Advanced Disposal Services, Inc. and Subsidiaries
Condensed Consolidated Statements 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
89,836,069
|
|
|
$
|
0.9
|
|
|
132,930
|
|
|
$
|
(4.1
|
)
|
|
$
|
1,527.7
|
|
|
$
|
(598.1
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
923.4
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.3
|
)
|
|
—
|
|
|
(6.3
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
Stock option exercises, restricted stock unit vesting and performance stock unit vesting
|
441,632
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.4
|
|
|
—
|
|
|
—
|
|
|
6.4
|
|
Stock repurchases (a)
|
—
|
|
|
—
|
|
|
45,610
|
|
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.5
|
)
|
Unrealized gain resulting from change in fair value of derivative instruments, net of tax of ($0.1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
Balance at March 31, 2020
|
90,277,701
|
|
|
$
|
0.9
|
|
|
178,540
|
|
|
$
|
(5.6
|
)
|
|
$
|
1,535.7
|
|
|
$
|
(604.4
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
924.0
|
|
(a) Stock repurchases represent shares withheld by the Company to pay employee taxes associated with restricted stock unit vesting and performance stock unit vesting.
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,
|
|
2020
|
|
2019
|
Cash flows from operating activities
|
|
|
|
Net loss
|
$
|
(6.3
|
)
|
|
$
|
(6.0
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities
|
|
|
|
Depreciation and amortization
|
64.6
|
|
|
65.9
|
|
Change in fair value of derivative instruments
|
—
|
|
|
2.5
|
|
Amortization of debt issuance costs and original issue discount
|
1.5
|
|
|
1.3
|
|
Accretion on landfill retirement obligations
|
4.5
|
|
|
4.4
|
|
Other accretion and amortization
|
1.8
|
|
|
1.5
|
|
Provision for doubtful accounts
|
2.2
|
|
|
1.1
|
|
Loss on disposition of property and equipment
|
0.1
|
|
|
0.2
|
|
Stock based compensation
|
1.6
|
|
|
4.1
|
|
Deferred tax benefit
|
(1.3
|
)
|
|
(1.6
|
)
|
Earnings in equity investee
|
(0.5
|
)
|
|
(0.8
|
)
|
Changes in operating assets and liabilities, net of businesses acquired
|
|
|
|
Decrease in accounts receivable
|
13.4
|
|
|
5.9
|
|
Decrease (increase) in prepaid expenses and other current assets
|
1.1
|
|
|
(0.1
|
)
|
Decrease in other assets
|
0.6
|
|
|
1.9
|
|
(Decrease) increase in accounts payable
|
(7.1
|
)
|
|
2.9
|
|
Decrease in accrued expenses
|
(2.1
|
)
|
|
(1.0
|
)
|
Decrease in deferred revenue
|
(3.6
|
)
|
|
(1.2
|
)
|
Decrease in other long-term liabilities
|
(2.1
|
)
|
|
(4.8
|
)
|
Capping, closure and post-closure obligations
|
(3.7
|
)
|
|
(3.7
|
)
|
Net cash provided by operating activities
|
64.7
|
|
|
72.5
|
|
Cash flows from investing activities
|
|
|
|
Purchases of property and equipment and construction and development
|
(47.1
|
)
|
|
(32.5
|
)
|
Proceeds from sale of property and equipment and insurance recoveries
|
0.3
|
|
|
1.0
|
|
Acquisition of businesses, net of cash acquired
|
—
|
|
|
(26.1
|
)
|
Net cash used in investing activities
|
(46.8
|
)
|
|
(57.6
|
)
|
Cash flows from financing activities
|
|
|
|
Proceeds from borrowings on debt instruments
|
65.0
|
|
|
58.0
|
|
Repayment on debt instruments, including finance leases
|
(70.8
|
)
|
|
(74.0
|
)
|
Proceeds from stock option exercises net of stock repurchases
|
6.4
|
|
|
1.9
|
|
Net cash provided by (used in) financing activities
|
0.6
|
|
|
(14.1
|
)
|
Net increase in cash and cash equivalents
|
18.5
|
|
|
0.8
|
|
Cash and cash equivalents, beginning of period
|
12.5
|
|
|
6.8
|
|
Cash and cash equivalents, end of period
|
$
|
31.0
|
|
|
$
|
7.6
|
|
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)
Operations
Advanced Disposal Services, Inc. together with its consolidated subsidiaries (the "Company"), as a consolidated entity, is a non-hazardous solid waste services company which provides collection, transfer, recycling and disposal services. The Company manages and evaluates its principal operations through three reportable operating segments on a regional basis. Those operating segments are the South, East and Midwest regions. Additional information related to segments can be found in Note 10.
