Notes) payable; interest at 5.625% payable in arrears semi-annually commencing May 15, 2017; maturing on November 15, 2024
|
425.0
|
|
|
425.0
|
|
Finance lease obligations, maturing through 2024
|
68.9
|
|
|
69.2
|
|
Other debt
|
8.2
|
|
|
9.5
|
|
|
1,920.9
|
|
|
1,928.2
|
|
Less: Original issue discount and debt issuance costs classified as a reduction to long-term debt
|
(23.9
|
)
|
|
(25.2
|
)
|
Less: Current portion
|
(84.3
|
)
|
|
(85.9
|
)
|
|
$
|
1,812.7
|
|
|
$
|
1,817.1
|
|
All borrowings under the Term Loan B, Revolver and Senior Notes are guaranteed by each of the Company's current and future domestic subsidiaries, subject to certain agreed-upon exemptions. All guarantors are jointly and severally and fully and unconditionally liable. There are no significant restrictions on the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan.
Revolver and Letter of Credit Facilities
As of
March 31, 2019
, the Company had an aggregate committed capacity of
$300.0
, of which
$100.0
was available for letters of credit under its credit facilities. The Company’s Revolver is its primary source of letter of credit capacity and expires in 2021. As of
March 31, 2019
and December 31, 2018, the Company had
$35.0
and
$37.0
of borrowings outstanding on the Revolver, respectively. As of
March 31, 2019
and December 31, 2018, the Company had an aggregate of
$32.3
and
$32.3
, respectively, of letters of credit outstanding under its credit facilities.
7. Derivative Instruments and Hedging Activities
The following table summarizes the fair values of derivative instruments recorded in the Company’s condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
March 31, 2019
|
|
December 31,
2018
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
2017 Interest rate caps
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
0.7
|
|
2017 Interest rate caps
|
|
Accrued expenses
|
|
(0.6
|
)
|
|
—
|
|
2017 Interest rate caps
|
|
Other long-term liabilities
|
|
(1.6
|
)
|
|
—
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
2016 Interest rate caps
|
|
Prepaid expenses and other current assets
|
|
3.3
|
|
|
5.8
|
|
Total derivatives
|
|
|
|
$
|
1.1
|
|
|
$
|
6.5
|
|
The Company has not offset fair value of assets and liabilities recognized for its derivative instruments.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
Interest Rate Caps
In November 2017, the Company entered into
two
interest rate cap agreements as cash flow hedges (the "2017 interest rate caps") to hedge the risk of a rise in interest rates and associated cash flows on its variable rate debt. The Company has applied hedge accounting to the 2017 interest rate caps; therefore, changes in the fair value of the 2017 interest rate caps are recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statements of comprehensive (loss) income. The 2017 interest rate caps commence in 2019 and expire in 2021. The Company will pay the
$4.9
premium on the 2017 interest rate caps in monthly installments beginning in October 2019. The Company recorded a loss of
$2.8
for the three months ended March 31, 2019 which was recorded in other comprehensive loss in the condensed consolidated statement of comprehensive (loss) income. The Company recorded a gain related to the 2017 interest rate caps of
$3.5
for the three months ended March 31, 2018 of which the effective portion of
$2.9
was recorded in other comprehensive income in the condensed consolidated statement of comprehensive (loss) income and the ineffective portion of
$0.6
was recorded in other income, net in the consolidated statement of operations. The notional value of the 2017 interest rate cap contracts aggregated were
$600.0
as of March 31, 2019 and will remain constant through maturity in 2021.
In May 2016, the Company entered into
three
interest rate cap agreements (the "2016 interest rate caps") as economic hedges against the risk of a rise in interest rates and the associated cash flows on its variable rate debt. The Company is paying the
$5.5
premium of the 2016 interest rate caps equally over eleven quarters beginning on March 31, 2017. The Company elected not to apply hedge accounting to the 2016 interest rate caps, therefore, changes in the fair value of the 2016 interest rate caps are recorded in other income, net in the condensed consolidated statements of operations. The Company recorded a loss related to the 2016 interest rate caps of
$0.5
and a gain of
$4.6
for the three months ended
March 31, 2019
and
2018
, respectively. The notional value of the 2016 interest rate cap contracts aggregated were
$800.0
as of
March 31, 2019
and will remain constant through maturity in September 2019.
8. Income Taxes
The Company’s effective income tax rate for the
three months ended March 31, 2019
and
2018
was
18.9%
and
27.6%
, respectively. The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of
21%
and reported income taxes for the three months ended March 31, 2019 was primarily due to the change to pre-tax book loss during the first quarter of fiscal 2019 versus pre-tax book income during the first quarter of fiscal 2018. The difference between income taxes computed at the federal statutory rate of
21%
and reported income taxes for the three months ended March 31, 2018 was primarily due to the impact of state and local taxes.
As of
March 31, 2019
, the Company had
$31.5
of liabilities associated with unrecognized tax benefits and related interest. These liabilities are included as components of other liabilities and deferred income taxes in the Company’s consolidated balance sheet. The Company does not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. The Company is not able to reasonably estimate when it would make any cash payments required to settle these liabilities, but the Company does not believe that the ultimate settlement of its obligations will materially affect its liquidity.
|
|
9.
|
Commitments and Contingencies
|
Financial Instruments
The Company has obtained letters of credit, performance bonds and insurance policies for the performance of the following: landfill final capping, closure and post-closure requirements; certain collection, landfill and transfer station contracts; environmental remediation; and other obligations. Letters of credit are supported by the Company’s Revolver (Note 6).
The Company does not expect that any claims against or draws on these instruments would have a material adverse effect on the Company’s condensed consolidated financial statements. The Company has not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for its current operations. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, the Company continues to evaluate various options to access cost-effective sources of financial assurance.
Insurance
The Company carries insurance coverage for protection of its assets and operations from certain risks including automobile liability, general liability, real and personal property, workers' compensation, directors' and officers' liability, pollution, legal
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
liability and other coverages the Company believes are customary to the industry. The Company's exposure to loss for insurance claims is generally limited to the per incident deductible, or self-insured retention, under the related insurance policy. Its exposure, however, could increase if its insurers are unable to meet their commitments on a timely basis.
The Company has retained a significant portion of the risks related to its automobile, general liability, workers' compensation and health claims programs. For its self-insured retentions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation and internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from the Company's assumptions used. The Company does not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on its financial condition, results of operations or cash flows.
Landfill Remediation
In fiscal 2018, the Company observed surface anomalies in specific areas of a landfill and received a proposed consent order, from a state environmental regulatory agency, outlining conditions required to be met at the landfill. The consent order was finalized during the three months ended March 31, 2019 and the Company was assessed a penalty of
$0.2
. Based on the Company's best estimate during fiscal 2018, the Company recorded remediation accruals of
$16.2
for required engineering enhancements related to leachate and gas infrastructure at the site. These accruals included costs for an enhanced de-watering system and the removal, treatment, and disposal of leachate at the site.
No
additional accruals related to this matter were recorded in operating expenses during the three months ended March 31, 2019. As of March 31, 2019,
$8.0
of expenditures related to the remediation accrual estimates have been incurred and
$8.2
remains on the consolidated balance sheet. This amount could increase or decrease as a result of actual costs incurred to completion. The Company expects the remaining expenditures to be incurred through fiscal 2022.
Litigation and Other Matters
In February 2009, the Company and certain of its subsidiaries were named as defendants in a purported class action suit in the Circuit Court of Macon County, Alabama. Similar class action complaints were brought against the Company and certain of its subsidiaries in 2011 in Duval County, Florida and in 2013 in Quitman County, Georgia and Barbour County, Alabama, and in 2014 in Chester County, Pennsylvania. The 2013 Georgia complaint was dismissed in March 2014. In late 2015 in Gwinnett County, Georgia, another purported class action suit was filed. The plaintiffs in those 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 in an unspecified amount. The Company believes that it has meritorious defenses against these purported class actions, which it will vigorously pursue. Given the inherent uncertainties of litigation, including the early stage of these cases, the unknown size of any potential class, and legal and factual issues in dispute, the outcome of these cases cannot be predicted and a range of loss, if any, cannot currently be estimated.
In February 2017, a waste slide occurred in one cell at the Company’s Greentree Landfill in Kersey, Pennsylvania.
No
benefit or charge was recorded in operating expenses during three months ended March 31, 2019 and a
$3.8
charge was recorded in operating expenses during the three months ended March 31, 2018. 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 expect to incur further benefits or charges related to this matter.
The Company is subject to various other proceedings, lawsuits, disputes and claims and regulatory investigations arising in the ordinary course of its business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against the Company include commercial, customer, and employment-related claims. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered in part by insurance. Although the Company cannot predict the ultimate outcome and the range of loss cannot be currently estimated, the Company does not believe that the eventual outcome of any such action could have a material adverse effect on its business, financial condition, results of operations, or cash flows.
Multiemployer Defined Benefit Pension Plans
Approximately
14.0%
of the Company’s workforce is covered by collective bargaining agreements with various local unions across its operating regions. As a result of some of these agreements, certain of the Company’s subsidiaries are participating employers in a number of trustee-managed multiemployer, defined benefit pension plans for the affected employees.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
A complete or partial withdrawal from a multiemployer pension plan may occur if employees covered by a collective bargaining agreement vote to decertify a union from continuing to represent them. The Company is not aware of any such actions in connection with continuing operations. As a result of certain prior discontinued operations, the Company is potentially exposed to certain withdrawal liabilities.
The Company does not believe that any future withdrawals, individually or in the aggregate, from the multiemployer plans to which it contributes could have a material adverse effect on the Company's business, financial condition or liquidity. However, such withdrawals could have a material adverse effect on the Company's results of operations for a particular reporting period, depending on the number of employees withdrawn in any future period and the financial condition of the multiemployer plan(s) at the time of such withdrawal(s).
Tax Matters
The Company has open tax years dating back to 2003. Prior to the acquisition in fiscal 2012, Veolia ES Solid Waste division was part of a consolidated group and is still 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.
The Company maintains a liability for uncertain tax positions, the balance of which management believes is adequate. Results of audit assessments by taxing authorities are not currently expected to have a material adverse impact on the Company's results of operations or cash flows.
10. Segment and Related Information
The Company manages and evaluates its operations primarily through its South, East and Midwest regional segments. These
three
groups are presented below as the Company’s reportable segments. The Company’s
three
geographic operating segments provide collection, transfer, disposal and recycling services. The Company serves residential, commercial and industrial, and municipal customers throughout its operating segments.
Service revenues, operating income/(loss) and depreciation and amortization for the Company's reportable segments for the periods indicated are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Revenues
|
|
Operating
Income
(Loss)
|
|
Depreciation
and
Amortization
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
South
|
$
|
159.9
|
|
|
$
|
24.0
|
|
|
$
|
22.7
|
|
East
|
94.9
|
|
|
1.7
|
|
|
19.2
|
|
Midwest
|
129.2
|
|
|
13.9
|
|
|
22.9
|
|
Corporate
|
—
|
|
|
(21.7
|
)
|
|
1.1
|
|
|
$
|
384.0
|
|
|
$
|
17.9
|
|
|
$
|
65.9
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
South
|
$
|
148.8
|
|
|
$
|
26.0
|
|
|
$
|
21.7
|
|
East
|
89.2
|
|
|
(1.8
|
)
|
|
18.0
|
|
Midwest
|
126.7
|
|
|
13.9
|
|
|
23.9
|
|
Corporate
|
—
|
|
|
(18.1
|
)
|
|
1.1
|
|
|
$
|
364.7
|
|
|
$
|
20.0
|
|
|
$
|
64.7
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
The following table presents the Company's revenues disaggregated by major line of business. Recycling rebates paid to customers, franchise fees paid to customers and state landfill taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Residential Collection Revenue
|
|
$
|
100.7
|
|
|
$
|
99.5
|
|
Commercial Collection Revenue
|
|
97.9
|
|
|
92.2
|
|
Rolloff Collection Revenue
|
|
62.3
|
|
|
60.6
|
|
Disposal Revenue
|
|
60.8
|
|
|
57.1
|
|
Fuel and Environmental Charges
|
|
27.6
|
|
|
26.8
|
|
Sale of Recyclables
|
|
3.1
|
|
|
5.1
|
|
Other Revenue
|
|
31.6
|
|
|
23.4
|
|
|
|
$
|
384.0
|
|
|
$
|
364.7
|
|
Fluctuations in the Company's operating results may be caused by many factors, including period-to-period changes in the relative contribution of revenue by each line of business and operating segment and by general economic conditions. In addition, its revenues and income from operations typically reflect seasonal patterns. The Company expects its operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring in the East and Midwest segments because of decreased construction and demolition activities during winter months in these regions of the United States. In addition, some of the Company's operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.
Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as hurricanes that most often impact the South region, can increase the Company’s revenues in the areas affected. While weather-related and other occurrences can boost revenues through additional work, the earnings generated can be moderated as a result of significant start-up costs and other factors, resulting in earnings at comparatively lower margins. These destructive weather conditions can result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs in disposal neutral markets. Certain weather conditions, including severe winter storms, may result in the temporary suspension of the Company’s operations, which can significantly affect the operating results of the affected regions.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
11. Fair Value Measurements
Assets and Liabilities Accounted for at Fair Value
In measuring fair values of assets and liabilities, the Company uses valuation techniques that maximize the use of observable inputs (Level 1) and minimize the use of unobservable inputs (Level 3). The Company does not have any assets or liabilities measured using unobservable Level 3 inputs. The Company also uses market data or assumptions that it believes market participants would use in pricing an asset or liability, including assumptions about risk when appropriate. The carrying value for certain of the Company's financial instruments approximate fair value because of their short-term nature. The Company’s assets and liabilities that are measured at fair value on a recurring basis include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at March 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
|
$
|
7.6
|
|
|
$
|
7.6
|
|
|
$
|
—
|
|
|
$
|
7.6
|
|
Interest rate caps - asset position
|
3.3
|
|
|
—
|
|
|
3.3
|
|
|
3.3
|
|
Interest rate caps - liability position
|
(2.2
|
)
|
|
—
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
Total recurring fair value measurements
|
$
|
8.7
|
|
|
$
|
7.6
|
|
|
$
|
1.1
|
|
|
$
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2018
Reporting Date Using
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
6.8
|
|
|
$
|
6.8
|
|
|
$
|
—
|
|
|
$
|
6.8
|
|
Interest rate caps - asset position
|
6.5
|
|
|
—
|
|
|
6.5
|
|
|
6.5
|
|
Total recurring fair value measurements
|
$
|
13.3
|
|
|
$
|
6.8
|
|
|
$
|
6.5
|
|
|
$
|
13.3
|
|
The fair value of the interest rate caps are determined using standard option valuation models with assumptions about interest rates based on those observed in underlying markets (Level 2 in fair value hierarchy).