Acquisitions
No acquisitions were completed during the three months ended March 31, 2020. Two acquisitions were completed during the three months ended March 31, 2019 for aggregate consideration consisting of a cash purchase price of $24.9. Additionally, the Company made a $2.2 deferred purchase price payment during the three months ended March 31, 2019 related to an acquisition completed during the fourth quarter of fiscal 2018. 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.
COVID-19
The Company is experiencing volume declines in all of its lines of business except residential due to deteriorating macroeconomic conditions and stay-at-home orders resulting from the COVID-19 pandemic. The Company is taking a number of steps to respond to this challenge including the following:
|
|
•
|
Reducing or eliminating face-to-face interactions with its employees;
|
|
|
•
|
Executing on enhanced protocols to keep vehicles, common areas, and offices extra clean;
|
|
|
•
|
Procuring additional personal protective equipment including masks, gloves, hand sanitizer, and cleaning solutions;
|
|
|
•
|
Reallocating resources, reducing overtime, and parking surplus equipment to reduce operating costs;
|
|
|
•
|
Rerouting where needed to maximize productivity and meet customer needs;
|
|
|
•
|
Flexing capital spending while still meeting business needs;
|
|
|
•
|
Significantly reducing travel and discretionary spending; and
|
|
|
•
|
Maintaining higher target cash balances and as of March 31, 2020 able to access $227.7 million of additional liquidity from its revolving credit facility supported by a diverse group of lenders.
|
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, 2020 and for the three months ended March 31, 2020 and 2019 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, 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, 2019.
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 June 2016, the FASB issued ASU 2016-13 associated with the measurement of credit losses on financial instruments. The amended guidance replaces the previous incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. The amended guidance was effective for the Company on January 1, 2020. Based on the amended guidance, the Company estimates credit losses for uncollectible accounts based on an evaluation of the aged accounts receivable and the likelihood of collection of the receivable based on historical collection data adjusted for forward-looking economic conditions. The Company's adoption of this guidance on January 1, 2020 did not have a material impact on its consolidated financial statements.
Revenue by Segment
See Note 10 for information related to revenue by reportable segment and major line of business.
Capitalized Sales Commissions
Under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company capitalizes sales commissions as contract assets related to commercial and permanent rolloff collection customers and amortizes those sales commissions over the estimated customer life. The balance of capitalized sales commissions as of March 31, 2020 and December 31, 2019 were $4.6 and $4.7, respectively. The Company recorded amortization expense of $0.4 and $0.4 related to capitalized sales commissions for the three months ended March 31, 2020 and 2019, respectively.
Deferred Revenues
The Company records deferred revenue when cash payments are received or are due in advance of the Company's performance. The decrease in the deferred revenue balance from December 31, 2019 to March 31, 2020 is primarily driven by $68.3 of revenues recognized that were included in the deferred revenue balance at December 31, 2019, offset by cash payments received or due in advance of the Company satisfying its performance obligations.
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, 2019 and for the three months ended March 31, 2020 are shown in the table below:
|
|
|
|
|
Balance at December 31, 2018
|
$
|
248.0
|
|
Increase in retirement obligation
|
11.0
|
|
Accretion of closure and post-closure costs
|
18.0
|
|
Asset retirement obligation adjustments
|
6.9
|
|
Costs incurred
|
(19.7
|
)
|
Balance at December 31, 2019
|
264.2
|
|
Increase in retirement obligation
|
2.5
|
|
Accretion of closure and post-closure costs
|
4.5
|
|
Costs incurred
|
(1.5
|
)
|
Balance at March 31, 2020
|
269.7
|
|
Less: Current portion
|
(16.6
|
)
|
|
$
|
253.1
|
|
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
5. Loss Per Share
The following table sets forth the computation of basic loss per share and loss per share, assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(6.3
|
)
|
|
$
|
(6.0
|
)
|
Denominator:
|
|
|
|
|
|
Average common shares outstanding
|
90,059,917
|
|
|
88,721,612
|
|
|
Other potentially dilutive common shares
|
—
|
|
|
—
|
|
|
Average common shares outstanding, assuming dilution
|
90,059,917
|
|
|
88,721,612
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
Diluted net loss per share
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
Basic net loss per share is based on the weighted-average number of shares of common stock outstanding for each of the periods presented. Diluted net loss per share is based on the weighted-average number of shares of common stock equivalents outstanding adjusted for the effects of common stock that may be issued as a result of potentially dilutive instruments. The Company's potentially dilutive instruments are made up of equity awards, which include stock options, restricted stock units and performance stock units. Since the Company is in a loss position for each period presented, no potentially dilutive common shares are included in the average common shares outstanding, assuming dilution.