Fair Value of Debt
The fair value of the Company’s debt (Level 2) is estimated using indirectly observable market inputs, except for the Revolver for which cost approximates fair value due to the short-term nature of the interest rate. Although the Company has determined the estimated fair value amounts using quoted market prices, considerable judgment is required in interpreting the information and in developing the estimated fair values. Therefore, these estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. The fair value estimates are based on information available as of
March 31, 2019
and
December 31, 2018
, respectively.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
The estimated fair value of the Company’s debt is as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Revolver
|
$
|
35.0
|
|
|
$
|
37.0
|
|
Senior Notes
|
433.4
|
|
|
418.6
|
|
Term Loan B
|
1,378.6
|
|
|
1,332.0
|
|
|
$
|
1,847.0
|
|
|
$
|
1,787.6
|
|
The carrying value of the Company’s debt at
March 31, 2019
and
December 31, 2018
was
$1,843.8
and
$1,849.5
, respectively.
12. Stock Based Compensation
Named Executive Officer (NEO) Grants
During the quarter ended March 31, 2019, there were
46,130
NEO restricted stock units granted under the 2016 Omnibus Equity Plan (the "2016 Plan") with a fair value of
$26.69
per share. The restricted stock units will vest in full on the third anniversary of the date of the grant.
During the quarter ended March 31, 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. 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 will be 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 will be the sum of the PSUs earned with respect to each individual year.
During the quarter ended March 31, 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. The contractual term of each option is
10 years
.
Non-Employee Director Grants
During the quarter ended March 31, 2019, there were
18,735
restricted stock awards granted under the 2016 Plan to non-employee directors with a fair value of
$26.69
per share. The restricted stock awards will vest in full on the third anniversary of the date of the grant.
Annual Stock Option Grants
During the quarter ended March 31, 2019, there were
548,399
annual options granted under the 2016 Plan for employees other than the NEO's. 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. The contractual term of each option is
10 years
.
13. Leases
The Company adopted ASC Topic 842, Leases, as of January 1, 2019 and has applied its transition provisions at the beginning of the period of adoption (i.e. on the effective date), and did not restate comparative periods. Under this transition provision, the Company has applied the legacy guidance under ASC Topic 840, Leases, including its disclosure requirements, in the comparative periods presented.
Under ASC Topic 842, a lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration. The Company’s contracts determined to be, or contain, a lease include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Leases are classified as either operating or financing. For operating leases, the Company has recognized
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for prepaid rents. The Company used its incremental borrowing rate to determine the present value of the lease payments. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company determined the incremental borrowing rates for its leases by applying its applicable borrowing rate, with adjustment as appropriate for lease currency and lease term.
Upon adoption, the Company recognized right-of-use assets and lease liabilities for operating leases in the amount of
$23.5
and
$24.3
, respectively.
The Company enters into contracts to lease real estate, equipment and vehicles. The Company’s most individually significant lease liabilities relate to real estate leases that have initial contract lease terms ranging from
8
to
55 years
. The company’s most significant lease liabilities in aggregate value relate to equipment and vehicle leases that have initial contract lease terms of
3 years
. Certain leases include renewal, termination or purchase options that were not deemed reasonably assured of exercise under ASC 840. Under ASC Topic 842, the lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option, and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the option is controlled by the lessor. The Company considered a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.
Operating leases result in a straight-line lease expense, while finance leases result in a front-loaded expense pattern. The assets associated with financing leases have been included in Property, Plant and Equipment in the consolidated balance sheet. Depreciation on financing lease assets is included in Depreciation and amortization on the consolidated statement of operations. The Company does not sublease any of its material leased assets to third parties and the Company is not party to any lease contracts with related parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
ASC Topic 842 includes practical expedient and policy election choices. The Company elected the package of practical expedients available in the standard and as a result, did not reassess the lease classification of existing leases, did not reassess 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 quarter ended March 31, 2019 that required a reassessment or re-measurement. In addition, there were no impairment indicators identified during the quarter ended March 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.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
Lease cost
|
|
|
Finance lease cost
|
|
|
Amortization of right-of-use assets
|
|
$
|
4.0
|
|
Interest on lease liabilities
|
|
0.8
|
|
Operating lease cost
|
|
1.3
|
|
Short-term lease cost
|
|
1.5
|
|
Total lease cost
|
|
$
|
7.6
|
|
|
|
|
Other information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from finance leases
|
|
$
|
0.8
|
|
Operating cash flows from operating leases
|
|
$
|
1.4
|
|
Financing cash flows from finance leases
|
|
$
|
9.6
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
8.5
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
0.5
|
|
Weighted-average remaining lease term (in years) - finance leases
|
|
2.5
|
|
Weighted-average remaining lease term (in years) - operating leases
|
|
17.2
|
|
|
|
|
|
|
Discount rates
|
|
|
Weighted-average discount rate - finance leases
|
|
4.8
|
%
|
Weighted-average discount rate - operating leases
|
|
5.0
|
%
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
The supplemental balance sheet information related to leases for the period is as follows:
|
|
|
|
|
|
|
|
March 31, 2019
|
Operating leases
|
|
|
Operating lease right-of-use assets
|
|
$
|
23.0
|
|
|
|
|
Accrued expenses
|
|
$
|
4.3
|
|
Other long-term liabilities
|
|
19.1
|
Total operating lease liabilities
|
|
$
|
23.4
|
|
|
|
|
Finance leases
|
|
|
Property and equipment, at cost
|
|
$
|
122.9
|
|
Accumulated depreciation
|
|
(28.0
|
)
|
Property and equipment, net
|
|
$
|
94.9
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
34.0
|
|
Long term debt, less current maturities
|
|
34.9
|
Total finance lease liabilities
|
|
$
|
68.9
|
|
Maturities of the Company’s lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
Year Ending
|
|
Operating Leases
|
|
Finance Leases
|
2019 (April through December)
|
|
$
|
3.9
|
|
|
$
|
27.8
|
|
2020
|
|
4.5
|
|
|
27.8
|
|
2021
|
|
3.1
|
|
|
13.7
|
|
2022
|
|
2.4
|
|
|
2.4
|
|
2023
|
|
1.8
|
|
|
1.3
|
|
2024
|
|
1.3
|
|
|
0.6
|
|
Thereafter
|
|
20.1
|
|
|
—
|
|
Total lease payments
|
|
37.1
|
|
|
73.6
|
|
Less: Imputed interest
|
|
(13.7
|
)
|
|
(4.7
|
)
|
Present value of lease liabilities
|
|
$
|
23.4
|
|
|
$
|
68.9
|
|
14. Subsequent Events
Agreement and Plan of Merger
On April 14, 2019, the Company entered into an Agreement and Plan of Merger with Waste Management, Inc., a Delaware corporation (“Parent”), and Everglades Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent. Further details can be found in the Company's Form 8-K related to this matter, filed with the Securities and Exchange Commission on April 15, 2019.
Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the unaudited condensed consolidated financial statements and notes thereto included under Item 1. In addition, you should refer to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our 2018 Annual Report on Form 10-K. All dollar amounts are presented in millions, unless otherwise stated.
Overview
We are a leading integrated provider of non-hazardous solid waste collection, transfer, recycling and disposal services, operating primarily in secondary markets or under exclusive arrangements. We have a presence in 16 states across the South, East and Midwest regions of the United States, serving approximately 2.8 million residential and over 200,000 commercial and industrial (C&I) customers through our extensive network of 95 collection operations, 73 transfer stations, 22 owned or operated recycling facilities and 41 owned or operated landfills. We have 18 active landfill gas operations at solid waste landfills where landfill gas is captured and utilized for its renewable energy value rather than flared. We also have post-closure responsibility for six closed landfills. We seek to drive financial performance in markets in which we own or operate a disposal facility or in certain disposal-neutral markets, where the disposal facility is owned by our municipal customer. In markets in which we own or operate a disposal facility, we aim to create and maintain vertically integrated operations through which we manage a majority of our customers' waste from the point of collection through the point of disposal, a process we refer to as internalization. By internalizing a majority of the waste in these markets, we are able to deliver high quality customer service while also ensuring a stable revenue stream and maximizing profitability and cash flow from operations. In disposal-neutral markets, we focus selectively on opportunities where we can negotiate exclusive arrangements with our municipal customers, facilitating highly efficient and profitable collection operations with lower capital requirements.
Geographically, we focus our business principally in secondary, or less densely populated non-urban, markets where the presence of large national providers is generally more limited. We also compete selectively in primary, or densely populated urban, markets where we can capitalize on opportunities for vertical integration through our high-quality transfer and disposal infrastructure and where we can benefit from highly efficient collection route density. We maintain an attractive mix of revenue from varying sources, including residential collections, C&I collections, landfill gas and special waste streams, and fees charged to third parties for disposal in our network of transfer stations and landfills.
Recent Development
On April 14, 2019, we entered into an Agreement and Plan of Merger with Waste Management, Inc., a Delaware corporation (“Parent”), and Everglades Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Parent. Further details can be found in our Form 8-K related to this matter, filed with the Securities and Exchange Commission on April 15, 2019.
Results of Operations
The following table sets forth for the periods indicated our consolidated results of operations and the percentage relationship that certain items from our condensed consolidated financial statements bear to revenue (in millions and as a percentage of our revenue).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Service revenues
|
$
|
384.0
|
|
|
100.0
|
%
|
|
$
|
364.7
|
|
|
100.0
|
%
|
Operating costs and expenses
|
|
|
|
|
|
|
|
Operating
|
245.2
|
|
|
63.9
|
%
|
|
232.3
|
|
|
63.7
|
%
|
Accretion of landfill retirement obligations
|
4.4
|
|
|
1.1
|
%
|
|
3.8
|
|
|
1.0
|
%
|
Operating expenses
|
249.6
|
|
|
65.0
|
%
|
|
236.1
|
|
|
64.7
|
%
|
Selling, general and administrative
|
49.7
|
|
|
12.9
|
%
|
|
45.6
|
|
|
12.5
|
%
|
Depreciation and amortization
|
65.9
|
|
|
17.2
|
%
|
|
64.7
|
|
|
17.7
|
%
|
Acquisition and development costs
|
0.7
|
|
|
0.1
|
%
|
|
0.2
|
|
|
0.1
|
%
|
Loss (gain) on disposal of assets and asset impairments
|
0.2
|
|
|
0.1
|
%
|
|
(1.9
|
)
|
|
(0.5
|
)%
|
Total operating costs and expenses
|
366.1
|
|
|
95.3
|
%
|
|
344.7
|
|
|
94.5
|
%
|
Operating income
|
$
|
17.9
|
|
|
4.7
|
%
|
|
$
|
20.0
|
|
|
5.5
|
%
|
Revenue
Through our subsidiaries, we generate revenue primarily by providing collection and disposal services to commercial, industrial, municipal and residential customers. Our remaining revenue is generated from recycling, fuel and environmental charges, landfill gas-to-energy operations and other ancillary revenue-generating activities. Revenues from our collection operations consist of fees we receive from municipal, subscription, residential and C&I customers and are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the recycling, transfer station or disposal facilities and our disposal costs. Standard C&I service agreements are typically three to five years, and we have historically maintained strong relationships with our C&I customers. Our municipal customer relationships are generally supported by exclusive contracts ranging from three to ten years in initial duration with subsequent renewal periods. Certain municipal contracts have annual price escalation clauses that are tied to changes in an underlying base index such as the consumer price index (CPI). We provide commercial front load and temporary and permanent rolloff service offerings to our commercial customers. While the majority of our rolloff services are provided to customers under long-term service agreements, we generally do not enter into written contracts with our temporary rolloff customers due to the relatively short-term nature of most construction and demolition (C&D) projects.
Our transfer stations and landfills generate revenue from disposal or tipping fees. Revenues from our landfill operations consist of fees which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenue consists of disposal or tipping fees and proceeds from the sale of recyclable commodities to third parties.
The amounts charged for collection, disposal and recycling services may include fuel charges and environmental charges. Fuel charges and environmental charges are not designed to be specific to the direct costs and expenses to service an individual customer's account, but rather are designed to address and to help recover changes in our overall cost structure and to achieve an operating margin acceptable to us.
Other revenue is comprised of ancillary revenue-generating activities, such as trucking, landfill gas-to-energy operations at municipal solid waste (MSW) landfills, management of third-party owned landfills, customer service charges relating to overdue payments, customer administrative charges relating to customers who request paper copies of invoices rather than opting for electronic invoices and compliance and business impact charges.
The following table sets forth our consolidated revenues by line of business for the periods indicated (in millions and as a percentage of total service revenues).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Collection
|
$
|
268.1
|
|
|
69.8
|
%
|
|
$
|
252.5
|
|
|
69.2
|
%
|
Disposal
|
127.0
|
|
|
33.1
|
%
|
|
124.1
|
|
|
34.0
|
%
|
Sale of recyclables
|
3.5
|
|
|
0.9
|
%
|
|
5.4
|
|
|
1.5
|
%
|
Fuel and environmental charges
|
28.9
|
|
|
7.5
|
%
|
|
28.0
|
|
|
7.7
|
%
|
Other revenue
|
27.8
|
|
|
7.2
|
%
|
|
26.8
|
|
|
7.3
|
%
|
Intercompany eliminations
|
(71.3
|
)
|
|
(18.5
|
)%
|
|
(72.1
|
)
|
|
(19.7
|
)%
|
Total service revenues
|
$
|
384.0
|
|
|
100.0
|
%
|
|
$
|
364.7
|
|
|
100.0
|
%
|
The following table reflects changes in components of our revenue, as a percentage of total revenue, for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Average yield
|
4.1
|
%
|
|
1.9
|
%
|
Recycling
|
(0.2
|
)%
|
|
(0.7
|
)%
|
Fuel surcharge revenue
|
0.3
|
%
|
|
0.7
|
%
|
Total yield
|
4.2
|
%
|
|
1.9
|
%
|
Organic volume
|
(0.3
|
)%
|
|
2.4
|
%
|
Acquisitions
|
1.4
|
%
|
|
3.6
|
%
|
Divestitures
|
—
|
%
|
|
(0.6
|
)%
|
Impact of revenue recognition standard adoption
|
—
|
%
|
|
(2.3
|
)%
|
Total revenue growth
|
5.3
|
%
|
|
5.0
|
%
|
Average yield is defined as aggregate contribution of price changes excluding recycled commodities and fuel surcharge revenue.
During the three months ended March 31, 2019, we experienced the following changes in components of our revenue as compared to the same period in fiscal 2018:
|
|
•
|
Average yield increased revenue by 4.1% driven by higher open market price yield as we continue to focus on disciplined pricing and higher price yield in our municipal residential collection business due to the positive impact of higher CPI contract resets;
|
|
|
•
|
Recycling revenue decreased revenue by 0.2% due to a continued decrease in recycling commodity prices;
|
|
|
•
|
Fuel surcharge revenue increased revenue by 0.3% due to an increase 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 increase in fuel prices results in an increase in our revenue. Our fuel surcharges reset on a monthly basis therefore an increase in our fuel surcharge revenue is delayed in comparison to the increase in our fuel expense when diesel fuel prices increase;
|
|
|
•
|
Organic volume decreased revenue by 0.3% however organic volume would have increased revenue by 0.2% without the impact of one less workday during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. The increase was primarily due to an increase in special waste and C&D disposal volumes. The increase was largely offset by lower commercial, rolloff and residential collection volumes;
|
|
|
•
|
Acquisitions increased revenue by 1.4% due to the completion of acquisitions that further enhance our vertical integration strategy.
|
Operating Expenses
Our operating expenses include the following:
|
|
•
|
Labor and related benefits, which consist of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes;
|
|
|
•
|
Transfer and disposal costs which include tipping fees paid to third-party disposal facilities and transfer stations as well as transportation and subcontractor costs (which include costs for independent haulers who transport waste from transfer stations to our disposal facilities and costs for local operators who provide waste handling services associated with markets outside our standard operating areas);
|
|
|
•
|
Maintenance and repairs expenses which include labor, maintenance and repairs to our vehicles, equipment and containers;
|
|
|
•
|
Fuel costs which include the direct cost of fuel used by our vehicles, net of fuel tax credits;
|
|
|
•
|
Franchise and host fees which consist of municipal franchise fees not paid to customers, host community fees and royalties;
|
|
|
•
|
Risk management expenses which include casualty insurance premiums, claims payments, estimates for claims incurred but not reported and casualty losses;
|
|
|
•
|
Other expenses which include expenses such as facility operating costs, equipment rent, leachate and sulfate treatment and disposal and other landfill maintenance costs;
|
|
|
•
|
Accretion expense related to landfill capping, closure and post-closure is included in operating expenses in our condensed consolidated statement of operations, but it is excluded from the table below (refer to “Accretion of Landfill Retirement Obligations” below for a detailed discussion of the changes in amounts).
|
The following table summarizes the major components of our operating expenses, excluding accretion expense on our landfill retirement obligations (in millions and as a percentage of our revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Labor and related benefits
|
$
|
85.7
|
|
|
22.3
|
%
|
|
$
|
82.0
|
|
|
22.5
|
%
|
Transfer and disposal costs
|
50.2
|
|
|
13.1
|
%
|
|
47.9
|
|
|
13.1
|
%
|
Maintenance and repairs
|
39.8
|
|
|
10.4
|
%
|
|
37.1
|
|
|
10.2
|
%
|
Fuel
|
18.9
|
|
|
4.9
|
%
|
|
18.2
|
|
|
5.0
|
%
|
Franchise and host fees
|
9.3
|
|
|
2.4
|
%
|
|
8.7
|
|
|
2.4
|
%
|
Risk management
|
9.4
|
|
|
2.4
|
%
|
|
8.4
|
|
|
2.3
|
%
|
Other
|
31.9
|
|
|
8.4
|
%
|
|
26.2
|
|
|
7.2
|
%
|
Subtotal
|
$
|
245.2
|
|
|
63.9
|
%
|
|
$
|
228.5
|
|
|
62.7
|
%
|
Greentree expenses, net of insurance recoveries
|
—
|
|
|
—
|
%
|
|
3.8
|
|
|
1.0
|
%
|
Total operating expenses, excluding accretion expense
|
$
|
245.2
|
|
|
63.9
|
%
|
|
$
|
232.3
|
|
|
63.7
|
%
|
The cost categories shown above may not be comparable to similarly titled categories used by other companies. Thus, you should exercise caution when comparing our operating expenses by cost component to that of other companies.
Three months ended March 31, 2019 compared to 2018
Operating expenses
increased
by $12.9 or 5.6% to $245.2 for the
three months ended March 31, 2019
from $232.3 for the
three months ended March 31, 2018
. Operating expenses, excluding the Greentree expenses, increased $16.7 or 7.3% to $245.2 for the
three months ended March 31, 2019
from $228.5 for the
three months ended March 31, 2018
. The change was due to the following:
|
|
•
|
Labor and related benefits
increased
by
$3.7
or
4.5%
to
$85.7
which was primarily attributable to the following: higher labor costs as a result of merit increases, acquisition activity and the addition of one company paid holiday; an increase in healthcare costs due less favorable actuarial development; and an increase in workers compensation costs due to the severity of claims;
|
|
|
•
|
Transfer and disposal costs increased by $2.3 or 4.8% to $50.2 primarily due to an increase in single stream recycling processing costs, an increase in transportation costs related to higher volumes coming through our transfer stations in the South segment and an increase in costs due to higher reliance on sub-contractors in the South segment;
|
|
|
•
|
Maintenance and repairs expense
increased
by
$2.7
or
7.3%
to
$39.8
primarily due to higher labor costs as a result of merit increases and an increase in the cost of maintenance and repair parts due to inflation;
|
|
|
•
|
Fuel costs
increased
$0.7
or
3.8%
to
$18.9
impacted by a CNG tax credit received in the first quarter of fiscal 2018 that did not recur in the first quarter of fiscal 2019;
|
|
|
•
|
Franchise and host fees increased $0.6 or 6.9% to
$9.3
primarily due to an increase in landfill host fees as a result of higher disposal volumes;
|
|
|
•
|
Risk management expense increased $1.0 or 11.9% to $9.4 primarily due to higher frequency and severity of automobile and property liability claims in the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 including the unfavorable impact to actuarial development;
|
|
|
•
|
Other operating costs
increased
$5.7
or
21.8%
to
$31.9
primarily due to higher leachate and gas treatment costs at several of our landfills partially due to weather related impacts and an increase in vehicle operating costs primarily due to higher reliance on rental equipment;
|
|
|
•
|
Greentree expenses, net of insurance recoveries, decreased $3.8. No additional costs were recorded related to this matter during the three months ended March 31, 2019. The costs recorded during the three months ended March 31, 2018 related to our estimate of remaining expenses necessary to remediate the damage caused by the waste slide in the first quarter of fiscal 2017 offset by estimated insurance recoveries related to the matter.
|
Accretion of Landfill Retirement Obligations
Accretion expense was
$4.4
and
$3.8
for the
three months ended March 31, 2019
and 2018, respectively. The increase of $0.6 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 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 exclude any such amounts recorded as restructuring charges.