Approximately 4.0 million and 5.5 million of outstanding stock awards were excluded from the diluted net loss per share calculation for the three months ended March 31, 2020 and March 31, 2019, 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,
2020
|
|
December 31,
2019
|
Revolving line of credit with lenders (Revolver), interest at applicable rate plus margin, as defined (4.27% and 5.43% at March 31, 2020 and December 31, 2019, respectively) due quarterly; balance due at maturity in November 2021
|
$
|
44.0
|
|
|
$
|
30.0
|
|
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
|
1,361.7
|
|
|
1,372.5
|
|
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
|
47.4
|
|
|
52.6
|
|
Other debt
|
7.8
|
|
|
8.1
|
|
|
1,885.9
|
|
|
1,888.2
|
|
Less: Original issue discount and debt issuance costs classified as a reduction to long-term debt
|
(18.7
|
)
|
|
(20.0
|
)
|
Less: Current portion
|
(87.4
|
)
|
|
(76.1
|
)
|
|
$
|
1,779.8
|
|
|
$
|
1,792.1
|
|
All borrowings under the Term Loan B, Revolver and Senior Notes are guaranteed by each of the Company's current and future domestic subsidiaries, subject to certain agreed-upon exemptions. All guarantors are jointly, severally, fully and unconditionally
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
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, 2020, 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, 2020 and December 31, 2019, the Company had $44.0 and $30.0 of borrowings outstanding on the Revolver, respectively. As of March 31, 2020 and December 31, 2019, the Company had an aggregate of $28.3 and $28.5, respectively, of letters of credit outstanding under its credit facilities. The Company has ample liquidity available through its Revolver which is supported by a diverse group of lenders.
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, 2020
|
|
December 31,
2019
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
2017 Interest rate caps
|
|
Accrued expenses
|
|
(2.4
|
)
|
|
(2.4
|
)
|
2017 Interest rate caps
|
|
Other long-term liabilities
|
|
(1.2
|
)
|
|
(1.7
|
)
|
Total derivatives
|
|
|
|
$
|
(3.6
|
)
|
|
$
|
(4.1
|
)
|
The Company has not offset fair value of assets and liabilities recognized for its derivative instruments.
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. The 2017 interest rate caps commenced in 2019 and expire in 2021. The Company is paying the $4.9 premium on the 2017 interest rate caps in monthly installments beginning in October 2019. The Company recorded a loss of $0.2 related to the 2017 interest rate caps for the three months ended March 31, 2020 of which a $0.6 loss was recorded to interest expense in the consolidated statement of operations and a $0.4 gain was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statement of comprehensive loss. The Company recorded a loss of $2.8 related to the 2017 interest rate caps for the three months ended March 31, 2019 which was recorded in change in fair value of interest rate caps, net of tax in the condensed consolidated statement of comprehensive loss. The notional value of the 2017 interest rate cap contracts aggregated were $600.0 as of March 31, 2020 and will remain constant through maturity in 2021.
In May 2016, the Company entered into three interest rate cap agreements (the "2016 interest rate caps") as economic hedges against the risk of a rise in interest rates and the associated cash flows on its variable rate debt. The Company paid the $5.5 premium of the 2016 interest rate caps equally over eleven quarters beginning on March 31, 2017. The Company elected not to apply hedge accounting to the 2016 interest rate caps; therefore, changes in the fair value of the 2016 interest rate caps were recorded in other (expense) income, net in the condensed consolidated statements of operations. The Company recorded no gain or loss related to the 2016 interest rate caps and a loss of $0.5 for the three months ended March 31, 2020 and 2019, respectively. The notional value of the 2016 interest rate cap contracts aggregated were constant at $800.0 over their term and matured on September 30, 2019.
8. Income Taxes
The Company’s effective income tax rate for the three months ended March 31, 2020 and 2019 was 24.1% and 18.9%, 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
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
taxes for the three months ended March 31, 2020 was primarily due to state and local taxes. 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 costs not deductible for income tax purposes.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act is designed to bring economic and fiscal relief to companies, small businesses, and individuals due to the COVID-19 health crisis. In accordance, with ASC 740 the income tax effects of the CARES Act should be reflected in the period of enactment. The CARES Act, enacts changes to net operating losses limitations, carry back of net operating losses, changes to depreciation of certain property, the acceleration of refunds for Alternative Minimum Tax (“AMT”), changes to the deductibility of interest expense, the deferral of certain payroll taxes and the allowance of certain employment tax credits. The enactment of the CARES Act resulted in an additional acceleration of $1.5 of the minimum tax credit carryforward to the Company. The current assets of the Company now has a receivable of $3.0 for the refund of AMT credit. The additional provisions of the CARES Act did not have a material impact on the first quarter unaudited consolidated financial statements.