The following table provides the components of our selling, general and administrative expenses for the periods indicated (in millions and as a percentage of our revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Salaries
|
$
|
31.8
|
|
|
8.3
|
%
|
|
$
|
28.6
|
|
|
7.8
|
%
|
Legal and professional
|
4.2
|
|
|
1.1
|
%
|
|
3.8
|
|
|
1.0
|
%
|
Other
|
13.7
|
|
|
3.5
|
%
|
|
13.2
|
|
|
3.7
|
%
|
Total selling, general and administrative expenses
|
$
|
49.7
|
|
|
12.9
|
%
|
|
$
|
45.6
|
|
|
12.5
|
%
|
Three months ended March 31, 2019 compared to 2018
|
|
•
|
Our salaries expense
increased
by
$3.2
or
11.2%
to $31.8 primarily due to the following: an increase in stock based compensation expense as a result of two of the Company's named executive officers reaching retirement age requiring immediate recognition of expense for stock awards issued in the first quarter of fiscal 2019; an increase in salaries due to merit increases; and an increase in severance expense;
|
|
|
•
|
Legal and professional fees
increased
$0.4
or
10.5%
to
$4.2
due to a slight decrease in litigation fees;
|
|
|
•
|
Other selling, general and administrative expenses
increased
$0.5
or
3.8%
to $13.7 primarily due to an increase in computer hardware and software maintenance costs.
|
Depreciation and Amortization
The following table summarizes the components of depreciation and amortization expense by asset type (in millions and as a percentage of our revenue). For a detailed discussion of depreciation and amortization by asset type refer to the discussion included in the following two sections herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Depreciation, amortization and depletion of property and equipment
|
$
|
58.1
|
|
|
15.1
|
%
|
|
$
|
54.3
|
|
|
14.9
|
%
|
Amortization of other intangible assets
|
7.8
|
|
|
2.1
|
%
|
|
10.4
|
|
|
2.9
|
%
|
Depreciation and amortization
|
$
|
65.9
|
|
|
17.2
|
%
|
|
$
|
64.7
|
|
|
17.7
|
%
|
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. Refer to the footnotes to the consolidated financial statements in our 2018 Annual Report on Form 10-K for a further discussion of our accounting policies.
The following table summarizes depreciation, amortization and depletion of property and equipment for the periods indicated (in millions and as a percentage of our revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
$
|
35.6
|
|
|
9.3
|
%
|
|
$
|
34.4
|
|
|
9.4
|
%
|
Landfill depletion and amortization
|
22.5
|
|
|
5.9
|
%
|
|
19.9
|
|
|
5.5
|
%
|
Depreciation, amortization and depletion of property and equipment
|
$
|
58.1
|
|
|
15.1
|
%
|
|
$
|
54.3
|
|
|
14.9
|
%
|
Three months ended March 31, 2019 compared to 2018
|
|
•
|
Depreciation and amortization of property and equipment increased $1.2 or 3.5% to
$35.6
due mainly to acquisition activity;
|
|
|
•
|
Landfill depletion and amortization
increased
$2.6
or 13.1% to
$22.5
due to changes in our landfill estimates, acquisition activity and increased disposal volumes.
|
Amortization of Other Intangible Assets
Amortization of other intangible assets was
$7.8
and
$10.4
, or as a percentage of revenue,
2.1%
and
2.9%
, for the
three months ended March 31, 2019
and 2018, respectively. The decrease was due to certain intangible assets becoming fully amortized partially offset by the impact of acquisition activity.
Acquisitions and Divestitures
In the ordinary course of our business, we regularly evaluate and pursue acquisition opportunities that further enhance our vertical integration strategy. We also regularly evaluate our current operations and consider divesting of those operations that do not provide us with an acceptable profit margin.
We completed two acquisitions during the
three months ended March 31, 2019
for a cash purchase price of
$23.9
and notes payable of $1.0, subject to net working capital adjustments, which we expect to be completed within approximately one year. Additionally, we made a $2.2 deferred purchase price payment during the three months ended March 31, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. Five tuck-in acquisitions were completed during the
three months ended March 31, 2018
for a cash purchase price of $4.5 and notes payable of $0.5. The results of operations of each acquisition are included in our condensed consolidated statements of operations subsequent to the closing date of each acquisition.
Other, Net
Changes in the fair value and settlements of derivative instruments that do not qualify for hedge accounting are recorded in other income, net in the condensed consolidated statements of operations and amounted to a loss of $0.7 and income of $4.6 for the three months ended
March 31, 2019
and 2018, respectively. Additionally, $0.6 of ineffectiveness for derivatives that qualify for hedge accounting was recorded in other income, net in the condensed consolidated statements of operations for the three months ended March 31, 2018. Income from equity investee for the
three months ended March 31, 2019
and 2018, respectively, was $0.8 and $0.5.
Interest Expense
Interest expense increased by $3.0 or 13.0% to $26.0 for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase was due to the impact of increasing interest rates on our variable rate debt.
Cash paid for interest was $18.3 and $15.2 for the three months ended March 31, 2019 and 2018, respectively.
Income Taxes
Our effective income tax rate for the three months ended March 31, 2019 and 2018 was 18.9% and 27.6%, respectively. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended March 31, 2019 was primarily due to the change to pre-tax book loss during the first quarter of fiscal 2019 versus pre-tax book income during the first quarter of fiscal 2018. The difference between income taxes computed at the federal statutory rate of 21% and reported income taxes for the three months ended March 31, 2018 was primarily due to the impact of state and local taxes.
Cash paid for income taxes (net of refunds) was $1.1 and $0.1 for the three months ended March 31, 2019 and 2018, respectively.
Reportable Segments
Our operations are managed through three geographic regions (South, East and Midwest) that we designate as our reportable segments. Service revenues, operating income/(loss) and depreciation and amortization for our reportable segments for the periods indicated are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Revenues
|
|
Operating
Income
(Loss)
|
|
Depreciation
and
Amortization
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
South
|
$
|
159.9
|
|
|
$
|
24.0
|
|
|
$
|
22.7
|
|
East
|
94.9
|
|
|
1.7
|
|
|
19.2
|
|
Midwest
|
129.2
|
|
|
13.9
|
|
|
22.9
|
|
Corporate
|
—
|
|
|
(21.7
|
)
|
|
1.1
|
|
|
$
|
384.0
|
|
|
$
|
17.9
|
|
|
$
|
65.9
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
South
|
$
|
148.8
|
|
|
$
|
26.0
|
|
|
$
|
21.7
|
|
East
|
89.2
|
|
|
(1.8
|
)
|
|
18.0
|
|
Midwest
|
126.7
|
|
|
13.9
|
|
|
23.9
|
|
Corporate
|
—
|
|
|
(18.1
|
)
|
|
1.1
|
|
|
$
|
364.7
|
|
|
$
|
20.0
|
|
|
$
|
64.7
|
|
Comparison of Reportable Segments—
Three Months Ended March 31, 2019
compared to
Three Months Ended March 31, 2018
South Segment
Revenue
increased
$11.1
or
7.5%
for the
three months ended March 31, 2019
compared to the
three months ended March 31, 2018
. The increase in revenue was due to the following: an increase in price yield from our collection and disposal operations of $6.1 as we continue to focus on disciplined open market pricing and receive the positive benefit from higher CPI contract resets in our municipal collection business; an increase in acquisition related revenue of $3.2; and an increase of $2.6 related to higher volumes coming through our transfer stations. The increase was slightly offset by lower volume of $0.7 resulting from one less workday during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018.
Operating income from our South Segment
decreased
by
$2.0
for the
three months ended March 31, 2019
compared to the
three months ended March 31, 2018
. The decrease was primarily due to the following: an increase in salaries and wages of $2.2 due to higher labor costs primarily attributable to merit increases, acquisition activity, higher healthcare costs due to less favorable actuarial development and higher workers compensation costs due to the severity of claims; an increase in depreciation and depletion expense of $2.0 due mainly to acquisition activity; an increase of $1.8 in leachate and gas treatment costs partially due to weather related impacts; a decrease in gains on sales of fixed assets of $1.5 primarily due to the timing of equipment sales; an increase in maintenance and repair costs of $1.3 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation; an increase in third party trucking costs of $1.1 due to labor and fuel cost increases; an increase of $0.8 in various general and administrative expenses; an increase in fuel costs of $0.7 primarily due to a CNG tax credit that was enacted in the first quarter of fiscal 2018 that did not recur in the first quarter of fiscal 2019; an increase in vehicle operating costs of $0.6 primarily due to higher reliance on rental equipment; an increase of $0.6 due to higher frequency and severity of automobile and property liability claims; and an increase of $0.5 due to higher reliance on sub-contractors.The decrease was partially offset by the revenue increase of $11.1 as described above.
East Segment
Revenue
increased
by
$5.7
, or
6.4%
for the
three months ended March 31, 2019
compared to the
three months ended March 31, 2018
. The increase was primarily due to the following: an increase in disposal volumes of $4.0; an increase in price yield from our collection and disposal operations of $3.0 as we continue to focus on disciplined open market pricing; an increase in fuel surcharges of $0.7 due to a slight increase in diesel fuel prices; and an increase in acquisition related revenue of $0.6. The increases were partially offset by a decrease in collection volumes of $1.9 and lower volume of $0.6 resulting from one less workday during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018.
Operating income from our East Segment increased $3.5 for the
three months ended March 31, 2019
compared to the three months ended March 31,
2018
. The increase in operating income was primarily due to the $5.7 increase in revenue as described above and a decrease of $3.8 in expenses related to the Greentree landfill waste slide. The increase in operating income was partially offset by the following: an increase in landfill depletion and amortization of $1.9 due to changes in our landfill estimates, acquisition activity and increased disposal volumes; an increase in salaries and wages of $1.2 due to higher labor costs primarily attributable to merit increases, acquisition activity, higher healthcare costs due to less favorable actuarial development and higher workers compensation costs due to the severity of claims; an increase of $1.0 in disposal facility costs primarily due to leachate and gas treatment costs; an increase in maintenance and repair costs of $0.8 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation; an increase in various general and administrative costs of $0.4; and an increase of $0.3 due to higher frequency and severity of automobile and property liability claims.
Midwest Segment
Revenue
increased
$2.5
or
2.0%
for the
three months ended March 31, 2019
compared to the
three months ended March 31, 2018
. The increase was primarily due to an increase in price yield from our collection and disposal operations of $5.7 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 $1.4. The increase was partially offset by the following: a decrease in collection volume of $3.2; a decrease in recycling revenue of $1.0 due to the continued decline in commodity prices; and lower volume of $0.6 resulting from one less workday during the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018.
Operating income from our Midwest Segment remained flat at $13.9 for the
three months ended March 31, 2019
compared to the
three months ended March 31, 2018
and was positively impacted by the $2.5 revenue increase as described above. This positive impact was offset by an increase of $1.4 in disposal facility costs primarily due to leachate and gas treatment costs as a result of weather related impacts and mix of disposal volumes. Additionally, maintenance and repair costs increased by $0.7 primarily due to higher labor costs as a result of merit increases and acquisition activity and an increase in the cost of maintenance and repair parts due to inflation.
Corporate
Operating loss
increased
$3.6
or 19.9% for the
three months ended March 31, 2019
compared to the
three months ended March 31, 2018
primarily due to the following: an increase in stock based compensation expense of $1.6 as a result of two of the Company's named executive officers reaching retirement age requiring immediate recognition of expense for stock awards issued in the first quarter of fiscal 2019; an increase in acquisition and development costs of $0.5; an increase in computer hardware and software maintenance costs of $0.5; and an increase in salaries of $0.4 due to merit increases.
Liquidity and Capital Resources
Our primary sources of cash are cash flows from operations, bank borrowings, debt offerings and equity offerings. We intend to use excess cash on hand and cash from operating activities, together with bank borrowings, to fund purchases of property and equipment, working capital, acquisitions and debt repayments. For this reason and since we efficiently manage our working capital requirements, it is common for us to have negative working capital. Actual debt repayments may include purchases of our outstanding indebtedness in the secondary market or otherwise. We believe that our current cash balances, cash from operating activities and funds available under our Revolver will provide us with sufficient financial resources to meet our anticipated capital requirements and maturing obligations as they come due. At
March 31, 2019
and December 31, 2018, we had negative working capital which was driven by purchases of property and equipment and landfill construction and development as well as the use of our cash to fund debt repayments and acquisitions.