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 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. As of March 31, 2020, $14.8 of expenditures related to the remediation accrual estimates have been incurred and $11.8 remains on the consolidated balance sheet which are expected to be incurred through 2023. These accruals include costs for an enhanced de-watering system and the associated removal, treatment, and disposal of leachate at the landfill. This amount could increase or decrease as a result of actual costs incurred to completion. Although it is reasonably possible this amount could change as a result of actual cost incurred to completion, the Company is unable to estimate a range of potential exposure due to the uncertainty of the remediation efforts required due to the nature of the process being undertaken.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
Litigation and Other Matters
The Company and certain of its subsidiaries have been named as defendants in various class action suits. Past suits have alleged the Company charged improper charges (fuel, administrative and environmental charges) that were in breach of the Company's service agreements. The Company reached a settlement for $9.0 (inclusive of plaintiff attorneys’ fees and costs), resolving four of these cases in fiscal 2019. One of these cases (the "Flaccus" suit) has not been settled and is still pending. Given the inherent uncertainties of litigation, including the early stage of the Flaccus case, the unknown size of any potential class, and legal and factual issues in dispute, the outcome of this case cannot be predicted and a range of loss, if any, cannot currently be estimated.
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 13.6% 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.
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).
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.
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
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, 2020
|
|
|
|
|
|
South
|
$
|
162.2
|
|
|
$
|
21.7
|
|
|
$
|
22.5
|
|
East
|
93.8
|
|
|
1.2
|
|
|
18.8
|
|
Midwest
|
130.7
|
|
|
10.4
|
|
|
21.9
|
|
Corporate
|
—
|
|
|
(19.6
|
)
|
|
1.4
|
|
|
$
|
386.7
|
|
|
$
|
13.7
|
|
|
$
|
64.6
|
|
|
|
|
|
|
|
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
|
|
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,
|
|
|
2020
|
|
2019
|
Residential Collection Revenue
|
|
$
|
105.9
|
|
|
$
|
100.7
|
|
Commercial Collection Revenue
|
|
100.3
|
|
|
97.9
|
|
Rolloff Collection Revenue
|
|
62.3
|
|
|
62.3
|
|
Disposal Revenue
|
|
58.0
|
|
|
60.8
|
|
Fuel and Environmental Charges
|
|
26.2
|
|
|
27.6
|
|
Sale of Recyclables
|
|
2.1
|
|
|
3.1
|
|
Other Revenue
|
|
31.9
|
|
|
31.6
|
|
|
|
$
|
386.7
|
|
|
$
|
384.0
|
|
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
Advanced Disposal Services, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(in millions, except share data)
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.
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, 2020
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
|
$
|
31.0
|
|
|
$
|
31.0
|
|
|
$
|
—
|
|
|
$
|
31.0
|
|
Interest rate caps - liability position
|
(3.6
|
)
|
|
—
|
|
|
(3.6
|
)
|
|
(3.6
|
)
|
Total recurring fair value measurements
|
$
|
27.4
|
|
|
$
|
31.0
|
|
|
$
|
(3.6
|
)
|
|
$
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2019
Reporting Date Using
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
12.5
|
|
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
12.5
|
|
Interest rate caps - liability position
|
(4.1
|
)
|
|
$
|
—
|
|
|
(4.1
|
)
|
|
(4.1
|
)
|
Total recurring fair value measurements
|
$
|
8.4
|
|
|
$
|
12.5
|
|
|
$
|
(4.1
|
)
|
|
$
|
8.4
|
|
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, 2020 and December 31, 2019, 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,
2020
|
|
December 31,
2019
|
Revolver
|
$
|
44.0
|
|
|
$
|
30.0
|
|
Senior Notes
|
431.4
|
|
|
443.4
|
|
Term Loan B
|
1,348.1
|
|
|
1,379.4
|
|
|
$
|
1,823.5
|
|
|
$
|
1,852.8
|
|
The carrying value of the Company’s debt at March 31, 2020 and December 31, 2019 was $1,830.7 and $1,827.5, respectively.
12. Merger
Agreement and Plan of Merger
On April 14, 2019, the Company entered into an Agreement and Plan of Merger with Waste Management, Inc., a Delaware corporation (“Parent”), and Everglades Merger Sub Inc., a Delaware corporation and a wholly-owned indirect subsidiary of Parent.