Summary of Cash and Cash Equivalents and Debt Obligations
The table below presents a summary of our cash and cash equivalents and debt balances (in millions):
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
|
|
|
Cash and cash equivalents
|
$
|
7.6
|
|
|
$
|
6.8
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
Current portion
|
84.3
|
|
|
85.9
|
|
Long-term portion
|
1,812.7
|
|
|
1,817.1
|
|
Total debt
|
$
|
1,897.0
|
|
|
$
|
1,903.0
|
|
Summary of Cash Flow Activity
The following table sets forth for the periods indicated a summary of our cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Net cash provided by operating activities
|
$
|
72.5
|
|
|
$
|
78.5
|
|
Net cash used in investing activities
|
$
|
(57.6
|
)
|
|
$
|
(37.7
|
)
|
Net cash used in financing activities
|
$
|
(14.1
|
)
|
|
$
|
(41.1
|
)
|
Cash Flows Provided by Operating Activities
We generated
$72.5
of cash flows from operating activities during the
three months ended March 31, 2019
, compared with
$78.5
during the
three months ended March 31, 2018
. The decrease was primarily due to the following:
|
|
•
|
A decrease in the change in accounts payable and accrued expenses of $7.0 driven by the timing of accruals, invoices received and cash disbursements.
|
The decrease in cash flows provided by operating activities for the three months ended March 31, 2019 was partially offset by the following:
|
|
•
|
An increase in net income of $1.8, after adjusting for non cash items.
|
Cash Flows Used in Investing Activities
We used
$57.6
of cash in investing activities during the
three months ended March 31, 2019
compared with $37.7 during the
three months ended March 31, 2018
,
an
increase
of
$19.9
. The variance was due to the following:
|
|
•
|
An increase of $21.6 in cash expenditures used to fund acquisitions;
|
|
|
•
|
Lower cash expenditures of $2.3 used to fund the purchase of property and equipment and landfill construction and development.
|
Cash Flows Used In Financing Activities
During the
three months ended March 31, 2019
,
net cash used in
financing activities was
$14.1
compared to net cash used in financing activities of
$41.1
during the
three months ended March 31, 2018
, a decrease of
$27.0
. The variance was primarily due to the following:
|
|
•
|
A decrease in net payments on debt instruments of $25.4 as we used excess cash to fund $26.1 of acquisitions during the three months ended March 31, 2019 compared to using the majority of our excess cash to make debt repayments during the three months ended March 31, 2018;
|
|
|
•
|
An increase in proceeds from stock option exercises of $1.6.
|
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 March 31, 2019 and December 31, 2018, we had $35.0 and $37.0 in borrowings outstanding under our Revolving Credit Facility. As of March 31, 2019 and December 31, 2018, we had an aggregate of approximately $32.3 and $32.3 of letters of credit outstanding under our Senior Secured Credit Facilities. As of March 31, 2019 and December 31, 2018, we had remaining capacity under our Revolving Credit Facility of $232.7 and $230.7, respectively. As of March 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 the three months ended March 31, 2019 and 2018 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 March 31, 2019 and December 31, 2018 was 4.4:1.0 and 4.4:1.0, respectively.
5.625% Senior Notes due 2024
On November 10, 2016, we closed a 144A offering (the “Notes Offering”) exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), of $425.0 aggregate principal amount of 5.625% senior notes due 2024 (the “Notes”).
We issued the Notes under an indenture dated November 10, 2016 (the “Indenture”) among the Company, the guarantors party thereto, and Wells Fargo Bank, National Association, as trustee (the “Trustee”). The Notes bear interest at the rate of 5.625% per year. Interest on the Notes is payable on May 15 and November 15 of each year, beginning on May 15, 2017. The Notes will mature on November 15, 2024. Before November 15, 2019, we may redeem the Notes, in whole or in part, at a redemption price equal to 100% of their principal amount plus a make-whole premium and accrued and unpaid interest to the date of redemption. At any time on or after November 15, 2019, we may redeem the Notes, in whole or in part, at the applicable redemption prices set forth in the Indenture, plus accrued interest. In addition, before November 15, 2019, we may, from time to time, redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 105.625% of the principal amount thereof, plus accrued and unpaid interest to the redemption date.
The redemption prices set forth in the indenture for the twelve month periods beginning on November 15 of the years indicated below are as follows:
|
|
|
|
Year
|
Percentage
|
|
2019
|
104.219
|
%
|
2020
|
102.813
|
%
|
2021
|
101.406
|
%
|
2022 and thereafter
|
100.000
|
%
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The Indenture contains covenants that, among other things, restrict our ability to incur additional debt or issue certain preferred stock; pay dividends (subject to certain exceptions) or make certain redemptions, repurchases or distributions or make certain other restricted payments or investments; create liens; enter into transactions with affiliates; merge, consolidate or sell, transfer or otherwise dispose of all or substantially all of our assets; transfer and sell assets; and create restrictions on dividends or other payments by our restricted subsidiaries. Certain covenants will cease to apply to the Notes for so long as the Notes have investment grade ratings. The Notes will be unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of our current and future U.S. subsidiaries that guarantee the Amended and Restated Credit Agreement. As of March 31, 2019, we were in compliance with the covenants under the Indenture.
Off-Balance Sheet Arrangements
As of
March 31, 2019
and December 31,
2018
, we had no off-balance sheet debt or similar obligations, other than financial assurance instruments, which are not classified as debt. We do not guarantee any third-party debt.
Seasonality
We expect our operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring in the East and Midwest segments because of decreased construction and demolition activities during winter months in these regions of the U.S. In addition, some of our operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.
Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as hurricanes that most often impact the South region, can increase the Company’s revenues in the areas affected. While weather-related and
other occurrences can boost revenues through additional work, the earnings generated can be moderated as a result of significant start-up costs and other factors, resulting in earnings at comparatively lower margins. These destructive weather conditions can result in higher fuel costs, higher labor costs, reduced municipal contract productivity and higher disposal costs in disposal neutral markets.
Liquidity Impacts of Income Tax Items
As of
March 31, 2019
, we have $31.5 of liabilities associated with unrecognized tax benefits and related interest. These liabilities are primarily included as a component of other long-term liabilities and deferred income taxes in our condensed consolidated balance sheet because the Company generally does not anticipate that settlement of the liabilities will require payment of cash within the next 12 months. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity.
Financial Assurance
We must provide financial assurance to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations for capping, closure and post-closure costs, and related to our performance under certain collection, landfill and transfer station contracts. We satisfy these financial assurance requirements by providing surety bonds and letters of credit. The amount of the financial assurance requirements for capping, closure and post-closure costs is determined by applicable state environmental regulations. The financial assurance requirements for capping, closure and post-closure costs may be associated with a portion of the landfill or the entire landfill. Generally, states require a third-party engineering specialist to determine the estimated capping, closure and post-closure costs that are used to determine the required amount of financial assurance for a landfill. The amount of financial assurance required can, and generally will, differ from the obligation determined and recorded under U.S. GAAP. The amount of the financial assurance requirements related to contract performance varies by contract. Additionally, we must provide financial assurance for our insurance program and collateral for certain performance obligations. We do not expect a material increase in financial assurance requirements in the foreseeable future, although the mix of financial assurance instruments may change.
These financial instruments are issued in the normal course of business and are not considered company indebtedness. Because we currently have no liability for these financial assurance instruments, they are not reflected in our condensed consolidated balance sheets. However, we record capping, closure and post-closure liabilities and self-insurance liabilities as they are incurred. The underlying obligations of the financial assurance instruments, in excess of those already reflected in our condensed consolidated balance sheets, would be recorded if it is probable that we would be unable to fulfill our related obligations. We do not expect this to occur.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of financial statements in accordance with GAAP requires our management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Our estimates and assumptions are based on historical experience and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments. A summary of significant accounting policies is disclosed in Note 1 to the Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption “Discussion of Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.
Recently Issued and Proposed Accounting Standards
For a description of new accounting standards that may affect us, see Note 2, Basis of Presentation, to our unaudited condensed consolidated financial statements in Part 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about market risks as of March 31, 2019 does not differ materially from that included in our 2018 Annual Report on Form 10-K.